PART 1
(OPEN TO THE PUBLIC)
ITEM NO.
REPORT OF THE CITY TREASURER
TO THE ACCOUNTS COMMITTEE
ON MONDAY, 24 SEPTEMBER 2007
TITLE :
AUDIT OF 2006/07 STATEMENT OF ACCOUNTS
RECOMMENDATIONS :
It is recommended that members:
a) consider the contents of the report and, should they wish, request further detail on any issue
of concern;
b) authorise the changes to the statement of accounts outlined herein;
c) authorise the Committee Chair to sign the statement on p12 of the statement;
d) authorise the Committee Chair to sign the Letter of Representation;
e) delegate authority to the City Treasurer to agree any further late changes to the statement
should they be required, to be subsequently reported to the Committee Chair for approval.
EXECUTIVE SUMMARY:
This report comments on the Audit Commission’s audit of the 2006/07 statement of accounts, and
provides supporting information to their Annual Governance Report, Salford City Council, Audit
2006/07 also being considered by this Committee. This report agrees with the Audit Commission’s
findings in the Accounts and Statement on Internal Control section of their report that a number of
amendments should be made to the unaudited version of the 2006/07 statement of accounts, and
welcomes the findings in the Use of Resources section in relation to the 12 Value for Money criteria.
BACKGROUND DOCUMENTS :
Final accounts working papers in the Finance Division (available for public inspection).
Report to Accounts Committee 29 June 2007, 2006/07 Statement of Accounts
Report to Budget & Audit Scrutiny Committee 2 November 2005, LOBO Loan Interest and Premiums
on Debt Rescheduling
ASSESSMENT OF RISK :
Low. The timeliness and quality of the Statement of Accounts contribute to the Financial Reporting
element of the Use of Resources CPA score. Members should also note the risks relating to the
Council’s treatment of LOBO Loan Interest and Premiums on Debt Rescheduling outlined herein and
considered in detail in a report to Budget and Audit Scrutiny Committee on 2 November 2005. It is
felt that this risk has now substantially reduced.
SOURCE OF FUNDING :
The statement of accounts shows how the financial resources of the Council have been utilised in
2006/07 and the financial position of the Council at 31 March 2007. The audit fees and the cost of
producing the statement are met from the Finance Division's revenue budget.
LEGAL ADVICE OBTAINED :
Legal advice is required and sought in the production of certain supporting information for the
statement.
FINANCIAL ADVICE OBTAINED :
This report and the statement of accounts have been produced by the Finance Division. Both have
been discussed with Audit Commission staff.
CONTACT OFFICER :
Phil Prady
Chris Hesketh
Tel: 793 3245
e-mail: phil.prady@salford.gov.uk
Tel: 793 2668
e-mail : chris.hesketh@salford.gov.uk
WARD(S) TO WHICH REPORT RELATE(S)
All
KEY COUNCIL POLICIES :
Budget Strategy; Capital Strategy
REPORT DETAILS
1
Introduction
1.1 The unaudited 2006/07 statement of accounts was approved by this Committee on 29 June 2007.
1.2 Under the Audit Commission Act 1998, the accounts are subject to audit by an independent
auditor: in the Council’s case, by the Audit Commission’s District Auditor and his staff. The audit
commenced in July and the main findings are presented in the Audit Commission’s report to
today’s meeting.
1.3 For the second year running, the formal deadline for approval by Accounts Committee has been
30 June following the close of each financial year.
1.4 Despite substantial changes to the content and layout of the accounts, dictated by CIPFA’s
Statement of Recommended Practice, the 30 June deadline was again met and officers involved
in the final accounts process feel that the quality of both the statement and associated working
papers has continued to improve.
2
The Audit
2.1 The audit is expected to be completed on schedule by 28 September 2007.
2.2 The audit is much wider than a simple check of the figures in the various accounting statements.
For instance, it is also concerned with accounting principles, internal controls and the overall
quality of disclosures, to ensure that a true and fair view is given of the state of the Council’s
finances. It is felt that the audit has again added significant value to the overall final accounts
process, as well as meeting the statutory requirement for an independent audit.
2.2 The auditors report all items they consider to be misstatements in the accounts to the Corporate
Accountancy Team and to any appropriate directorate accountants. In addition, some
misstatements can be identified by accountants and reported to the auditors. Where
misstatements are considered to be ‘clearly trivial’, no changes to the statement are necessary,
although often the statement will be amended anyway. For items that don’t fall into the ‘clearly
trivial’ category, the District Auditor recommends that the Council amends the statement of
accounts accordingly.
