Statement of Accounting Policies and Estimation Techniques

The accounts have been prepared in accordance with the Code of Practice on Local Authority Accounting in the UK 2006 - A Statement of Recommended Practice (SORP) issued by the Chartered Institute of Public Finance and Accountancy (CIPFA).  These accounts are maintained on an historical cost basis, subject to the revaluation and depreciation of certain categories of asset where values are based on current cost.

The County Council has established a number of provisions to meet liabilities which are expected to arise in future years but are of uncertain timing or amounts.

Details of these provisions are shown in note 29.

Such provisions are charged to the appropriate service when created. Payments when eventually made are charged directly to that provision.

The council sets aside resources for future policy purposes. These are created by appropriating amounts from the income and expenditure account after Net Operating Expenditure. When expenditure to be financed from a reserve is incurred this is charged to the appropriate service in that year. A withdrawal from the reserve is then made in order to avoid a net charge against council tax.

   Revenue

The General County Fund balance represents a working balance derived from past savings disclosed in the income and expenditure account or budgeted contributions.  This balance incorporates both school balances, which as a result of legislation are retained by each individual school, and underspends on services that have been approved for carry forward to the following year.  

In addition a number of earmarked revenue reserves are maintained for future expenditure which fall outside the definition of a provision.  Details of these reserves are shown in note 31.

   Capital

In accordance with standard accounting practice for local authorities two non cash backed Capital reserves exist as part of the system of capital accounting. These are:

This reserve represents the movement arising on the revaluation of fixed assets

This reserve represents amounts set aside from revenue resources, and capital receipts to finance expenditure on fixed assets or for the repayment of external loans and certain other capital financing transactions.

All expenditure on the acquisition and/or improvement of land, buildings, roads, bridges, plant and major purchases of equipment is capitalised on an accruals basis provided that these assets yield a benefit to the Authority for a period of more than one year.  However, some relatively minor items may be financed from revenue.

Fixed assets are valued on the basis recommended by the SORP and in accordance with the Statements of Asset Valuation Principles and Guidance Notes issued by the Royal Institute of Chartered Surveyors (RICS).

The basis of valuation of the various categories of assets is as follows:

   Intangible Assets cover the purchase of software licences and valuation is based on depreciated historical cost for all assets with an original cost in excess of £10,000.

   Land and operational buildings are included in the balance sheet at open market    value for existing use or, where because of the specialised nature this could not be assessed (there being no market for such an asset), at depreciated replacement cost.

Valuation is carried out on a selective on-going basis such that all assets are revalued at least once every five years, and on completion of a capital scheme above £50,000.  The valuation is carried out by various Chartered Surveyors in the Property Services Division of the Resources Department.  Asset lives have been reviewed and standardised, and over the next 4 year revaluation programme will be updated within the Asset Register

The current asset values used in the accounts are based on a certificate issued by the Council's Head of Property Services Division as at 1 April 2006.  Additions since that date are either included in the accounts at their cost of acquisition (if above £50,000), or recognised in the Income and Expenditure account if the actual expenditure does not increase the asset valuation.

   Infrastructure assets are valued on the basis of depreciated historical cost.

   Community assets are assets that the authority is likely to keep in perpetuity for the benefit of local people, e.g. country parks and reclaimed land.  Such assets are valued at nominal values for assets acquired prior to 1994 and historical cost thereafter.

   Non-operational assets cover investment properties, assets surplus to service requirements and assets under construction or refurbishment. Valuation of investment properties and assets surplus to requirements is based on open market value whilst valuation of assets under construction is based on actual payments made to date.

   Vehicles, plant, furniture and equipment; valuation is based on depreciated historical cost for all assets with an original cost in excess of £10,000, with the exception of Leicestershire Highways who occasionally capitalise an asset under £10,000.

Assets acquired under finance leases are reflected in the appropriate category of fixed asset, together with a deferred liability to pay future rentals.  In addition, assets financed by a deferred purchase arrangement are similarly reflected in fixed assets, with the liability to the merchant bank included in long term borrowings.

Rentals payable under operating leases are charged directly to income and expenditure account.

Deferred charges represent expenditure which may be properly capitalised but which does not represent tangible fixed assets. The County Council operates a policy of charging 100% of such expenditure to service income and expenditure accounts.

Depreciation is chargeable to all services in the income and expenditure account, which utilise assets in the delivery of that service.

Buildings are depreciated over their remaining useful economic lives as assessed by the property valuer, with no allowance for a residual value. No depreciation charge is made for the majority of land, community assets or assets under construction or refurbishment.

Where assets suffer impairment, then dependent upon the reason for that impairment, an accelerated depreciation charge may be made to the income and expenditure account.

Where depreciation is provided for, assets are depreciated using the straight line method over the following periods:

   Intangible Assets – up to 5 years

Buildings - varies from asset to asset (the remaining useful economic life of each asset is reviewed at the same time as the revaluation is completed).

Infrastructure - 40 years.

Vehicles, plant, furniture and equipment - estimated useful life (averaging around 5 years).

No depreciation is charged in the year of acquisition, whereas a full year’s depreciation is charged in the year of disposal, with the exception of Leicestershire Highways trading account, where a half a year’s charge for depreciation for vehicles, plant and equipment is made in the year of acquisition.

Under the 2006 CIPFA SORP, notional interest charges are no longer required.  To compare 2006/7 to 2005/6 accounts, notional interest charges have been removed from the 2005/6 comparative figures in the Income and expenditure Account.

Service income and expenditure accounts are charged with actual rentals paid to leasing companies rather than the SORP request to charge depreciation and interest.

