Local government finance circular 10/2022 - finance leases and service concession arrangements: statutory guidance
- Published
- 20 September 2022
- Topic
- Public sector
Statutory guidance that provides a temporary statutory override to the requirements of the Code of Practice for Local Authority Accounting in accounting for infrastructure assets.
Dear Director of Finance,
Accounting for service concession arrangements, leases and similar arrangements
This Local Government Finance Circular replaces Local Government Finance Circular 4/2010 Accounting for PFI and Similar Arrangements and sets out the accounting requirements for:
1. Service concession arrangements, leases and similar arrangements.
2. Applying the temporary flexibility for service concession arrangements entered into prior to 1 April 2022.
Yours faithfully
Elanor Davies
Head of Local Authority Accounting
Accounting for service concession arrangements, leases and similar arrangements
Part 1 – Background and non-statutory guidance
Part 2 – Statutory guidance – accounting for service concession arrangements, leases and similar arrangements
Part 1 of this document gives non-statutory guidance only and is not part of the guidance itself, which is contained in Part 2.
Part 1 - Background and non statuory guidance
Background
1. The statutory accounting for service concession arrangements, leases and similar arrangements was previously set out in Local Government Finance Circular 4/2010 (as amended by Circular 6/2011)(Circular 4/2010) and was introduced in response to a change in accounting standards.
2. Prior to 1993 the only fixed assets (non-current assets) on a local authority Balance Sheet were those financed by borrowing, with the Balance Sheet value being mainly equal to the value of outstanding debt. The value therefore represented the historic cost value, reduced by the amount of debt repaid. The charge to the General Fund was the cost of the debt repayment (this was commonly referred to as debt charge accounting).
3. In 1993 the Accounting Code introduced new capital accounting rules. It replaced the system of debt charge accounting (which aligned with the 1975 statutory provisions to require local authorities to maintain a loans fund), which was considered to have significant deficiencies in that the cost of services was linked to capital financing decisions and not to the cost of using fixed assets. The new framework for fixed asset accounting, as set out in the Accounting Code, was based on carrying most categories of fixed assets at their current value to the authority’s operations on the Balance Sheet, with depreciation being charged to the General Fund to recognise the use of the asset.
4. Until 2010, this did not apply to service concession arrangements. Under statutory arrangements in place at the time, the unitary charge was charged to the General Fund as incurred (applying the equal instalments method to the principal repayments).
5. The 2007 Budget report, published on 21 March 2007, announced that in order to bring consistency and comparability between financial reports in the global economy and to follow private sector best practice, the annual financial statements of government departments and other public sector bodies would in future be prepared using International Financial Reporting Standards (IFRS) adapted as necessary for the public sector by the Accounting Code or Government Financial Reporting Manual.
6. The original timetable for this was the financial year 2008 2009 but this was deferred to 2009 2010 in the 2008 Budget report, published on 12 March 2008.
7. Following this announcement the local authority SORP Board put together a proposal, with a timetable, for local government to prepare their financial statements using IFRS. The 2009 SORP included revised accounting arrangements for service concession arrangements. Under accounting arrangements prior to 1 April 2009 a local authority was only required to recognise a service concession related asset on the balance sheet where certain tests were satisfied. The tests included that payments for property can be separated and these can be treated as a lease and that the local authority has the benefits and risks of the property. Applying these tests resulted in many service concession assets not being recognised on local authority balance sheets. Under the new arrangements from 2009 to 2010 the criteria for asset recognition moved from risk and reward to issues about control of service provision and control of the residual value of the asset.
8. The adoption of IFRS accounting standards in 2010 required that where the asset reverted to the local authority at the end of the contract, the local authority was considered to own the asset from the outset and therefore the local authority should recognise both an asset (i.e. a school) and a liability (for the unitary charge) on the Balance Sheet, with the asset being depreciated over its useful life.
9. For service concession arrangements, being an asset of a local authority, depreciation accounting now applied. This changed the annual expenditure profile. Previously, the unitary charge would have been the charge to the General Fund. This aligned with statutory accounting arrangements in place at the time. With the adoption of depreciation accounting, depreciation of the asset and the interest cost on the loan would be the charges to the General Fund. The principal repayment of the debt would be accounted for as a reduction to the balance of the lease liability on the Balance Sheet (rather than being treated as a charge to the General Fund, as required by previous accounting standards and historic statutory arrangements).