2.3 Accountants agree with the auditors that a number of changes to the statements are necessary,
both correcting and clarifying the details reported to this Committee in June. The significant
changes are referred to in the Auditor’s report under the headings Adjusted misstatements in the
financial statements and Qualitative aspects of accounting practices and financial reporting.
They are further considered in section 3 below. Where necessary, accountants will be taking
appropriate action to prevent a recurrence of any misstatements in future years.
2.4 The auditor has recommended that further time be built into the accounts closure programme to
carry out a qualitative review of the accuracy and completeness of the disclosure notes in the
financial statements. As the timetable for production of the statement of accounts has already
been compressed over the past few years in order to meet early closure dates, it has been
difficult to build in time for comprehensive review. Nevertheless, the principle is agreed and the
Accountancy Development Group have recently reviewed the process and identified areas for
improvement which will allow more time for review.
3 Changes Agreed
The items outlined in the paragraphs below are those referred to by the Auditor in his report
under the headings Adjusted misstatements in the financial statements and Qualitative aspects
of accounting practices and financial reporting. It is agreed that appropriate adjustments should
be made to the statement of accounts.
3.1 Adjusted misstatements
Details of the changes made to the core financial statements are given below and their impact
on the statements are illustrated at Appendix A.
3.1.1 Manchester Airport land
A non-operational asset of £7.663 million has been brought into the balance sheet, the
opposite entry being in the Fixed Asset Restatement Account. This represents the economic
benefit of a share of land at the airport which Manchester City Council holds, but for which
assets and liabilities are, by formal agreement in 1994, shared with other GM authorities. The
other authorities are making a similar adjustment. This adjustment has an effect on the “bottom
line” of the balance sheet, increasing the net worth of the Council.
3.1.2 Debtors
A number of grant regimes had been aggregated within a code in the financial information
system. While the grants are all from Department for Education and Skills (now Department
for Children, Schools and Families), it is accepted that the correct disclosure is to identify the
debtor and creditor balances separately, increasing each by £1.9m. The coding structure is
being amended to facilitate this separation in future years. This adjustment has no effect on
the balance sheet net worth.
3.1.3 Investments
An item of LIFT expenditure, which included both infrastructure works and the Council’s
investment in LIFT stock had all been treated under the latter heading. The infrastructure
works totalled £638k and it has been moved to its correct place in fixed assets. This
adjustment has no effect on the balance sheet net worth.
3.1.4 School reserve
A prepayment of Direct Schools Grant had been debited direct to the schools reserve, when it
should instead have been within debtors and prepayments. The corrected treatment has the
benefit of making the reserve position more healthy by £616k, and increases the net worth
position on the balance sheet.
3.1.5 Long-term debtors
A loan made to the Higher Broughton Partnership in 2005/06 £413k (net of a partial
repayment) together with a further advance in 2006/07 of £96k had been treated as a deferred
charge in the accounts. The loans which are repayable have been made to enable the
partnership to undertake preliminary work with regard to design and consultation relating to the
redevelopment of the HB area. This has now been recognised in the accounts as a long term
debtor with an associated increase in the net worth position on the balance sheet.
3.1.6 Insurance fund provision
The £497k provision for fire insurance claims had been incorrectly included under a creditors
code within the financial information system. The provision is based on the findings of the
actuarial investigation of claims reserve and has now been included in the Insurance Fund
provision.
3.2 Other Items (Qualitative aspects of accounting practices and financial reporting)
Throughout the audit process, Audit Commission and Council staff continue to improve the
statement of accounts, both by correcting any errors and by critically examining the content to
see if it might be presented in a more meaningful way. This section lists agreed changes to the
document.
 Prior year adjustments resulting from changes in the SORP (p29)
A note has been included to explain the impact of the SORP changes on the prior year
comparative figures shown in the core financial statements.
 Housing stock options
As the position has moved on from that reported to this committee in June, the notes on
pages 10 and 63 have been updated.
 Debtors and prepayments, and creditors and receipts in advance
The SORP is not prescriptive over the form of analysis to be applied. A number of items
have nevertheless been re-analysed within the overall heading in the interests of the
clearest disclosure.
 PFI2 (p34)
The PFI note has been expanded to include the second phase of schools PFI. Members
should note that, while expenditure so far on PFI2 has been considered “off-balance
sheet”, this treatment will be reconsidered in conjunction with the auditors during
2007/08.
 Local Authority Business Growth Incentive Scheme (LABGI)
Note 11 has been updated to reflect that the Council have recently received notification
from the DCLG of an additional grant of £632k. This additional allocation has resulted
from the outcome of a judicial review of the scheme.
 Analysis of net assets employed
This has been adjusted to reflect all the other changes outlined herein.
