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

Part 2 – Statutory guidance on proper accounting practices

Statutory guidance on loans fund accounting

Issued by Scottish Ministers under section 12(2)(b) of the Local Government in Scotland Act 2003 [proper accounting practices]

Definitions

In this guidance –

1975 Act means the Local Government (Scotland) Act 1975.

2016 Regulations means the Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 [SSI 2016 No. 123] (as amended by the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2021, the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2022, and the Local Authority (Capital Finance and Accounting) (Scotland) Amendment Regulations 2024).

Accounting Code of Practice means the Code of Practice on Local Authority Accounting in the UK published each year by CIPFA/LASAAC.

Capital Financing Requirement (CFR) is as defined in the Prudential Code.

Credit arrangement has the same definition as Regulation 6 of the 2016 Regulations.

Housing Revenue Account (HRA) – is the account a local authority may be required to maintain by virtue of the Housing (Scotland) Act 1987.

Local Authority has the same definition as Regulation 1 of the 2016 Regulations.

Prudential Code means the Prudential Code for Capital Finance in Local Authorities 2021 Edition issued published by CIPFA.

Application

1. This guidance applies to those authorities defined as a local authority in Regulation

1 of the 2016 Regulations.

2. This statutory guidance applies from 1 April 2024

Duty to maintain a statutory loans fund

Statutory purpose of the loans fund from 1 April 2016

3. Regulation 12 of the 2016 Regulations requires a local authority to maintain a loans fund and to administer the loans fund in accordance with the Regulations, proper accounting practices and prudent financial management.

4. The statutory purpose of the loans fund is –

a. To recognise, by making advances from the loans fund, the expenditure incurred, or loans made to third parties, by the authority which a local authority has determined are to be financed from borrowing, as permitted by Regulation 2 of the 2016 Regulations;

b. To record transactions - opening balance each financial year, new advances, repayments charged to revenue (the statutory repayment of debt), and a closing balance at each financial year-end, being the value of loans fund advances still to be repaid/ charged to revenue;

c. To record, for each loans fund advance, the annual repayment to be made to revenue. This will provide an authority with a profile of annual charges representing the amount of statutory repayment of debt to be charged to the General Fund/ HRA in any financial year.

5. The statutory loans fund reflects the local authority’s underlying need to finance, by borrowing money, the expenditure incurred in any financial year on those purposes set out in Regulation 2 (but excluding Regulation 2(1)(b) – treasury management). The value of loans fund advances will increase whenever expenditure is incurred, or loans made, which a local authority has determined should be met from borrowing. The value of loans fund advances is reduced when loans fund advances are repaid by making a charge to the General Fund or HRA.

6. The balance of a loans fund at 31 March each year represents the amount of past expenditure financed by borrowing money that a local authority has a liability to meet from future revenue budgets.

7. Loans fund accounts must be maintained in such a way as to enable any HRA advances, repayments and balances to be separately identifiable. Further, loans fund accounts must be maintained to enable advances, repayments and balances for each of the Regulation 2 purposes (but excluding Regulation 2(1)(b)) of the 2016 Regulations) to be separately identifiable.

External borrowing and the statutory loans fund

8. Regulation 2 of the 2016 Regulations sets out the purposes for which a local authority may borrow. However, the timing of the external borrowing is unlikely to match the expenditure, or the lending to third parties, that the authority has determined should be financed from borrowing in any financial year. The Prudential Code recognises that the timing of the external borrowing will be in accordance with treasury management principles. A local authority’s Capital Financing Requirement (CFR) reflects the local authority’s underlying need to finance capital expenditure by borrowing or credit arrangements. Actual external debt may be higher or lower than the CFR. The Prudential Code sets out the need for an authority to set boundaries for external debt reflecting capital plans and treasury management requirements. Advances from the loans fund will be made to match actual expenditure/ loans made to third parties in the financial year, for those purposes set out in Regulation 2 and which a local authority has determined will be financed from borrowing. The timing of external borrowing does not inform when a loans fund advance is made.

9. External borrowing is no longer required to be carried to the statutory loans fund. A local authority, through prudential indicators, is required to demonstrate that its borrowing is, in the medium term, for capital expenditure. Capital expenditure, for prudential and statutory purposes, includes that expenditure or lending to be financed by borrowing as permitted by Regulation 2.

10. Any prudential indicators set locally should not associate any part of the authority’s external borrowing with particular items, categories or purposes of expenditure. The authority should have an integrated treasury management strategy within which its borrowing and investments are managed in accordance with best professional practice.