10. Finance Circular 4/2010 introduced statutory accounting requirements for both service concession arrangements and leases, to require a charge for the statutory repayment of debt (principal repayments of the liability element of the arrangement) to be the charge to the General Fund and for this charge to replace depreciation as the charge to the General Fund.
11. This Circular now replaces Local Government Finance Circular 4/2010 (as amended by Local Government Finance Circular 6/2011). For relevant service concession arrangements and leases entered into prior to 1 April 2022 the statutory charges have not changed.
12. In addition to the statutory adjustments originally set out in Finance Circular 4/2010, Finance Circular 10/2022 permits a further flexibility which is set out in section 2.2 of the guidance.
Non- statuory guidance
13. Finance Circular 10/2022 applies to all service concession arrangements and leases recognised by a local authority on its balance sheet, in accordance with the Accounting Code.
14. Schedule 3 of the Local Government (Scotland) Act 1975 required each local authority to establish and maintain a loans fund, a memorandum account to capture all money borrowed by the authority and the redemption or repayment of borrowing.
15. The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 (the 2016 Regulations) 2016 Regulations replace the statutory arrangements set out in Schedule 3 of the Local Government (Scotland) Act 1975 for the administering of the Loans Fund.
16. The 2016 Regulations set out new statutory arrangements for local authority borrowing and lending and the requirement to maintain a loans fund. That loans fund is required to be administered in accordance with the 2016 Regulations, proper accounting practices and prudent financial management.
17. The 2016 Regulations require a local authority to determine the expenditure to be met from borrowing, to make a loans fund advance for that expenditure, and to repay that advance over future financial years as a charge to the general fund. The local authority is to determine the period over which the advance is to be repaid and the amount of repayment to the loans fund in each financial year.
18. The 2016 Regulations only apply to the repayment of monies borrowed by the local authority. The Scottish Government considers that service concession arrangements are not the borrowing of money under the 2016 Regulations, rather a long term liability or credit arrangement as identified in the Prudential Code. However, the outstanding long term liability identified on the local authority balance sheet for service concession arrangements is still considered to be debt associated with capital financing. As such any service concession arrangement which a local authority is required to recognise as an outstanding liability on its balance sheet from 1 April 2009 will come under the prudential regime and will form part of the capital financing of a local authority.
19. The statutory guidance applies the principle that depreciation will not be a charge to the General Fund. The charge to the General Fund will be a sum which recognises the repayment of the principal element of the lease component of the service concession or lease liability for the year. This is consistent with the approach taken in the 2016 Regulations in respect of the statutory borrowing of money.
20. For the purposes of the Prudential Code, debt refers to the sum of borrowing and other long term liabilities. The outstanding long term liability identified for a service concession arrangement will form part of ‘other long term liabilities’.
21. The statutory guidance (Part 2) sets out the options for the recognition of repayments of the principal element of the lease component of the service concession or lease liability for the year.The options are:
- section 1: applying the Accounting Code with the reversal (i.e. elimination) of all statutory adjustments
- section 2.1: continuation of existing statutory accounting for all relevant service concession arrangements, leases and similar arrangements, as originally set out in finance circular 4/2010)
- section 2.2: service concession arrangements only – this section permits an additional flexibility for service concession arrangements recognised within an authority’s Annual Accounts prior to 1 April 2022. Section 2.1 continues to apply to leases and similar arrangements
22. Summary of Accounting Requirements:
| Section | Description | Applies to | Application |
|---|---|---|---|
| 1 | No Statutory Adjustments (Pre-existing Arrangements) | Pre 1 April 2022 service concession arrangements AND leases |
|
| 2.1 | Maintain Existing Statutory Adjustments | Pre 1 April 2022 service concession arrangements AND leases |
|
| 2.2 | Service Concession Arrangements (PPP/PFI) Flexibility Permitted: Principal Repayments | Pre 1 April 2022 service concession arrangements only |
|
Part 2: Accounting for service concession arrangements, leases and similar arrangements
Issued by Scottish Ministers under section 12(2)(b) of the Local Government in Scotland Act 2003.
