LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Introduction
The purpose of this explanatory paper is to provide an easily understandable guide
to the Council’s Statement of Accounts for the year ended 31st March 2006. It is both
a summary and an interpretation of the accounts and also highlights the key issues,
which have arisen during the financial year.
The Council’s accounts
The accounts have been compiled in accordance with the Code of Practice on Local
Authority Accounting, in the United Kingdom 2005 (the SORP) and the Best Value
Accounting Code of Practice, which have been developed by CIPFA and the
Accounting Standards Board. They are subject to audit by the Audit Commission.
The accounts are presented as a number of distinct sections and these are
summarised below: Statement of Accounting Policies - This describes the legislation and principles
that the Authority has followed in preparing the figures within the accounts.
Consolidated Revenue Account - This shows the net cost for the year of the major
functions for which the Council is responsible, together with the income received
from fees and charges made by the Council, from local taxation and from Central
Government grants.
Housing Revenue Account - This reflects a statutory obligation to account
separately for local authority housing provision. It shows the major elements of
housing revenue expenditure - maintenance, administration, rent rebates and capital
financing costs - and how these are met from rents, subsidy, and other income.
Collection Fund - This shows the transactions of Merton as a billing authority in
relation to non-domestic rates and the council tax, and illustrates the way in which
these have been distributed to precepting authorities and to Merton’s General Fund.
Consolidated Balance Sheet - This sets out the Authority's year end financial
position. It shows the balances and reserves at the Authority's disposal and its longterm indebtedness, the fixed and net current assets employed in its operations, and
summarised information on the fixed assets held. It includes the Housing Revenue
Account and the Collection Fund.
Statement of Total Movements in Reserves - This brings together all the
recognised gains and losses of the Authority during the period and identifies those
which have and have not been recognised in the Consolidated Revenue Account.
The statement separates the movements between revenue and capital reserves.
Cash Flow Statement - This consolidated statement summarises the inflows and
outflows of cash arising from revenue and capital transactions with third parties.
Pension Fund - The revenue account shows the contributions by members to the
fund and the benefits paid from it, together with details of investment activity. The
net Assets Statement shows the financial position of the fund at the end of the
financial year.
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LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Revenue spending in 2005/06
(Source: Consolidated Revenue Account)
The Council’s General Fund budget requirement was £211.236m. This included the
addition of £1.9m to general fund balances. To maintain and improve Council
services, growth of £4m in certain areas was included in the budget, although
savings of £15m were also identified. There was no Collection Fund surplus
transferred to the General Fund.
The budget included a contribution to balances of £1.9m but with rigorous budgetary
control procedures in place throughout the year, the Council was able to add
£2.018m to General Fund balances, increasing them from £3.665m to £5.683m.
In 2005/06, Merton’s net cost of services was £239.079m, an increase of £12.46m
(5.5%) on 2004/05. This included increases of £7.5m (7%) in Education Services
and £1.7m (3%) in Social Services. The Council’s contribution to the Magistrates
Court service was discontinued from 2005/6.
The chart below shows the actual spend for each service and proportion of the total.
Non distributed
costs
£5.1m
Corporate and
2%
democratic
£6.8m
3%
Central Services
£3.6m
2%
Court Services
£0.1m
0%
Cultural Services
£8.3m
3%
Social Services
£52.8m
22%
Education Services
£112.3m
47%
Planning &
Development
£2.3m
1%
Housing Highways and
£19.5m
Transport
8%
£12.7m
5%
Environmental
Services
£15.6m
7%
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LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
The graph below shows the year on year change in spending on each service.
% Service Changes 2005
15%
10%
9%
10%
9%
7%
How the expenditure was funded:
Planning & Development
Housing
Highways and Transport
Environmental Services
-15%
Education Services
-10%
-2%
-5%
Cultural Services
-5%
-10%
Court Services
0%
Central & Corporate Services
0%
3%
Social Services
5%
(Source: Consolidated Revenue Account)
Other than income collected by service departments from fees and charges and
specific government grants, there are three ways in which general fund services are
paid for. These are revenue support grant, a contribution from the business rates
pool and council tax. The following chart shows the actual funding for 2005/06: -
Council Tax
£71.1m
34%
Business Rates
£63.8m
30%
Revenue
Support Grant
£76.8m
36%
In 2005/06, Merton’s Council Tax increase was the 4 th lowest in Outer London
leading to the 10th highest Council Tax (Band D) of the twenty Outer boroughs.
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LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Variances from budget
Within the General Fund there were a number of large over and under spendings.
These were mainly within social services where demand-led budgets were under
pressure.