Interest costs

11. The payment of interest or dividends on external borrowing is no longer a function of a statutory loans fund. Accounting for external borrowing, and the repayment of that borrowing, including any interest or other costs, is, for the purposes of statutory Annual Accounts, to be in accordance with proper accounting practices. Proper accounting practices will include relevant statutory requirements as set out in statutory guidance issued as a Circular, for example Finance Circular 4/2007

12. A local authority may be required, through provisions contained in the Housing (Scotland) Act 1987, to maintain a Housing Revenue Account (HRA). Where there is a requirement to maintain an HRA Part II of Schedule 15 of the 1987 Act sets out the operation of the HRA. This includes the requirement for a local authority to debit the HRA for loan charges which the authority is liable to pay for that year in respect of money borrowed by the local authority for a number of purposes. Schedule 15 sets out those purposes. HRA loan charges are made up of the repayment of loans fund advances made for HRA expenditure, plus the HRA share of interest or other costs of external borrowing of the local authority. This includes any temporary borrowing for treasury management activities but excludes borrowing for the common good or a local government pension fund.

13. A statutory purpose of the loans fund is to enable the identification of HRA loans fund advances and to make annual repayments of loans fund advances. This does not include interest costs.

14. There is no Scottish Government guidance on the charge to be made to the HRA for interest or for other costs arising from the borrowing of money. A local authority’s policy for allocation should however be available to tenants / tenant groups and be applied consistently. In this respect see the guidance Operation of Local Authority Housing Revenue Accounts (HRAs) in Scotland issued by the Scottish Government in February 2014. In making an allocation of interest costs to the HRA consideration must also be given to any statutory guidance issued in relation to accounting for interest costs and the impact any statutory guidance may have on the actual interest cost chargeable to the General Fund, and hence the HRA.

Capital receipts

15. Income to the statutory loans fund is limited to the repayment of loans fund advances. Paragraph 22 of Schedule 3 of the 1975 Act permits a local authority to establish a Capital Fund. A Capital Fund may be used to provide money for the repayment of the principal of loans (but not any payment of interest on loans). Where the Capital Fund is used to fund the annual statutory repayment of debt this is to be treated as a separate transaction. This means that the statutory repayment of debt must still be charged, in full, to the General Fund. The transfer from the Capital Fund to the General Fund is a separate transaction. The Scottish Government recognises that a local authority may wish to use the Capital Fund to extinguish or reduce a loans fund advance. This usage is the same as applying capital receipts/capital fund to fund capital expenditure, except in this case the expenditure has taken place in previous years and has been met from borrowing.

16. As a general principal, loans fund repayments reflect revenue provision and should be made from revenue. The use of capital receipts for loans fund repayments should therefore be minimised.

Non-statutory loans fund

17. Local authorities may continue with full loans fund accounting for their own internal management purposes. This will be on a non-statutory basis.

Loans fund advances

18. Regulation 2 of the 2016 Regulations sets out the purposes for which a local authority may borrow. Only expenditure for the purposes set out in Regulation 2 may be the subject of a loans fund advance.

19. All expenditure incurred, or lending to third parties, which the authority has determined is to be financed from borrowing as permitted by Regulation 2, must be the subject of a loans fund advance.

20. 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)).

21. 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 administered in accordance with proper accounting practice. Proper accounting practices for loans fund advances made on or after 1 April 2023 and the subsequent repayment of those advances are set out in this statutory guidance.

22. There is no requirement to revisit decisions taken prior to 1 April 2024 with regards to existing loans fund advances.

23. This statutory guidance applies to loans fund advances made both prior to and since 1 April 2023.

Capital expenditure of the local authority (Regulation 2(1)(a) of the 2016 Regulations)

24. Capital expenditure of a local authority, which an authority has determined should be met from borrowing, must be the subject of a loans fund advance in the financial year the expenditure is incurred. The loans fund advance/s is/are equal to the expenditure the authority has determined should be met from borrowing. For the purposes of the statutory Annual Accounts this expenditure is to be accounted for in accordance with the Accounting Code of Practice.

25. No statutory adjustment is to be made to the statutory Annual Accounts for this expenditure.

26. Applying the Prudential Code, a local authority’s Capital Financing Requirement (CFR) is increased by this expenditure. When estimating the CFR this expenditure should be included in the local authority’s estimate of capital expenditure. When calculating the CFR from the balance sheet the CFR is increased as the capital expenditure will be reflected in the value of tangible or intangible fixed assets of the local authority.

Capital grants to third parties / expenditure on third party tangible assets (Regulation 2(1)(b) and 2(1)(c) of the 2016 Regulations)

27. The 2016 Regulations permit a local authority to borrow for other purposes as set out in Regulation 2. This includes borrowing to fund expenditure that is not capital expenditure of the local authority. By permitting borrowing for these additional purposes this expenditure is to be treated as capital expenditure for the purposes of the legislative capital control framework and the Prudential Code.

28. Regulation 2(1)(b) and 2(1)(c) allows a local authority to borrow to provide a capital grant to a third party or to finance certain expenditure on a third party’s tangible assets.

