Early pensions contributions, provisions for business rate appeals & property valuations

In our regular feature, Ask The Auditor, Graham Liddell from Grant Thornton UK LLP answers questions about prepaying pension costs, valuing property, plant and equipment and estimating provisions for appeals against business rates. To ask Graham a technical query, email editor@room151.co.uk

If a local authority pays pension fund contributions early in a return for a discount can it defer the charge to the general fund?

This is a matter of interpretation of regulations and where local authorities are considering making an early payment but not charging the general fund until later, I would recommend obtaining external expert legal advice. Based on the proposals we have seen and following consultation with the Audit Commission and the other audit suppliers in England, our current view is that the charge would not be deferred.

The capital finance and accounting regulations require local authorities to charge to their general fund the amounts which are “are payable for that financial year”. The dates that amounts become payable are set out in the actuary’s rates and adjustments certificate. If a local authority makes an early payment in exchange for a discount, I would expect the certificate to set out this earlier date. The local authority would, as far as we understand, be required to charge its general fund in accordance with the earlier payment date.

This does not mean that local authorities are automatically prevented from taking advantage of early payment discounts. For example, local authorities could:

–          charge the full amount to the general fund

–          consider using  reserves for funding the early payment

–          discuss with the actuary whether it is possible to bring forward payments within each year rather than making a single payment at the start of the three-year period.

How should local authorities estimate provisions for appeals against rating assessments?

The move to local business rates retention is a positive one. But local authorities have faced a series of obstacles in trying to make it a success. I understand government’s desire to make sure that the system is fair and that there is a balance between incentives and managing risks. But it is nearly a year since business rates retention was introduced and the rules are still changing. And while local authorities seem to be issued with plenty of regulation updates, they are struggling to get access to critical information, such as the likely outcome of appeals against business rates.

The CIPFA/LASAAC Code (the Code) requires local authorities to make their best estimate of provisions at the balance sheet date. They will need to update this estimate at key stages of the year: when preparing the NNDR1 claim and the draft financial statements and before the conclusion of the audit. The key information for making these estimates is held by the Valuation Office Agency (the VOA). The Audit Commission is in discussions with the VOA about the timing of processing appeals and the availability of information for local authorities and auditors. In the meantime, local authorities will need to work with the VOA to make sure they get the best information available. They will then need to consider how to make their best estimate of provisions for:

–          appeals that have been made

–          appeals that have not been made but are expected.

For appeals that have been made, I would expect local authorities to apply a methodology based on past experience of outcomes. CIPFA has been working with local authorities to share good practice and this might be a good place to start.

Making a best estimate for appeals that have not yet been made is harder. Local authorities should seek to make estimates where possible. For example, it might be possible to make estimates based on intelligence on major rate payers or patterns in past behaviour. I recognise, however, that it may not always be possible to make a reliable estimate. In such cases, the authority should set out clearly its evidence for reaching this conclusion and disclose a contingent liability.

What is a ‘short period’ over which local authorities may value a class of property, plant and equipment  assets?

There has been much debate as to whether the changes to the Code this year mean that revaluations of a class of assets should be completed in one year or can be spread over a longer period.

This misses the point. The new wording in the Code also includes an explicit statement that revaluations must be ‘sufficiently regular to ensure that the carrying amount does not differ materially from that which would be determined using the fair value at the end of the reporting period.’

In other words, a local authority will need to demonstrate that the value of assets in its balance sheet is not materially different from the amount that would be given by a full valuation carried out on 31 March 2014. This is likely to be a complex analysis which might include consideration of:

–          the condition of the authority’s property portfolio at 31 March 2014

–          the results of recent revaluations and what this might mean for the valuation of property that has not been recently valued

–          general information on market prices and building costs.

I would strongly recommend that local authorities discuss with their auditor how they intend to demonstrate that the carrying value of assets does not differ materially from the fair value at 31 March 2014. The debate as to whether or not a class of assets has been valued over a short period is of secondary importance.

Graham Liddell is Grant Thornton UK LLP’s national technical lead for the public sector.
No responsibility or liability is accepted by Grant Thornton UK LLP towards any person or organisation in respect of the use of, or reliance on, information contained in this column.