AGN 06
Local Government Audit Planning
Issued on 11 February 2016
Auditor Guidance Note AGN 06 – Local Government Audit Planning
Auditor Guidance Note 6 (AGN 06)
Local Government Audit Planning
Version issued on: 11 February 2016
About Auditor Guidance Notes
Auditor Guidance Notes (AGNs) are prepared and published by the National Audit Office (NAO)
on behalf of the Comptroller and Auditor General (C&AG) who has power to issue guidance to
auditors under Schedule 6 paragraph 9 of the Local Audit and Accountability Act 2014 (the Act).
AGNs set out guidance to which local auditors must have regard under Section 20(6) of the Act.
The guidance in AGNs supports auditors in meeting their requirements under the Act and the
Code of Audit Practice published by the NAO on behalf of the C&AG.
The NAO also issues Weekly Auditor Communications (WACs) to local auditors to bring to their
attention relevant information to support them in carrying out audit work. The firms that are
local auditors under the Act may use WACs to update their own internal communications and
reference tools.
AGNs are numbered sequentially and published on the NAO’s website. Any new or revised AGNs
are brought to the attention of local auditors through the WACs.
The NAO prepares Auditor Guidance Notes (AGNs) solely to provide guidance to local auditors in interpreting
the Code of Audit Practice made under the Local Audit and Accountability Act 2014. The contents of AGNs
cannot be reproduced, copied or re-published by parties other than local auditors without permission from
the NAO.
The AGNs are designed to assist local auditors in forming their own understanding of the requirements of the
Code. Auditors are required to have regard to AGNs, and the Code explains that this means that auditors are
expected to comply with the NAO’s guidance or provide a reasonable explanation as to why not. AGNs are in
no way intended as a substitute for the exercise of the independent professional skill and judgement of a local
auditor in deciding how to apply the NAO’s guidance or when providing explanations as to why guidance has
not been followed.
Local auditors should not assume that AGNs are comprehensive or that they will provide a definitive answer in
every case.
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AGN 06
Local Government Audit Planning
Issued on 11 February 2016
AGN 06 is relevant to all local auditors of local government bodies covered by the Local Audit
and Accountability Act 2014 and the Code of Audit Practice. Guidance on auditors’ work on
value for money arrangements and on reporting is published in AGN 03 and AGN 07
respectively.
Introduction
The guidance within this document is prepared to assist auditors in meeting their
responsibilities as the statutory auditor of local government bodies, under the Code of
Audit Practice. This AGN sets out guidance for auditors to support planning work on
audits of financial statements of local government bodies. The NAO will issue other
supporting information through the WAC to assist auditors during 2016.
As part of their planning process, audit teams identify changes to accounting
requirements drawing on any relevant technical briefings prepared by their firms. This
guidance is not intended to replace auditors’ own procedures.
Local auditors are also component auditors in the context of the NAO’s audit of Whole of
Government Accounts (WGA). The NAO group audit team issues a group instruction
which local auditors need to follow. The group instruction sets out requirements for local
auditors to assist the NAO group audit team in meeting its responsibilities supporting the
C&AG as the statutory auditor for WGA.
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AGN 06
Local Government Audit Planning
Issued on 11 February 2016
Contents
The AGN is structured as follows:
Page
Section 1: Statutory requirements including changes for 2015-16



Reminder about the chief financial officer’s section 114 responsibilities
Accounts and Audit Regulations 2015
Opinions on pension fund accounts
4
5
8
Section 2: Local government developments and issues impacting on 2015-16 accounts



Better Care Fund
Revising Minimum Revenue Provision
Fair Value
9
10
13
Section 3: Police and fire accounting issues impacting on 2015-16 accounts


Firefighter injury benefits
Police and fire pension commutation
15
15
Section 4: 2016-17 local government accounting issues

Highways Network Asset
17
Other support and raising technical issues or queries on this AGN
19
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AGN 06
Local Government Audit Planning
Issued on 11 February 2016
Section 1: Statutory requirements including changes for 2015-16
Reminder about the chief financial officer’s section 114 responsibilities
What is the issue?
1. Under Section 114 of the Local Government Finance Act 1988 (the 1988 Act), the chief
financial officer (section 151 officer) is required to report, following consultation with
the council’s monitoring officer, to all the authority’s members if there is, or is likely to
be, unlawful expenditure or an unbalanced budget. When issuing such a report the
section 151 officer is required to copy it to the external auditor.
