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The STRGL A Single Entity District Perspective What is it trying to show? – CIPFA FAN STRGL and Cash Flow Series – May

The STRGL A Single Entity District Perspective What is it trying to show? – CIPFA FAN STRGL and Cash Flow Series – May 2008. Roman Haluszczak CIPFA Fan Advisor : e-mail Roman.Haluszczak@ipf.co.uk. The promises that it would:

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The STRGL A Single Entity District Perspective What is it trying to show? – CIPFA FAN STRGL and Cash Flow Series – May

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  1. The STRGL A Single Entity District Perspective What is it trying to show? – CIPFA FAN STRGL and Cash Flow Series – May 2008 Roman Haluszczak CIPFA Fan Advisor : e-mail Roman.Haluszczak@ipf.co.uk

  2. The promises that it would: Explain the changes in an authority’s net worth in a straightforward way Be calculated in a swift and uncomplicated manner without taking up too much of practitioner time Show clearly the gains and losses that an authority made during its financial year both within and outside the new UK GAAP based income and expenditure account Increase stakeholder understanding of the financial performance of an authority Ensure that the component entries making up the authority’s net gain\loss for the year were to be identified in a transparent and realistic way THERE SHOULD NEVER BE MORE THAN THREE LINES TO THE STRGL ! IT WILL ALL BE OVER BY CHRISTMAS! Introduced by SORP 2006 – On unsuspecting local authority accounting practitioners and stakeholders

  3. FRS3 – Page 5 onwards STRGL is a primary statement that enables users to consider all the recognised gains and losses of a reporting entity in assessing its overall performance It includes profit and loss with all other movements on reserves recognising gains and losses attributable to share holders. It does not reflect the realisation of gains and losses in previousperiods and does not deal with transfers between reserves Gain on the revaluation of a fixed asset should be reflected in the STRGL in the period when it takes place Main components of a typical private sector STRGL would include: profit and loss before dividends, adjustments to asset valuations and foreign exchange differences in net investment in foreign enterprises MEASURES CHANGES IN A COMPANY’S NET WORTH Statement of Total Recognised Gains and Losses (STRGL) – The theory

  4. Net Worth – In the context of the Private Sector as measured in accounting terms from its balance sheet = Total Assets less liabilities owed to outside bodies This difference equals the shareholders\owners equity Equity = The owners share in the business after all liabilities to outside bodies have been met In reality a business is almost always worth more than its net worth – net worth is largely based on historical cost accounting The market capitalisation of a company will usually be greater than its balance sheet net worth The definition of net worth is Crucial in relation to the STRGL as the STRGL measures the change in net worth of the business over the financial year How does this net worth concept translate into a public sector environment? Under IFRS STRGL to be replaced by a statement of the movement in equity (SOME) – first SOME probably on the 1st of April 2009 Statement of Total Recognised Gains and Losses (STRGL) – Net Worth (Private Sector)

  5. Statement of Total Recognised Gains and Losses (STRGL) – The theory (2) A typical private sector company STRGL

  6. What is local taxpayers’ ‘net worth’ in the local authority context and how applicable is it? For a company, the balance sheet would usually be balanced to shareholders’ funds – the net worth of the company that is attributable to shareholders. The same concept is being applied to a local authority balance sheet, and this will need to be explained to our stakeholders in a thorough manner The movement in local authority net worth might best be described as a measure of the movement in social net worth for the operational area of the authority This net worth will never revert to the inhabitants of the local area on any dissolution of the authority The definition of an authority’s net worth is crucial in explaining a local authority’s STRGL Statement of Total Recognised Gains and Losses (STRGL) – Net Worth (Local Authorities)

  7. The STRGL needs to balance to the movement in the net worth of the local Authority Balance sheet as shown by the aggregate of: Revaluation Reserve Investment Properties Revaluation Reserve? Capital Adjustment Account Usable Capital Receipts Reserve Pensions Reserve Financial Instruments Adjustment Account Available for Sale Financial Instruments Account HRA MRR (English HRA authorities only) Fund Balances (including GF) and earmarked reserves Other deferred Debits and Credits SORP 2007 guidance notes Module 3 Note L5 onwards– Balance Sheet- Net Worth (1)

  8. SORP 2007 guidance notes Module 3 Note L6 onwards– Balance Sheet- Net Worth (2) This definition of net worth is crucial to understanding the STRGL Is that it for the components of net worth? Difference = 47,369,000 = STRGL bottom line

  9. SORP 2007 guidance notes Module 3 Note F5 onwards– Balance Sheet- Net Worth (2) Is it really as simple as that? – Only four lines – Can we go home now?

