CHAPTER TWO Concepts and principles

Transcription

1 CHAPTER TWO Concepts and principles 2.3 GOVERNMENT AND NON-GOVERNMENT GRANTS Recognition and presentation grants and contributions Grants and contributions, including donated assets, shall not be recognised until there is reasonable assurance that: the authority will comply with the conditions attached to them, and the grants or contributions will be received Grants and contributions relating to capital and revenue expenditure shall be accounted for on an accruals basis, and recognised immediately (when the two criteria in paragraph are met) in the Comprehensive Income and Expenditure Statement as income, except to the extent that the grant or contribution has a condition(s) (as opposed to restrictions) relating to initial recognition that the authority has not satisfied. Grants and contributions that satisfy the recognition criteria in paragraph but which have a condition attached that remains to be satisfied are recognised initially in the relevant Grants Receipts in Advance Account General grants and contributions (comprising Revenue Support Grant, NNDR redistribution and unringfenced government grants) are required to be disclosed as one or more items on the face of the Comprehensive Income and Expenditure Statement Grants, contributions and donated assets that are not general grants described above shall be credited to service revenue accounts, support services, trading accounts, the Housing Revenue Account and corporate accounts in accordance with CIPFA s Service Reporting Code of Practice Donated assets transferred to an authority for nil consideration shall be recognised immediately at fair value as an asset on the Balance Sheet. The asset shall be recognised in the Comprehensive Income and Expenditure Statement as income, except to the extent that the transfer has a condition(s) (as opposed to restrictions) that the authority has not satisfied. In this case the asset is credited to the Donated Assets Account and recognised in the Comprehensive Income and Expenditure Statement once the condition(s) has been satisfied Where donated assets have been acquired for less than fair value (ie a non-

2 exchange transaction), the difference between the fair value of the asset and the consideration paid shall be recognised immediately in the Comprehensive Income and Expenditure Statement as income, or in the event that the transfer has a condition(s), recognised in the Donated Assets Account until such time as the condition(s) have been met. The measurement at fair value of an asset, acquired for no consideration or for less than fair value, does not constitute a revaluation A grant, contribution or donated asset may be received subject to a condition that it be returned to the transferor (subsequent to initial recognition) if a specified future event does or does not occur (for example, a grant may need to be returned if the authority ceases to use the asset purchased with that grant for a purpose specified by the transferor). In these cases, a return obligation does not arise until such time as it is expected that the condition will be breached and a liability is not recognised until that time. Such conditions do not prevent the grant, contribution or donated asset being recognised as income in the Comprehensive Income and Expenditure Statement After initial recognition, donated assets shall be re-valued and depreciated in line with section 4.1 of the Code (also see IAS 16 Property, Plant and Equipment) or section 4.10 of the Code (also see FRS 30 Heritage Assets) and impaired in line with section 4.7 of the Code (also see IAS 36 Impairment of Assets) The benefit of a loan at a below market rate 1 of interest is treated as a grant or contribution. The loan shall be recognised and measured in accordance with chapter seven of the Code (also see IAS 39 Financial Instruments: Recognition and Measurement). The benefit of the below market rate of interest shall be measured as the difference between the initial carrying value of the loan determined in accordance with chapter seven of the Code and the proceeds received. It is expected that in the majority of circumstances the loan will be for the acquisition or enhancement of an asset and as such the benefit is accounted for in accordance with paragraph An authority shall consider the conditions and obligations that have been, or must be, met when identifying the costs for which the benefit of the loan is intended to compensate Where revenue grants have been recognised in the Comprehensive Income and Expenditure Statement because the conditions have been met (or there are no conditions) but restrictions remain as to when and/or against which expenditure the grants can be applied, the Code Board encourages authorities to hold the unapplied balance an earmarked reserve or, in Scotland, earmark a proportion of General Fund Balance, until such a time as the restrictions on the application of the grants to qualifying expenditure or the year in which it is to be applied are removed. 1 PWLB loans are not loans at below market value for this purpose.

