Post archive

Ichabod's at Room 151

Ichabod's blogs are now published on the Room 151 website ...

14 April 2020: No accounts simplification for 2019/20

23 March 2020: COVID-19 and production of the accounts

20 December 2019: Audit 2019 was a bust - let's hope it gets better

6 August 2019: The state of local government audit

9 April 2019: Public interest wobbles the Prudential Framework

4 January 2019: Audit and accounts outlook 2019

5 December 2018: Sale and leaseback: the accounting lowdown

17 September 2018: Looking ahead to the 2018/19 Statement of Accounts

13 June 2018: Prepare for a deep dive into lease accounting

24 April 2018: Do we need a statutory override for IFRS 9?

8 March 2018: IFRS 9 and impairment are no April fool

31 January 2018: Closedown 2017/18 leaves little time to relax

4 December 2017: Prudential Framework consultation

30 October 2017: The most complicated accounting standard ever issued

13 September 2017: Troubles with the auditor? Maybe it's not you

19 June 2017:  Expanding your property portfolio? Prepare for the auditors

14 March 2017: The auditor's dreaded knock on the door

30 January 2017: Plotting the big audit and accounting events ahead

28 November 2016: Making sure your MRP is "just right"

25 July 2016: Impact of Brexit on local authority accounting

17 May 2016: Living in a material world

4 April 2016: Thumb twiddling risks in auditor appointments

12 January 2016: MRP policy ripe for review

9 December 2015: The reserves iceberg

20 October 2015: In defence of local authority accounting

15 September 2015: Special purpose companies, geese and golden eggs

 20 July 2015: LOBOs controversy

17 March 2015:  Accounts and Audit Regs 2015

10 February 2015: Break up of the Audit Commission

17 December 2014:  Accounts and audit prospects for 2014/15

10 November 2014: Getting the best from your external audit teams

19 August 2014: Getting the most from your external audit reports

15 May 2014:  Getting your external auditors working for you


Posted @ 06:42:16 on 22 September 2015  back to top

Accounting for TIF, LEPs, etc


Accounting for Infrastructure Projects within Tax Increment Financing (TIF) Funded Programmes

Ichabod's is currently one of the leading advisers on the accounting implications of TIF, dealings with Local Enterprise Partnerships (LEPs) and the management of revolving infrastructure funds.


A number of initiatives are under way that involve local authorities investing in infrastructure and other development projects on the basis that the investment will result in an increased business rates yield that can be applied to finance the cost.  Tax increment financing (TIF) brings several new challenges to local government, particularly in relation to the risk that projections of incremental income cannot be made with absolute confidence as to amounts and the period over which they will accrue.

There are also substantial accounting issues that can impact on financing decisions and determine whether a project is viable.

Outline of the Accounting and Financing Issues

 Involvement in a TIF programme will bring a number of accounting challenges.  These will include:

  • Determining the extent to which the authority is a principal or an agent for other parties in the transactions for which it has responsibility under the programme.
  • Determining the accounting implications for the various vehicles in which the authority might have an interest - programme working can involve joint committees, partnerships, minority and majority stakes in companies, etc, that will need to be accounted for in the authority's single entity financial statements and (possibly) in group accounts.


However, the accounting issue with the greatest potential to have a practical impact on a programme, potentially threatening its viability, will be the likelihood that an authority will experience a revenue deficit in the early part of the programme as costs are incurred in advance of new income being receivable.  Before a new income stream is realised, such as retained business rates, an authority may be exposed to a number of costs chargeable to revenue:

  • Administrative costs of setting up the programme
  • Preparatory costs for capital schemes
  • Borrowing costs
  • Lost income through the demolition or closure of existing facilities (including rates)


In the commercial world, a projection of early losses followed by growing surpluses would not be problematic where it shows that the organisation will at least break even in the long-term.  However, local authorities are required to budget to break even each financial year through the process for setting council tax.  Unless the early deficit for a programme can be supported from accumulated balances then it must be met from council tax increases if the programme is to proceed.  Managing the early deficit can therefore be a substantial challenge for an authority.

