Audit Committee - Thursday 28 October 2010 at 10.00Am Item 2A - Final Annual Statement

HERTFORDSHIRE COUNTY COUNCIL

AUDIT COMMITTEE

THURSDAY 28 OCTOBER 2010 AT 10.00 AM

FINAL ANNUAL STATEMENT OF ACCOUNTS 2009-10

Report of the Director of Resources and Performance

[Author: Claire Cook, Assistant Director Strategic & Specialist Services

Tel: 01992 555737]

Executive Member: David Lloyd (Resources and Economic Wellbeing)

Purpose of Report

To provide Members with an outline of the key changes to the statement of accounts;

To provide information on the processes to simplify the production and speed of reporting of the annual accounts.

2.Summary

2.1A number of changes to the accounts have been required following the audit review of the closure of the accounts. These result from:

Work undertaken on the review of the supporting records to the accounts by the finance team, in particular the treatment of the impairment of fixed assets;

Revisions required in order to comply with the revisions to the Statement of Accounting Practice particularly in relation to the PFI and Collection Fund Account;

Other adjustments required following audit testing.

2.2This report summaries these adjustments and sets out more detailed information on key changes.

2.3Whilst work has commenced on improvements to current systems and processes in order to simplify and automate the production of accounts and associated working papers, there have been some delays due to the requirement to focus resource on the closure of the 2009/10 accounts. However, this work has been used to inform further improvements in the structure and quality of accounts and associated records.

3.Background

3.1The draft statement of accounts which were subject to audit and final approval were presented to the audit committee on 30 June 2010.

3.2Following the audit review and significant, more detailed, reconciliation work by the Herts Finance team a number of changes have been made to the statements of accounts. The key areas of change and the impact on the statement of accounts are set out in this report. Appendix A and B provide a summary of movements to Income and Expenditure account and Balance Sheet. The Final Statement of accounts is set out in Agenda Item 2B, and where relevant this report makes cross reference to that statement.

4Clarification made to accounting policies

4.1A number of changes have been made to the Chief Officers Statement and Accounting Policies. These concern clarifications on the treatment of the Accruals (page 23), the Private Finance Initiative (PFI) (pages 13 and 31), and the level of de-minimus in relation to capital (page 34).

5General Fund Balance

5.1There has been a significant movement to the general fund balance from £52.773m to £31.369m. This movement was inherent in the Final Monitor report made to Cabinet in June 2010 when it was estimated that the final balance would be £31.4m. The most significant element of this change relates to the incorrect treatment of impairment of £21.001m through the Capital Adjustment Account and Statement of Movement of General Fund Balance, which was referred to in the Audit Commission’s Interim Governance Report.

Table 1 – Movements to General Fund Balance

£’000
General Fund Balance in draft accounts / 52,773
Adjustment for MRP / (21,001)
Net adjustments to creditors/debtors / 51
Adjustment relating to assets / (778)
Other adjustments / 324
General Fund balance in Final Accounts / 31,369

6Fixed Assets

6.1Following review of the underlying records a number of adjustments have been required to the fixed asset accounts. These relate to:

Restatement of the revaluation reserve;

Adjustments to the treatment of the PFI;

An adjustment relating to the incorrect treatment of the Howe Dell school scheme;

Other adjustments following review of the assets stated as not adding to value.

6.2The level of the revaluation reserve in the accounts was greater than that stated in the fixed asset register by £13m. This relates to reserves in the ledger that pre-dated 2007. The SORP requires that these should have been reflected in the gross book value but should be zero in the reserves. This impacts on the value of fixed assets and the Capital Adjustment Account as shown in Appendix B1 for 2008/09and table 2 below.

6.3Adjustments following audit to correct the PFI treatment for 2008/09 and 2009/10 in the fixed asset register and HoweDellSchool are summarised in tables 2 and 3.

Table 2 – Fixed Asset Adjustments to restated 2008/09 accounts

Description / Fixed Assets / Revaluation Reserve / CAA
£’000 / £’000 / £’000
PPA / Correction of revaluation reserve. / -13,027 / 13,027
PPA / PFI. / -2,657
PPA / PFI. / 126 / -2,531
PPA / Howe Dell impairment correction. / -9,465 / -9,465
PPA / Howe Dell impairment correction (depreciation). / 158 / 158
PPA / PPA Total / -11,838 / -13,027 / 1,189

6.4Further work has been undertaken to analyse those assets totalling £5.459m which had been classified as ‘not adding to value’ in the accounts. Following this detailed piece of work these have now been reclassified as:

Assets under Construction (AUC) - £0.521m
Revenue Items - £0.498m
Revenue items funded from Capital (REFCUS) – non county council assets - £2.983m
Other fixed assets - £1.457m

Details of the resultant adjustments to the accounts are set out in table 3, alongside information relating to other adjustments identified as part of the audit testing and the review of the accounts.

Table 3 – Fixed Asset adjustments to 2009/10 accounts

Description / Fixed Assets / Revaluation Reserve / CAA / Useable Capital Receipts / General Fund Balance / Deferred Grants
£’000 / £’000 / £’000 / £’000 / £’000 / £’000
Prior Period Adjustments / (11,838) / (13,027) / 1,189 / 0 / 0 / 0
How Dell Impairment Reversal / 9,307 / 9,465 / (158)
Opening Balance corrections (in-year). / (29) / (145) / (29) / 145
PFI impairment reversal (CSF) - Children Looked After. / 6,423 / 6,423
AUC - reverse capex not adding value. / 5,459 / 5,459
AUC to revenue / (498) / (498)
AUC to REFCUS. / (2,983) / (2,920) / 63
Correction re treatment of Stevenage purchase / (454) / 454
Revaluation Reserve Corrections / 945 / (945)
Deferred Grant Adjustments / 2,159 / 2159
Watford Fire Station correction re treatment of use of receipts / 2,300 / (2,300)
CFAA error mapping (balance creditors/CFAA) / 2,049 / 302
Reversal of Impairment / 21,001 / (21,001)
Other Changes / (502)
2009/10 Total / 5,839 / (2,763) / 36,076 / (2,300) / (21,404) / 2,524

7Council Tax Adjustments

7.1The restated 2008/09 accounts identified only the net balance on the collection fund and not, as required by the SORP, details of the relevant creditors and debtors. In addition the balance on the collection fund had been posted incorrectly as a credit rather than a debit. These adjustments have the following effect on the accounts which are also detailed in Note 1 (page 47).

