Local government finance circular 7/2024: Loans Fund accounting guidance

Part 1 – Informal commentary

Capital Financing

Part 1 of this document provides a commentary on the statutory guidance, the statutory guidance itself is set out in Part 2.

Commentary

1. Part 1 provides an overview of the Local Authority (Capital Financing and Accounting) (Scotland) Regulations 2016 (the 2016 Regulations), as amended by the Local Authority (Capital Financing and Accounting) (Scotland) Amendment Regulations 2024 (the 2024 Amendment Regulations).

Overview

2. The 2016 Regulations were amended by the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2021 and the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2022. They have now been further amended by the Local Authority (Capital Finance and Accounting) (Scotland) Amendment Regulations 2024 (the 2024 Amendment Regulations).

3. The 2016 Regulations, as amended by the 2024 Amendment Regulations, apply from the financial year 2024-25 (i.e. from 1 April 2024).

Summary of the 2016 Regulations (as amended)

4. Part 1 contains general provisions concerning the citation, commencement and interpretation of the Regulations.

5. Part 2 Regulations 2 to 9 makes provision about local authority borrowing:

• Regulation 2 sets out the purposes for which a local authority may borrow. Borrowing for other purposes requires the consent of the Scottish Ministers, as does any borrowing that is not in sterling.
• Regulation 3 enables local authorities to borrow jointly and sets out how these Regulations apply to such borrowing.
• When a local authority exercises the power to borrow, Regulation 4 requires it to have regard to generally recognised codes of practice and to guidance, such as the CIPFA Prudential Code and CIPFA Treasury Management Code.
• Regulation 5 enables borrowing through credit arrangements, as defined by Regulation 1(3), and provides for calculation of the amount of external debt that a local authority needs to recognise in respect of borrowing through such arrangements.
• Regulation 6 makes the calculation of the Authorised Limit for External Debt, as required by the CIPFA Prudential Code a requirement and provides for the determination and variation of the authorised limit.
• Regulation 7 requires that all money borrowed, and interest on it, must be secured over all the revenues of the local authority, and can only be secured in that way. All securities must have equal ranking, which is a continuation of requirements under the 1975 Act.
• Existing protection for lenders under the 1975 Act is continued by Regulation 8.
• Regulation 9 provides that borrowing by a local authority for the purposes of the funds specified in that Regulation is not to be classed as borrowing by that authority for the purposes of these Regulations.

6. Part 3 (Regulations 10 and 11) enables a local authority to borrow to lend to other local authorities, specified other bodies and any common good fund of that authority.

7. Part 4 (Regulations 12 to 14) concerns loans funds:

• Regulation 12 places a duty on a local authority to maintain a loans fund, which is to be administered in accordance with the 2016 Regulations, proper accounting practices and prudent financial management.
• Regulation 13 requires a local authority to make loans fund advances each year for expenditure of, or lending by the local authority which the authority has determined should be met from borrowing as permitted by Regulation 2. Loans fund advances may not however be made for treasury management activities (Regulation 13(2)(a)) or for a credit arrangement (Regulation 13(2)(b)). Regulation 13(3) requires that, except for an advance to which regulation 14 applies, a local authority must repay a loans fund advance in accordance with proper accounting practices.
• Regulation 14 applies to loans fund advances made prior to 1 April 2023. Regulation 14(2) permits a local authority, where it considers it prudent to do so, to vary either or both the period or the amount of a loans fund repayment.
• Regulation 14(3), as amended by the 2024 Amendment Regulations, prohibits the variation of loans fund repayments where the borrowing for which the loans fund advance is made was subject to the consent of the Scottish Ministers.
• Regulation 14(4), which was added by the 2024 Amendment Regulations, states that a variation to a loans fund repayment under regulation 14(2) must not result in the repayment period exceeding the useful life of the asset for which the loans fund advance is made, may only be calculated on the balance of the loans fund advance as it applies on the first day of the financial year in which the variation is made, and may never give rise to a nil or negative repayment. Where a useful asset life cannot reasonably be determined for a loans fund advance, the loans fund repayment period may not exceed 50 years.
• Regulation 14(5), which was added by the 2024 Amendment Regulations, provides an exception to Regulation 14(4) to permit a variation to the repayment period for a loans fund advance to exceed 50 years or the life of an asset with the consent of the Scottish Ministers.
• Regulation 14(6), which was added by the 2024 Amendment Regulations, requires the useful life of an asset to which a loans fund advance relates to be determined in accordance with proper accounting practice.

8. The amendments enacted by the 2024 Amendment Regulations are summarised below.

Amendments to the 2016 Regulations

9. The following amendments to the 2016 Regulations, as reflected above, came into force from 1 April 2024. There will be no requirement to revisit decisions taken prior to 1 April 2024 with regards to existing loans fund advances and the repayment of those advances.