Definitions
23. Local Authority means a council constituted under section 2 of the Local Government etc. Act 1994 (c.39), regional transport partnerships and other bodies as set out in section 106 of the Local Government (Scotland) Act 1973.
24. General Fund means the fund as detailed in section 93(1) of the Local Government (Scotland) Act 1973.
25. Proper accounting practices are those practices as set out by section 12 of the Local Government in Scotland Act 2003.
26. A service concession arrangement, such as a Public Private Partnership (PPP), or a Private Finance Initiative (PFI) or similar contract, typically involves a private sector entity (the operator) constructing or upgrading infrastructure used in the provision of a public service, and operating and maintaining that infrastructure for a specified period of time. These arrangements involve the operator undertaking an obligation to provide infrastructure (and related services) that are used to provide services to the public. The operator is paid for its services over the period of the arrangement.
27. Given the transition to IFRS 16 Leases, the term lease in this guidance refers to a ‘finance lease’ as defined by the Accounting Code interpretation and adaptation of IAS 17 and a ‘lease’ as defined by the Accounting Code interpretation and adaptation of IFRS 16, dependent on the accounting policy adopted by the authority concerned.
- applying IAS 17: the Accounting Code defines A finance lease as a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee
- applying IFRS 16: the Accounting Code defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. The Accounting Code amends this definition to remove ‘in exchange for consideration’
28. Infrastructure refers to the property plant or equipment provided by the operator.
29. A relevant service concession arrangement or lease, includes a PPP, PFI or similar contract and is one which requires the local authority to recognise the infrastructure associated with the service concession arrangement, lease, or similar contract as assets of the local authority in accordance with proper accounting practice.
30. A financial year is one that commences on 1 April and ends on 31 March.
31. The annual unitary payment is the payment due to the operator for any financial year.
32. A capital receipt is the proceeds from the sale of assets of the local authority.
33. A long term liability associated with a relevant PFI is the related liability, or debt, recognised by the local authority when the local authority recognises the PFI asset as property plant and equipment of the local authority. The repayment of this liability by the General Fund is set out in this guidance.
Application
34. This statutory guidance applies to all service concession arrangements, relevant leases and similar arrangements.
35. For service concession arrangements and leases recognised on the Balance Sheet of a local authority prior to 1 April 2022, a local authority must comply with the statutory requirements set out in this guidance which permits the following options:
- application of the Accounting Code with no statutory adjustments
- continuing to apply the statutory arrangements originally set out within Finance Circular 4/2010 and updated within this guidance
- for service concession arrangements recognised on the Balance Sheet of a local authority prior to 1 April 2022 a further flexibility is available, as set out in section 2.2 of this guidance
36. This statutory guidance applies from the financial year 2022 to 2023 but permits retrospective application as an option.
37. An asset the subject of a relevant service concession arrangement, lease or similar arrangement continues to be subject to this guidance at the expiration of the service concession arrangement or lease contract.
38. A liability the subject of a relevant service concession arrangement, lease or similar arrangement continues to be subject to this guidance at the expiration of the service concession arrangement or lease contract.
Section 1: Adoption of the Accounting Code requirements for service concession arrangements, leases and similar arrangements without statuory adjustments.
39. A local authority may choose to adopt the Accounting Code requirements in full without any statutory adjustments for service concession arrangements, leases and similar arrangements. This accounting treatment can be retrospectively applied such that all prior accounting entries are reversed and replaced with the requirements of the Accounting Code. This approach cannot be applied selectively. If this approach is adopted, all statutory charges will be reversed, such that only the accounting entries required by the Accounting Code will remain. The balance of the Capital Adjustment Account for service concession arrangements, leases and similar arrangements will be nil.
40. The Accounting Code requirements for the valuation, revaluation, impairment and depreciation of the asset and lease liability of a service concession or other lease arrangement will be applied in full.
41. The cumulative financial effect of all the prior years’ reversals will be a statutory adjustment to the General Fund, reported through the Movement in Reserves Statement.
42. To ensure consistency, if this approach is adopted, it must be applied to all service concession arrangements, leases and similar arrangements with the exception of such arrangements where the contract will expire within five years.