  10. Paragraph 13 of SSAP 19, which states that “changes in the market value of investment properties should not be taken to the profit and loss account … unless a deficit (or its reversal) on an individual investment property is expected to be permanent …” Under SSAP 19, gains and losses on revaluation are taken to an investment revaluation reserve, and negative balances are allowed. The 2007 SORP does not prohibit the use of an investment properties revaluation reserve, and authorities may choose to operate such a reserve; however, they are not required to do so. Where authorities choose not to operate an investment revaluation reserve, they should charge any revaluation losses that take the asset below depreciated historical cost to the Income and Expenditure Account, as they would with similar revaluation losses on other classes of asset. Potential Extra Element of Net Worth – LAAP Bulleting 73 – Investment Properties Revaluation Reserve? (IPRR) – (1)

  11. If an authority chooses to operate an investment properties revaluation reserve, it should create the reserve (with a zero balance) as at 31 March 2007 (the same time as it creates the new revaluation reserves) Movements on both reserves will be included in the STRGL, and could be combined into a single line of the STRGL. When an authority operates an IPRR any transactions that would otherwise result in a negative balance on the IPRR will need to be debited to the I + E account Authorities are therefore not permitted to maintain a negative balance on the IPRR. (LAAP bulletin 73 – Para 49) Potential Extra Element of Net Worth – LAAP Bulleting 73 – Investment Properties Revaluation Reserve? (IPRR) – (2)

  12. Total Recognised Gains and Losses for the year should have equalled local authority net worth in 2006-07 they did not in all cases because: There was confusion in terms of how a UK GAAP based local authority income and expenditure account would work in practice (No distinction between capital and revenue income flows under UK GAAP). The I + E account should be the main source of gains/losses under UK GAAP Certain gains\losses (e.g. on investment sales) had not yet been charged to the UK GAAP based I + E account Certain gains and losses (e.g. Capital receipts and pension liability movements) needed to be accounted for through the I + E account and not as balance sheet movements Where separate statutory funds were outside the GF but included in the Balance Sheet – Any movement in those funds not due to an interaction with the GF needed to be considered under “Any other Recognised Gains\Losses” ( Special consideration for the Collection Fund – see later) All movements in the SMGFB needed to be mapped to the authority’s definition of net worth Some Authorities defined net worth differently to the way it was defined in the SORP ( and still do?) – Do external auditors agree with these alternative definitions? – This may cause reconciliation problems Problems Reconciling the STRGL to local Authority Net Worth in 2006-07 (1)

  13. Revenue government grants that do not relate to the performance of a specific service should be shown as income on the face of the Income and Expenditure Account. SSAP 4 requires that grants are recognised in the same year as the relevant expenditure. Where a grant has been paid in a particular year but is restricted to being used for a particular purpose, then it would not be credited to revenue until the authority actually incurs qualifying expenditure (even where there are no provisions for the grant to be repaid if expenditure is not incurred Grant monies that are unspent at the year-end should be credited to revenue only if all restrictions on the expenditure to which they can be applied have been removed. Otherwise they should be held in the top half of the balance sheet as grant unapplied Recognition of Grant Income and Capital Grant SORP 2007 Module 3 Paragraph D33 – Page 101 (1)