29. Scottish Government or other central government capital grant may permit the grant to be used for similar purposes. Where the central government grant conditions permit this use the expenditure is also treated as capital expenditure for statutory purposes.

30. There is no statutory power for a local authority to use other capital resources, such as the Capital Fund or capital receipts, to fund this expenditure.

31. A local authority may use revenue resources to finance the expenditure but in such cases the expenditure is not treated as capital expenditure for statutory or Prudential Code purposes and no loans fund advance is made.

32. Expenditure for the purposes set out in Regulation 2(1)(b) or 2(1)(c), which an authority has determined should be met from borrowing, must be the subject of a loans fund advance in the financial year the expenditure is incurred. The loans fund advance/s made is/are equal to the expenditure the authority has determined should be met from borrowing. For the purposes of the statutory Annual Accounts this should be accounted for in accordance with the Accounting Code of Practice as revenue expenditure.

33. The repayment of the loans fund advance for the purposes set out in Regulation 2(1)(b) and/or 2(1)(c) should be determined under Option 3, the repayment period being equal to the useful life of the asset/s the subject of the grant aid.

34. For statutory capital framework purposes and the Prudential Code the expenditure is to be treated as capital expenditure.

35. For statutory purposes a statutory adjustment is made to the statutory Annual Accounts. A local authority’s Capital Adjustment Account is to be debited and the General Fund (or HRA) credited with a sum equal to the expenditure an authority has determined should be met from borrowing.

36. Under the Prudential Code a local authority’s Capital Financing Requirement (CFR) is increased by this expenditure. When estimating the CFR this expenditure should be included in the local authority’s estimate of capital expenditure. When calculating the CFR from the balance sheet the CFR is increased due to the debit to the Capital Adjustment Account for this expenditure.

Lending to third parties (Regulation 2(1)(c), Part 3 and Regulation 2(2))

37. Lending for the purposes set out in Regulation 2(1)(c) and Part 3, or as permitted by a Regulation 2(2) borrowing consent, which an authority has determined should be met from borrowing, must be the subject of a loans fund advance. The loans fund advance/s is/are equal to the value of loans the authority has determined should be met from borrowing. For the purposes of the statutory Annual Accounts the loans are to be accounted for in accordance with the Accounting Code of Practice. These loans are likely to require recognition as a debtor.

38. A local authority may only determine that the loan is to be financed from borrowing for those loans made to those bodies, and for those purposes, as set out in Regulation 2(1)(c) and Part 3.

39. For statutory capital framework purposes and the Prudential Code the loans are to be treated as a capital transaction.

40. No statutory adjustment is to be made to the statutory Annual Accounts for these loans.

41. Applying the Prudential Code, a local authority’s Capital Financing Requirement (CFR) is increased by these loans. When estimating the CFR these loans should be included in the local authority’s estimate of capital expenditure. When calculating the CFR from the balance sheet the CFR is increased as the debtor (or investment) is to be considered a capital transaction.

42. There is no statutory power for a local authority to use other capital resources, such as the Capital Fund or capital receipts, to finance lending to third parties.

43. Any other loans made by an authority will need be financed from cash reserves. These other loans are not to be recognised as capital and will not form part of the authority’s CFR. A local authority’s ability to make loans from cash backed reserves will be linked to their policy on the value of reserves held and its longer-term financial plans. A local authority making loans to third parties using cash reserves must be able to demonstrate that over the period of the loan the investment remains funded from cash surpluses and will not require a local authority to borrow, except in the short term, to maintain liquidity. No loans fund advance is to be made for loans made which use cash reserves.

44. Finance Circular 5/2010 sets out the consent of Scottish Ministers for the investment of monies by Scottish local authorities. Paragraph 9(d) of the consent provides that loans made by a local authority to another authority, or harbour authority, using powers contained in Schedule 3, paragraph 10 or 11 of the Local Government (Scotland) Act 1975 are not investments. The power to lend to other statutory bodies is preserved in the new Regulations at Regulation 2(1)(e). For the purposes of Paragraph 9(d) of Circular 5/2010 loans made by a local authority to another statutory body using powers contained in Regulation 2(1)(e) of The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 are not investments. Local authorities are still required to recognise as an investment those loans to third parties financed from cash reserves.

45. As the loan will have an income stream Option 4 is likely to be the most appropriate option for the loans fund repayments. The repayment period and profile for the portion of the loans fund advance to which an income stream is attributable should align to that income stream, with the remaining portion of the loans fund advance (to which income is not attributable) being repaid over the asset life. If option 1 or option 3 are selected the loans fund repayment period should not exceed the useful life of the asset the subject of the loan. The useful life of the asset should be determined at the outset, and the loan period may not be extended, nor is it required to be shortened, thereafter, even if in reality the condition of the asset changes.

