Highways Network Asset - Continuing your road to success


By David Ellis, FAN Advisor, Local Government Faculty

Highways authority practitioners will have been very aware that the 2016/17 Code of Practice on Local Authority Accounting in the United Kingdom (Accounting Code) included a significant change to the measurement of the Highways Network Asset (HNA), moving from measurement at depreciated historic cost to a current cost measurement at depreciated replacement cost (DRC).

However, at its meeting on 9 November 2016, the CIPFA/LASAAC Local Authority Accounting Code Board (CIPFA/LASAAC) made the decision to postpone the full implementation of the move to DRC and will issue an Update to the 2016/17 Accounting Code to confirm this decision. That delay was in part due to the unavailability of updated central GRC rates for the 2016/17 accounts, rates that were last produced outside of the five-year period permitted under the Highways Network Asset Code…however that’s only part of the story.

One factor in the final decisions by CIPFA/LASAAC is the readiness of local authorities to implement the change and the arrangements in place to provide assurance (both central and local) on the accuracy and completeness of the HNA inventory data. Whilst there has been positive feedback to the recent readiness surveys, some issues have been raised through auditor discussions and at the FAN HNA workshops held in late 2016 that indicate some authorities still have a distance to travel on the road to successful implementation. CIPFA/LASAAC will want assurance when it next meets in March that the change to the Code won’t lead to qualified local authority accounts on the grounds of audit uncertainty, given the anticipated scale of the likely restatement of the HNA.

On the positive side, CIPFA/LASAAC decided the approach to the new measurement requirements in the 2017/18 Code will be on the same basis as planned for 2016/17, so there continues to be no requirement to restate preceding year information. What is becoming increasingly clear though, is that many authorities have a number of significant inventory assurance issues to address. The deferral of the Code implementation is not therefore a reason to take your foot off the gas, rather it’s a real opportunity for authorities to ensure that their route map for success is accurate and that it takes into account the real and perceived hazards along the way.

Feedback from the FAN workshops highlighted significant concerns in a number of areas. These included the use of default road widths where it was clear the local inventory differed to those default assumptions, and also a lack of comprehensive up to date condition survey data to inform the accuracy of the accumulated depreciation position of the network, a key element of the DRC measurement for the balance sheet. Estimation errors on road widths alone could result in differences in the hundreds of millions of pounds, so regardless of how the ongoing discussions around auditing materiality play out, the risk of qualification is very real.

Many authorities may now feel a more robust approach to data assurance is needed. Can you confidently answer the following question: 'Can you prove that your Highways Asset Management Systems are materially complete and all the assets exist?’.

Feedback received from practitioners and auditors indicate that the majority of highways authorities still have unanswered questions on the completeness and accuracy of their data. There is still plenty of distance to travel on the journey to that confidence.

The risk to authorities is not that the accountants get the HNA debits and credits in the wrong place; indeed those who attended the FAN events will be aware that the HNA accounting requirements are not hugely different to that for other Property, Plant and Equipment, apart from some unique differences on things like depreciation and derecognition. The risk for the authority and the CFO is very clear – is your HNA supporting data incomplete, inaccurate or unable to be evidenced?

CIPFA FAN are outlining the accounting issues and focusing on the key assurance factors that both auditors and CFOs will need confidence on in the joint FAN / EY Accounts Closedown workshops running from late January to early March. Details of the workshops are on the FAN website if you feel you would benefit from the networking opportunities with peers, CIPFA and an auditor. FAN encourage a focus on the big numbers; obtaining robust supporting data for your road widths and condition data will arguably be far more crucial to the true and fair presentation of the HNA in your accounts than focusing on the accuracy of your street furniture. Whilst some auditors are now starting to consider the concept of a separate materiality threshold just for the HNA, significant errors on road widths are always likely to be material.

So, don’t take your foot off the pedals, the deferral in implementation provides a final chance for authorities to ensure the journey to Code compliance is paved with success, just watch out for those potholes!

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