Accounting Qualification
Answers
Technician Level 4
Drafting financial statements
(local government) (DFSL)
December 2010
Note:
The model answers may, in parts, be longer than would be expected of candidates in the exam. The fuller version is given for teaching purposes.
Section 1
Task 1.1
Loveee District CouncilDepreciation calculation
Opening net value / Other land and buildings
1 April 2009 / Building element / Building element value / Years remaining / Depreciation charge
2009-10
£ / % / Number
Environment & Regulatory / 30,000,000 / 60 / 18,000,000 / 50 / 360,000
Planning Development / 50,000,000 / 80 / 40,000,000 / 40 / 1,000,000
Cultural Related Services / 30,000,000 / 70 / 21,000,000 / 30 / 700,000
Central Services / 3,500,000 / 100 / 3,500,000 / 10 / 350,000
Capital expenditure / During
2009-10
£
Environment & Regulatory / 3,000,000 / 100 / 3,000,000 / 60 / 50,000
Planning Development / 5,000,000 / 100 / 5,000,000 / 50 / 100,000
Cultural Related Services / 3,000,000 / 90 / 2,700,000 / 40 / 67,500
Central Services / 1,500,000 / 100 / 1,500,000 / 20 / 75,000
Grand total / Depreciation on opening balance / Depreciation on capital expenditure / Total depreciation
£ / £ / £
Environment & Regulatory / 360,000 / 50,000 / 410,000
Planning and Development / 1,000,000 / 100,000 / 1,100,000
Cultural and Related Services / 700,000 / 67,500 / 767,500
Central Services / 350,000 / 75,000 / 425,000
2,410,000 / 292,500 / 2,702,500
Task 1.2
Loveee District Council
Income and Expenditure Account for the year ended 31 March 2010
Grossexpenditure
£000 / Income
£000 / Net expenditure
£000
Environment & Regulatory (1,500+500+200+410) / 2,610.0 / 380.0 / 2,230.0
Planning Development (1,100+1,600+1,000+1,100) / 4,800.0 / 300.0 / 4,500.0
Cultural Related Services (3,200+1,900+200+767.5) / 6,067.5 / 930.0 / 5,137.5
Central Services (1,200+1,400+600+425) / 3,625.0 / 100.0 / 3,525.0
Corporate and Democratic Core (450+60) / 510.0 / 0.0 / 510.0
Non-distributable costs (150-60) / 90.0 / 0.0 / 90.0
Net cost of services / 17,702.5 / 1,710.0 / 15,992.5
Interest and investment income / -2,100.0
Pension liability interest costs / 4,700.0
Voluntary minimum revenue provision / 70.0
Pension assets expected return / -3,500.0
To pension reserve / -1,100.0
Net operating expenditure / 14,062.5
Amount to be met from government grant and local taxes
General government grants / 6,500.0
Non domestic rate redistribution / 6,100.0
Demand on collection fund / 5,100.0
Net general fund (surplus)/deficit / -3,637.5
Balance general fund b/f / -2,200.0
Balance general fund c/f / -5,837.5
Task 1.3
Subjective analysis of expenditureYear ended 31 March 2010 / Workings
Expenditure / £000
Salaries and related employee costs / 7,000.0 / 1,500+1,100+3,200+1200
Running expenses / 5,400.0 / 500+1,600+1,900+1400
Support services / 2,000.0 / 200+1,000+200+600
Capital charges / 2,702.5 / 410+1,100+767.5+425
Corporate and Democratic Core / 600.0 / (450+60)+(150-60)
Gross expenditure / 17,702.5
Task 1.4
To:Chief Accountant
From:Central Accountant
Date:1 December 2010
Subject:Re: Preparation of thenotes to final accounting statements
1.Outline the difference between a defined benefit scheme and a defined contribution scheme.
Defined benefit is often regarded as present in final salary schemes like that operated by this Council, where the employer guarantees the benefit to the employee. The employer must make up any shortfall on the fund to ensure employees get their full pension entitlement.
Defined contribution schemes are where the contribution by the employer is limited to a defined amount. The pension benefit to the employee is therefore subject to the success of the fund’s performance and not guaranteed.
2.Explain where the Council obtains the information it needs regarding the valuation of the pension fund.
The pension fund is required to commission a valuation every three years. The valuation work is undertaken by professional actuaries who produce a report for the Council setting out the estimated worth of the fund and the level of contributions required to sustain the scheme.
3.The note for the final accounts on pensions in accordance with FRS 17 is provided below.