43. Fixed assets, service concession arrangements and leased assets will continue to form part of the capital framework and be included in prudential indicators. Depreciation based on an asset’s historical cost, amortisation and any impairment or revaluation charged to Surplus or Deficit on the Provision of Services (SDPS) will therefore be a charge to the General Fund for relevant fixed and leased assets.
44. In line with the Accounting Code, revaluation gains will 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. Revaluation losses will be recognised in the revaluation reserve up to the credit balance existing in respect of the asset and thereafter in surplus or deficit on the provision of services.
45. IAS 16 Property, Plant and Equipment requires a revaluation surplus adjustment, being the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s historical cost. This adjustment is made between the General Fund and the Revaluation Reserve.
46. Once this approach is taken it may not then be reversed. This means that where a local authority has reverted in full to the Accounting Code and reversed all statutory adjustments, reflected in the audited statutory Annual Accounts of a local authority, that authority may not choose to re-apply Local Government Finance Circular 10/2022 in subsequent years.
47. The statutory adjustment is made as at 1 April in the year the revised arrangements are applied. This option can be exercised in any financial year from 1 April 2022 and has retrospective application. Being a cumulative statutory adjustment there is no prior year restatement of statutory adjustments in Annual Accounts.
Application of capital receipts
48. Capital receipts may not be used to reduce the long term liability, repay the long term liability, or fund the statutory adjustment required to reverse all statutory charges.
Disclosures
49. Where a local authority chooses to reverse all statutory charges and apply the Accounting Code in full, an explanation should be disclosed in the relevant note to the Annual Accounts to explain the basis for the accounting policy change and the impact on the balances reported within the Annual accounts. These adjustments should be reported through the Movement in Reserves Statement.
Section 2:1: Statutory accounting for service concession arrangements, leases and similar arrangements (as originally set out in finance circular 4/2010).
50. This section sets out the accounting and statutory charges, as originally defined in Finance Circular 4/2010, for service concession arrangements, leases and similar arrangements. This approach may continue to be adopted, in which case no accounting adjustments will be required.
Proper accounting practice
Unitary payments to the operator
51. Unitary payments to the operator for a relevant service concession arrangement or lease are to be charged to the Comprehensive Income and Expenditure Statement in accordance with the Accounting Code.
Depreciation, impairment and revaluations
52. Depreciation, impairment and the revaluation of assets recognised by local authorities under service concession arrangements and leases shall be accounted for in accordance with proper accounting practices. This means such assets will be accounted for in the same way as other local authority assets. It also means that these costs are not chargeable to the General Fund and are adjusted through the Movement in Reserves Statement.
53. Depreciation costs are to be charged to the Comprehensive Income and Expenditure Statement of a local authority in accordance with proper accounting practices. Depreciation costs are to be excluded when determining the movement on the General Fund balance for the financial year and are adjusted through the Movement in Reserves Statement.
54. Impairment costs are to be charged to the Comprehensive Income and Expenditure Statement of a local authority in accordance with proper accounting practices. Impairment costs are to be excluded when determining the movement on the General Fund balance for the financial year and are adjusted through the Movement in Reserves Statement.
55. The revaluation of assets recognised by local authorities under service concession arrangements shall be accounted for in accordance with proper accounting practices. This means such assets will be accounted for in the same way as other local authority assets. It also means that these costs are not chargeable to the General Fund and are adjusted through the Movement in Reserves Statement.
56. On a revalued asset, a transfer between the revaluation reserve and capital adjustment account shall be carried out that represents the difference between depreciation based on the revalued carrying amount of the asset and the depreciation based on the asset’s historical cost.
Statutory charges for service concession arrangements
57. In any financial year two statutory charges may need to be made – one for the repayment of the debt (the long term liability) and one to fund any capital expenditure associated with the relevant service concession or lease asset.
58. When determining the movement on the General Fund balance for a service concession arrangement, lease or other similar arrangement, in the financial year a ‘Statutory charge for the repayment of debt’ shall be made. This statutory charge is equal to the annual lease charge, after deducting those amounts which have been charged to the Comprehensive Income and Expenditure Statement for interest in accordance with proper accounting practices.