46. Should a local authority convert a loan to a grant at any time consideration must be given as to whether the loans fund repayments continue to be prudent. Where the loan was made on an equal instalment or annuity basis it would be prudent for the repayments to the loans fund to continue without any change. However, if the loan was made on a maturity basis it would be prudent to amend the repayment schedule. The repayments should be re-calculated applying option 3, the asset life option. In such cases the asset life is equal to the remaining useful life of the third-party asset and not the original life of the asset when first recognised by the third party.

Borrowing for other purposes with the consent of Scottish Ministers (Regulation 2(2) of the 2016 Regulations)

47. The 2016 Regulations make provision for Scottish Ministers to consent to a local authority borrowing for other purposes than those permitted under Regulation 2(1).

48. Scottish Ministers’ consent will continue to be required for:

a. Borrowing to lend to third parties that are not included in the list of bodies set out in Part 3 of the 2016 Regulations;

b. Borrowing to lend to bodies included in the list of bodies set out in Part 3 but for a purpose which is not authorised by any legislation;

c. Borrowing to grant aid a third party where the test of capital expenditure set out in the 2016 Regulations is not met;

d. Borrowing for any revenue expenditure.

e. Any other purpose where there is no other statutory authority to borrow.

49. Where an authority has been provided with a statutory borrowing consent the expenditure which an authority has incurred and has determined should be met from borrowing, must be the subject of a loans fund advance in the financial year the expenditure is incurred. The loans fund advance/s made is/are equal to the expenditure the authority has determined should be met from borrowing relying on the consent. For the purposes of the statutory Annual Accounts this should be accounted for in accordance with the Accounting Code of Practice as revenue expenditure.

50. For statutory capital framework purposes and the Prudential Code the expenditure is to be treated as capital expenditure.

51. Under the Prudential Code a local authority’s Capital Financing Requirement (CFR) is increased by this expenditure. When estimating the CFR this expenditure should be included in the local authority’s estimate of capital expenditure. When calculating the CFR from the balance sheet the CFR is increased due to the debit to the Capital Adjustment Account for this expenditure.

52. Where Scottish Ministers’ consent to borrow is sought for non-capital investment purposes, local authorities should note that this type of consent requires the agreement of the UK Government if the borrowing is not to impact on the Scottish budget.

53. A loans fund advance must be made which is equal in value to any expenditure incurred, or lending made, for the purposes set out in Regulation 2(2) which Scottish Ministers have provided a consent, and the authority has determined is to be met from borrowing (to use the consent) in any financial year.

54. Scottish Ministers will usually advise which option applies for repayment of the loans fund advance. Where this is not set out in the borrowing consent the statutory guidance applies.

Prudent repayment of loans fund advances

55. 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)).

56. 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. Proper accounting practices for loans fund advances made on or after 1 April 2023 and the subsequent repayment of those advances are set out in this statutory guidance.

57. 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. This statutory guidance confirms the statutory accounting arrangements for loans fund advances made prior to 1 April 2023, in accordance with the 2016 Regulations (as amended by the 2024 Amendment Regulations).

58. From 1 April 2024, the 2024 Amendment Regulations (which apply to loans fund advances made prior to 1 April 2023) require that:

• A loans fund repayment may not be varied where Scottish Ministers have consented to that borrowing Regulation 14(3)(b).
• 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 Regulation 14(4)(a).
  • 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 (Regulation 14(4)(b)).
  • 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 (Regulation 14(4)(c)).
  • d) never give rise to a nil or negative repayment (Regulation 14(4)(d)).
• 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.

59. There is no requirement to revisit decisions taken prior to 1 April 2024 with regards to existing loans fund advances.

60. The following provisions apply, in accordance with the 2016 Regulations and this statutory guidance, to all loans fund advances (both those made prior to and after 1 April 2023) and will have effect from 1 April 2024.

Meaning of prudent repayment

61. Where a loans fund advance relates to an asset, the prudent repayment period should align to the asset life, as determined for the purposes of calculating depreciation in accordance with proper accounting practice, or to the period over which a local authority will receive an income stream to fund the loans fund repayment.

62. Where an asset life cannot reasonably be established, the loans fund repayment period is limited to 50 years.

Variation to loans fund repayments

63. From 1 April 2024 any variation to loans fund repayments may only be calculated on the balance of the loans fund advance outstanding in the financial year of variation and may only be applied prospectively. A variation may not result in either a nil or negative charge in the annual accounts.

64. The asset life is based on the depreciation term of the asset in the year of the loans fund advance. Loan fund repayments may only be varied where this aligns with a variation to the depreciation term of an asset, as determined in accordance with proper accounting practice.