2. Authorities are required by Section 32 of the Local Government Finance Act 1992, and
in particular section 32(4), to set a balanced budget. However, financial pressures
within the local government sector are increasing the risk that section 151 officers may
need to consider whether they are required to act in accordance with their
responsibilities under section 114 of the 1988 Act.
Why is this important?
3. A report by a section 151 officer under section 114 will have significant consequences.
Where the issue is a real or potential unbalanced budget, CIPFA’s Guidance on the role
of the Chief Financial Officer recommends that the section 151 officer consults the
external auditor to help determine how to proceed.
4. Local auditors also have a range of reporting powers and responsibilities which need to
be considered where the matter of a real or potential unbalanced budget arises.
What should auditors do?
5. Where there is the risk of a potential unbalanced budget auditors should liaise with
the section 151 officer to inform consideration of possible actions, recognising their
respective roles and responsibilities. This should include consideration of the potential
actions the section 151 officer can take as outlined within CIPFA’s guidance.
6. The auditor also has a number of relevant reporting powers and responsibilities under
the Local Audit and Accountability Act 2014 (the 2014 Act). Under Section 29 and
Schedule 8 of the 2014 Act the auditor may issue an advisory notice in relation to such
a matter. Auditors should refer to AGN 04 – Auditors’ Additional Powers and Duties
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and AGN 07 – Auditor Reporting for further guidance on issuing an advisory notice
(including discussing this with the Local Audit Code and Guidance team at the NAO),
and engage with the section 151 officer regarding consequent courses of action should
the section 151 officer’s actions not be successful in averting an unbalanced budget.
7. Auditors should also consider the impact of the authority’s actions on their opinion
and VFM arrangements conclusion. When doing so, the extent to which the matter has
been appropriately addressed within the authority’s annual governance statement
should be taken into account.
8. Regarding going concern, as local authorities are created and abolished only by
statutory changes there is an underlying assumption in the 2015-16 CIPFA/LASAAC
Code of Practice on Local Authority Accounting (2015-16 accounting Code) (paragraphs
2.1.2.4, 3.4.2.23 and 3.8.2.8) that their accounts will be prepared on a going concern
basis. However, where auditors have significant concerns regarding an entity’s ability
to deal with financial pressures they should consider how the entity is disclosing these
pressures in their financial statements in accordance with International Accounting
Standard 1: Presentation of Financial Statements (IAS 1). Concerns over financial
health and the ability of the entity to continue in its current form need to be clearly
disclosed. Where this is not the case, auditors should consider reporting implications,
for example the inclusion of an emphasis of matter paragraph in the audit report.
Accounts and Audit Regulations 2015
What is the issue?
9. The Accounts and Audit Regulations 2015 (A&A Regulations) came into effect from 1
April 2015 for financial years beginning on or after 1 April 2015. The A&A Regulations
apply to relevant authorities other than health service bodies as defined by the 2014
Act.
Why is this important?
10. The A&A Regulations apply to 2015-16 and auditors will wish to be aware of changes
that the regulations introduce in respect of requirements for narrative reporting,
arrangements for the exercise of public rights and the accounts timetable.
11. The A&A Regulations make a distinction between Category 1 and Category 2
authorities. Category 1 authorities are all relevant authorities covered by the 2014 Act,
except those falling under the definition of Category 2 (smaller authorities) in Section 6
of the Act. Category 1 also includes smaller authorities who have opted for a full Code
audit.
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Narrative reporting requirements
12. The A&A Regulations require Category 1 authorities to produce and publish a narrative
statement. Paragraph 8 of the A&A Regulations requires that a Category 1 authority:


must prepare a narrative statement in respect of each financial year; and
must comment in its narrative statement on its financial performance and
economy, efficiency and effectiveness in its use of resources over the financial
year.
13. Authorities will need to publish the narrative statement along with the financial
statements. The narrative statement replaces the explanatory foreword and will need
to be prepared in accordance with the 2015-16 accounting code.
14. The 2015-16 accounting code has been updated to take account of the requirement to
produce a narrative report (equivalent to the narrative statement required by the A&A
Regulations). Paragraphs 3.1.4.1 and 3.1.5.3 set out the high level principles for
authorities to follow when preparing the narrative report, with paragraph 3.1.5.3
addressing the new requirement for the narrative statement to cover economy,
efficiency and effectiveness in the use of resources. Paragraph 3.1.1.2 of the update to
the 2015-16 accounting code also confirms that ‘the narrative report should be fair,
balanced and understandable for the users of the financial statements’.