Note to the final accounting statementsPension information included in theaccounting statements
£
Current service costs / 1,430,000
Past service cost / 320,000
Net cost of service / 1,750,000
Interest cost / 5,400,000
Expected return on assets in the scheme / (3,600,000)
Net operating expenditure / 3,550,000
Amount by which the FRS 17 requirement differs from contributions due to the pension fund / (1,030,000)
Working(3,550-2,520=1,030)
Actual amount charged to council tax for pensions in the year / 2,520,000
Working: (2,100 + 420)
Task 1.5
Dr£000 / Cr
£000
Note 1 / Provision for doubtful debts account / 2,100
Usable capital receipts reserve / 2,100
Note 2 / Pension fund assets and liabilities / 5,500
Pension fund balance / 5,500
Note 3 / Intangible fixed assets / 85
General fund income and expenditure / 85
Note 4 / Provision for doubtful debts / 800
General fund / 800
=6,000,000 at 5% = £300,000 less (3,200-2,100)=1,100 therefore reduce by £800,000
Note 5 / Usable capital receipts / 300
Capital Adjustment Account / 300
General fund income and expenditure / 300
Operational assets / 300
Note 6 / Operational assets / 175
Obligations under finance lease / 175
Obligations under finance lease / 40
General fund remove operational lease expense / 40
General fund depreciation charge £175K /5 years / 35
Operational assets provision for depreciation / 35
Capital adjustment account / 35
Statement of movement general fund balance / 35
General fund minimum revenue provision / 40
Capital adjustment account / 40
General fund increase finance charge / 15
General fund remove operational lease expense / 15
Tutorial note:
The last two entries have no effect on the general fund balance.
Task 1.6Leasetown Council
Balance sheet as at 31 March 2010
£000 / £000 / Workings
Fixed assets
Intangible / 35,185 / (35,100+85)
Operating assets(net of depreciation) / 75,840 / (90,000-300+175)-(14,000+35)
Investment property / 40,500 / 151,525
Investments
Total long term assets / 16,000 / 16,000
167,525
Current assets
Stock / 100
Debtors / 5,700 / (6,000)-(3,200-2,100-800)
Bank / 3,000 / 8,800
Total assets / 176,325
Current liabilities
Creditors / 19,100
Total assets less current liabilities / 157,225
Less long-term liabilities
Pension fund liabilities / 59,500
Total assets less liabilities / 97,725
Usable capital receipts / 21,800 / 20,000-300+2,100
Pension fund reserve / (59,500) / 65,000 – 5,500
Obligation under finance lease / 135 / 175-40
Capital adjustment account / 130,305 / 130,000+300-35+40
County / General fund / 4,985 / 4,400+85+800+40-300-35+35-40
97,725
Task 2.1
To:Director of Resources
From:Central Accountant
Date:1 December 2010
Subject:Review of Central Service costs and final accounts process
Thank you for your email. I can advise you as follows.
1.Corporate management costs are part of the corporate and democratic core costs, and are concerned with those activities and costs that provide the infrastructure that allows services to be provided, whether by the authority or not, and the information required for public accountability. These costs are not charged to individual services.
Non distributable costs are costs that relate to past activity costs, such as the cost of redundant assets or information technology, or past service pension. These costs are not charged to individual services.
2.Statutory external audit costs, including value for money
These costs are corporate management because they are part of the general accounting work of a multi- functioning organisation, and are not related to any single service.
External Audit work on grant claims for the housing subsidy.
These are no corporate management costs because they relate to an individual service and should be charged to the Council’s Housing Revenue Account.
Costs related to the Chief Executive.
These are Corporate Management costs providing the CEO does not directly manage and individual service. If a direct service were managed by the CEO then that part of costs would need to be charged to the service being managed.
Consultants employed producing the final accounting statements. These are corporate costs because they relate to the general accounting function and not to a specific service.
Expenses paid to Council members.
These are Corporate Democratic core costs because they are part of the general management of the organisation.
3. Requirements of Audit Commission
The external audit of the accounting statements takes place after the final accounting statements have been prepared and presented to the Council. The financial year ends on 31 March and the final accounts must be reported to comply with the law by the end of June. The final statements presented to the Council are the starting point for the external audit work. It is essential that the schedule of working papers and reconciliations required by the External Auditor are ready and normally required in a hard copy and electronic format.
The external audit work then takes place and must be completed by the end of September, when the External Auditor presents the ISA 260 report to the Council along with their opinion of whether the accounts fairly present the Council’s financial position.
Task 2.2
(a)
Gross profit200,000 x 100 = 16.1%
1,245,000
Net profit10,000 x 100 = 0.80%
1,245,000
Current ratio90,000= 0.64: 1
140,000
Acid test ratio90,000-50,000= 40,000= 0.29: 1
140,000
Interest cover100,000= 1.11 times
90,000
Gearing ratio10,050,000= 91.0%
11,050,000
(b)Comment on the bid compared with the specification
TheDiggarwell Housing Association (DHA)development is for 20 one-bed flats and 31 two-bed flats. The specification requires 9 more one-bed flats, therefore the bid does not comply with the tender requirement. It will not be able to be compared with other bidders and is not providing what the Council requires, so will be rejected on this aspect alone.
The DHAdevelopers are expected to attract Housing Corporation funding of up to £40,000 per unit. The Council believes that the maximum Housing Corporation grant is only £30,000 and therefore the bid appears unrealistic, and at best would need to be adjusted for comparison down to the maximum available. This would probably create significant doubt over the credibility of DHA.
The DHAcost of construction is 20% lower than expected, and this is very competitive if costed accurately with no omissions or substandard materials. This fact could give the DHA an advantage over other bidders, but is only one aspect on which the tender would be awarded.
The bid included the highest payment for the land - £5,000 more than a competitor who has met all the Council’s conditions of tender. Had this been without the error on Housing Corporation funding, it would have given a minor advantage over other bidders, although £5,000 is immaterial