Statutory charge for the repayment of debt
59. The statutory charge for the repayment of debt in any financial year shall be a sum equal to the unitary payment in respect of the financial year after deducting:
- those amounts which have been charged to the Comprehensive Income and Expenditure Statement in accordance with proper accounting practices, adjusted as necessary for paragraph 11 below
- actual lifecycle replacement costs capitalised in year. The value deducted for lifecycle replacement costs shall not exceed the planned lifecycle replacement costs as set out in the contract. The value to be deducted for works undertaken earlier than planned is equal to the planned value as set out in the contract, ignoring the planning year. Where the capital expenditure exceeds the balance of the unitary payment after deducting those costs identified in a) above the statutory payment for the repayment of debt shall be zero
- prepayments posted to the balance sheet for future lifecycle replacement costs
60. Where a local authority has adopted the prepayment option for lifecycle replacement costs and the work is either not undertaken or the costs were less than planned an adjustment is required. A sum equal to the prepayment written off to the Comprehensive Income and Expenditure Statement is to be disregarded when determining the value of 10 a) above. Where the prepayment relates to lifecycle replacement costs which may not be capitalised, any charge to the Comprehensive Income and Expenditure Statement for lifecycle replacement costs shall be disregarded when determining the value of 10 a) above.
61. Where the capital expenditure exceeds the unitary payment after deducting those costs as identified in 10 a) above, the excess of actual lifecycle costs will be charged to the unitary payment in the subsequent financial year. For the purposes of paragraph 10 b) above, those excess costs, when met from the unitary charge, are not to be deducted as actual lifecycle replacement costs capitalised in year.
62. The statutory charges made for the repayment of the principal element of the debt represent the repayment of the long term liability associated with a relevant service concession arrangement or lease. The total charge across all years to the General Fund for any relevant service concession arrangement or lease should be equal to the long term liability recognised for the service concession arrangement or lease infrastructure. Adequate records must be kept to demonstrate that the General Fund has been correctly charged.
Statutory charge for lifecycle replacements - capital expenditure
63. Sums set aside from the unitary payment as a prepayment for lifecycle costs planned within the contract shall not be a charge to the General Fund when set aside. The statutory charge to the General Fund is made when the capital expenditure is actually incurred and the prepayment is used to meet that cost.
64. Authorities may transfer sums from the General Fund to the Renewals and Repair fund should they wish to identify and set aside funds to finance the capital expenditure when it occurs.
65. If it becomes probable during the contract that the programmed lifecycle replacement costs will not take place or the authority believes the prepayment is too large the excess should be charged to the Comprehensive Income and Expenditure Statement. Should this occur no statutory adjustment is required. Local authorities would however release a matching amount from the earmarked reserves/ Renewal and Repair fund at the same time to support the charge to the Comprehensive Income and Expenditure Statement.
66. When determining the movement on the General Fund balance for the financial year, a statutory charge ‘Capital expenditure charged to the General Fund’ shall be made for a relevant service concession arrangement or lease. This statutory charge to the General Fund, made via the Movement in Reserves Statement, in any financial year shall be a sum equal to:
a) the actual lifecycle replacement expenditure capitalised in year in accordance with proper accounting practice where this is less than the planned replacement cost; or
b) the actual lifecycle replacement cost where this is equal to the planned replacement cost
c) the planned replacement cost where the actual expenditure exceeds the planned replacement cost
d) where the capital expenditure is equal to, or less than, the planned expenditure but exceeds the unitary payment (after deducting those amounts charged to the Comprehensive Income and Expenditure Statement) together with any balance of lifecycle prepayments, the statutory charge for the year is equal to the lifecycle prepayment plus the balance remaining of the unitary payment after deducting those amounts charged to the Comprehensive Income and Expenditure Statement .
67. Adequate records must be kept to demonstrate that the General Fund has been correctly charged with the capitalised lifecycle replacement costs. Returns to the Scottish Government for capital expenditure shall include capital expenditure recognised as incurred on relevant service concession arrangement or lease assets. The financing of that expenditure will be the revenue contribution to capital.
Scottish Government support for service concession arrangements
68. The statutory guidance for service concession arrangements will not impact the accounting treatment of Scottish Government support for such arrangements. This forms part of the General Revenue Grant. As such there is no requirement to apportion the grant and then to match the grant with the new elements of the expenditure and the equivalent service lines.