Arrangements for the exercise of public rights
15. In respect of Category 1 authorities, paragraph 9(1) of the A&A Regulations requires
the responsible financial officer to commence the thirty working day period for the
exercise of public rights and to notify the local auditor of the date on which that period
was commenced. Paragraph 9(2) is clear that the final approval of the statement of
accounts by the authority prior to publication of the audited accounts cannot take
place until after the conclusion of the period for the exercise of public rights.
16. Category 2 authorities (smaller authorities) are not required to re-approve the
statement of accounts prior to publication, but must also wait until the conclusion of
the thirty working day period for the exercise of public rights before publishing their
accounts and the auditor’s report.
17. As the thirty working day period for the exercise of public rights must include the first
ten working days of July for both Category 1 and Category 2 authorities, this means
that authorities will not be able to approve or publish their 2015-16 audited accounts
before 15 July 2016.
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Faster closing timetable
18. Auditors should note that the A&A Regulations include a phased timetable for faster
closure and publication of the audited accounts. From 2017-18 onwards the A&A
Regulations bring forward the local government reporting timetable for published
accounts for Category 1 authorities to 31 July.
19. There is a corresponding amendment to the arrangements for the exercise of public
rights from 2017-18 for Category 1 authorities with the requirement for the thirty
working day period for the exercise of public rights changing to include the first ten
working days of June rather than July.
What should auditors do?
20. Auditors should engage with audited bodies on how they are planning to meet the
requirements of the A&A Regulations, and ensure that relevant bodies are aware of
the requirements for narrative reporting in the A&A Regulations and the 2015-16
accounting code.
21. The narrative statement does not form part of the financial statements and it is not
covered by the audit opinion. The update to the 2015-16 accounting code specifies
that the narrative report must be published with the financial statements. Auditors will
need to review the narrative statement for consistency with their knowledge drawn
from their other work on the audit.
22. Auditors will be familiar with procedures for reviewing and reporting on consistency
between other financial information and the accounts. Where there is an
inconsistency auditors should consider whether and how to report on this, having
regard to the NAO’s Auditor Guidance Note 7 (AGN07) on auditor reporting.
23. Auditors should also keep in mind that narrative reporting includes an explicit
statement on VFM. Auditors therefore should review the narrative report to consider
whether there are any implications for their conclusion on VFM and where this is the
case bring it to the attention of the authority.
24. Although the update to the 2015-16 accounting code specifies that the narrative
report should be fair, balanced and understandable this does not apply the Fincancial
Reporting Council’s Corporate Governance Code from which these principles are
taken. This therefore does not trigger the enhanced reporting requirements under
IAS700. Auditors should refer to AGN 07 for guidance on auditor reporting.
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25. As part of 2015-16 planning discussions with audited bodies, auditors should discuss
the implications of the new arrangements for the exercise of public rights as it may
affect the scheduling of committee meetings and firms’ own internal review and
approval processes.
26. Authorities and auditors will need to begin planning how they will meet the earlier
timetable from 2017-18 onwards. Auditors should engage with their audited bodies to
understand the arrangements needed to meet the required changes including, for
example, considering whether a staggered approach should be taken to bring the
timetable forward in preceding years.
Opinions on pension fund accounts
What is the issue?
27. The 2014 Act sets out a requirement for the accounts of a pension fund to have a
separate audit opinion.
Why is this important?
28. Section 20(3) of the 2014 Act requires that: “if, for any part of the period for which a
relevant authority is required to prepare a statement of accounts, the authority is
required to maintain a pension fund under regulations under section 1 of the Public
Service Pensions Act 2013 as they relate to local government workers (within the
meaning of that Act), the authority’s local auditor must give a separate opinion on the
part of the statement that relates to the accounts of that pension fund”. This moves
the requirement to give a separate opinion on the pension fund account to a statutory
basis.
What should auditors do?
29. Auditors of bodies that are responsible for a pension fund should ensure that they are
aware that the requirement to give and publish a separate opinion on the accounts of
the pension fund is now a statutory requirement.
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Local Government Audit Planning
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Section 2: Local government developments and issues impacting on
2015-16 accounts
Better Care Fund
What is the issue?