Proceeds from the sale of assets (if over £10,000) are credited to the usable capital receipts reserve. All such receipts are available to the authority to enhance its programme of capital expenditure or to reduce external borrowing. Receipts so used are transferred to the capital financing account. The extent to which receipts have not been utilised at year end are reflected in the balance sheet as capital receipts unapplied.

Any gains/losses on disposal of assets are now taken to the Income and Expenditure account. The statutory regulations require a reversal of this entry via the Statement of Movement on the General County Fund balance to have no impact on the General Fund Balance.

The income and expenditure accounts of the County Council are maintained on an accruals basis. Thus, sums due to or amounts owing by the Council in respect of goods and services rendered but not paid for at 31March are included in the accounts. The exceptions to this policy are as follows:

a)Payments covering a period, e.g. fuel, telephone, rent, are brought into account in the year they become due and are not apportioned over the years to which they may relate.

b)Interest on staff car loans for the whole period of the loan is taken to the income and expenditure account when the loan is granted.

c)Provisions for doubtful debts are maintained for certain categories of income by individual departments.

Government grants are accounted for on an accruals basis.  Revenue grants have been credited to the appropriate service income and expenditure account, whilst the majority of capital grants are credited to the government grants and contributions deferred account.   Amounts are then released from this account to a) offset any depreciation, calculated on the basis of average useful life, on assets financed from such resources, b) reflect expenditure incurred that does not increase asset values.

The release of government grants to match depreciation is now credited to services, rather than to the asset management revenue account which is no longer in operation.

Stock accounts are normally only maintained for certain specified major items; other immaterial stocks, e.g. cleaning materials, books and stationery, are fully charged to income and expenditure in the year of purchase.  Stocks are valued at cost price with allowance for obsolescent or slow moving stocks where material, with the exception of Leicestershire Highways and Catering trading accounts where stock is valued at average cost, and Central Print which use last price.  Work in progress is shown at cost price.

The expenditure of the various services include a charge for all support services provided by the central departments of the Authority, other than the direct cost of councillors and their support and non distributed costs both of which are disclosed separately in the income and expenditure account, as corporate and democratic core.

 

These charges are based upon various methods of allocation including staff time and volume of transactions.  Office accommodation costs are based on floor areas occupied.

The County Council participates in two pension schemes for employees in particular services.  All the schemes provide members with defined benefits related to pay and service.  The schemes are as follows:

   Teachers

This is an unfunded scheme administered by the Teachers Pensions Agency (TPA) on behalf of the Department for Education and Skills.

   Other employees

Other employees, subject to certain qualifying criteria, are eligible to join the Local Government Pension Scheme.  This is a funded scheme with employees and employers paying contributions into the fund calculated at a level intended to balance liabilities with investment assets.

Note: In Leicestershire the Local Government Pension Scheme is administered by Leicestershire County Council and the Pension Fund accounts are included later in this booklet.

Accounting for this scheme follows that of a defined contribution scheme and thus there is no reflection of assets and liabilities in the County Council’s accounts.  The pension cost charged to the accounts is the contribution rate set by the TPA on the basis of a notional fund.

   Other Employees

As a defined benefit scheme accounting arrangements follow the requirements of FRS17 on Retirement Benefits, which requires the disclosure of the estimated pension liability in the balance sheet whilst charges to the income and expenditure account are based upon the cost of benefits earned by employees in that year as assessed by an actuary.

The liabilities of the scheme are calculated, by the actuary, Hymans Robertson, on the ‘projected unit method’ based on assumptions of mortality rates, employee turnover and estimates of future earnings. These liabilities are discounted, based upon high quality corporate bond interest rates pertaining at the end of each financial year. Changes in this interest rate can result in considerable fluctuation in the overall liability, year on year.

The components of the assets of the fund are shown at fair value, principally the market value of the investments.

The extent to which the costs of benefits earned differs to employers contributions paid in accordance with statutory regulations is reflected by a transfer to or from a Pension Reserve to ensure that these accounting arrangements  do not impact on the levels of local taxation.

Since 2004/5 any new additional retirement benefits awarded to former employees within the local government pension scheme are subject to a one off payment from the income and expenditure account to the pension fund. Actual cash payments being charged to the pension fund. Payments of such benefits awarded prior to this date continue to be charged to the income and expenditure account.

The capitalised cost of early retirements for employees with unreduced benefits is charged to services over a period of up to 5 years.

The authority continuously reviews existing external loans and interest rates being paid, and has the option of restructuring or refinancing this debt.

Premiums and discounts arising from premature repayments of debt arising in 2006/07 are charged to the income and expenditure account over the lesser of the remaining period of the loan(s) being repaid or a maximum of 25 years. All outstanding premiums arising from earlier periods are being charged to income and expenditure account over 25 years.

VAT incorporated in the income and expenditure account is limited to irrecoverable sums.

Income received towards public sector infrastructure that is required to be spent within a certain period of time has now been reclassified in the balance sheet as creditors.

Introduced in 2005/06 in order to provide financial incentives to reduce the amount of biodegradable municipal waste sent to landfill.

Annual allowances (in terms of tonnages) are allocated free of charge by the Department of Environment, Food, and Rural Affairs (DEFRA) to waste disposal authorities. If the actual waste tonnage exceeds that allowance the local authority either buys additional allowances from authorities with a surplus or incurs a penalty payable to DEFRA. Surplus allowances can be carried forward or sold to other waste disposal authorities.

The interim accounting arrangements that apply in 2006/07 are based upon the fact that the actual usage of landfill will not be known until after the completion of the annual accounts. As such they comprise the creation of an intangible current asset based on allowances issued valued at average market price, coupled with a provision based on the estimated usage at the same average market price.  The income and expenditure account includes, as grant income, the above valuation of the allowance whilst the estimated usage of the allowances has been shown as expenditure. As allowances issued currently exceed usage the resultant surplus has been appropriated to a reserve.