HERTFORDSHIRE COUNTY COUNCIL
AUDIT PANEL
Agenda Item No.
3
THURSDAY 2 FEBRUARY 2006 AT 2 P.M.
ANNUAL STATEMENT OF ACCOUNTS 2004/05 – ANALYSIS OF
MOVEMENTS IN DEBTORS AND CREDITORS
Report of the Finance Director
Author: Andrew Nightingale
1.
Tel: 01992 555331
Purpose of Report
To present an analysis of the creditors, debtors and provision for
doubtful debts position as at 31 March 2005 and to explain the principal
movements in the financial years to that date.
2.
Background
At its July 2005 meeting the Audit Panel recommended the approval of
the draft 2004/05 statement of accounts subject to audit. The panel
noted the significant movements in year end creditors, and debtors and
requested that further information be provided to explain these
movements. The figures presented in this report take account of
adjustments agreed with the auditor following the completion of the
audit of accounts.
3.
Information
3.1.
Creditors
(a)
Note 10 to the 2004/05 Statement of Accounts is reproduced in Table
1, showing an overall increase in year end creditors of £55.239m. The
principal reasons for this movement are explained in Table 2.
Table 1.
2004
£000
2005
£000
110,707
15,552
16,487
142,746
138,352
37,638
21,995
197,985
10. Creditors
Sundry Creditors and Receipts in Advance
Grants received in advance
Contractor Deposits
Total
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Table 2: Analysis of Movement in Creditors
£,000
Sundry Creditors and Receipts in Advance
Early payment of March 2004 creditors
Underlying Increase in creditors
Increase in Receipts in advance
Grants received in advance
Increase in Grants Unapplied
Contractor Deposits
Increase in Developers Contributions
(b)
Early payment of March 2004 creditors
Para
Ref.
13,000
5,700
9,000
27,645
22,086
5,508
£13m
As part of the strategy to minimise the risks of SAP “Go-live” on 1 April
2004, arrangements were made to process for payment all invoices in
respect of 2003/4 that were registered on the walker system at the end
of March, even if their payment terms would normally mean payment
actually being made in April. This action ensured that the risk of late
payment to suppliers was kept to a minimum during the transition to the
new system, but does mean that the March 2004 creditors figure
shown in the accounts was £13m less than it would otherwise have
been. This action protected the cash flow of our Small Medium Sized
enterprise suppliers, as well as the council’s reputation at the cost of
reduced interest income of around £20,000 in the period.
(c)
Underlying increase in creditors
£5.7m
After adjusting for the item explained in paragraph 1.2 the reported
level of creditors was £5.7m higher than in the previous year. This is
largely explained by the increased transparency in balance sheet
accounting that SAP has enabled. Within the previous Walker
accounting system SAP, there were areas of the balance sheet where
a series of personal accounts were netted off against each other to give
overall net creditor or net debtor figures, despite the fact that within
these range of accounts there may be a series of credit and debit
balances. Within SAP all credit balances are now correctly aggregated
into the overall creditor figures and all debit balances allocated to the
debtor figure. This change in accounting practice also explains a
significant proportion of the increase in the reported debtors figure in
the year.
(d)
Increase in receipts in advance
£9m
The vast majority of this increase (£8m) relates to invoices raised to
health authorities in respect of their April 2005 contributions to pooled
budget arrangements. The health authorities required that HCC bill
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them several weeks in advance of agreed payment date to ensure they
can make payments on the due date. This means that accounts were
raised and our system created debtors on the council’s balance sheet.
This transaction was reversed by a receipts in advance posting to avoid
accounting for this 2005/06 income in the old year revenue account.
Their inclusion means that both receipts in advance and debtors have
been overstated by £8m. Systems and procedures are being reviewed
to ensure that this does not arise again in 2005/06. In producing the
2005/06 accounts the 2004/05 comparative information will be adjusted
accordingly.
(e)
Increase in Grants Unapplied
£22.1m
This increase arises as the value of specific grants received in the year
but not spent in the year increased significantly compared to the
previous year. Slippage on basic needs and school modernisation
programmes within CSF is the largest area contributing to this
increase. The various reasons for slippage in these programmes was
explained in the provisional outturn monitor for 2004/05 but include the
need to await DFES decisions on “Building Schools for the Future”
allocations before deploying these resources. Also the New Secondary
Modernisation grants programme has contributed to the slippage.