30. The Better Care Fund (BCF) came into operation on 1 April 2015 for the 2015-16
financial year, with £3.46 billion of NHS England’s funding to Clinical Commissioning
Groups (CCGs) ring-fenced for the establishment of the fund. To administer the fund,
CCGs were required to establish joint arrangements with local authorities to operate a
pooled budget to deliver more integrated health and social care. This will be
complemented by £134 million Social Care Capital Grant and £220 million Disabled
Facilities Grant, both paid directly from Government to local authorities.
Why is this important?
31. The Care Act 2014 requires a pooled fund to be established between CCGs and local
authorities in the form of a section 75 agreement. BCF is potentially material for some
local authorities.
32. Local BCF arrangements are complex and varied, involving a number of valid
commissioning and accounting arrangements that raise risks of misunderstanding,
inconsistencies and confusion between members of a BCF pooled budget internally
and between commissioners and providers. It is therefore vital that the bodies
communicate with each other to agree a consistent view of the accounting
arrangements.
33. Although the Care Act 2014 requires a pooled fund, consideration will need to be given
under the 2015-16 accounting code’s adoption of IFRS 11 to determine if joint control
exists and if so whether it is either a joint venture or a joint operation. Paragraph
9.1.2.51 of the 2015-16 accounting code sets out the accounting treatment of joint
operations. Health and local government bodies may also need to discuss and
consider:


IFRS 10 to assess where the control and risks lie; and
IAS 18 to determine whether it is a principal or agent relationship.
34. As anticipated the majority of BCF arrangements are being hosted by local authorities.
Local authorities should be aware of the earlier reporting deadlines applicable to NHS
bodies and the need to provide information to meet these requirements.
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35. Pooled budget arrangements do not constitute a delegation of statutory
responsibilities, which are retained by the CCG governing body and the relevant local
authorities. Governance arrangements will need to meet the needs of all the parties
involved and arrangements will need to be appropriately considered within the annual
governance statement. Healthcare Financial Management Association (HFMA) and
CIPFA have produced guidance on Pooled Budgets and the Better Care Fund.
36. Detailed guidance on accounting for BCF transactions between CCGs and local
government is included within Chapter 3 Annex 1 to Department of Health Group
Manual for Accounts 2015-16. The footnote to Paragraph 5 of this guidance sets out
that “Local authorities account for their collaborative arrangements under the
specifications of the Code of Practice on Local Authority Accounting in the United
Kingdom (the Code). They may find this guidance as useful background, in particular
explaining the NHS context, while continuing to comply with the Code”.
What should auditors do?
37. The nature of the arrangements may present a number of audit risks which auditors
will need to consider as part of their planning process. Auditors will need early
discussions with local authorities to determine:




how the funds will operate, including the processes in place to ensure the
information requirements of the parties involved are met, particularly financial
reporting timing differences between NHS bodies and local authorities;
that the arrangements in place have been considered against the requirements
of the 2015-16 accounting code and that the financial reporting implications of
the arrangements are fully agreed and understood by all parties;
that planned disclosure of pooled budget arrangements is appropriate; and
that governance issues are appropriately considered and reported in the
annual governance statement.
Revising the Minimum Revenue Provision
What is the issue?
38. Regulation 28 of the Local Authorities (Capital Finance and Accounting) (England)
Regulations 2003 (2003 Regulations), as amended, requires local authorities to set
aside a prudent amount of Minimum Revenue Provision (MRP). DCLG has issued
Guidance on Minimum Revenue Provision which sets out the principles and processes
to be followed in complying with these regulations and gives four options which are
consistent with these and which are referred to as options 1, 2, 3 and 4 below.
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39. Local authorities, under the DCLG guidance, have to make an annual statement setting
out their MRP policy for the year which is approved by elected members. Auditors will
be aware that some authorities have been reviewing their policy in respect of making
an annual charge for MRP. Changing MRP does not lead to an absolute revenue saving
as the change typically reallocates the cost of financing into future years. Authorities,
when revising their MRP, will need to consider the possible consequences such as
maintaining a higher Capital Financing Requirement (CFR) and the interest implications
of a higher underlying need to borrow.
Why is this important?