Strategies for Managing the Early Deficit

There are a number of opportunities for managing the effect of the "early deficit" issue:

  • exporting costs to another entity, such as a joint venture - revenue budgets could be relieved by arranging for other parties to bear the early costs of a programme (but without creating a liability for the authority)
  • making an accurate assessment as to whether the authority is acting as a principal or an agent for a grant paying body or a developer and thus whether it needs to account for expenditure as a result of the flow of funds
  • reviewing opportunities for the capitalisation of borrowing costs - those incurred both directly by the authority and indirectly by other parties but funded by the authority
  • maximising capitalisation of preparatory and administrative costs under the relevant statutory provisions
  • considering whether any income lost as a result of a scheme can be capitalised
  • profiling the impact of MRP most effectively within the relevant statutory provisions


These opportunities will apply to greater or lesser degrees depending on the individual nature of each project.

Revolving Infrastructure Funds

Many authorities are also challenged by parallel needs to maintain revolving infrastructure funds which are commonly associated with TIF projects operating through Local Enterprise Partnerships and similar structures.  The accounting implications of funds for which a local authority is the accountable body are not always obvious.


2012/13 Statement of Accounts Hotspots - Where Might the Wind Blow?


The dust never really settles on the desolate Statement of Accounts plain.  Until all the sheep are safely penned and the external audit collie has headed off to gnaw on someone else's bones, there is always the chance that a gust of wind will raise a choking cloud that will scatter the flocks once more.

 But come April time, the weather is usually set sufficiently fair for a reasonable assessment of where the dust devils are likely to spring up.  Here is the Ichabod's top ten of hottest spots for 2012/13 …

1        Explanatory Foreword - the 2012/13 Accounts Code encourages authorities to consider the Management Commentary provisions of HM Treasury's Financial Reporting Manual when preparing the Explanatory Foreword.  Have a peek; you might be inspired to give your Foreword a whole new look.  Or you might not.   Dust devil rating: 2

2        Standards issued not adopted - the annual requirement to look ahead and predict the potential impact of Accounts Code changes that will take place next year.  Pensions costs disclosures are to be remodelled in 2013/14 and your actuaries will be able to produce detailed 2012/13 figures in anticipation.  But how much of this detail is it going to be material to include in the 2012/13 note on standards issued not adopted?  Dust devil rating: 3

3        Events after the balance sheet date - on 1 April 2013, two significant events took place in England.  Billing and precepting authorities started to accrue the effects of the localisation of business rates income; and some authorities took over public health functions.  Where these events might have a material impact on your financial position or assets/liabilities, then they might need to be reported as events after the balance sheet date (with (gu)estimated figures).  Dust devil rating: 4

4        Property, Plant and Equipment revaluation periods - the 2013/14 Accounts Code exposure draft was rewritten to emphasise that the five year rule sets a maximum time between revaluations and does not exempt authorities from revaluing more regularly where there might have been material movements in value.  If your authority has made a generous application of the rule and your auditors are minded to think of the implications of the anticipated 2013/14 Code, things could get serious in 2012/13.  Dust devil rating: 5

5        Mutual Municipal Insurance - during 2012/13 the prospect of a levy payment having to be made by MMI creditors became more likely; similarly the likelihood of having to make (or refine) a provision for the cost.  Dust devil rating: 4

6        Local Authority Mortgage Scheme - more authorities have become involved in LAMS in 2012/13, but the accounting is complicated.  Why would there be capital expenditure?  And if there is, why would you not make MRP?  Dust devil rating: 4

7        Schools' assets - there has been lots of talk as to whether schools' governing bodies are group entities and, if not, whether their assets are still controlled by the authority.  This talk goes on into 2013/14 at the earliest.  Dust devil rating: 1

8        Transport infrastructure assets - there is still no sign that the Accounts Code will adopt fair value accounting for infrastructure assets in the medium term.  However, the demands of Whole of Government Accounts tighten further each year.  Dust devil rating: 1 (for the Statement of Accounts, anyway)

9        Cutting clutter - very rare is the accounts prep agenda that doesn't these days feature some reference to uncluttering the financial statements.  Similarly rare is anybody bold enough yet to have done anything significant about it.  There is a glittering prize available in the form of a much more effective Statement of Accounts, but at significant short-term cost of redesigning your template and convincing your auditors to accept the new slim look.  Dust devil rating: 1

