Local government finance circular 8/2024 - accounting for infrastructure assets: temporary statutory override

Part 1: Background and non-statutory guidance

Background

1. Infrastructure assets are inalienable assets, expenditure on which is only recoverable by continued use of the asset created (in other words there is no prospect of sale or alternative use). They are often homogenous assets that form part of a continuous network that is maintained in a relatively steady state, though there may be distinctive components of this network, such as carriageways, structures, street lighting, street furniture and traffic management systems. They are largely assets with very long lives.

2. Infrastructure assets are one of the few categories of property, plant and equipment assets measured at historical cost rather than at an asset measurement described as ‘current value’ by the CIPFA/LASAAC Code of Practice for Local Authority Accounting (the Code). On the move to capital accounting in 1994 it was decided that there was limited use for measuring the ‘worth’ of infrastructure assets in the same way as other assets in the balance sheet. At that time, infrastructure assets were brought on to the balance sheet at undischarged capital amounts (this was net of revenue contributions, capital receipts applied and grants and contributions received before 1 April 1994/1996), and this was described as (depreciated) historical cost.

3. This measurement basis may have excluded infrastructure assets constructed before the authority’s creation and may have included expenditure on assets which the authority has either never owned or no longer owns, but for which it took on financing responsibilities (for the transferred assets).

4. There are further information deficits to be addressed. This is particularly the case in relation to roads, where the engineering records that are useful for maintenance, and identification of replacement expenditure and new expenditure for the (highways) infrastructure assets have not been created to map against identifiable components.

5. In addition, prescriptions within historic versions of the Code limited the reporting of infrastructure assets. For example following the requirement of UK GAAP, the 2000 version of the Code (which was then a Statement of Recommended Practice), applicable from 1 April 2000, prohibited the capitalisation of expenditure on replacement parts of an asset unless the replaced parts had been accounted for as separate components, whereas the 2010/11 Code, applicable from 1 April 2010 to-date, requires all replacement costs to be capitalised and also requires the replaced component to be derecognised. 

6. A move to a valuation process for these assets was deemed to be too costly when it was considered by CIPFA LASAAC from 2015 to 2017, and therefore infrastructure assets continue to be held in local authority balance sheets at depreciated historical cost.

7. There has been increased scrutiny of the audit of local authority accounts in recent years and there has been an acknowledged focus on the measurement and accounting of property, plant and equipment. One of the main concerns is that the derecognition provisions of the Code are difficult for local authorities to apply for infrastructure assets because the information deficits may mean that there is no balance for the derecognised asset or part thereof in the balance sheet to be removed.

8. Concerns were raised by local government auditors that some authorities are not applying component accounting requirements appropriately when there is replacement expenditure. This was first identified by a local auditor in England but came to light via audit network discussions convened by the National Audit Office.

9. The issue raised by auditors relates to subsequent expenditure on infrastructure assets and specifically on whether local authorities should be assessing if there is any undepreciated cost remaining in the balance sheet for the replaced components that needs to be derecognised when the subsequent expenditure is incurred. This has led to issues relating to the reporting of gross historical cost and accumulated depreciation as elements of depreciated historical cost.

10. CIPFA offered to assist resolution by providing additional guidance and by pursuing possible augmentations to the Code. The CIPFA LASAAC Code Board undertook an urgent consultation on temporary changes to the code to resolve infrastructure assets reporting issues. 

11. However, CIPFA LASAAC were unable to agree an approach, within the restricted timeframe required, that addressed the concerns of all stakeholders whilst also supporting high quality financial reporting.

Non-statutory guidance

12. CIPFA LASAAC’s consultation identified the requirement for temporary prescriptions on accounting/proper practices in two main areas:

1. The Reporting (Disclosure) of Gross Cost and Accumulated Depreciation: CIPFA LASAAC has suggested that because of historical reporting requirements and information deficits local authorities are unlikely to have reliable, meaningful information to accurately report gross historical cost and accumulated depreciation. 
2. The Accounting Transaction to Derecognise Replaced Components: Historical information deficits and custom and practice mean that information required to evidence the derecognition of replaced components of infrastructure assets will not be able to be produced.

13. The Scottish Government has agreed to permit a temporary statutory override to the Code in order to address these issues.

Statutory override –infrastructure assets

14. This form of statutory override is unlike statutory mitigations which seek to ameliorate the short-term impact or volatility of accounting practices on the general fund and thus what is charged to council tax or housing rents.

15. A statutory override of this form instead confirms previous custom and practice and the economic position.

16. The statutory overrides permitted within this guidance are time limited for the periods from 1 April 2010 to 31 March 2025.

17. A local authority may choose whether or not to apply either or both of the statutory overrides set out in Part 2 of this guidance.

18. If a local authority chooses not to apply Statutory Override 1 then gross historical cost and accumulated depreciation of infrastructure assets will be reported in line with the normal provisions of the Code.

19. If a local authority chooses not to apply Statutory Override 2 then infrastructure assets, including the derecognition of replaced components, will be accounted for in accordance with the normal provisions of the Code.

20. Statutory Override 1:  This statutory override permits that, for accounting periods commencing from 1 April 2021 until 31 March 2025, a local authority is not required to report the gross cost and accumulated depreciation for infrastructure assets.

21. Statutory Override 2: This statutory override requires that, for the periods from 1 April 2010 to 31 March 2025, the carrying amount to be derecognised in respect of a replaced part of an infrastructure asset is a nil amount, and no subsequent adjustment shall be made to the carrying amount of the asset with respect to that part. This is required on the basis that parts of infrastructure assets are rarely replaced before the part has been fully consumed and should therefore, in most cases, be fully depreciated at the date of replacement.