  14. Big problem area last year – See CIPFA Fan Issues document on SORP 2006 Guidance notes – www.cipfanetworks.net/fan/ Hence extended guidance Balance sheet to be structured “correctly” – authorities to define net worth in line with the SORP 2007 guidance Gains and losses need to be properly allocated either to STRGL or I+E Capital Grant\Developers’ contributions counted as deferred income waiting to be written off against asset depreciation (neutral effect on the STRGL) In UK GAAP – No difference between treatment of capital and revenue grants – but there is in terms of legal distinctions for Local Authority accounting Balancing the STRGL to the Movement in Net Worth in the Balance Sheet Module 3 SORP 2007 GN Note F10 to F12 – Page 115 (2)

  15. Grants towards capital expenditure should be credited to the Government Grants Deferred Account when they are applied to finance capital expenditure. Subsequently they are amortised to the appropriate service income in the Income and Expenditure Account on a straight-line basis over the asset’s life. In the exceptional event that no match can be made then there is no justification in the SORP for deferring recognition of the income and the grant will be credited directly to the Income and Expenditure Account under the appropriate service heading. Indicatively capital grant will be reversed out later through SMGFB – BUT SEE LAAP 73 CLARIFICATION Recognition of Grant Income and Capital Grant Module 3 SORP 2007 GN Paragraph D34 – Page 101(3)

  16. Where grants and contributions are received in advance of the completion of the asset, they cannot be credited to the GGDA, because the asset is not yet in use. Therefore grants and contributions received in advance should be credited to Grants and Contributions Unapplied pending completion of the asset. Upon completion of the asset and it coming into use the grant or contribution would be transferred from the relevant Unapplied Account to the GGDA (or Contributions Deferred Account) Grants and contributions should be matched with the assets which they are intended to finance, and to make releases from the Government Grant Deferred Account (GGDA) in line with the depreciation of the related assets once those assets come into use. Consequently authorities should be able to demonstrate that the balance on the GGDA (and the Contributions Deferred Account) relates to particular assets. LAAP Bulletin 73 – Further Clarifications on Accounting for Government Grants and Capital contributions (1)

  17. Where authorities are unable to identify assets relating to a proportion of their Government Grant Deferred Account due to events in the past, the grant (or contribution) will need to be derecognised in the balance sheet. Where the error is not material, the appropriate treatment would be to credit the grant to the ‘general government grants’ section of the Income and Expenditure Account. The credit will then need to be reversed out in the Statement of Movement on General Fund Balance by a transfer to the Capital Adjustment Account (DR SMGFB -- CR CAA) Where the error is material it will need to be treated as a prior year adjustment assuming balances arose before 31 March 2006, the opening 2006/07 balance sheet could be adjusted by transferring the balances from the Government Grants Deferred Account to the Capital Adjustment Account (or Capital Financing Account as it then was) Authorities may wish to discuss the levels of materiality for these transactions with their auditors. LAAP Bulletin 73 – Further Clarifications on Accounting for Government Grants and Capital contributions (2)

  18. Following gains\losses should be recognised directly within the STRGL Net revaluations of fixed assets (excluding any impairments charges to the Income and Expenditure account) Net revaluations of available for sale financial assets (excluding) any impairments charges to the Income and Expenditure account FRS17 actuarial gains and losses Guidance on balancing the STRGL to the Movement in Net Worth in the Balance Sheet Module 3 SORP 2007 GN Note F10 to F12 – Page 115 (4)

  19. Fixed Asset treatments and the STRGL Additions and enhancements – neutral effect on STRGL Depreciation and impairment due to the consumption of economic benefits – debited to I + E account Asset net revaluations (After taking account of impairment losses charged to I + E and any depreciation written out on revaluation) The carrying amount of assets disposed of or decommissioned will be debited to the I+E Account as part of the gain/loss on disposal - this should be net of any accumulated depreciation for the relevant assets Guidance on balancing the STRGL to the Movement in Net Worth in the Balance Sheet Module 3 SORP 2007 GN Note F10 to F12 – Page 115 (3)

  20. Some problem areas for reconciliation have included: Treatment of Transferred debt Statutory special funds (Scotland) Capital Expenditure not deemed to add any value to the asset Deferred Government Grants Unapplied Grants and Contributions Guidance on balancing the STRGL to the Movement in Net Worth in the Balance Sheet Module 3 Note F10 to F12 – Page 115 (4)