Debt restructuring – movement of the general fund balance
69. Service concession arrangements, leases and similar arrangements may include clauses that transfer a proportion of the savings arising from the restructuring of the operator’s debt to the local authority. The revised accounting arrangements will require any debt restructuring to be accounted for as a renegotiation of the lease. The existing liability shall not be altered but the revised financing terms reflected as a re-profiling of repayments and finance charges. This adjustment may only be applied prospectively.
70. Where the authority receives a share of the benefit from the refinancing as a lump sum this will either be included in deferred income and released to the Comprehensive Income and Expenditure Statement over the life of the arrangement, if the gain is conditional on the continuation of the arrangement, or as an immediate gain if unconditional on the continuation of the arrangement. Where the refinancing gain is accounted for as deferred income and released to the income and expenditure account over the life of the arrangement no statutory adjustment is required. The statutory charge for the repayment of the outstanding liability for the service concession arrangement will continue to be charged in accordance with the statutory guidance.
71. If the share of the benefit from the refinancing is recognised as an immediate gain, a statutory adjustment is required. Statutory guidance permits premiums arising from the refinancing of borrowing to be deferred and charged to the General Fund over time (Finance circular 4/2007).
72. The statutory adjustment to be made where the authority recognises an immediate gain from a restructuring of the operator’s debt is to credit an equivalent sum to the Financial Instruments Adjustment Account and debit the General Fund. This transfer is to be reported as part of the Movement in Reserves Statement – adjustments between accounting basis and funding basis under statute.
73. Where a local authority has no outstanding statutory premium balances in the Financial Instruments Adjustment Account this requirement will not apply. If the value of the outstanding statutory premiums held is less than the refinancing gain the transfer is restricted to the value of the outstanding premiums. The refinancing gain is to be released back to the General Fund over the life of the contract.
74. The statutory requirement to transfer the refinancing gain to the Financial Instruments Adjustment Account is prospective only.
75. Where the value of statutory premiums held in the Financial Instruments Adjustment Account is less than the refinancing gain recognised in the Comprehensive Income and Expenditure Statement, the credit to the Financial Instruments Adjustment Account is reduced. The credit, and associated debit, shall be equal to the outstanding value for statutory premiums forming part of the Financial Instruments Adjustment Account.
76. The refinancing gain shall be released back to the General Fund over the contract period. This transfer is to be reported as part of the Movement in Reserves Statement – adjustments between accounting basis and funding basis under statute).
Local authority assets
77. A local authority may provide the operator with access to existing assets of the authority that are not used in the service concession arrangement but are in exchange for reduced or eliminated service concession payments.
78. Where the arrangement involves the permanent transfer of an asset to the operator, or the asset is provided in the form of a lease to the operator, the local authority is required to derecognise the asset. The authority is required to recognise the consideration received from the asset / operator. This may be the reduction or elimination of the service concession outstanding liability. The statutory guidance permits the capital receipt to be applied to the outstanding liability to reflect the reduced liability and hence reduced service concession payments.
79. In such cases no further statutory intervention is required, and the annual charge to the General Fund follows the statutory guidance.
80. Where the arrangement does not involve the permanent transfer of the assets to the operator but is provided as an operating lease, no revised balance sheet entries are required to reflect the asset used by the operator. This remains the local authority asset. In such cases the local authority is required to recognise the service concession infrastructure asset (at fair value) and the associated long term liability. Over the period of the operating lease the authority will recognise income from the operating lease in the Income and Expenditure Account. At the point that the income is recognised, there shall be a corresponding reduction in the long term liability, reflecting the offsetting arrangements. The statutory charge to the General Fund is unaffected by the operating lease arrangements.
Donated assets
81.Where the capital expenditure is greater than the lifecycle costs identified in the contract the statutory charge to the General Fund is equal to the contract cost. The excess of expenditure is a gain to be recognised. The asset is effectively ‘donated’ by the operator and, where all conditions are met, income is recognised in the Comprehensive Income and Expenditure Statement. This income is not income that may be credited to the General Fund and therefore when any such donated asset is recognised in the Comprehensive Income and Expenditure Statement a statutory adjustment equal to the income recognised must be charged to the General Fund via the Movement in Reserves Statement.
Application of capital receipts
82. Capital receipts may not be used to reduce the long term liability, repay the long term liability, or fund the statutory charge associated with a service concession arrangement.