65. Where an asset life cannot reasonably be attributed to an asset, the loans fund repayment period should align to the period over which benefit of the expenditure will be provided to the community but may not exceed 50 years and may not be subsequently varied. The only exception is where the consent of the Scottish Ministers to a variation of the 50-year period is expressly given.

66. Loan fund advances where Scottish Ministers have consented to that borrowing may not be varied.

Options for prudent repayment

This statutory guidance provides a number of options for the prudent repayment of a loans fund advance. These options are likely to be relevant for most local authorities. Other approaches may be relevant to a particular project or scheme. What is prudent is a decision for each authority.

67. The four options included in this guidance are:

a. Option 1 – Statutory Method – only available for capital expenditure prior to 1 April 2021

b. Option 2 - Depreciation Method.

c. Option 3 – Asset Life method either

(i) Equal Instalment method or

(ii) Annuity method

d. Option 4 – Funding / Income profile method

A local authority need not select a single option but may select different options for different capital schemes/projects. However, a local authority should be consistent in applying options – for further guidance see section ‘Policy on prudent repayment and reporting on sums committed’.

Option 1 – statutory method

68. The statutory method for the repayment of loans fund advances was withdrawn from 1 April 2016. For loans fund advances made prior to 1 April 2016, to which option 1 was applied, this method may continue to be applied to the loans fund repayments.

69. An alternative option may be selected, if appropriate, however any such variation may only be applied to future loans fund repayments made from 1 April 2024 onwards and the repayment term may not exceed the asset life to which the loans fund advance relates. Where an asset life cannot reasonably be established, any variation may not extend the loans fund repayment term beyond 50 years.

Option 2 – depreciation method

70. IAS 16 Property, Plant and Equipment permits an entity to choose either the cost model or the revaluation model for each class of property plant or equipment. The Accounting Code sets out for each class of asset the model which a local authority is to apply.

71. The annual repayment of the loans fund advance for an asset, or a component of an asset, the subject of a loans fund advance is 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.

72. Where the percentage of the expenditure on the asset financed by the loans fund advance is less than 100%, the repayment should be equal to the same percentage of the charge calculated in paragraph 73 above.

73. This method is not suitable for assets, such as freehold land, where no useful life can be attributed and hence there is no depreciation charge. Option 3 or option 4 (if the land generates income) should be chosen for land. If a structure is also acquired on the land the structure would be treated as a separate component. In such cases Option 2, the depreciation option is suitable for structure (the component).

74. This method is not suitable where the expenditure the subject of the loans fund advance is either expenditure for the purpose of giving a grant to any person (Regulation 2(1)(b)) or for expenditure on works to assets not owned by the authority (Regulation 2(1)(c).

75. This method is not suitable for the repayment of loans fund advances made for lending to third parties (Regulation 2(1)(c) or Regulation 2(2)).

Capital expenditure – residual value

76. Where an asset has a residual value, this method will result in a loans fund advance having the same residual sum outstanding when an asset is fully depreciated. A local authority should continue to make repayments of the loans fund advance equal to the depreciation charge made in the previous financial year until the loans fund advance is fully repaid.

77. The Code requires an asset to be derecognised on disposal or when no future economic benefits or service potential are expected from its use or disposal. For these assets there is no future depreciation charge to inform the future loans fund repayment values. In such cases the loan fund repayments should either continue in accordance with the depreciation schedule as if the disposal had not taken place, or the outstanding balance on the loans fund may be repaid in full (charged to the General Fund). This is a matter for the local authority to determine. A local authority should have an approved policy on how an outstanding loans fund advance should be managed on derecognition or disposal of an asset.

Subsequent variation to loans fund repayments

78. 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.

Option 3 – asset life method

79. This method represents a simpler alternative to the depreciation method (if using straight line). The asset life method differs from the depreciation method as the residual value of an asset is not taken into consideration, and repayments continue to be based on the initial life and value of an asset and do not change if the asset life is subsequently varied or is subject to impairment.

80. Note that if this option is selected then 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.

81. The Accounting Code requires each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item to be depreciated separately. Where components of an asset have different useful lives, separate loans fund advances will need to be made. The period of the repayment of the loans fund advance is the useful life of the relevant asset component, which must be the same useful life recognised for that asset component in the statutory Annual Accounts.

82. The annual repayments are calculated as either equal instalments or by the annuity method.

83. The equal instalment method is the same as straight-line depreciation ignoring the residual value of an asset. The asset life is the same asset life as recognised for that asset on initial recognition in the local authority’s statutory annual accounts.

84. The equal instalment method results in a series of equal annual amounts over the useful life of the asset. The calculation to be made is set out in a formula in the statutory guidance. The original amount of expenditure (“A” in the formula) remains constant. The cumulative total of the repayments made to date (“B” in the formula) will increase each year. The outstanding period of the estimated life of the asset (“C” in the formula) reduces by 1 each year. For example, if the life of the asset is originally estimated at 25 years, then in the initial year when a repayment is made, C will be equal to 25. In the second year, C will be equal to 24, and so on. The useful life of the asset is determined at the outset and should not be varied thereafter, even if in reality the condition of the asset has changed significantly.