Table 4 2008/09 Creditors and Debtors Movements relating to Council Tax

Creditors / Debtors
£’000 / £’000
Draft Accounts / 342,341 / 81,077
Adjustment for council tax / 16,541 / 16,541
Adjustment for balance on council tax / 4,826
Final Accounts / 358,882 / 102,444

7.2In 2009/10 an adjustment has also been required to transfer bad debt provision from creditors to debtors for council tax of £8.756m in addition to the impact of the incorrect carry forward balance on council tax as set out in paragraph 7.1. Other adjustments relate to movements between PFI and general creditors, and the incorrect treatment of the schools Supply Sickness insurance scheme in creditors rather than specific reserve. These adjustments accountfor the major element of the change to debtor and creditors as shown in the table below.

Table 5 2009/10 Creditors and Debtors Movements

Creditors / Debtors
£’000 / £’000
Draft Accounts / 331,310 / 112,368
Adjustment for council tax bad debt / (8,756) / (8,756)
Adjustment for balance on council tax / (4,826)
Movement to reserves – related to supply sickness / (5,573)
Identification of PFI liabilities / (553)
Other adjustments / (384) / (328)
Final Accounts / 311,218 / 103,284

8.School Balances

8.1The other major movement in the balance sheet relates to the treatment of school balances. The majority of schools have bank accounts within the County Council's banking arrangements with the National Westminster Bank. These schools' bank balances are added to the rest of the County Council's balances to create a single pooled balance for investment purposes. This is done via an overdraft account for the total value of the schools' balances. To date the overdraft has been shown in the bank overdraft figure in the accounts rather than netting it off the schools' bank balances. However, in response to the recent audit, and given that the schools are not technically in overdraft, the overdraft and cash figures have now been netted off. This has resulted in an adjustment of £66.465m to bank overdrafts and cash which is shown in Appendix B2. The other adjustment in cash relates to investment income held by Leventhorpe school which is required to be shown as a short term investment.

Table 6 2009/10 Cash and Bank Movements

Bank Overdraft / Cash and Bank / Short term investments
£’000 / £’000 / £’000
Draft Accounts / 87,520 / 93,496 / 17,642
Adjustment for school balance / (66,465) / (66,465)
Adjustment to short term investments / 1,050 / 1,050
Final Accounts / 22,105 / 27,031 / 18,692

9Movements in Income and Expenditure accounts statements

9.1Adjustments to the 2008/09 Income and Expenditure statements relate to the requirement to disclose Contributions in Lieu of Interest (£2.623M) within the Insurance Fund rather than separately on the face of the accounts, and the correction of treatment of the Collection Fund (£2.271M) where the movement in the share of surplus/deficit is required to be reflected in the Income and Expenditure account. This is then reversed out through the Statement of Movement of general fund balance so does not impact on the accounts.

9.2In 2009/10 a number of reserve movements had been excluded incorrectly from the net movement on services, instead had simply been adjusted through the balance sheet. Whilst this did not impact on the general fund balance, it did result in the income and expenditure account and Statement of Movement of General Fund Balance being understated. In addition there were a number of changes required as a consequence of the adjustments to assets as set out in section 6 of this report. The impact of these changes on the net cost of services are summarised in the table overleaf:

Table 7 2009/10 Income and Expenditure Movements to Net Cost of Services

2009/10 Change
£’000
Incorrect Treatment of Reserves / (15,891)
Deferred grant adjustments / (2,159)
PFI Impairment reversal / (6,423)
AUC to Revenue / 498
AUC to REFCUS / 2,983
Howe Dell Impairment / 158
Other Fixed Asset Adjustments / 2,942
Other adjustments / 2,779
Total Movement / (15,113)

9.3The other major change to the income and expenditure statement was in respect of the separate analysis of Fire Pension Top Up grant (£4.454M) which had been previously accounted for within General Government Grants.

10Processes to simplify and speed the production of accounts

10.1Work has commenced on processes to simplify theproduction of the statement of accounts. The outcomes of this project are intended to deliver:

A simplified Statement of Accounts;

Automation of the Trial Balance and Notes/ Working Papers from SAP, rather than spreadsheet/ manual processes;

A quarterly trial balance, which will be built in to monitoring processes/ timetable;

Draft accounts to Audit Committee by 14 June 2011.

10.2Whilst there have been some delays to this project due to the need to focus resource on the closure of the 2009/10 accounts, work has commenced on the necessary housekeeping to facilitate improvements to the records. The additional work required to the 2009/10 accounts has also informed this work. This, together with the revised structure for the Herts Finance service, is intended to deliver improvements in both the speed and quality of reporting and year end processes. The revised structure which provides clear accountabilities in terms of key deliverables is set out in Appendix C of this report. Appointment processes to the new structure have now commenced, with the aim of completing these by the end of November 2010.

11Suggested Resolution

The Committee is invited to note and comment upon the report, and to approve the Final Annual Statement of Accounts (attached at Item 2B).

101028 Audit Committee