CFWG Paper 60
To:
Capital Finance Working Group (CFWG)
From:
Scottish Government
Date:
5 June 2013
Subject:
Non-current asset insurance events and compensation
Background
1.
The Group considered the question of when an insurance receipt should be
treated as a capital receipt at its meeting 22 August 2012.
2.
It was agreed at that meeting that an insurance receipt should not be a capital
receipt. However, a local authority should act prudently in the application of an
insurance receipt.
3.
An action arising from that agreement was for the Scottish Government to
draft a policy note for comment by the Group.
Policy note and its publication
4.
The proposed policy note is set out in Annex A.
5.
It is proposed that the policy note is issued as a Scottish Government Local
Government Finance Circular. The circulars are located on the SG website at:
http://www.scotland.gov.uk/Topics/Government/local-government/17999/11203
6.
It is also proposed that the policy note is issued as non-statutory guidance
within the accounting section of the SG website at:
http://www.scotland.gov.uk/Topics/Government/local-government/17999/LAacc/NonStatutory-Accounting
Recommendation
7.
Comments are invited on
7.1
The guidance as drafted in Annex A
7.2
The proposal to issue this on the SG website as non-statutory
accounting guidance
Scottish Government
5 June 2013
ANNEX A
GUIDANCE TO BE ISSUED AS A SCOTTISH GOVERNMENT LOCAL
GOVERNMENT FINANCE CIRCULAR
NON-STATUTORY ACCOUNTING GUIDANCE
Our ref: A
[DATE] 2013
Dear Director of Finance,
INSURANCE RECEIPTS – NON STATUTORY GUIDANCE 2012-13
Background
8.
Reflecting on the capital control framework in place for local government the
Capital Finance Working Group (CFWG) was requested by the Local Authority
(Scotland) Accounts Advisory Committee (LASAAC) to consider whether an
insurance receipt should be treated as a capital receipt.
9.
The CFWG considered the following information:
Capital receipts - definition
9.1
In Scotland there is no legislative definition of a capital receipt.
9.2
In England, Section 9(1) of the Local Government Act 2003 provides a
basic definition of a capital receipt:
“…a sum received by the authority in respect of the disposal by it of an
interest in a capital asset.” A capital asset is defined by section 9(2) as “An
asset is a capital asset…if, at the time of the disposal, expenditure on the
acquisition of the asset would be capital expenditure.”
9.3
CIPFA’s publication, a “Practitioners’ Guide to Capital Finance in Local
Government” (2008) identifies that this definition is based on a mirror
principle. If an authority enters into a transaction where it will receive income
for a disposal, it has to imagine that it is the other party to the transaction. If
the acquisition of the interest would meet the statutory definition of capital
expenditure it is a capital receipt.
9.4
The CIPFA Guidance, in considering the legislation, notes that the
definition is a precise one and no matter how big the sum received, it will not
be a capital receipt unless it satisfies the terms of section 9. The guidance
uses insurance as an example, and advises that insurance proceeds would
only be a capital receipt if the settlement related specifically to the insurer
purchasing the damaged asset from the authority.
9.5
Applying this approach, an insurer may be considered to have
purchased a vehicle but it is not so likely that an insurer would be considered
to have purchase a damaged or destroyed building. It is probably more likely
that the insurer is considered to have compensated the authority rather than
have purchased the asset. The conclusion is that, applying this approach, the
insurance receipt is not considered to be a capital receipt.
Statutory accounting adjustments
9.6
Losses arising from impairments, or from the de-recognition of an
asset, is not a charge to the General Fund. If the insurance receipt is a
revenue receipt, a question arises as to whether the impairment, or loss
arising, which is the subject of compensation income, should continue to be
the subject of a statutory adjustment.
10.
The CFWG considered that the intended use of the insurance receipt was
more important than its classification as a capital receipt or revenue compensation
payment. The CFWG agreed that a local authority should act prudently in the use
and application of an insurance receipt.
Prudent use of an insurance receipt
11.
Where a non-current asset is damaged or destroyed and the local authority
replaces or rebuilds the non-current asset it is considered prudent that the insurance
receipt is used to fund any capital expenditure. Prudence in this regard extends
beyond the strict application of an exact replacement or rebuild of an asset, and
encompasses any capital expenditure to restore or continue service provision the
subject of the insurance claim.
12.
Where a non-current asset is damaged or destroyed and the local authority
does not replace or rebuild the non-current asset, it is for the local authority to
determine what is prudent. In making such a determination a local authority is
expected to consider whether there is any outstanding borrowing on the non-current
asset and the long term capital investment plans of the local authority. The
materiality of the insurance receipt should also be taken into account. If a local
authority maintains a statutory Insurance Fund a prudent application of the receipt
may be a transfer to the Insurance Fund.
Proper accounting practice
13.
Proper accounting practice shall be applied to insurance receipts.
14.
Insurance receipts may not be carried directly to the statutory Insurance Fund.
Any application of an insurance receipt must be in accordance with proper practices
by way of a transfer from the General Fund.
I trust this guidance is helpful.
Yours faithfully
Hazel Black
Head of Local Authority Accounting
Local Government Division