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Stephen Sheen: Taking pride in accounting

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  • by Stephen Sheen
  • in Stephen Sheen · Technical
  • — 20 Oct, 2015

On 28 September, Fitch issued a statement making observances about local authority accounts, already responded to by a number of Room 151 experts.

It wasn’t quite clear what Fitch were after.  Were they suggesting that local authority accounts were in some way not fit for purpose?  Or were they looking for sympathy that their job has been made harder by the progressive moves in the UK away from cash accounting towards the recognition of accruals and the prevalence of value over cost?

So it’s a bit tricky to argue whether they have a case.

But do they have a case?

Complaint

Their complaint, if that it be, is that the statement of accounts does not contain detailed cash flow data for operational activities (such as paying employees).

Further, the Comprehensive Income and Expenditure Statement (CIES) has an objective rather than a subjective analysis (ie, with net expenditure split by service rather according to things that money was spent on).

The first of these is a matter of preference for local authorities.  The Accounting Code of Practice offers a choice between preparing the cash flow statement using either the direct method or the indirect method.

The former requires analysis of the cash book and results in a presentation that details where cash came from and how it was applied.  The latter is prepared by adjusting the I+E outturn to remove the effect of accruals, and the statement is presented only to disclose the adjustments made to the I+E figure.

If you wish to make your accounts more friendly towards the credit rater, make sure that you use the direct method.  But be prepared for the serenity this brings you to be interrupted by the pained groans from your accountants as they strive to get the figures to add up.  The indirect method is more congenial for the practitioner.

The complaint about the subjective analysis is correct for the CIES, but the Accounting Code does require the information to be provided in a note to the accounts (the one about segmental reporting).

It is easy to overlook it.  Friendly efforts therefore need only to be restricted to making the note as prominent as possible.  (The Code does prevent you from presenting the CIES on a subjective basis, though.)

It’s my party

However, the Code is flexible enough to support you if you wish to determine that a primary purpose for your statement of accounts should be to support those interested in the authority’s liquidity and its ability to act as a reliable guarantor.

Readership is a perennial problem for the statement of accounts.  The job of preparing the statement has often seemed like throwing a lavish party to which no-one will come.  If you think that Fitch and their colleagues would attend, opportunities are there to arrange the furniture, knock up the nibbles and pick a playlist to tempt them in.

Why are authorities not doing this already, then?  Probably because the majority do not have any pressing need to demonstrate their credit worthiness.  Or, more altruistically, to make comparative information more widely available to assist the rating of those that do have that need.

There may be arguments in these straitened times, with rumours of authorities about to go to the wall, that there should be more transparency in the statement of accounts about liquidity.

My own view is that we should take greater pride in the longer term view that the statement of accounts now provides about such thing as the maintenance of an authority’s asset base and its accumulation of liabilities (particularly for pensions).

If this puts us out of step with our European peers, then look back sympathetically at them over your shoulder, but keep on marching.

Stephen Sheen is the managing director Ichabod’s Industries, a consultancy providing technical accounting support to local government.

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  • 151 BRIEFS – WHAT’s NEW?

    • Homes England agrees strategic partnership with two authorities
    • Soaring inflation and pay pressures to add £3.6bn to council budgets
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    • Government preparing to intervene in Nottingham City Council
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