 Borrowing
The existing note 30 (now 30b) described only long-term borrowing. A new note 30a has
been inserted, better describing the Council’s position in short-term borrowing.
 Deferred credits and deferred liabilities
The main element of deferred credits was deferred capital receipts which are now
identified separately in the net worth section of the balance sheet. The remaining items
are considered to meet the definition of deferred liabilities and therefore they have been
combined under one note 33, deferred liabilities.
 Dividend income
A new note 34 has been inserted to describe this line on the income & expenditure
account.
 Government grant deferred account
The treatment of these items changed in 2006/07. Unfortunately, the note described the
previous treatment and has now been updated.
 MAST LIFT Company Ltd
In view of its future importance to the Council, a new note 40m has been inserted to
describe the Council’s involvement with this company.
 Post Balance Sheet Events
Note 42 now includes reference to the Council’s agreement dated 20 June 2007 to
sponsor the BBC Philharmonic Orchestra at a total cost of £20m over the next eight
years.
 Group accounts
All changes in the Council’s single entity accounts have also been adjusted in the group
accounts. In addition we have now received details of the accounts related to the Salford
One Hundred Venture Ltd in which the Council has a 22% stake. This company has now
been incorporated into the group accounts of the Council as an associate. We have also
updated details relating to NPHL to reflect changes agreed in its audited set of accounts.
3.3 Minor Presentational Adjustments, Typing Errors etc
Despite proof-reading, it is inevitable that a number of minor mistakes remain in the document.
Where these have been recognised by Audit Commission or Council staff during the audit, they
have been corrected. In addition, there have been a number of minor presentational
adjustments and expansions of descriptions agreed with the auditors, which both parties feel
assist in improving the value of the document.
These adjustments are not analysed in this report, but members can be assured that no
changes have been made to the document without the knowledge of the auditors.
4
Other Matters
4.1 LOBO Loan Interest and Premiums on Debt Rescheduling
Members will recall from previous years’ final accounts processes that there have been different
views of the correct accounting treatment of these items. The matter was presented in detail in
the report LOBO Loan Interest and Premiums on Debt Rescheduling that was considered by
Cabinet in October 2005 and Budget and Audit Scrutiny Committee in November 2005.
As reported to this committee in June, there has at last been guidance issued on these matters
in the CIPFA SORP applicable to 2007/08 and by Government Regulation intended to mitigate
the impact of the SORP. Our assessment, in brief, is as follows:
 From 2007/08 the Council will have to spread the cost of LOBO interest based on the
average interest rate over the life of the loan, ie we will not be able to obtain a short-term
benefit from any lower interest charges in the initial period of a LOBO.
 From 2007/08, it is confirmed that the Council will be able to spread premiums on the
rescheduling of debt over the life of the replacement debt (which is our current treatment),
but only where the rescheduling counts as a “modification” of the existing debt. Where it
counts as a “replacement”, premiums must be written off immediately.
 The Regulations are intended to ensure that there is no requirement to recalculate LOBO
or premium charges up to 2006/07, ie policies adopted up to 2006/07 will not have to be
revisited in 2007/08. Unfortunately, as currently worded, the impact may not be fully
mitigated; however DCLG has indicated that further Regulations will be issued to complete
the mitigating effect and the risk associated with this item is now judged to be minimal.
Therefore, for 2006/07 the same policy as that adopted from 2003/04 to 2005/06 has again been
applied. We will adopt a policy in accordance with the revised guidelines in 2007/08. Subject to
DCLG Regulations confirming the mitigating effect for previous years, this is felt to be a
satisfactory solution all-round.
In summary we have taken a view, supported by advice and guidance from the Council’s
external treasury management advisors, that the likelihood of an actual liability is not high.
Nevertheless, it is accepted that there is some risk that could reasonably be disclosed in a
contingent liability note. Therefore the following note has been inserted,
“Interest on LOBO loans
Under new capital financing regulations, the Council will apply a notional interest rate to
calculate the interest charge on loans from 2007/08. This will have the effect of averaging
the interest charged over the life of a loan. Where the coupon rate of a loan is lower in the
initial period then rises, such as has been the case for some of the Council’s LOBO loans,
the charge to the Income & Expenditure Account will thus be greater in the short term than
the actual in-year payment.
The government has indicated that there will be no retrospective impact arising from the
regulations, and the Council has charged the actual loan interest payment in its accounts
up to 2006/07. Should the government fail to give the retrospective protection, there would
be an additional charge in the Council’s 2007/08 accounts, the sum depending on the
calculation method used. It is considered unlikely that the government will fail to give this
protection.”