3 2.3.4 Disclosure Requirements Having regard to paragraph of the Presentation of Financial Statements section of the Code, authorities shall disclose the following notes in relation to grants and contributions, and donated assets: 1) The financial statements shall disclose: a) the accounting policy adopted for grants and contributions, and donated assets b) the nature and extent of grants and contributions, and donated assets recognised in the financial statements c) where the condition(s) of the grant and contributions, and donated assets have not been met, the breakdown of any balance of the liability (ie the Capital Grants Receipts in Advance and the Donated Asset Account). 2) Authorities are encouraged to disclose the following in the financial statements: a) where the movements in earmarked reserves or, in Scotland, earmarked proportion of General Fund Balance (those reserves encouraged by paragraph ) have not been presented separately either in the Movement in Reserves Statement or related notes, sufficient information to demonstrate the nature of such reserves and the movement on the Reserves Changes since the /123 Code The /134 Code (following the amendments introduced in the 2011/12 Code Update) adds the definition of stipulations on transferred assets from IPSAS 23, includes minor clarifications to the recognition requirements for grants and the treatment of general grants and removes references to Area Based Grant (England), which ended on 31 March 2011 encouragement for local authorities to create an earmarked reserve or, in Scotland, earmark a proportion of General Fund Balance and where relevant make appropriate disclosure of these balances for unspent revenue grants that have been recognised in the Comprehensive Income and Expenditure Statement because the conditions have been met (or there are no conditions) but restrictions remain.

4 CHAPTER THREE Financial statements 3.4 PRESENTATION OF FINANCIAL STATEMENTS Accounting Requirements The summary of significant accounting policies shall include the following items where they have a significant effect on the amounts recognised in the financial statements: a) accruals of expenditure and income b) acquired operations c) back pay arising from unequal pay claims d) Business Improvement District schemes (England, Scotland and Wales) e) cash and cash equivalents f) contingent assets g) contingent liabilities h) discontinued operations i) employee benefits j) events after the Balance Sheet date k) exceptional items and prior period adjustments l) financial instruments m) foreign currency translation n) government grants and other contributions o) heritage assets p) intangible assets q) inventories and long-term contracts r) investment property s) landfill allowances schemes t) leases (separate policies required for operating and finance leases) u) non-current assets held for sale v) overheads w) PFI schemes x) property, plant and equipment

5 y) provisions z) reserves aa) revenue expenditure funded from capital under statute, and ab) value added tax.

6 CHAPTER FOUR Non-current assets 4.1 PROPERTY, PLANT AND EQUIPMENT Accounting Requirements Recognition The cost of an item of property, plant and equipment falling under this section of the Code shall be recognised (and hence capitalised) as an asset on a local authority Balance Sheet if, and only if: it is probable that the future economic benefits or service potential associated with the item will flow to the authority, and the cost of the item can be measured reliably Costs that meet the recognition principle in paragraph include initial costs of acquisition and construction, and costs of additions incurred subsequently to add to, enhance, replace part of, or service the asset Subsequent costs arising from day-to-day servicing of an asset (ie labour costs and consumables), commonly referred to as repairs and maintenance, should not be capitalised if as they do not meet the recognition principle in paragraph because the expenditure does not add to the future economic benefits or service potential of the asset. Rather the expenditure maintains the asset s potential to deliver future economic benefits or service potential that it was expected to provide when originally acquired Where a component is replaced or restored (ie enhancements), the carrying amount of the old component shall be derecognised to avoid double counting and the new component reflected in the carrying amount, subject to the recognition principles as set out in paragraph being met. This accounting treatment shall be applicable to enhancement subsequent expenditure costs meeting the criteria in paragraph incurred from 1 April Initial measurement An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost and capitalised on an accruals basis.

7 Donated assets transferred to an authority shall be measured at its fair value as at the date of acquisition (see section 2.3 of the Code). In this situation the measurement at recognition of an asset, acquired at no or nominal cost, at its fair value, does not constitute a revaluation The measurement of cost comprises: purchase price any costs attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, and the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located The accounting treatment of borrowing costs is referred set outto in section 4.8 of the Code The cost of an item of property, plant and equipment is the cash price equivalent at the date when the asset is recognised. When payment is deferred beyond normal credit terms, the cost of the asset is the cash equivalent (that is, the discounted amount). The difference between this amount and the total payments is recognised as interest over the period of the credit in Surplus or Deficit on the Provision of Services The cost of an item of property, plant and equipment held by a lessee under a finance lease is determined in accordance with section 4.2 of the Code (also see IAS 17) Where property, plant and equipment are acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets, the cost of the acquired item shall be measured at fair value unless: The exchange transaction has no commercial substance, or The fair value of neither the asset received nor the asset given up can be reliably measured The acquired item is measured at fair value even if the authority cannot immediately derecognise the asset given up. The acquired item is measured at the carrying amount of the asset given up if it is not measured at fair value. Measurement after recognition Infrastructure and assets under construction (excluding investment property see section 4.4 of the Code) shall be measured at depreciated historical cost). An authority may measure community assets at either valuation (in accordance with section 4.10 of the Code) or historical cost All other classes of asset shall be measured at fair value. If there is no marketbased evidence of fair value because of the specialist nature of the asset and the