40. Paragraph 5 of DCLG’s MRP guidance states that the broad aim of prudent provision is
to ensure that debt is repaid over a period that is either:
a) reasonably commensurate with that over which the capital expenditure
provides benefits; or
b) in the case of borrowing supported by Revenue Support Grant (RSG),
reasonably commensurate with the period implicit in that grant.
41. Options 1 and 2 of the DCLG Guidance are methods of charging for MRP as if there
were a link between borrowing and RSG i.e. b) above. However, given that there is no
longer any link between RSG and support for borrowing, then b) does not apply to new
borrowing. Therefore, in such circumstances local authorities should be setting MRP
over a reasonably commensurate period which matches the benefit of the asset, i.e.
applying options 3 or 4. It is likely that authorities will be applying a combination of
the options to reflect the borrowing undertaken when it was supported by RSG
(options 1 and 2) and subsequent new borrowing (options 3 and 4).
42. Paragraph 3 of the DCLG Guidance requires local authorities to approve an annual MRP
statement before the start of each financial year and permits changes to this in year.
Therefore local authorities may change their MRP policy provided it meets the
requirement for it to be a prudent amount and meets the aims of the DCLG Guidance
(see paragraph 40 above).
43. DCLG has advised that in its view:



under regulation 27 of the 2003 Regulations, local authorities must charge to
their revenue accounts for each financial year MRP to account for the cost of
their debt in that financial year;
the regulations make no provision for a credit to the account; and
therefore the 2003 Regulations make it clear that MRP cannot be a credit but is
an annual charge.
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44. In respect of revising the authority’s annual MRP statement, there are two questions
that commonly arise:


can the revised MRP charge be backdated? In other words whether local
authorities can retrospectively restate previous year’s accounts for excess
MRP; and
can a local authority that had in effect overpaid MRP make no charge for
future years until the excess charge from previous years has been removed?
45. In respect of the first question, MRP is a statutory annual charge rather than a
provision made under accounting standards and therefore cannot be credited back to
the general fund. However in making the MRP charge, authorities will need to use a
prudent technique. Changes in such techniques are not the correction of errors and
therefore are not treated as prior period adjustments. Instead, any change in an
amount previously calculated has to be applied prospectively. However, this does not
preclude authorities from estimating what they would have charged in previous years
as MRP, and then adjusting future years’ MRP to take account of any under or over
charge arising in previous years.
46. In respect of the second question, where authorities identify that they have ‘over
charged’ MRP in previous years, then any recovery in future years cannot result in a
negative MRP charge. Local authorities with loan debt outstanding and a positive CFR
must make a prudent Minimum Revenue Provision – in other words they cannot have
a break from making an annual charge. A prudent approach would be, for example,
phasing in any reduction in future years’ MRP over a period commensurate with that
over which the capital expenditure provides benefits.
What should auditors do?
47. Auditors should consider whether authorities in revisiting their MRP policy have
complied with the requirements of the relevant regulations and guidance. In particular
the auditor should consider whether an authority has followed due process by:





considering all the options available and their wider impact on the CFR and
underlying borrowing;
determining what prudent means in the context of their authority;
demonstrating that the proposed revised MRP policy complies with the
requirement to make a prudent amount of MRP, including the robustness of
any further legal or accounting advice sought, and in this case meets either a)
or b) in paragraph 40 – most likely a), for the reasons set out above;
discussing any proposed changes with their auditors; and
securing approval of elected members for the change in policy.
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Fair Value
What is the issue?
48. The International Accounting Standards Board (IASB) issued International Financial
Reporting Standard (IFRS) 13 Fair Value Measurement in May 2011. This standard
applied to the private sector for accounting periods beginning on or after 1 January
2013.
49. The standard defines fair value as ‘the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date’. IFRS 13 applies to both financial and non financial assets and
liabilities measured at fair value. It does not take into account the entity’s intention for
the use of the asset or liability. The fair value measurement is based on the
hypothetical transaction that could take place in the principal or (in its absence) the
most advantageous market.
50. For 2015-16 local government accounts, IFRS 13 has been adopted without adaptation.
A new section, Section 2.10 is included in the 2015-16 accounting code to reflect the
adoption of this standard. It ‘requires that local authorities shall measure their assets
and liabilities and provide disclosures in accordance with IFRS 13 where another
section of the 2015-16 accounting code requires or permits fair value measurement,
except where adaptations to fit the public sector are detailed in the 2015-16
accounting code’. The 2015-16 accounting code also relates to fair value disclosures
i.e. where fair values are disclosed alongside carrying values as part of the financial
instrument disclosures eg. PWLB, PFI liability. Bodies will need to make appropriate
arrangements for communicating and obtaining this information from valuers and
other advisors.
