May 2008

1. CIPFA FAN A Single Entity District Perspective Statement of Total Recognised Gains and Losses (STRGL) May 2008 “Working with and on behalf of local people” Presented by Mark Dickenson Group Accountant KBC

2. LAAP Bulletin 73 • April 2008 • Closure of the 2007/08 Accounts and Use of Resources Assessments • Key Message from LAAP 73 Auditors will be interested in how authorities manage the STRGL process for the 2007/08 accounts. • Balancing Items • RISK ALERT – POSSIBLE QUALIFICATION

3. Sessions Objectives & Agenda • Objective 1 Understanding the STRGL and the accounts in the bottom half of the Balance Sheet. - Purpose - Balance Sheet Accounts (Net Worth) - STRGL Format • Objective 2 Provide an approach to compiling the STRGL. - The Kettering Model • Objective 1 & 2 - Questions

4. Purpose • Extract from the SORP “Not all gains and losses experienced by a local authority are reflected in the Income and Expenditure Account – e.g.. gains and losses on revaluation of fixed assets, available for sale financial assets, and pension actuarial gains and losses are excluded as they are treated under UK GAAP as arsing from asset and liability valuation changes rather than from an entity’s operating performance. FRS 3 Reporting Financial Performance requires all gains and losses to be included in the STRGL”.

5. Purpose • Extract from the SORP The Income & Expenditure (I & E) Account brings together all the functions of the authority and summarises all of the resources that the authority has generated, consumed or set aside in providing services during the year.

6. Purpose • What does this mean ? • Overall movement on the STRGL = Movement in Net Worth. • STRGL reports separately those accounts which change the net worth of the authority but which DO NOT pass through the I &E account. • Therefore everything else not separately reported needs to pass through the I & E account, for the STRGL to balance. • The STRGL is a Primary Statement and ensures all accounting entries have been correctly applied.

7. Purpose • What impacts on the STRGL? • STRGL IMPACT - I & E surplus or deficit - Dr and Cr entries that take place between top and bottom half of the balance sheet. (Changes in net worth not recognised in the I & E.) • NO STRGL IMPACT - Dr and Cr entries that take place within the bottom half of the balance sheet. This includes the SMGFB balance as this impacts on the GF Balance, which constitutes movement in the bottom half of the Balance Sheet.

8. Balance Sheet STRGL Impact • Revaluation Reserve • Investment Properties Revaluation Reserve • Available for Sale Financial Instruments Reserve • Capital Adjustment Account • Financial Instruments Adjustment Account • Pensions Reserve • Usable Capital Receipts Reserve • Deferred Credits • General Fund (I & E / SMGFB) • Housing Revenue Account • Major Repairs Reserve • Collection Fund • Earmarked Reserve

9. Balance Sheet Accounts • Revaluation Reserve Records unrealised revaluation gains arising from holding fixed assets (fm 01/04/07) • Dr Entries 1) Temporary Impairments (FA’s) No debit balances allowed for individual assets 2) Historical Cost Adjustments (CAA) Difference between Current Cost Dep’n and Historical Cost Dep’n. Delegate Information Only Example: Year 1 Asset value £4m / Asset Life 9 Years Dep’n for the year £444k Asset Value £3.556m Revalued to £5.550m Revaluation Gain £1.944m

10. Balance Sheet Accounts • Revaluation Reserve Example Continued - Year 2 CV Dep’n £688k (£5.550m / 8) HC Dep’n £444k (£3.556m / 8) HCA (CV – HC Dep’n) £244k Dr Entries 3) Realised Valuations (CAA) – Removes any revaluations from RR and transfers these to the CAA. RR balance therefore relates to revaluations for assets held. Cr Entries 4) Upward Revaluation of Assets (FA’s) Only take the net gain (i.e. upward and downward movement in revaluations) to the STRGL.

11. Balance Sheet Accounts • Available for Sale Financial Instruments Reserve Records unrealised revaluation gains arising from holding available for sale investments, plus any unrealised losses that have not arisen from impairment of the assets. Dr Entries 1) Decrease in Fair Value (Investment) Cr Entries 2) Increase in Fair Value (Investment) Available for Sale Financial instruments are to be carried at fair value and need regular revaluation. Where impairment losses are incurred due to the likelihood contracted payments will not be received, these are charged to the I & E (i.e. default on payments).

12. Balance Sheet Accounts • Available for Sale Financial Instruments Reserve • Recycling of any amount on the Reserve to the I & E account will result in a mismatch between the STRGL and the Balance Sheet. Recycled amounts should then be deducted as an additional item from the STRGL to avoid overstating the gains for the year. (Additional disclosure required) • Where impairment losses have been recognised for an available for sale asset, all subsequent losses incurred on the asset should be posted to the I & E Account rather than the available for sale reserve. • When the asset is derecognised, the cumulative gain or loss previously recognised through the STRGL is recognised in the I & E. • Thereby removing gains / losses from the STRGL and moving it to the I & E.