Statutory Charge for The Repayment Of Leases
83. Leases are a method of financing capital expenditure. As with service concession arrangements, they do not represent the borrowing of money but rather a credit arrangement. Where assets are acquired through a lease, and where the expenditure may be properly capitalised in accordance with proper accounting practices, the following statutory guidance applies:
84. When determining the movement on the General Fund balance for the financial year a ‘Statutory charge for the repayment of debt’ shall be made for a lease. This statutory charge is equal to the annual lease charge after deducting those amounts which have been charged to the Comprehensive Income and Expenditure Statement for interest in accordance with proper accounting practices.
85. Depreciation costs are to be charged to the Comprehensive Income and Expenditure Statement of a local authority in accordance with proper accounting practices. Depreciation costs are then transferred to the Capital Adjustment Account and reported in the Movement in Reserves Statement.
86. Impairment costs are to be charged to the Comprehensive Income and Expenditure Statement of a local authority in accordance with proper accounting practices. Impairment costs are then transferred to the Capital Adjustment Account and reported in the Movement in Reserves Statement.
87. Revaluation gains or losses are initially charged to the Comprehensive Income and Expenditure Statement of a local authority in accordance with proper accounting practices and then transferred to the Capital Adjustment Account and reported in the Movement in Reserves Statement
88. On a revalued asset, a further adjustment is required: a transfer between the revaluation reserve and capital adjustment account shall be carried out that represents the difference between depreciation based on the revalued carrying amount of the asset and the depreciation based on the asset’s historical cost.
Application of capital receipts
89. Capital receipts may not be used to reduce the long term liability, repay the long term liability, or fund the statutory charge associated with a lease.
Section 2.2: Statutory accounting flexibility for service concession arrangements
90. This statutory accounting flexibility applies only to service concession arrangements entered into prior to 1 April 2022 and does not apply to leases or any other similar arrangement.
91. This is a flexibility on the statutory provisions set out within section 2.1 above with regards to the calculation of the statutory repayment of debt (the principal repayments). All other requirements set out in Section 2.1 continue to apply.
92. Option 2.1, in line with previous Finance Circular 4/2010, requires that amounts equal to the unitary charge should be the charge to the General Fund.
93. However, following the request of local government, a temporary flexibility to this requirement is permitted, as set out below.
94. The statutory adjustment is made as at 1 April in the year applied. Being a cumulative statutory adjustment, there is no prior year restatement of statutory adjustments in the Annual Accounts.
Accounting flexibility
95. This flexibility may only be applied in either the 2022 to 2023 or 2023 to 2024 financial year. Local authorities may apply the flexibility either retrospectively (applying a change in treatment as if the new treatment had always applied) or prospectively (applying a change in treatment from the date of the change).
96. Any subsequent changes to the accounting policy chosen to account for service concessions (following application of this flexibility) may only be applied as required by the Accounting Code, for instance to address changes to, or adoption of, new accounting standards. Subsequent changes must be disclosed in a detailed narrative as part of the relevant note to the accounts to set out the reason for the change to the accounting policy adopted and why the previous accounting policy is no longer considered appropriate.
Options for prudent repayment
97. Either the Equal Instalment of Principal (EIP) method or the annuity method may be used to calculate the annual charge for the principal repayments of the liability.
98. If utilising the annuity method, the discount rate to be applied should follow the requirements of the Accounting Code. As such, the principal repayments should be discounted using the interest rate implicit in the contract, if that rate can be readily determined. If that rate cannot be readily determined, the incremental borrowing rate of the local authority should be used.
99. The annual charge for the principal repayments of the liability may be calculated in accordance with the useful life of the asset.
100. If this flexibility is applied it must be applied consistently to all service concession arrangements with the exception of contractual agreements due to end within five years of the date of application of this flexibility and provided that excluding this arrangement from the application of the flexibility would not result in an annual charge that is materially different, in which case such service concession arrangements may be excluded from the requirement to apply the flexibility consistently. If a service concession is excluded from the application of the flexibility then section 2.1 must be applied.
101. There will be no change to the interest and service charge costs associated with relevant service concession arrangements, which will continue to be charged to the Comprehensive Income and Expenditure Statement as incurred.