Major Variations greater than £250,000 Direct Budget against Actual
Department
Sector Category
£000
Environmental
Waste Collection
450
Children, schools
Pre School Education (incl Nursery)
(446)
HRA
Income
Expenditure
(314)
(467)
Corporate
Interest and Investment Income
Social Services
Children Looked After (24+)
Older People 65+
(1,367)
(566)
3,035
Capital expenditure and financing
(Source: Financial Accounts 2005/2006)
Capital expenditure reflects spending on tangible fixed assets such as buildings and
equipment and intangible assets such as the capital contribution to NewSchools.
where the benefits to the authority last for more than one year.
The Council incurred capital expenditure of £32.240m in 2005/06, compared with an
original budget of £32.625m. This was spent on services as follows:-
HRA
£5.4m
17%
Housing
General Fund
£1.0m
3%
Corporate
Services
£6.4m
20%
Education
£4.3m
13%
Environment &
Regen
£10.5m
33%
Leisure &
Libraries
£3.6m
11%
4
Social Services
£1.0m
3%
LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Capital Expenditure was financed through a variety of resources as shown below
Financing of Capital Resources
Credit Approvals/Supported Capital Expenditure
Usable Capital Receipts
Capital Grants
Section 106
Major Repairs Allowance
Revenue Financing
Unsupported Borrowing
Unsupported
Borrowing
17%
£m
4.8
4.5
8.8
1.0
4.5
3.1
5.5
Credit Approvals/
Capital Support
15%
Revenue
Financing
10%
Major Repairs
Allowance
14%
%
15
14
27
3
14
10
17
Usable Capital
Receipts
14%
Capital Grants
27%
Section 106
3%
There has been major capital investment on a wide-range of projects including: Committee
Capital works undertaken
Housing
Adaptations
Revenue
Decent Homes Morden
Account
West Barnes Roof Phase 3
Community
Raynes Park Library
and Housing
Libraries Investment
Social Services capital
Corporate
IT Systems and programme
Vehicles and Equipment
Capitalisation works
Children,
schools and
families
Environment &
Regeneration
Devolved Capital
Modernisation
Improvements Smart Centres (PRU)
Education Works
Highways Infrastructure
Principal Road Maintenance/Bus priority works
Public Service Agreement – Highway Maintenance
Capitalisation works
Bus Priority Works
Affordable Housing
Cannons Leisure Centre
5
£000
469
428
393
918
758
704
1,832
1,211
764
1,083
782
667
796
1,804
1,786
1,755
1,344
681
569
450
LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Financial Health
(Source: Consolidated Balance Sheet)
The Council’s Consolidated Balance Sheet gives a snapshot of the Council’s
financial position at the year end (i.e. 31st March 2006). It shows what the Council
owns (its assets) and what it owes (its liabilities). The Council’s reserves and
balances represent the balance of these.
Summary Balance Sheet at 31st March 2006
Assets
Fixed and Other Long Term Assets
Current Assets including investments, cash and debtors
Current Liabilities including creditors and short term borrowing
Total Assets
Liabilities
Long term borrowings
Other liabilities
Government Grants & Contributions not applied
Pension Fund Net Liability under FRS17 methodology
Total Liabilities
Total Net Assets
£m
782
123
(39)
866
(186)
(4)
(6)
(124)
(320)
546
Represented by:
Reserves and balances which cannot be spent
Reserves and balances which can be spent
Net worth
526
20
546
The main features of the Consolidated Balance Sheet at 31st March 2006 are as
followsAccount category
A decrease in long-term assets, largely due to disposal of
Council dwellings.
An increase in net current assets, due in the main to an
increase in investment in short-term cash deposits.
An increase in longer-term liabilities, due in the main to
borrowing undertaken in advance of need, to take advantage of
beneficial interest rates.
Change in Net Assets
6
£m
(49)
19
(15)
(45)
LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Reserves and fund balances
In total, the Council now has usable capital reserves amounting to £2.4m and
revenue and fund balances amounting to £17.1m. This represents a fall in the
overall level of reserves and balances when compared with the audited 2004/05
figures. This is because Section 106 balances have been reclassified as creditor
balances rather then capital reserves. By comparison with the revised 2004/2005
figures the level of reserves and fund balances has increased by £6.2m.
The following chart gives further details: -
General Fund
Balances
£5.7m
33%
General Fund
Reserves
£8.5m
50%
Collection Fund
£2.0m
12%
HRA
£0.9m
5%
In accordance with the Council’s strategy to increase general fund reserves, there
has been further improvement during 2005/06. The Council added £2.018m to
General Fund balances so that at the end of 2005/06 there are accumulated
balances of £5.687m.
Housing Revenue Account (HRA)
The HRA is concerned with transactions involving management of the Council's
housing stock. HRA spending cannot be subsidised by the General Fund.
As at 31st March 2006, HRA balances are £0.930m (£0.828m at 31st March 2005).
