Local authority accounts are impenetrable to most council tax payers. This is a shame as the council tax payers are also the voters and therefore responsible for judging the local authorities. Arguably most council tax payers aren’t happy with numbers or accounts and therefore any type of accounting system would be impenetrable. But local authority accounts are impenetrable to most council tax payers who are qualified accountants.
Local government accounts are directed by a Statement of Recommended Practice. This document attempts to interpret accounting standards fore local authorities in the light of their many statutory requirements.
The first (and arguably most significant of these) is the minimum revenue provision. Back in the midst of time (Ok 1987 ish), local authority councillors (it was said) found a way to make themselves more popular with voters. They would undertake large capital projects (for example build a leisure centre) but not pay for them. How was this achieved? Well they would borrow the money on an interest only basis making no provision to repay the capital. In 25 years time when the loan was due for renewal the Councillors would be long gone and paying for it would be somebody else’s problem.
It was therefore decided (in the 1989 Local Government and Housing Act) that local authorities should put aside an amount each year to repay debt. It wasn’t necessary for them to actually repay debt each year as this may not be efficient treasury management practice; but each year the council tax should include a charge for debt. This charge was to be approximately 4% of outstanding debt and was known as the minimum revenue provision. The Councillors could then be held accountable for their spending.
This sounds fairly logically; as a householder you would want to put aside money to repay any outstanding debts. However in the corporate world we are all ready charging depreciation (to represent the consumption of the asset).
Local government want to comply with accounting standards, they really do…but they also like the minimum revenue provision. What to do?
Well, first they charge depreciation (and any extra consumption of economic benefit) to the service that uses the asset. If for example education has a mini-bus for school trips; then the depreciation on that mini-bus will be charged to education. They then go on to calculate any surplus or deficit that the authority has made. Then they reverse out the depreciation (and impairment) and replace it with the Minimum Revenue Provision (MRP).
This is extremely complicated; so complicated local authorities have to produce a statement that nobody else produces and in turn makes there accounts less understandable.
What are the alternatives? We could just charge the MRP instead of depreciation- the problem here is that we are not showing the cost of assets used we only show the cost of those that are debt financed. We could just charge depreciation, this would make the accounts consistent with other organisations and would show the cost of assets used. It would mean charging the council tax payer a non-cash based charge but as that would represent the cost of the assets used it would make sense. We could always get around this by calculating the council tax on the cash requirement.
Tags: accountancy, finance, local government, politics