There are over 40 schools with projects in the £41m two-year New
Modernisation DFES Externally Funded programme and some of these
schemes have taken longer than expected to come to fruition and
therefore a greater proportion of the expenditure now falls in the
second year of the programme i.e. 2005/06.
The increase includes an increase of over £2m in the level of
government grants given directly to schools but unused at the year
end. The overall level of unapplied grants of this nature as at March
2005 was £9.2m
The increase also includes £2.2m of grants received relating to asylum
seekers which because of lower than originally estimated asylum
seeker numbers was not used in the year. It is now likely that this sum
will need to be repaid.
(f)
Increase in developers’ contributions
£5.5m
Developer’s contributions received do vary significantly between years
depending on the timing of developments and the agreements with
developers to support particular schemes. In 2004/05, the amounts
received by both CSF and Environment were higher than in the
previous year.
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3.2.
Debtors
Note 7 to the Statement of Accounts is reproduced as follows:7.
(a)
Debtors
2004
2005
£000
£000
Other
Payments in Advance - Other
Grants recoverable
H.M. Customs and Excise
Recoverable Fire Damage
54,462
12,907
3,464
2,374
1,226
74,433
82,286
7,865
8,472
5,716
26
104,365
Less Provision for Doubtful Debts
Total
(2,441) (2,276)
71,992 101,089
Increase in other debtors
£27.8m
Of this increase in year end debtors £11.1m relates to monies owed to
the council by the health sector, as given its financial circumstances
and cash accounting arrangements much of the sector was unable to
pay over amounts due until after 1 April. The two principal increases in
health sector debt relate to Herts Continuing Health Care and the
Primary Care Trust where debts owed to the council at the year end
increased by £4.2m and £6.9m respectively.
Another factor in the increase relates to the grossing up of creditor and
debtor positions as a result of the SAP implementation as explained in
paragraph 1.3. Also the overstatement of the debtors position relating
to 2005/6 health authority pooled budget contributions explained in
paragraph 1.4 also contributes to the reported increase in debtors.
Together these two factors explain £13.7m of the increase.
Leaving aside these factors underlying debt levels did rise during the
year, as it took several months to ensure that automated dunning
processes operate effectively, and there were also difficulties for
services in getting detailed reporting on outstanding debts. Both of
these initial problems have now been resolved and the total level of
outstanding debt as at the end of December 2005 is now £15.1m lower
than the level reported at the end of March. A project is now underway
to further tighten debt systems and procedures.
(b)
Decrease in payments in advance
£5.042m
The difference in the reported levels of payments in advance between
years is principally due to arrangements put in place in the transition
period of March/April 2004, whereby payments to clients and
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contractors were set up in advance on the Walker system to minimise
the risk of delayed payments when moving onto the SAP system.
(c)
Increase in grants recoverable
£5.008m
The largest items causing this increase in grant income owed to the
council are an increase in Standards Fund grant outstanding of £2.9m
and training support grant in CSF and ACS of £900,000.
(d)
Reduction in recoverable fire damage
£1.2m
The reduction here arises as outstanding fire claims have been settled
and no major fire incidents took place in the year.
(e)
Increase in amount owed by H.M. Customs & Excise
£3.3m
The amount VAT to be reclaimed by the council from Customs and
Excise at the end of March 2005 was higher than in March 2004,
because of the higher level of Vatable expenditure incurred in March
2005, than in the previous March. This was largely due to the relatively
high level of spending on roads maintenance and the Baldock By-pass
in the final month of the year.
In addition to this factor £1.9m of the increase is explained by a
technical difference in the way that SAP works.
(f)
Reduction in provision for doubtful debts
£165,000
The County Council’s general policy for calculating the provision for
bad or doubtful debts is shown below. These general rates are subject
to review by individual services where special circumstances may
apply.
Provision
Age of debt
%
(months)
10 to 15
35
16 to 21
50
Over 21
100
As at the end of March although total debt was higher than in the
previous year, the levels of debt older than one year were lower than in
the previous year. In addition, a proportion of the older debt related to
monies owed by the health sector and for recoupment from other
LEAs, where it is reasonable to continue to assume the majority of
these sums will ultimately be settled.
Since the year end the levels of debt older than one year have risen,
partly as a consequence of the difficulties in early months of 2004/5
relating to dunning and debt reporting. A project is now underway to
improve this position with the assistance of the SHARP team and
Serco.
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