13. Balance Sheet Accounts • Pensions Reserve This is an adjustment account that manages the effect of FRS17 Disclosure as per the SOA Deficit in the fund 1 Apr 07 £19.128m Contributions Paid (£ 1.915m) I & E Current Service Cost £ 1.740m I & E Past Service Cost £ 0.226m I & E Net Interest/Return on Assets £ 0.429m I & E Actuarial gain (£ 2.773m) STRGL Deficit in the fund 31 Mar 08 £16.835m

14. Balance Sheet Accounts • Pensions Reserve The figure that is reported in the STRGL is the actuarial gain or loss on pension assets and liabilities. The SMGFB reverses the I & E transactions to ensure FRS 17 has a nil impact on the taxpayer.

15. Balance Sheet Accounts • General Fund and HRA All income and expenditure transactions are shown in the first line of the STRGL. Change in Net Worth in GF balance is calculated as follows: I & E Account Deficit £3.012m (Taken to the STRGL) SMGFB (£3.332m) (Amount to be Cr to GF) Increase in GF Balance (£0.320m) All SMGFB transactions are transfers between accounts in the bottom half of the Balance Sheet.

16. Balance Sheet Accounts • Collection Fund • SORP 4 alternative ways, two of which are possible. • Disaggregation of the Collection Fund (Preferred Option.) • Another option add movement on the Collection Fund Balance to the STRGL. • Approach should have been agreed with your auditors as part of the 2006/07 closedown. However if you have changed your auditors you may need to agree approach. • Movement taken directly to the STRGL.

17. STRGL Format • Surplus or deficit on the Income and Expenditure Account. • Surplus or deficit arising on revaluation of fixed assets. • Surplus or deficit arising on revaluation of available for sale financial assets. (NEW FOR 2007/08). • Actuarial gains and losses required to be included in the STRGL • Any other gains and losses required to be included in the STRGL.

18. Surplus or Deficit on the I & E • Comes straight from the Income and Expenditure Statement. • Key is to ensure all items have been correctly recorded in the Income and Expenditure Account and reversed out in the SMGFB. • Any short cuts taken in accounting entries will cause an imbalance on the STRGL, an example is posting direct to a reserve.

19. Revaluation Gains / Losses • Asset Register - Primary Source of Data / to detail – Accounting Entries. • Revaluations differentiate between RR and those charged to the I &E. • Upward Revaluation In most cases this is straight forward as the Fixed Asset is debited and the RR Credited, however, in rarer circumstances a revaluation gain will reverse a revaluation loss on the same asset that was debited to the I & E • Permanent Impairment – (Clear consumption of economic benefit (e.g. obsolescence of physical damage to a fixed asset) Does not pass through the RR instead this is charged direct to the I & E.

20. Revaluation Gains / Losses • Temporary Impairment – (General fall in prices (e.g. significant decline in a fixed assets market value) Where there is credit balance for the individual asset being revalued the maximum that can be charged cannot exceed the credit in the RR, if there is no credit balance or the revaluation exceeds the credit this is to be charged to the I & E.

21. The Kettering Model • Model used successfully in 2006 has been developed to meet 2007 SORP requirements. • Data submitted and validated. • Time assessment based on quality of data submitted. • Where there are validation issues data returned for review. • When data has been successfully validated work can commence on compiling the STRGL. • STRGL produced from primary statements providing a clear audit trail for the external auditors. • If primary and secondary statements change the STRGL can easily be updated.

22. Considerations • Auditors took a lenient approach in 2006/07, however be aware of LAAP Bulletin 73. • Auditors are not looking for a repeat of the levels of inconsistencies experienced in 2006/07. • If you answer YES to any of the questions detailed below this may indicate underlying problems elsewhere in the accounts. More than four lines in 2006/07 ? More than five lines in 2007/08 ? Has other gains and losses included items other than movement on the Collection Fund ?

23. Assistance • So you think you may need help ? • STRGL and Cashflow are the last documents to be produced, therefore these are produced under pressure as time is the limiting factor, this model can assist in streamlining this process. • Necessary to validate data to assess time required. • Register interest. • Costs being worked up.

24. Provide feedback By post Mark Dickenson Kettering Borough Council, Bowling Green Road Kettering, Northamptonshire. NN15 7QX  By fax 01536 410795  By phone 01536 410333  @ By e-mail markdickenson@kettering.gov.uk Internet www.kettering.gov.uk 