8 asset is rarely sold, authorities may need to estimate fair value using a DRC approach. The fair value of council dwellings shall be measured using EUV SH. EUV SH and DRC are methods of valuation that are based on fair value with additional special assumptions for each of the respective methods Authorities may elect to adopt a depreciated historical cost basis as a proxy for fair value for non-property assets that have short useful lives or low values (or both). For depreciated historical cost to be considered as a proxy for fair value, the useful life must be a realistic reflection of the life of the asset and the depreciation method used must provide a realistic reflection of the consumption of that asset class Classes of assets whose fair value can be measured reliably shall be carried at a re-valued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and accumulated impairment. When an asset is re-valued, any accumulated depreciation and impairment at the date of valuation shall be eliminated against the gross carrying amount of the asset and the net amount restated to the re-valued amount of the asset. Where authorities use the alternative method of proportionately restating any accumulated depreciation and impairment at the date of valuation, they should refer to IAS Where the carrying amount of property, plant and equipment is increased as a result of a revaluation, the increase shall be recognised in the Revaluation Reserve, unless the increase is reversing a previous impairment loss charged to Surplus or Deficit on the Provision of Services on the same asset (see section 4.7 of the Code) or reversing a previous revaluation decrease charged to Surplus or Deficit on the Provision of Services on the same asset A revaluation gain shall be used to reverse a previous revaluation decrease recognised in Surplus or Deficit on the Provision of Services on the same asset. In the same way as the treatment of a reversal of a previous impairment loss (see section 4.7 of the Code), the reversal of a revaluation decrease previously recognised in Surplus or Deficit on the Provision of Services shall not exceed the increase that would reinstate the carrying amount that would have been determined (net of amortisation or depreciation) had no revaluation decrease been recognised for the asset in prior years. Any excess above the carrying amount that would have been determined (net of amortisation or depreciation) had no revaluation decrease been recognised for the asset in prior years shall be treated as a revaluation gain and credited to the Revaluation Reserve Where the carrying amount of an item of property, plant and equipment is decreased as a result of a revaluation, ie a significant decline in an asset s carrying amount during the period that is not specific to the asset or the authority (as opposed to an impairment which is covered in section 4.7 of the Code), the decrease shall be recognised in the Revaluation Reserve up to the credit balance existing in respect of the asset (ie up to its depreciated historical cost) and

9 thereafter in Surplus or Deficit on the Provision of Services Where assets are re-valued (ie the carrying amount is based on fair value), valuations shall be carried out at intervals of no more than five years. Valuations may be carried out on a rolling basis or once every five years.rrevaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the fair value at the balance sheet date. The items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period and provided the revaluations are kept up to date. Valuations shall be carried out at intervals of no more than five years The fair value fair value of land and buildings shall beis usually undertakendetermined by appraisal of appropriate evidence that is normally undertaken by professionally qualified valuers Changes since the /132 Code There The 2013/14 Code includes clarification to the recognition and measurement provisions have been no changes in in relation to accounting for property, plant and equipment since the 2011/12 Code.

10 4.2 LEASES AND LEASE-TYPE ARRANGEMENTS Accounting Requirements Definitions A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. In considering the accounting arrangements for a particular agreement, authorities shall take into account the requirements of SIC 27 and IFRIC A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred An operating lease is a lease other than a finance lease The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease. As at this date: a) a lease is classified as either an operating or a finance lease; and b) in the case of a finance lease, the amounts to be recognised at the commencement of the lease term are determined The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease (ie the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate) The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option Further definitions, including definitions of minimum lease payments, gross investment in the lease and net investment in the lease are contained in IAS The definition of a lease includes hire purchase contracts. Classification of leases Leases are classified as either finance leases or operating leases based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. A lease is classified as a finance lease if it transfers