10     Auditors' lucky dip - 2012/13 of all years is one where the auditor might surprise you by picking a plum of an issue from their own agenda.  This might particularly be the case where your Audit Commission audit has been outsourced and the winning firm starts to exert control and impose its technical views.  Componentisation? Schools?  But it could apply to any audit firm, all of whom dance to the tune of the Financial Reporting Council's Audit Quality Review team.  The Team has recently been riffing heavily on audit approaches to the fair value measurement of assets and liabilities, revenue recognition and related parties, as well as exhorting auditors to be more sceptical of the information and explanations provided to them.  Will your auditors rock with them?  Dust devil rating: 2? 4? 5?

 [This is an edited version of a comprehensive compendium of hot topics for the 2012/13 Statement of Accounts (and sources of further guidance) provided to subscribers to the Ichabod's Local Government Accounting Technical Support Service.  See for further details.]


Accounting Implications of the Local Audit Bill

Now that the accounts for 2011/12 are published, local authority accountants in England should plan to set aside some time over the coming months to monitor the progress of the Local Audit Bill.

Although the majority of the Bill is concerned with the detail of how the Audit Commission will be abolished and the framework under which local appointment of auditors will operate, there are some aspects that have the potential to impact directly on an authority's financial administration.

The first of these is that Clause 2 of the Bill borrows from the Companies Act to set a new requirement to keep adequate accounting records.   Sub clauses explain that this means records that are sufficient to show and explain the authority's transactions and to disclose at any time with reasonable accuracy the financial position at that time.

Is this more than being able to make a rough estimate of progress against the budget on any given day?   Or is it a requirement to be able to pop out a Comprehensive Income and Expenditure Statement before the end of a working day?   And how accurate is reasonable accuracy?   I don't know.   But I do recommend that you watch carefully what happens around the proposal in the forthcoming months to ensure that there is no challenge to the quality and scope of your financial systems.

The Bill proposes to extend parts of the audit regime to cover entities connected with the authority, most notably in Clause 63 giving auditors a right to issue public interest reports on matters related to such entities.   This is significant because Clause 20 defines connected entities by reference to the need to consolidate transactions into group accounts.   This enhanced significance for group accounting decisions has the potential to re-open the "group or not group" debate amongst auditors wishing to ensure consistent application.  Better knock the rust off your understanding of the Accounts Code's requirements.

There is also likely to be some debate about audit requirements for joint committees.   They are included as relevant authorities requiring accounts and audit in Clause 4, but the Ichabod's Industries response to CLG has been matched by that of CIPFA in suggesting that this is unnecessary.   The Accounts Code is sufficiently sophisticated to ensure that joint committees are accounted for comprehensively in the accounts of consitituent authorities.   Hope that this will result in clearer guidance that ensures that this is so.


Code Guidance Notes 2012/13

CIPFA has issued the Code Guidance Notes for the 2012/13, available via the Policy and Guidance pages of the CIPFA website.

A full summary of the changes to the Notes has already been sent as a briefing to subscribers to the Ichabod's Local Government Accounting Technical Support Service.  This details all the amendments and enhancements that have been made, significant and less significant.  Hurry to sign up to the Service to receive the briefing and all the related technical support you might need.

The new or amended material likely to be of most interest to accounts preparers relates to:
  • CRC Energy Efficiency Scheme - the Notes set out the accounting treatment that is expected now formally to apply to the costs of emissions and allowances once the 2012/13 Code Update is issued - ie, largely that which most authorities applied in 2011/12 with the added twist that in 2012/13 we need to account for the surrender of allowances
  • Explanatory Foreword - the 2012/13 Code encourages authorities to consider the Management Commentary provisions of HM Treasury's Financial Reporting Manual - how should practitioners entertain this encouragement?
  • Cash Flow Statement notes - since IFRS was introduced, it has not been clear whether authorities using the indirect method should provide a breakdown of the adjustments made to the Surplus/Deficit on the Provision of Services figure to arrive at Operating Activities cash flows - the Notes now say a big "please!"
  • HRA (England) - any mention of using the Major Repairs Allowance (RIP) as a proxy for depreciation has been removed
  • Joint committees - some guidance has been added specifically as to how joint committees should be accounted for in the single entity financial statements


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