A few questions to ask yourself on capital accounting


Caroline White, Finance Advisor, CIPFA Finance Advisory Network (FAN)

Local authority accounting is constantly changing so sometimes it is worthwhile going back to the fundamentals and checking that they are right in order to build from there. This is especially true as local authorities move into more and more complicated transactions with regard to capital accounting. However complicated these transactions get, it is worthwhile remembering that the accounting must still meet the Code requirements and it is there and in the Code Guidance Notes that you will find the support you need to comply.

Also to help you with your accounting for capital and assets are your asset registers, whether these are automated systems or (very large and complicated) spreadsheets. These are tools to assist you in dealing with the sheer volume of asset transactions that befall authorities, but are no substitute for understanding how transactions should work and do not negate the fact that practitioners need to know how to account for the outcomes of these systems and spreadsheets.

So, for example, do you check and are you happy with the following with regard to your accounting for capital expenditure and non-current assets?

You are only capitalising expenditure that either meets the definition of expenditure on an asset under proper accounting practice, that is expenditure on an asset that will provide your authority with control of the resulting economic benefit or service potential and that has a measurable cost, or that is revenue expenditure allowed to be funded by capital under statute (REFCUS) or under a capitalisation direction in accordance with the Local Government Act 2003. In short, expenditure under the latter two entries would not normally result in recognition on your authority’s balance sheet or asset register.

Are you happy that you know the difference between expenditure which qualifies as REFCUS, usually a gift given without condition; and a loan, which still qualifies as capital expenditure but for which repayment is expected? And are you treating these correctly? The former should be recognised through your Comprehensive Income and Expenditure Statement and General Fund Movement in Reserves Statement, while the latter should not feature at all. However both increase your capital financing requirement (CFR). Are you happy that your CFR calculated from your balance sheet position reconciles to the movement in CFR each year?

Have you reviewed your componentisation policy lately and ensured that in these times of reducing revenue expenditure, its materiality thresholds for the impact of depreciation are still appropriate? Are you also in the habit of recognising components as they are replaced, even if you haven’t recognised them as separate components prior to their replacement?

Speaking of materiality, are you confident that your balance sheet valuations are carried out with sufficient regularity to ensure they are materially correct at the balance sheet date?

If you are an HRA authority, are you confident that you are accounting correctly for depreciation and revaluation/impairment losses and gains during the transitional period following self-financing, and are you aware of the proposed changes to the accounting for these from 2017/18?  

Lastly, are you confident in your asset register workings for the revaluation reserve? Authorities are required to maintain historical cost as well as current (carrying) value records for every asset that they recognise on their asset register. This is in order to establish the revaluation reserve balance, which is unique to each and every asset. The revaluation reserve in your balance sheet should be the sum of the individual revaluation reserves of each individual asset. The revaluation reserve should reflect, at all times, except for investment properties and assets held for sale, the difference between the historical cost net book value and carrying value net book value – does it reflect this correctly and are you assured that the balance is zero or in credit, but never in debit? Such balances cannot be moved between assets or 'borrowed' from one asset to cover another that incurs revaluation losses for example.

Just some things to think about before things get even more complicated!  

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