11 substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: 1) the lease transfers ownership of the asset to the lessee by the end of the lease term 2) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value so as to make it reasonably certain the option will be exercised 3) the lease term is for the major part of the economic life of the asset 4) the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, and 5) the leased assets are of such a specialised nature that only the lessee can use them without major modifications. Where leases of assets are provided on non-commercial terms ie for a nominal or at a peppercorn rents or lease payments, authorities will need to consider the substance of the transaction. CIPFA/LASAAC is of the view that it is likely that the situation set out at point 4) will not apply to an authority s analysis of the classification of the lease where lease payments are nominal or at a peppercorn. Note that this exception is only relevant for transactions on non-commercial terms and would not be relevant, for example, where lease arrangements also include a substantial payment (ie a lease premium) Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are: a) if the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equalling most of the sales proceeds at the end of the lease), and c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent The examples above are not always conclusive. If it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease. For example, if the lease transfers ownership of the asset for a variable payment equal to its fair value, the lessee may not have substantially all risks and rewards incidental to ownership Lease classification is made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the lease, other than by renewing

12 the lease, in a manner that would have resulted in a different classification of the lease under the criteria in paragraphs if the changed terms had been in effect at the inception of the lease, the revised agreement is regarded as a new agreement over its term.a lessee and a lessor may agree to change the provisions of the lease. Except where this change is by renewing the lease, the revised agreement is regarded as a new agreement over its term if, had the changed terms been in effect at the inception of the lease, this would have resulted in a different classification of the lease. However, changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased property), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes Leases of land and buildings are classified as finance or operating leases in the same way as leases of other assets. However the land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification. In determining whether the land element is an operating or finance lease, an important consideration is that land normally has an indefinite life When accounting for a lease of land and buildings, the minimum lease payments are allocated between the land and the buildings elements in proportion to the relative fair values of the leasehold interests. Where the amount that would initially be recognised for the land element is immaterial, the land and buildings may be treated as a single unit for lease classification Separate measurement of the land and buildings elements is not required where the lessee s interest in both is classified as an investment property (see section 4.4 of the Code and IAS 40) and the fair value model is used (as required by section 4.4 of the Code). Where an authority, as lessee, classifies a property interest held under an operating lease as an investment property, it shall account for the interest as a finance lease and the fair value model shall be used. The authority will continue to account for the interest as a finance lease even where subsequent events mean the property is no longer classified as an investment property. An example would be where the authority occupies the property itself Changes since the /12 13 Code There The 2013/14 Code has enhanced the previous provisions of the Code in relation to leases and lease type arrangements by adding: have been no changes in accounting for leases and lease-type arrangements since the 2011/12 Code. a number of definitions minor clarifications to classifications of leases provisions for leases where which no premium is paid but for which lease rentals are charged at a peppercorn or other nominal rate.

13 4.9 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Classification of non-current assets (or disposal groups) as held for sale An authority shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continued use For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable.the following criteria have to be met before an asset can be classified as held for sale under this section of the Code: The asset (or disposal group) must be available for immediate sale in its present condition subject to terms that are usual and customary for sales of such assets (or disposal groups). The sale must be highly probable; the appropriate level of management must be committed to a plan to sell the asset (or disposal group) and an active programme to locate a buyer and complete the plan must have been initiated. The asset (or disposal group) must be actively marketed for a sale at a price that is reasonable in relation to its current fair value. The sale should be expected to qualify for recognition as a completed sale within one year 2 of the date of classification and action required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year 3 from the 2 Events or circumstances may extend the period to complete the sale beyond one year, for example the delay in the completion of the sale is beyond the authority s control and there is sufficient evidence that the authority remains committed to the plan to sell the asset (or disposal group). Further information regarding the extension of the period required to complete the sale is given in Appendix B of IFRS 5. 3 Events or circumstances may extend the period to complete the sale beyond one year, for example the delay in the completion of the sale is beyond the authority s control and there is sufficient evidence that the authority remains

14 date of classification, except as permitted, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn If all the above criteriathe asset does not meet the requirements for classification as a non-current asset held for sale in paragraphs are not met the asset it shall continue to be accounted for in accordance with the relevant section of the Code, ie section 4.1 and section Sale transactions include exchanges of non-current assets for other non-current assets when the exchange has commercial substance in accordance with section 4.1 of the Code (also see IAS 16 Property, Plant and Equipment). committed to the plan to sell the asset (or disposal group). Further information regarding the extension of the period required to complete the sale is given in Appendix B of IFRS 5.