  21. Some problem areas for reconciliation have included: Unattached Capital receipts Deferred Credits (usually Deferred capital Receipts) – module 5 Paragraphs K11 to K20 Pension Fund Creditors for Employees contributions – Module 4 Paragraph T12 SORP 2007 Treatment of the Collection Fund ( Extra line?) Guidance on balancing the STRGL to the Movement in Net Worth in the Balance Sheet Module 3 SORP 2007 GN Note F10 to F12 – Page 115 (5)

  22. Pension Fund Contributions -- The guidance in paragraph T12 of Module 4 has been revised to require a movement on the pensions liability, which removes the mismatch. An authority ends 20XX/YY with March employer’s contributions of £90,000 outstanding to the pension fund. In 20YY/ZZ, all contributions of £1,200,000 due for the year are paid by 31 March 20ZZ. 20XX/YY Dr Statement of Movement on the General Fund Balance £90,000 Cr Pensions Reserve £90,000 To recognise the contributions payable against the General Fund Balance requiring to be covered by council tax Dr Pensions Asset/Liability £90,000 Cr Creditors £90,000 To recognise the increase in scheme assets (debtors), matched with an authority creditor for the pension fund. Guidance on balancing the STRGL to the Movement in Net Worth in the Balance Sheet Module 3 SORP 2007 GN Note F10 to F12 – Page 115 (5)

  23. Collection Fund for English Authorities only: For the STRGL and the Balance sheet to be in harmony the balance on the Collection Fund needs to be accounted for in this reconciliation process Appropriate way forward is recommended to be a disaggregation of the collection Fund Balance between precepting authorities (debtors\creditors) – top half of Balance Sheet and residual balance attributed to the billing authority – bottom half of the Balance Sheet Splitting process not that straightforward -- Billing authorities to let preceptors know their split? Movement on the residual balance relating to the authority would be included in the STRGL as a separate line– See over SORP 2007 Module 3 Note F9 Onwards– – Reconciling the STRGL to the Balance Sheet – Collection Fund Issues (3)

  24. SORP 2007 Module 3 Note F9 Onwards– – Reconciling the STRGL to the Balance Sheet – Ordering of the Balance Sheet (4) Realistic approach?

  25. Some Possible tests for Potential STRGL Entries (1)

  26. Some Possible tests for Potential STRGL Entries (2)

  27. It is fair to say that the STRGL, as a new requirement this year, has caused issues across many councils. Some Common problems included Charging revenue contributions to capital expenditure directly to the I + E account when they should have been charged to SMGFB Capital Grants Unapplied “wrongly” counted as net worth when they should have been in the top half of the balance sheet The surplus on revaluation of fixed assets in the STRGL was expressed incorrectly after entries in the FARA were examined in detail Capital Receipts and other gains not cycled through the I + E Account (charged directly to reserves) thus imbalance of the STRGL to Net Worth Audit Commission –STRGL Reconciliation 2006-07 Issues Identified -

  28. SORP 2006 guidance not detailed enough and many authorities made local decisions on reconciliation issues after consulting with their auditors As well as the collection fund issues (See earlier slides) may authorities had surpluses\deficits on their BID accounts which also need to be included within the STRGL Capital Grants and Contributions Unapplied, which may have been included as a separate line (in 2005/06) within Net Worth. Now included within the Government Grants Deferred Account in top half of the balance sheet and no longer part of net worth; Provisions and Reserves: in some cases provisions or reserves may not be accounted for correctly through appropriations and shown in Net Worth i.e. an imbalance would result if a provision was created through directly charging the Income and Expenditure Account (not SMGFB), but then included in net worth reserves. STRGL 2006-07 Reconciliation –Practitioner Issues Identified by CIPFA FAN