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LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Collection Fund
The Council is a “billing” authority (i.e. it sends out council tax bills). Consequently, it
is required to keep a separate account, the Collection Fund, to record all monies
received and paid. All council tax and business rates receipts are paid in to it and
from the account, the Council pays for the services it provides, it pays business rates
to the government pool, and it pays over to the GLA, the money it has collected on
its behalf. Any surplus/deficit in respect of Council Tax transactions is shared in
proportion between the Council and the GLA. The business rates transactions do not
generate a surplus or deficit. The following summarises the position for 2005/06:£000
Income
Council Tax
Business Rates received
Total Income
£000
91,910
55,620
147,530
Less Expenditure
London Borough of Merton
GLA
Business Rates paid to Government
Allowance to General Fund for collecting Business Rates
Provision for non payment of Council Tax
Total Expenditure
71,150
18,253
55,340
280
1.104
146,127
Surplus on Income and expenditure 2005/6
Surplus at 31 March 2005
Surplus at 31 March 2006
(1,403)
(632)
(2,035)
The following chart shows how the Council tax surplus will be distributed : -
L B Merton
£1.6m
80%
GLA
£0.4m
20%
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LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Cash Flow
This statement analyses the movement on cash over the year 2005/06.
Cash flows into the Council when, for example, assets are disposed of or grants and
payments for services are received. Similarly, it flows out when the Council pays its
suppliers or repays borrowing. Cash held includes the Council’s bank balances,
including those held in individual school bank accounts.
The table below is a summary.
Cash
Cash
Net Cash
Inflows
Outflows
Inflow/
(Outflow)
£m
£m
£m
Cash at bank at 31st March 2005
11.5
Revenue Activities
452.3
(420.9)
31.4
Capital Activities
18.7
(32.2)
(13.5)
Interest paid less received
4.7
(12.7)
(8.0)
Investments sold/ (Borrowing repaid)
(16.4)
(16.4)
Net movement in cash at bank
(6.5)
Cash at bank at 31st March 2006
5.0
Treasury
In accordance with best practice as advocated by the Prudential Code, when making
capital investment decisions, a local authority must take into account the affordability
of those decisions on its asset management plans, the implications for external
borrowing and value for money consequences through options appraisal and their
strategic plans.
Borrowings
There has been an increase in overall borrowings between 2004/05 and 2005/06,
due to the undertaking of some borrowing in advance of need, to take advantage of
beneficial interest rates.
Borrowing - Source
Balance at
Increase/ Change in Balance at
1 April
Repayment
temporary
31 March
2005 of long term Borrowings
2006
Borrowings
£m
£m
£m
£m
Public Works Loan Board
84.5
18.0
0
102.5
Money Market
98.0
0
(15.0)
83.0
Total
182.5
18.0
(15.0)
185.5
Investment
The change in the Council’s investment profile is represented in the following table:Investment Profile
Balance at
Change in Change in Balance at
1 April
investment investment
31 March
2005
Managed
Managed
2006
Internally
externally
£m
£m
£m
£m
Total
75.1
19.9
0
95.0
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LONDON BOROUGH OF MERTON
Explanatory Paper for the Statement of Accounts 2005/06
Pension Fund
The pension scheme is financed by contributions from employees and the employer,
together with income and proceeds from investment of a Pension Fund administered
by the Council.
Net increase in fund from members contribution less benefits
Net increase in fund from investment transactions
Net Increase in Pension Fund during 2005/06
Fund Value at 31 March 2006
£000
28,476
33,860
62,336
291,233
Pension Fund Liabilities
The Pension Fund accounts do not take account of liabilities to pay pensions and
other benefits after 31st March 2006. However, the main financial statements now
incorporate the requirements of FRS (Financial Reporting Standard) 17, Retirement
Benefits, which does take account of these liabilities, but without affecting the
amount to be paid by council taxpayers.
FRS17 requires that the authority must disclose the effect of pensions liabilities in
the accounts when they are incurred rather than when they are paid. The
Consolidated Balance Sheet now contains the net pensions liability of the Council
(i.e. its estimated liabilities net of its attributable share of the pension fund assets),
and a corresponding reserve. Appropriations are made from the reserve to the
Consolidated Revenue Account to neutralise the effect of this reporting standard on
the amount to be paid by council taxpayers.
The FRS17 calculation for 2005/06 shows assets of £283.2m (£216.9m in
2004/2005) and estimated liabilities of £407.3m (£344.3m in 2004/2005), producing
an estimated fund deficit of £124.1m (£127.4m in 2004/05).
Essentially the FRS17 calculation forecasts the overall financial status of the
Pension Fund for management information purposes. The nature of the forecast
calculation is such that it will change with future movements in Pension Scheme
membership, contributions levels and investment performance. Although the FRS 17
calculation produces a fund deficit, the Pension scheme has sufficient funds to pay
immediate and medium term pensions and other benefits.
Disclaimer:
All of the figures in this summary have been compiled having due regard to proper
accounting practice. In order to provide simplified, meaningful, summary information
some figures have been combined.
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