51. Although IFRS 13 has been adopted without adaptation for the public sector, IAS 16
Property, Plant and Equipment has been adapted and interpreted for the public sector
context which limits the circumstances in which a valuation is prepared under IFRS 13
for these assets.
Why is this important?
52. The concept of fair value is used throughout the 2015-16 accounting code (see
paragraph 2.1.2.33 for an overview). IFRS 13 provides a consistent definition of fair
value.
53. Paragragph 4.1 of the 2015-16 accounting code adapts IAS 16 requiring that items of
property, plant and equipment that are operational, and providing service potential
are measured for their service potential and not at fair value. However, surplus assets
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(property, plant and equipment that are not operational) are measured at fair value in
accordance with section 2.10 of the 2015-16 accounting code.
54. Bodies will need to provide auditors with:




evidence that fair values have been determined in line with IFRS 13;
documented consideration of highest and best use for non-financial assets;
evidence of information on characteristics has been supplied to experts; and
evidence to support critical judgements that authorities make in calculating fair
value.
What should auditors do?
55. Auditors should familiarise themselves with the presentation and disclosure
requirements of IFRS 13 as adopted by the 2015-16 accounting code and discuss any
changes required with local authorities.
56. Auditors should discuss with audited bodies whether additional valuations are needed
and that any changes to disclosures in the financial statements have been considered.
57. Auditors should also be aware of the impact of IFRS 13 on financial instruments and
other assets and liabilities, including investment property, valued at fair value.
58. Local authorities are required to apply the measurement and disclosure requirements
of Section 2.10 of the 2015-16 accounting code prospectively from 1 April 2015.
Restatement of prior year transactions is not required.
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Section 3: Police and fire accounting issues impacting on 2015-16
accounts
Firefighter injury benefits
What is the issue?
59. From 1 April 2006, The Firefighters’ Compensation Scheme (England) (Amendment)
Order 2006 came into force, putting new arrangements in place for the funding of
firefighters’ injury benefits. All injury benefit payments were required to be funded
from operational (revenue) accounts rather than the pension fund account.
Why is this important?
60. In 2014-15 it was identified that a number of fire and rescue authorities (FRAs) had
incorrectly charged firefighters’ injury benefit payments to the pension fund account,
resulting in an overpayment of DCLG pension top-up grant.
61. DCLG has determined that the overpaid grant is to be reclaimed and where FRAs chose
to settle this before the year end it will be a 2015-16 issue. For other FRAs it is likely to
be an issue for 2016-17 and possibly beyond, depending on the agreed timescale for
the recovery of overpayments.
What should auditors do?
62. Bodies will need to consider how to show the liability in their 2015-16 financial
statements.
63. We will provide further information to auditors in a WAC once more information about
the recovery mechanism and timetable is available.
Police and fire pension commutation
What is the issue?
64. In May 2015, the Pensions Ombudsman published their Final Determination in the
case of Milne v Government Actuaries Department (GAD), which confirmed that the
calculation of pensioners’ lump sum amounts on commutation since 1998 was based
on out-of-date actuarial data. This means that some pensioners may have received too
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little lump sum in return for commuting some of their pension, or may have
commuted more of their pension than was necessary in order to secure a particular
lump sum. The Home Office and DCLG issued guidance to local police and fire
authorities in 2014-15 which enabled local bodies to calculate the necessary provision
for their 2014-15 accounts. This guidance continues to be relevant to bodies
preparing their 2015-16 accounts.
Why is this important?
65. The commutation factors should have been updated in previous periods and
consequently the pension amounts recorded in the financial statements of the
authority’s prior periods were incorrect due to the failure to update the factors. The
effect on the prior years’ financial statements was that the net defined benefit pension
liability was understated.
66. The Pensions Ombudsman’s determination makes clear that there was a previous
mistake in the amount of commuted sum payable to the individual so that they had
received less than the amount to which he was entitled under the scheme. The
determination states that the individual should be compensated for the difference,
plus interest.
67. However, other retirees may have previously received the full lump sum to which they
were entitled under the scheme (because there is a maximum) and so the loss to them
arises from their ongoing pension having been reduced by too great an amount. The
compensation they would receive therefore is an immediate payment for the
underpaid pension between their date of retirement and 31 March 2015, and then a
prospective increase in their future pension.