85. The alternative is the annuity method, which links the repayment of the borrowing to the flow of benefits from an asset where the benefits are expected to increase in later years. A local authority is required to use an appropriate interest rate to calculate the annual repayment of the loans fund advance. Once calculated it is only the principal element of the calculation that represents the annual repayment of the loans fund advance. Interest is to be disregarded after calculation, the principal element being fixed at the time of the calculation.

86. The statutory duty to administer the loans fund in accordance with prudent financial management extends to the interest rate selected for the annuity calculation. A local authority should set out their policy on interest rate selection and apply that policy consistently.

87. The first loans fund repayment will normally be made in the financial year following the one in which the expenditure is incurred, with one exception. In the case of the provision of a new asset a local authority may defer the commencement of the repayment until the financial year following the one in which the asset is first available for use. This replicates a similar effect if option 2, the depreciation method, is selected.

88. Land generally has an unlimited useful life. For the purposes of this option land should be treated as equal to a maximum of 50 years. However, if there is a structure on the land, which the authority will depreciate over a useful life of longer than 50 years, the land may also be assigned the same repayment period as the depreciation period.

89. Whilst the Asset Life option spreads the loans fund repayment over the useful life of the asset local authorities may adopt shorter periods.

90. A loans fund advance is repaid by reference to the life of an asset. The life of the asset is the life attributed to that asset in accordance with proper accounting practices. There are two main methods.

a. The equal instalment method, similar to straight-line depreciation but is a simpler alternative. This method is calculated by the formula -

The annual repayment is the amount given by the following formula:

(A - B) / C

where-

A is the amount of the capital expenditure in respect of the asset financed by borrowing (the loans fund advance)

B is the total repayment made before the current financial year in respect of that expenditure

C is the inclusive number of financial years from the current year to that in which the estimated life of the asset expires.

b. The annuity method, which links the flow of benefits from an asset where the benefits are expected to increase in later years. The annual repayment is the principal element for the year of the annuity required to repay over the asset life. A local authority should use an appropriate interest rate to calculate the amount.

91. The repayment of the loans fund advance normally commences in the financial year following the one in which the expenditure is incurred. However, where the borrowing is for an asset that is not yet in use an authority may postpone beginning to make repayments until the financial year following the one the asset first comes into use.

92. The asset life is determined in the year the loans fund advance is made and is not subsequently revised, even if in reality the condition of the asset changes that life significantly. If no life can reasonable be attributed to an asset, such as freehold land, the life should be taken as a maximum of 50 years. However, in the case of freehold land on which a building or other structure is constructed, the life of the land may be treated as equal to that of the structure, where this would exceed 50 years.

93. Where the loans fund advance relates to a grant paid to a third party for capital purposes (Regulation 2(1)(b), the asset life may not exceed the useful life of the asset the subject of the grant.

94. Where the loans fund advance is for expenditure on assets not owned by the local authority (Regulation 2(1)(c)) the asset life may not exceed the useful life of the asset the subject of the expenditure.

Option 4 – funding / income profile method

95. This method allows the annual repayment of a loans fund advance to be calculated by reference to an income stream. It must be reasonable to link that funding/ income stream to the asset the subject of a loans fund advance.

96. The loans fund repayment (statutory repayment of debt) and the income (whether grant, tax or other income) are separate accounting transactions. Income may not be carried to the loans fund to extinguish the annual repayment. The repayment of the loans fund advance (the statutory repayment of debt) and the funding or income, are separate transactions in the statutory Annual Accounts, recorded in accordance with proper accounting practices.

97. A loans fund advance may not exceed the value of the expected funding/ income. Where the expenditure is greater than the expected income a second loans fund advance must be made, with repayments based on an alternate option.

98. The loans fund repayment period for the portion of the loans fund advance to which an income stream is attributable should align to the term over which the income will be provided.

99. Where an income stream is attributable to all or part of a loans fund advance, the portion of the loans fund advance to which the income stream relates should not subsequently be varied.

100. The repayment term for the remaining portion of the loans fund advance (that to which an income stream is not attributable) may align to either the period over which income will be received or the asset life.

101. The repayment term for the portion of the loans fund advance to which an income stream is not attributable may subsequently be varied only where this is undertaken to align the repayment term to a change to the asset life.

102. A local authority must keep under review any advances that have been calculated by reference to an income stream to ensure the provision for repayment remains prudent.