  29. An authority looking for reconciling items should check through its allocations to ensure that all income and expenditure has gone to the I+E and that the SMGFB only features postings between reserves making up the authority’s net worth position. Avoid making entries directly from I+E Account to the elements comprising the authority’s definition of net worth (e.g. provisions\reserves) this will cause an imbalance within the STRGL Ensure entries from I+E to elements comprising the authority’s net worth are debited\credited to SMGFB (not directly to the I + E account) Try to use the Income and Expenditure account to record as many “gains” as possible – should simplify the process SORP 2007 Module 3 Note F9 Onwards– – Reconciling the STRGL to the Balance Sheet – Ordering of the Balance Sheet -- Principles

  30. Each element of net worth needs to be analysed as follows: opening balance at 1st of April 2007 + Column1{Gains (Cr) – losses (Dr)} + Column2 {transfers between net worth reserves} = Closing balance of the net worth element at financial year end carried forward to the new financial year. The total of column 1 will be a debit or a credit figure whilst the total of column 2 will be zero – Transfers between net worth reserves will come to zero – PLEASE See overleaf for how this position was addressed by a real Authority in 2006-07 SORP 2007 guidance notes Module 3 Note L5 onwards– Balance Sheet- Net Worth (1)

  31. Statement of the Movement in Net Worth for an Authority in 2006-07

  32. STRGL -- For An Authority – 2006-07

  33. A complicated STRGL -- For An Authority – 2006-07

  34. Replacement of the Fixed Asset Restatement Account and Capital Financing Account with a Revaluation Reserve and a Capital Adjustment Account Opening balance on the revaluation reserve will equal zero – No prior year adjustment required for 2006-07 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 Financial Instruments Adjustment Account – provides a balancing mechanism between the different rates at which gains and losses (such as premiums on the early repayment of debt) are recognised under the SORP and are required by statute to be met from the General Fund. Note 37 p163 SORP 2007 – Requires disclosure of movements on these reserves SORP 2007 – Summary of Main Changes to STRGLNet Worth format for 2007-08

  35. STRGL – Para F8 page 114 – Movement in the Available for Sale Financial Instruments Reserve(AFSFIR) should be the net position of the following: Gains in value of AFSFA’s recognised during the year Losses arising from changes in value of AFSFA’s ( but not losses arising from impairments attributable to the likelihood of payments not being met) Accumulated net gains/losses in AFSFIR relating to a specific AFSA written off to I+ E when an impairment charge on that AFSFA is made to I+E Accumulated net gains/losses in AFSFIR relating to a specific AFSA written off to I+ E when an AFSFA is de-recognised Reconciliation issues to the STRGL of the last two bullet points – possible deduction from 2007-08 STRGL? SORP 2007 Guidance notes – Potential Effects on the STRGL (1)

  36. Re-measurement of financial instruments at 1st of April 2007 as part of the transition to the new financial instruments agenda Re-measurement entries will take place on the 1st of April 2007 – Dr\Cr to SMGFB or Available for Sale financial Instruments Reserve (AFSFIR)and Dr\Cr to financial instrument accounts Some of these impacts will be mitigated by the statutory provisions actioned through Financial Instruments Adjustment Account -- Additional note at the foot of the STRGL to explain the above entries Move to the new Capital revaluation reserve agenda – tidying up entries on capital assets actioned through the new CAA – Watch out for the STRGL implications of this SORP 2007 Guidance notes – Potential Effects on the STRGL (2)– Para D19 Page 717

  37. SORP 2007 Guidance notes – Potential Effects on the STRGL (3)– Para D19 Page 717 – LAAP Bulletin 73 • Any restatement of 1 April 2007 balance sheet in respect of financial instruments has implications for the STRGL. • Restatements are made to opening balances on 1 April 2007 and will not therefore appear in the Income and Expenditure Account in either 2006/2007 or 2007/08. • Any restatements will impact initially on the General Fund, resulting in a change to the net worth of the authority and will need to be included as a single line in the STRGL. • The net worth will change even where the authority is able to rely on the Capital Finance and Accounting Regulations to ameliorate the impact upon Council Tax requirements (SI 573)

  38. Making the STRGL work Operating gains and losses and the income and expenditure account Dealing with asset, financial asset and liability revaluations Reconciling the authority’s net worth STRGL – Summary Position

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