5
Use of Resources
5.1 The governance report includes the auditor’s value for money conclusion. It is noted that, in all
significant respects, the Council has been found to meet all 12 value for money criteria, and
these findings are welcomed.
6
Summary Statement of Accounts
6.1 It is necessary that the full Statement of Accounts is an extremely detailed document so that a
specialist user may be given a full appreciation of the Council’s financial position. However, it is
of limited use to the average reader. The Corporate Accountancy Team are therefore again
developing a summary statement intended for use in budget consultation groups and other
meetings or occasions when a more general overview of the Council’s finances would be
appropriate, which will be circulated to members following the conclusion of the audit.
7
Finalising The Audit
7.1 Upon agreement of the proposed changes, a new statement of accounts will be prepared. This
will also incorporate the Auditor’s report drafted in Appendix 4 to the Audit Commission’s report
expressing the Auditor’s opinion that “the statement of accounts presents fairly…the financial
position of the Authority and its Group as at 31 March 2007 and its income and expenditure for
the year then ended”.
7.2 If further changes are required before the formal conclusion of the audit it is proposed that:


they are agreed between the City Treasurer and the District Auditor;
they are reported to the Chair of this Committee for his approval.
8 Conclusions and Recommendations
8.1 It is to be expected that there will be a number of changes to the accounts identified during the
course of the audit. In the main, these can be considered to be presentational issues or
corrections of typographical errors, although there have been a handful of more significant items
uncovered during the audit, as listed in section 3 above. These are not considered to be
contentious items and the auditors’ input has again contributed to the revised statement being
able to present a clearer and fuller description of the Council’s financial position.
8.2 It is recommended that members:
a) consider the contents of the two reports presented today and, should they wish, request
further detail on any issue of concern;
b) authorise the changes to the Statement of Accounts outlined herein;
c) authorise the Committee Chair to sign the statement on p12 of the statement;
d) authorise the Committee Chair to sign the Letter of Representation;
e) delegate authority to the City Treasurer to agree any further late changes to the statement
should they be required, to be subsequently reported to the Committee Chair for approval.
John Spink
City Treasurer
Appendix A
Income and Expenditure Account
for the Year Ended 31 March 2007
2005/06
Net
Expenditure
£000s
2,666
317
41,649
130,512
30,284
(3,446)
77,091
2,902
5,757
0
287,732
0
(171)
33,552
14,729
(1,529)
(714)
(3,442)
2,300
332,457
(73,318)
(149,230)
(72,157)
(1,871)
(995)
34,886
2006/07
Gross
Expenditure
£000s
Central services to the public
Court services
Cultural, environmental & planning services
Education services
Highways, roads and transport services
Housing services
Social services
Non-distributed costs
Corporate & democratic core
Exceptional costs of equal pay settlements
Net Cost of Services
(Gain) or loss on the disposal of fixed assets
Trading account (surpluses) and deficits
Interest payable and similar charges
Contribution of housing capital receipts to
Government Pool
Dividend income
Investment (gains)/losses
Interest & investment income
Pensions interest cost and expected return on
pensions assets
Net operating expenditure
Demand on the Collection Fund
General government grants
Revenue Support Grant
Non-domestic rates redistribution
PFI grant support
LABGI scheme grant
Net (surplus)/deficit for the year
28,995
339
88,969
190,489
38,188
166,274
143,468
958
6,556
6,405
670,641
2006/07
Gross
Income
£000s
25,665
27
40,790
169,059
7,103
174,768
60,895
0
686
0
478,993
2006/07
Net
Expenditure
£000s
3,330
312
48,179
21,430
31,085
(8,494)
82,573
958
5,870
6,405
191,648
(491)
(502)
33,175
16,923
(1,250)
396
(3,054)
(100)
236,745
(77,343)
(18,097)
(93,750)
(1,796)
(1,207)
44,552
Statement of Movement on the General Fund Balance
2005/06
2006/07
Net Expenditure
£000s
£000s
34,886
Surplus or deficit for the year on the income and
Expenditure Account
44,552
(36,121)
Net additional amount required by statute and nonstatutory proper practices to be credited to the General
Fund Balance for the year
Increase in General Fund Balance for the year
(46,214)
(10,550)
General Fund Balance brought forward
