Local government finance circular 7-2023: accounting for service concession arrangements, leases and similar arrangements

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

1.    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.

2.    General Fund means the fund as detailed in section 93(1) of the Local Government (Scotland) Act 1973.  

3.    Proper accounting practices are those practices as set out by section 12 of the Local Government in Scotland Act 2003

4.    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. 

5.    The Accounting Code applies IFRS 16 from 1 April 2024 and 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’.

6.    Infrastructure refers to the property plant or equipment provided by the operator.

7.    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 an asset of the local authority in accordance with proper accounting practice.

8.    A financial year is one that commences on 1 April and ends on 31 March.

9.    The annual unitary payment is the payment due to the operator for any financial year.

10.    A capital receipt is the proceeds from the sale of assets of the local authority.

11.    A long-term liability associated with a relevant service concession arrangement is the related liability, or debt, recognised by the local authority when the local authority recognises the service concession arrangement 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

12.    This statutory guidance applies to all relevant service concession arrangements, leases and similar arrangements and applies from the financial year 2024-25.

13.    Local authorities have the option to disapply the statutory adjustments and recognise service concession arrangements, leases and similar arrangements in accordance with the Accounting Code. 

14.    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. 

15.    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 

16.    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.   

17.    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.

18.    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 in the financial year of adoption. 

19.    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.  

20.    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.

21.    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.

22.    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. 

23.    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 (as amended by Finance Circular xx/2023) in subsequent years.

24.    The statutory adjustment is made at 1 April in the year the revised arrangements are applied. This option can be exercised in any financial year from 1 April 2023 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

25.    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

26.    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: Statutory accounting for service concession arrangements, leases and similar arrangements 

27.    This section sets out the statutory accounting and statutory charges for service concession arrangements, leases and similar arrangements.  

Statutory charges for service concession arrangements 

28.    Depreciation costs are to be charged to the Income and Expenditure account 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. 

29.    Impairment costs are to be charged to the Income and Expenditure account 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. 

30.    Unitary payments to the operator for a relevant service concession arrangement are to be charged to the Income and Expenditure Account in accordance with proper accounting practice.

31.    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 asset.  The statutory charge to fund capital expenditure should be treated as a capital expenditure charge to the General Fund.

Statutory charge for the repayment of debt

32.    With the exception of those service concession arrangements to which the temporary statutory flexibility was applied in either 2022-23 or 2023-24, from 1 April 2024 an annual ‘statutory charge for the repayment of debt’ shall be made to the General Fund for all existing and new service concession arrangements. The statutory charge must reflect the principal repayments and must be charged to the General Fund over the term of the contract, after deducting those items described in paragraphs 34(a) to 34(c) below.

33.    For service concession arrangements entered into prior to 1 April 2022, where the temporary statutory flexibility to permit the principal repayments to be accounted for over the asset life rather than contract term was exercised in either 2022-23 or 2023-24, the annual ‘statutory charge for the repayment of debt’ to the General Fund may continue to be calculated on the basis of the asset life, as set out in Finance Circular 10/2022.

34.    When determining the movement on the General Fund balance for a service concession arrangement in the financial year the ‘statutory charge for the repayment of debt’ shall be a sum equal to the unitary payment in respect of the financial year after deducting:

a)    those amounts which have been charged to the Comprehensive Income and Expenditure Statement in accordance with proper accounting practices, adjusted as necessary for paragraph 35 below

b)    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

c)    prepayments posted to the balance sheet for future lifecycle replacement costs

35.    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 34(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 34(a) above.

36.    Where the capital expenditure exceeds the unitary payment after deducting those costs as identified in 34(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 34(b) above, those excess costs, when met from the unitary charge, are not to be deducted as actual lifecycle replacement costs capitalised in year.

37.    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.  The total charge across all years to the General Fund for any relevant service concession arrangement should be equal to the long-term liability recognised for the service concession arrangement infrastructure.  Adequate records must be kept in order to demonstrate that the General Fund has been correctly charged.

38.    Prepayments posted to the balance sheet for future lifecycle replacement costs may not be a charge to the General Fund when recognised. 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.

Statutory charge for lifecycle replacements - capital expenditure

39.    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.  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

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

40.    The planned replacement cost in paragraph 38 refers to the lifecycle replacement expenditure recognised in the relevant service concession arrangement. In determining the statutory charge to be made the timing of the planned cost identified in the relevant service concession arrangement shall be disregarded. For example, if the replacement is planned to occur in 2012-13 but is incurred in 2011-12 the cost shall still be treated as planned for the purposes of determining the statutory charge.

41.    Adequate records must be kept in order 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 assets.  The financing of that expenditure will be the revenue contribution to capital.

Debt restructuring – movement of the general fund balance

42.    Service concession arrangements may include clauses that transfer a proportion of the savings arising from the restructuring of the operator’s debt to the local authority.  Where a local authority receives a share of the benefit from the refinancing as a lump sum and recognises this as an immediate gain in finance income in the income and expenditure account a statutory adjustment must be made. The Financial Instruments Adjustment Account shall be credited, and the General Fund debited, with an equivalent amount as the refinancing gain recognised. This transfer is to be reported as part of the Movements in Reserves Statement.

43.    Where the value of statutory premiums held in the Financial Instruments Adjustment Account is less than the refinancing gain recognised in the income and expenditure the credit to the Financial Instruments Adjustment Account is reduced. 

44.    The credit, and associated debit, shall be equal to the outstanding value for statutory premiums forming part of the Financial Instruments Adjustment Account. 

45.    Where the value of statutory premiums held is zero paragraph 41 does not apply.

46.    The requirement in paragraph 41 only applies to refinancing gains arising in the financial year commencing 1 April 2010, and future financial years.

47.    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 Movements in Reserves Statement.

Donated assets

48.    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

49.    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

50.    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:

51.    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.

52.    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.

53.    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

54.    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. 

55.    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.   

Application of capital receipts

56.    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.

Scottish Government 
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