68. The GAD should take into account the effect of prospective increases in future
pensions as part of their valuation for 2015-16.
69. Central government has agreed to repay the cost of the errors caused by the incorrect
commutation factors applied by GAD, however a decision has not yet been reached as
to whether this will be done as a compensation payment or through top-up grant.
What should auditors do?
70. Auditors should ensure that calculations to support the liabilities and GAD valuations
are complete and in accordance with IAS 19 Employee Benefits.
71. We will provide further information to auditors in a WAC in respect of the timing and
mechanisms adopted by DCLG and Home Office to compensate bodies for the cost
incurred.
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Section 4: 2016-17 local government accounting issues:
Highways Network Asset
What is the issue?
72. The measurement requirements of the CIPFA Code of Practice on Transport
Infrastructure Asset (2013) (transport code), to measure highways infrastructure at
Depreciated Replacement Cost (DRC), will apply to the 2016-17 financial statements.
This has been confirmed by the 2016-17 accounting code.
Why is this important?
73. This is important as it will represent a change in accounting policy from 1 April 2016.
CIPFA/LASAAC has agreed an adaption of IAS 1 for the transition for the move to
measuring the Highways Network Asset at DRC, so there is no requirement to restate
the preceding year information (including opening balances for 1 April 2015), or to
restate the opening balance as 1 April 2016. The change will instead be accounted for
as an adjustment to opening balances as at 1 April 2016. However, bodies will need to
consider their disclosures in the 2015-16 accounts to ensure that they are complying
with the requirement of IAS 8 as set out Appendix C in the update to the 2015-16
Code.
74. The 2016-17 accounting code requires a separate asset class, the highways network
asset to be established. This will require relevant authorities to disaggregate the
assets specified by the transport code from the current infrastructure class of assets.
CIPFA has signalled both of these changes to local authorities in the first of a series of
briefing notes. Of particular importance is the view of CIPFA/LASAAC that district
councils will not meet the definition of a single Highways Network Asset. Where this is
the case districts will continue to account for any highways infrastructure assets under
the 2016-17 accounting code at historical cost.
75. CIPFA/LASAAC conducted a survey of authority readiness to meet these changes.
While the majority of bodies that responded to the survey felt that they will meet the
2016-17 accounting code requirements, there was still a significant proportion that
expressed concern at meeting the timetable.
What should auditors do?
76. Auditors should discuss with relevant local authorities in 2015-16 the steps they are
taking to implement the change to DRC for Highways Network Assets for 2016-17.
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77. Auditors should note that the Code anticipates that district councils are unlikely to
have an asset meeting the definition of a Highways Network Asset and therefore tailor
their work accordingly.
78. Auditors should continue to work closely with their relevant authorities to achieve
their plans for complying with the 2015-16 and 2016-17 accounting code requirements
in respect of Highways Network Assets. In particular auditors should:



discuss with their bodies whether they are intending to use the CIPFA centrally
provided structures toolkit (for bridges) and valuation toolkit. If bodies are not
intending to use the toolkits then they need to discuss with their auditor the
approach that they are taking to ensure compliance with the accounting and
transport codes;
understand the arrangements that bodies are putting place to ensure the
completeness and accuracy of their inventory, including the capture of
condition data; and
agree with bodies that accounting records will be in place on 1 April 2016 and
31 March 2017 to ensure that opening and closing values have clearly been
documented for accounts preparation.
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Other support and raising technical issues or queries on this AGN
79. Auditors in firms should raise queries within the firm, in the first instance, so that the
relevant technical support service can consider whether to refer queries to the NAO’s
Local Audit Code and Guidance (LACG) team by e-mailing
LACG.queries@NAO.gsi.gov.uk.
80. Information supporting auditors is available on the LAGC extranet. Updates will be
communicated through the Weekly Auditor Communication (WAC). If there is a need
for further statutory guidance during the year, the NAO may issue an addendum to this
AGN.
81. The NAO also engages with the firms through its Local Auditors’ Advisory Group
(LAAG) and supporting technical networks to consider any emerging regime-wide
technical issues on a timely basis. Auditors should follow their in-house arrangements
for bringing significant emerging issues to the attention of their supplier’s
representative on LAAG or the relevant technical network.
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