(11,785)
(11,785)
General Fund Balance carried forward
(13,447)
(1,235)
(1,662)
(1,625)
Amount of General Fund Balance held by schools under
local management schemes
(913)
(10,160)
Amount of General Fund Balance generally available for
new expenditure
(12,534)
(11,785)
(13,447)
Note of reconciling items for the Statement of Movement on the General Fund
Balance
2005/06
2006/07
£000s
2006/07
Net Expenditure
£000s
£000s
Amounts included in the Income and Expenditure Account but
required by statute to be excluded when determining the
Movement on the General Fund Balance for the year
(100)
(20,183)
(1,833)
Amortisation of intangible fixed assets
Depreciation and impairment of fixed assets
Excess of depreciation charged to HRA services over the
Major Repairs Allowance element of Housing Subsidy
4,993
Government Grants Deferred amortisation
1,301
Government Grants on non-depreciating assets
(216)
(11,627)
0
714
0
(6,300)
Contribution (from)/to capital reserves
Write downs of deferred charges to be financed from capital
resources
Net gain or (loss) on sale of fixed assets
Investment gains or (losses)
(116)
(18,531)
(1,254)
5,453
0
(78)
(11,583)
491
(335)
Reversal of Equal pay provision
(2,398)
Net change made for retirement benefits in accordance with
FRS17
(6,600)
(33,251)
(34,951)
Amounts not included in the Income and Expenditure Account
but required by statute to be included when determining the
Movement on the General Fund Balance for the year
5,257
Minimum revenue provision for capital financing
5,970
1,103
Capital expenditure charged in year to the General Fund
Balance
97
(14,729)
Transfer from Usable Capital Receipts to meet payments to
the Housing Capital Receipts Pool
(16,923)
(8,369)
(10,856)
Transfer to or from the General Fund Balance that are
required to be taken into account when determining the
Movement on the General Fund Balance for the year
(180)
Housing Revenue Account balance
1,099
Voluntary revenue provision for capital financing
4,580
5,499
Net transfer to or from earmarked reserves
(36,121)
(522)
1,438
(1,323)
(407)
Net additional amount required to be credited to the
General Fund balance for the year
(46,214)
Statement of Total Recognised Gains & Losses
2005/06
£000s
34,886
(91,037)
16,300
0
(39,851)
2006/07
£000s
(Surplus)/deficit for the year on the Income and Expenditure Account
(Surplus)/deficit arising on revaluation of fixed assets
Actuarial(gains)/losses on pension fund assets and liabilities
Other gains (attributable movement on the Collection Fund balance)
Total recognised (gains) for the year
44,552
(135,467)
(51,400)
(885)
(143,200)
Balance Sheet as at 31 March 2007
31 March
2006
£000s
31 March
2006
£000s
401
774,235
255,881
9,079
60,431
1
38,889
45,120
4,836
1,188,873
20,565
33,591
1,617
2,580
13,426
1,260,652
984
61,841
49,150
11,364
123,339
1,383,991
(954)
(72,692)
(2,154)
(9,140)
(84,940)
1,299,051
(506,677)
(15,555)
0
(1,363)
(1,471)
(10,910)
(75,699)
(192,600)
(804,275)
494,776
516,608
124,304
10,884
2,598
3,792
(192,600)
17,405
11,785
494,776
31 March
2007
£000s
Fixed assets
Intangible Assets
Operational Assets
Council dwellings
Other land and buildings
Vehicle, plant, furniture and equipment
Infrastructure assets
Community assets
Non-operational assets
Investment properties
Surplus assets held for disposal
Assets under construction
Total fixed assets
Other long-term assets
Long-term investments
Deferred premiums on early repayment of debt
Stock discount
Deferred consideration
Long-term debtors
Total long-term assets
Current assets
Stocks, WIP and stores
Debtors and prepayments
Short-term investments
Cash
Total assets
Current liabilities
Borrowing - amounts falling due within one year
Creditors & receipts in advance
Provisions
Cash Overdrawn
Total assets less current liabilities
Long-term liabilities
Long-term borrowing
Deferred liabilities
Deferred credits
Debt rescheduling discounts
Lowry receipt in advance
Insurance Fund
Government grants deferred
Pensions liability
Total assets less liabilities
Financed by:
Fixed asset restatement account
Capital financing account
Usable capital receipts reserve
Deferred capital receipts
Housing revenue account
Pensions reserve
Other reserves
General Fund reserve
Total net worth
31 March
2007
£000s
301
881,104
248,617
8,957
61,220
1
46,840
70,036
20,998
1,338,074
20,397
30,136
1,499
6,723
15,169
1,411,998
607
75,462
37,738
10,405
124,212
1,536,210
(51,103)
(75,534)
(6,333)
(10,720)
(143,690)
1,392,520
(468,634)
(16,131)
0
(1,951)
(1,418)
(11,866)
(106,741)
(147,800)
(754,541)
637,979
614,343
131,710
5,722
2,717
3,270
(147,800)
14,569
13,448
637,979