Amendment to existing Regulation 14(3)(b)

10. A loans fund repayment may not be varied where Scottish Ministers have consented to that borrowing.

Ministerial consent will usually be required for borrowing where an exception to proper accounting practice is required, for example to permit a local authority to borrow to lend to a third party and therefore incur expenditure which is not capital in nature and requires an exception to current rules. In such cases, the Ministerial consent will specify a reasonable repayment period for the expenditure to be treated as capital. As the repayments will not align to a specific asset of the local authority, there is no basis to permit a future variation.

New Regulation 14(4)(a) and (b)

11. A variation to a loans fund repayment must:

a) not result in the repayment period exceeding the useful life of the asset, as determined in accordance with proper accounting practice.

This regulation will require the loans fund repayment term to align to the useful life of an asset.

b) not result in the repayment period exceeding 50 years if the loans fund advance does not relate to an asset for which a useful asset life can reasonably be determined.

This Regulation requires that where a useful asset life cannot reasonably be determined, the repayment period may not exceed 50 years.

New Regulation 14(4)(c) and (d)

12. A variation to a loans fund repayment must-

c) only be calculated on the balance of the loans fund advance as it applies on the first day of the financial year in which the variation is made.

This regulation will require any variation to the period or amount of loans fund repayments to be applied prospectively. Loans fund repayments already charged in the annual accounts may not be varied.

d) never give rise to a nil or negative repayment.

This regulation will require that any variation to the period or amount of loans fund repayments may not result in a nil or negative repayment.

New Regulation 14(5)

13. An exception to Regulation 14(4)(a) and (b) is provided by Regulation 14(5) which permits a variation to result in a repayment period exceeding either the useful life of an asset or 50 years, in accordance with a) or b) above, with the consent of the Scottish Ministers.

Proper accounting practices

14. The 2016 Regulations often refer to proper accounting practices. Proper accounting practices are defined in Section 12 of the Local Government in Scotland Act 2003 (the 2003 Act) as:

(a) those which the local authority is required to observe by virtue of any enactment;

(b) those which have been specified in guidance issued by the Scottish Ministers;

(c) those which, whether by reference to any generally recognised, published code or otherwise, are regarded as proper accounting practices to be observed in the preparation and publication of accounts of local authorities.

Loans fund advances

15. Regulation 13(3) applies to all loans fund advances made on or after 1 April 2023 and requires that all such loans fund advances are repaid in accordance with proper accounting practice, permitting statutory guidance to set out the statutory accounting arrangements for loans fund advances and subsequent repayments from 1 April 2023. The statutory guidance in Part 2 sets out proper accounting practice for loans fund advances in accordance with Regulation 13.

16. Regulation 14 applies to loans fund advances made prior to 1 April 2023. The statutory guidance therefore confirms the statutory accounting arrangements for loans fund advances made prior to 1 April 2023, in accordance with Regulation 14 of the 2016 Regulations (as amended by the 2024 Amendment Regulations).

Consultation on the draft statutory accounting guidance

17. Local authorities were consulted on the draft statutory accounting guidance to accompany the 2016 Regulations, as amended by the 2024 Amendment Regulations. Six responses were received to the consultation.

Alignment with the Prudential Code

18. Some consultation responses noted potential conflict with the prudential framework by requiring the loans fund repayment term to align with the useful life of the asset. However, the Prudential Code is primarily concerned with borrowing rather than with loans fund repayments.

19. In line with both the prudential framework and the statutory framework, external borrowing will be on a portfolio basis and will not be attributed to specific assets. External borrowing will be accounted for in accordance with the Accounting Code.

20. Loans fund advances reflect a local authority’s unfinanced capital expenditure and therefore the local authority’s borrowing requirement rather than actual external borrowing.

Loans fund repayments – alignment with asset life

21. The options for the calculation of loans fund were introduced by Finance Circular 7/2016 and have always required the loans fund repayment term to align to the life of the asset for which the loans fund advance is made.

22. Option 2, the depreciation method, included in both Part 1 and Part 2 of Finance Circular 7/2016 and continued in Part 2 of this guidance requires the annual loans fund repayment to be equal to:

a. depreciation for the asset as charged to the Surplus or Deficit on the Provision of Services; less

b. the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost (as recognised by a transfer from the Revaluation Reserve to the Capital Adjustment Account); plus

c. any impairment or decrease in the carrying amount required to be recognised in the Surplus or Deficit on the Provision of Services; less

d. any reversal of a revaluation decrease or impairment previously recognised in the Surplus or Deficit on the Provision of Services.