102. In order to apply this flexibility a local authority must be able to separately identify the value of each service concession arrangement. If this cannot be done, both the asset and the liability of the service concession arrangement must be restated at market values prior to adoption of the flexibility outlined above.
103. For the purposes of this guidance a service concession asset remains a service concession asset until the liability for any service concession arrangement has been fully recharged to the General Fund.
104. If a service concession asset is derecognised the outstanding liability not yet charged to the General Fund becomes an immediate charge to the General Fund.
Government funding
105. Scottish Government support for service concession arrangements forms part of the General Revenue Grant. As such there is no requirement to apportion the grant and then to match the grant with the new elements of the expenditure and the equivalent service lines
Approval by full council
106. In order to apply this flexibility, the decision must be taken to full Council for approval setting out the reason for the change. The submission to full Council must make explicit that this change is prudent, sustainable and affordable over the life of the asset. Where a prepayment is re-profiled as part of the application of this flexibility, it should also be made explicit in the submission to full Council that this change is prudent, sustainable and affordable over the life of the asset.
Prepayments
107. Where a prepayment has been funded by borrowing, i.e. a loans fund advance, a local authority may vary the amount and period, if prudent to do so, in accordance with the 2016 Regulations.
108. Where a prepayment has been funded from revenue reserves (General Fund or the Renewals and Repair Fund) a local authority may revisit that decision, in part of in full, and choose to fund that prepayment, in part or in full, by borrowing, this being recognised by a loans fund advance. The value of the prepayment being replaced with borrowing must be returned to the revenue reserve from which the prepayment was originally funded.
109. Where a prepayment has been funded from capital reserves (Capital Fund or capital receipts) a local authority may revisit that decision, in part of in full, and choose to fund that prepayment, in part or in full, by borrowing, this being recognised by a loans fund advance. The amount of prepayment being replaced with borrowing must be returned to the capital reserve from which the prepayment was originally funded.
110. There will be no prior year adjustment made, the cumulative financial impact being recognised in the financial year the decision has been taken.
111. Where a local authority chooses to revisit a previous decision on the financing of the prepayment the 2016 Regulations and associated statutory guidance will apply. The decision to revisit the funding of a prepayment , the decision must be taken to full Council for approval, setting out the reason for the change. The submission to full Council must make explicit that this change is prudent, sustainable and affordable over the life of the asset.
Statutory charge for lifecycle replacements - capital expenditure
112. Sums set aside from the unitary payment as a prepayment for lifecycle costs planned within the contract may also be calculated in accordance with the useful life of the asset.
Accounting entries
113. The accounting entries for the cumulative difference in the statutory repayment of debt will be a debit to the Capital Adjustment Account and a credit to the General Fund to recognise the reduction in the cumulative charge to the General Fund of the statutory repayment of debt and a corresponding increase in the balance of the Capital Adjustment Account (which will increase the Capital Financing Requirement). This will be reported in the Movement in Reserves Statement.
114. The service concession arrangement liability recognised on the Balance Sheet will not be adjusted and will continue to be written down by the contractual principal repayments.
Disclosures
115. An explanation of the reason for the change to the accounting basis for service concession arrangements should be provided within the relevant note to the Annual Accounts, along with an explanation of the movement in both the Balance Sheet and the General Fund of applying this flexibility.
116. Where the annuity method has been applied to calculate the principal repayments, the narrative should also explain how this method links to the flow of benefits from the asset.
117. Where a service concession is excluded in accordance with paragraph 100 when applying this flexibility the disclosures should provide an explanation that for service concessions with less than five years until the contract expiry and where restatement would not result in a material difference to the annual charge, the statutory repayment of debt continues to be based on the contract life rather than the asset life.
118. The note to the accounts should also include a narrative to disclose the cumulative value of the liability charged to the General Fund prior to applying the permitted flexibility, the revised cumulative value of the liability charged to the General Fund in adopting the permitted flexibility and the balance of funds released to the General Fund as a result of applying this flexibility.
119. These adjustments should be reported through the Movement in Reserves Statement as ‘Adjustment to the statutory repayment of debt for service concession arrangements - permitted flexibility’.
120. The Local Financial Return (LFR) will be reviewed to incorporate relevant data on this flexibility from 2022 to 2023 onwards.
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