103. Where an authority identifies that the income stream is, or will be, insufficient to repay the loans fund advance the authority must review the repayment schedule and address any shortfalls. This may require a reduction to the outstanding loans fund advance to match the new income value and profile, with a new loans fund advance made equal to the reduction made, applying an alternate repayment option. In such cases the asset life is equal to the remaining useful life of the asset and not the original life of the asset when first recognised. Option 2 (depreciation method) may be selected but the authority is required to make an initial loans fund repayment equal to the cumulative value of the depreciation costs charged to prior years.

104. In some cases, it may be prudent to recognise grant funding or other income streams when determining both the period of the repayment and/or the annual repayment of any loans fund advance. It must however be reasonable to link that funding/ income stream to the asset the subject of a loans fund advance. Some examples of where this income approach may be considered prudent are provided below.

105. To ensure the funding/income basis continues to be prudent a local authority will need to consider the reliability of, and any changes to, that funding or income.

Town and Country Planning (Scotland) Act 1997 - Section 75 planning obligations

106. The Planning etc (Scotland) Act 2006 (the 2006 Act) amends the Town and Country Planning (Scotland) Act 1997 (the 1997 Act) replacing the existing section 75 with a revised section 75 and adding new sections 75A to 75G. Section 75(1) of the 1997 Act provides that "a planning authority may enter into an agreement with any person interested in land in their district (in so far as the interest of that person enables him to bind the land) for the purpose of restricting or regulating the development or use of that land, either permanently or during such period as may be prescribed by the agreement". Section 75 (2) provides that "any such agreement may contain such incidental and consequential provisions (including financial ones) as appear to the planning authority to be necessary or expedient for the purposes of the agreement''.

107. A financial provision in an agreement may require capital investment, the investment being provided by the local authority with a financial contribution from the developer, this contribution being payable at a future date/ over a future period. Some contributions may be linked to the sale of housing or other assets, with the contribution only payable if those sales are made. Where a local authority borrows (a loans fund advance) and profiles the repayment to align with the anticipated receipt of contributions there will need to be a focus on whether the anticipated receipts are prudent and will require a continual review on whether the anticipated receipts will materialise. Changes to the loans fund repayment profile should be made in recognition of any changes in estimates or timing of anticipated receipts.

Tax Incremental Financing (TIF)

108. The Scottish Ministers have agreed a number of pilot Tax Incremental Financing (TIF) projects. TIF is a method of financing the public infrastructure investment necessary to unlock private investment. The increases in property tax from the development are used to repay the public infrastructure investment required by a project. For the pilot TIF projects a local authority retains the increased (incremental) Non Domestic Rates (NDR) revenues over a 25-year period.

109. The TIF pilots are required to demonstrate that incremental NDR (known as TIF Revenue) is sufficient to finance the TIF debt costs over the life of the TIF. It is recognised that during the investment period the incremental NDR income is likely to be less than the debt costs – a funding gap.

110. For these projects it is reasonable for a local authority to profile the repayment of the TIF loans fund advances to mirror the TIF Revenue profile. This may result in the repayment profile including zero repayments if no TIF revenue is forecast/received.

City Deals and similar arrangements

111. Central Government (UK and/ or Scottish Government) may agree to a number of financial arrangements to support local authority capital investment. It may be reasonable in certain circumstances to profile the annual loans fund repayment to reflect the profile of future grant receivable from central government.

112. In previous years the Scottish Government supported a level of local authority borrowing for capital investment. This was known as supported borrowing. This provides an example where it would be prudent for the loans fund advance period and annual repayments to mirror the grant period and grant amount expected to be included in future annual revenue settlements. This type of government support is known as loan charge support.

113. Whilst supported borrowing ceased as a method of support in 2010 other arrangements may contain specific grant conditions permitting grant from central government (UK and/ or Scottish Government) to be used to fund loans fund advance repayments. A capital grant from central government is usually only available to fund capital expenditure directly and for no other purpose. A recent City Deal agreement (Glasgow and Clyde Valley) includes specific provision to permit City Deal local authorities to use City Deal capital grant receivable in future years to repay loans fund advances made in prior years for City Deal expenditure. Reflecting this specific grant provision it would be reasonable for the annual repayment of a number of loans fund advances to take into consideration future central government grant.

114. Central Government may agree other types of financial arrangement resulting in a local authority undertaking capital investment and funding this from borrowing (an advance from the loans fund). A different type of arrangement may see central government funding linked not to the capital investment itself but to the outcome of that investment, such as demonstrable and sustained economic growth and job creation. This is a payment by results type arrangement. An example of this type of arrangement is the Growth Accelerator Model (GAM) agreed with the City of Edinburgh Council. Whilst there is no direct link between the central government grant and the local authority borrowing costs (loans fund advance repayments) it would be reasonable for a local authority to link the period of the repayment to the grant period and to profile the annual loans fund repayments to reflect anticipated future central government revenue grant.