23. Option 3, the asset life method, included in both Part 1 and Part 2 of Finance Circular 7/2016 and continued in Part 2 of this guidance requires the loans fund repayments to be calculated on the basis of the asset life as established in the year of the loans fund advance.

24. Option 4, the funding / Income profile method, included in both Part 1 and Part 2 of Finance Circular 7/2016 and continued in Part 2 of this guidance requires the loans fund repayments to be calculated by reference to an income stream and for it to be reasonable to link that funding/ income stream to the asset the subject of a loans fund advance.

25. Each of these options link the loans fund repayment to the asset for which the loans fund advance is made.

26. Paragraph 117 of the statutory guidance (part 2) allows for the selection of an alternative loans fund repayment option provided that it aligns with the asset life for which the loans fund advance is made and applies a pattern of repayments that accurately reflect the economic reality of the public value of the asset.

Loans fund repayments – subsequent variation

27. The statutory guidance requires the loans fund repayment term to align to the life of the asset. The asset life is established in the year of the loans fund advance, as determined in accordance with proper accounting practice.

28. A loans fund repayment may only be varied where this aligns with a variation to the useful life of the asset, as determined in accordance with proper accounting practice.

29. Where an asset life cannot reasonably be established, the loans fund repayment period is limited to 50 years and may not subsequently be varied.

30. Whilst there is no requirement to revisit decisions taken with regards to loans fund advances made prior to 1 April 2023 or to alter the way in which the loans fund is managed for existing loans fund advances and repayments, it is recommended that for loans fund advances made from 1 April 2024 both the loans fund advance and the subsequent repayment of that advance are identifiable against a specific asset or group/category of assets.

31. If a loans fund advance and schedule of repayments are separately identifiable for each asset or type of asset, the loans fund repayment term may subsequently be varied where this aligns to a change to the asset life following a revaluation.

32. However, if loans fund advances and repayments are managed on a consolidated basis it will not be possible to identify the asset to which the loans fund advance relates and therefore there will be no basis upon which to subsequently vary the loans fund repayments.

Changes since Finance Circular 7/2016

33. Part 1 of the circular is intended to provide informal commentary rather than to set out proper accounting practices and therefore those aspects of Part 1 of Finance Circular 7/2016 which set out a position on proper accounting practices have been moved to Part 2, which provides the guidance on proper accounting practices. Aside from this, the restructure has merely consolidated the repetition which existed between Part 1 and Part 2 of Finance Circular 7/2016.

34. Consultation responses noted concern as to the extent of changes introduced by this circular. However, the majority of changes noted in those responses had been introduced by Finance Circular 7/2016. Therefore, in order to provide clarification, the amendments to the statutory guidance (Part 2) are summarised below.

Capital receipts

35. Paragraph 16 has been added to state that, as a general principal, loans fund repayments reflect revenue provision and should be made from revenue, therefore the use of capital receipts for loans fund repayments should be minimised.

36. Paragraphs 20 to 23 describe the application of Regulation 13(3) and Regulation 14 and the scope of the statutory guidance.

37. Paragraphs 56 to 66 set out new provisions with regards to loans fund repayments.

Options for prudent repayment

38. The only changes to the options for repayment of loans fund advances are as follows:

• Paragraph 80, under option 2, depreciation method, has been added to confirm that the loans fund repayment term may only be varied to align with a change in the useful life of an asset life. This is to be treated as a change in an accounting estimate (as would apply to the change in the annual depreciation charge). Any change to the loans fund repayments must only be applied prospectively and calculated on the balance of the loans fund outstanding at the time of the change.
• Paragraph 82, under option 3, asset life method, confirms that the asset life is determined in the year that the loans fund advance is made and is not subsequently revised. Where an asset life cannot reasonably be established, the loans fund repayment period may not exceed 50 years.

Other options

39. Paragraph 117 notes that other options are not ruled out provided that:

(a) For depreciable assets, they are fully consistent with the principles of depreciation accounting and applying a pattern of repayments that accurately reflect the economic reality of the public value of the asset;

(b) For non-depreciable assets, they are fully consistent with the statutory duty to make prudent revenue provision and applying a pattern of repayments that accurately reflect the economic reality of the public value of the asset. The loans fund repayment term should align to the asset life or where the asset life cannot reasonably be established over a term not exceeding 50 years.

Other amendments

40. Paragraph 118 sets out provisions with regards to investment properties.

41. Paragraphs 119 to 122 confirm the statutory accounting arrangements for service concession arrangements, leases and similar arrangements, as set out in Finance Circular 7/2023.

42. No additional reporting requirements have been introduced and no other changes have been made.