Advisers clash over bonds agency loans
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Accountancy firm Grant Thornton has rejected public criticism by treasury adviser Arlingclose of advice it has given to councils on the accounting treatment of Municipal Bond Agency loans.
The advice, prepared by Grant Thornton on behalf of the Municipal Bonds Agency, has been sent to local authorities looking to take part in the agency’s first bond issue, which is due this year.
In a blog, Arlingclose said that it “disagrees with accountancy advice received from Grant Thornton with regard to the guarantees provided” under the joint and several liability (JSL) guarantees each borrowing authority will sign up to. These guarantees commit participants to cover liabilities caused by any defaults on payments.
David Green, client director at Arlingclose, told Room151: “When you account for the JSL guarantee you estimate the value of the potential liability and multiply it by the chance of it getting called.
“Grant Thornton is saying that a council should book this as a revenue cost. But we believe that this cost should be balanced against the money that councils would save on the lower interest rate they would be receiving.”
Green added that although the chances of an individual council defaulting on its MBA loan repayments was negligible, councils would also be on the hook if the agency itself goes bust.
He said: “Even if a council takes out a 25-year loan from the agency, they could still be tied in under JSL.
“Over a period of 70 years, the chances of the agency going bust are not zero – the MBA has quite high running costs and needs to maintain a high volume of business from participating councils.”
A statement provided to Room151 by Grant Thornton said that it was “unfortunate” that Arlingclose has chosen to put this statement in the public realm without contacting it first.
It said: “We are satisfied with the advice provided in our report in relation to accounting for the loans and financial guarantees.
“Our report set out the key requirements and options available to local authorities.
“It set out the accounting principles to be considered by local authorities in accounting for the arrangements including recognition of liabilities at fair value which is an area of significant judgement.
“Therefore our report does not seek to make assumptions or use judgements as these rightly need to be made by local authorities in conjunction with their treasury advisers as appropriate.
“We recognise that circumstances will vary and certainly wouldn’t be saying that all councils should account for these transactions in a linear and specific way.”