Other options

115. Other approaches 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.

Investment properties

116. Where a local authority classifies an asset as an investment property it should fully provide for debt taken on to acquire that asset over the lifetime of that debt. Prudent provision should reflect the schedule of debt repayments.

Service concession arrangements (PPP/PFI etc), leases and similar arrangements

117. Regulation 5(a) of the 2016 Regulations permits a local authority to incur debt through borrowing by way of a credit arrangement for financing capital expenditure of the authority. Regulation 5(b) requires the amount of external debt to be recognised by a local authority in respect of a credit arrangement to be the value of the liability arising from the credit agreement in accordance with proper accounting practices.

118. Local Government Finance Circular 7/2023: Accounting for Service Concession Arrangements, Leases and Similar Arrangements defines proper accounting practice for such arrangements, which are considered to be credit agreements rather than the borrowing of money.

119. The value and period of loans fund repayments for service concession arrangements, leases and similar arrangements will be equal to the contractual unitary payment due for 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; and

b) actual lifecycle replacement costs capitalised in year (which may not exceed the planned lifecycle replacement costs set out in the contract); or

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

120. The loans fund repayment period may not exceed the contractual term of the agreement.

Accounting for loans fund repayments

121. Depreciation, revaluation gains or losses, impairment loss or reversal of impairment loss charged to Surplus or deficit on the Provision of Services are not proper charges to the General Fund. Such amounts shall be transferred to the Capital Adjustment Account.

122. For each financial year a local authority is required to charge the General Fund with the value of loans fund repayments the local authority has determined under either Regulation 13(3) or Regulation 14 of the 2016 Regulations. The determination should be based on a local authority’s policy on prudent repayment, that policy to reflect the meaning of prudent as set out in this guidance. A local authority is required to debit the General Fund (the statutory repayment of debt) and credit the Capital Adjustment Account with the value of loans fund repayments. Where the local authority is required to maintain an HRA the HRA shall be debited with the value of HRA loans fund repayments.

Policy on prudent repayment and reporting on sums committed

123. Capital investment, borrowing and the investment of money are inter-related and Scottish Ministers have previously indicated (circular 5/2010) that they recommend a local authority to have a single annual Strategy covering capital, treasury management, the setting of prudential indicators and the requirements of the investment Regulations and associated consent. A single Report covering the same elements should be produced at each financial year end. The reporting requirements set out below should be included in the annual Strategy and annual Report. Where a local authority does not produce a single strategy or report the information should be included in the most appropriate reports.

124. Section 56 of the Local Government (Scotland) Act 1973 permits a local authority to discharge their functions by committee. An exception is borrowing money which is to be discharged by the authority. The reporting requirements set out below are to be reported in the annual Strategy or annual Report and hence will be subject to approval by the local authority (i.e. full Council or equivalent for other local authorities).

125. A local authority is to set out its policy for the statutory repayment of debt (repayment of loans fund advances).

126. A local authority is to disclose the following loans fund account information:

a. Balance 1 April (anticipated / actual)

b. Advances for the financial year (anticipated / actual)

c. Repayments made for the year (anticipated / actual)

d. Balance 31 March (anticipated / actual)

127. A prior year comparator is required.

128. The disclosure must also identify the liability to make future repayments of loans fund advances. The disclosure is to provide a breakdown of the balance as at 31 March into five-year periods. The first five-year period should detail the amount repayable in the next financial year and, separately years’ two to five. This should be in table format.

129. Where a local authority is required to keep an HRA, the information which relates to the HRA should be reported separately from the General Fund.

130. Should a local authority wish to include interest costs in the disclosure these costs must be shown separately to the amounts disclosed for the loans fund. There is no requirement to include interest costs in the report.

131. The disclosure should include narrative explaining the purpose of the loans fund and what the balance on the loans fund represents.

132. Regulation 14(2) of the 2016 Regulations permits a local authority to subsequently vary either the period or the amount of repayment, or both, if it considers it prudent to do so. Subsequent changes require a narrative to explain why any change is considered to be prudent.

133. The Management Commentary, a component of the statutory Annual Accounts, should include narrative as to how the capital plans of the authority are meeting the objectives of the council. Where that capital investment is financed from borrowing this is required to be prudent, affordable and sustainable. Key performance indicators are likely to be used to set policy and to demonstrate compliance with that policy. Any risks associated with a policy would be identified through the Commentary. The information contained in an annual Strategy and an annual Report will provide the detailed information, and narrative on an authority’s capital investment plans, treasury management (borrowing and investments), prudential indicators and the loans fund liabilities. The Management Commentary should direct the reader to the annual Strategy and annual Report to find this additional information.

Scottish Government

Victoria Quay, Leith, Edinburgh EH6 6QQ

10 June 2024