Scottish Local Government Finance Statistics 2021-22

4. Reserves and Fixed Assets

4.1 Reserves

Usable reserves reflect a local authority's accumulation of surplus income that can be used to finance future revenue or capital expenditure on services. Chart 4.1 shows the total usable reserves at 31 March 2022, by fund.

Please note that 'Other' revenue reserves includes the Insurance Fund.

Source: LFR 23

The General Fund is the principle usable revenue reserve of the local authority. Any deficit in a local authority's revenue accounts is met from their General Fund, and any surplus is added to the General Fund reserve. The General Fund therefore reflects a local authority's accumulation of surplus income that can be used to finance future revenue expenditure on services or to fund future capital expenditure.

The Orkney County Council Act 1974 and the Zetland County Council Act 1974 require Orkney and Shetland to also hold a Harbour Account, a separate account and reserve fund specifically for harbour undertakings. Orkney and Shetland are also able to transfer money between their General Fund and their Harbour Accounts. In this chapter Harbour Account figures are presented separately, however they are included within General Fund figures in other chapters within this publication.

Where a council has housing stock, the accumulation of surplus income relating to housing is separately identified in their Housing Revenue Account (HRA).

In addition to the General Fund a local authority may also hold other statutory usable revenue reserves, such as a Renewal and Repairs Fund, an Insurance Fund, or other reserves specific to a local authority as permitted by legislation. Amounts will be transferred to and from the General Fund to these reserves.

Local authorities hold two capital reserves – the Capital Fund / Capital Receipts Reserve and a Capital Grants and Receipts Unapplied Account.

The Capital Fund and Capital Receipts Reserve were previously identified separately but are now treated as a single reserve. The Capital Fund / Capital Receipts Reserve may be used for the purpose of meeting the cost of capital expenditure and for the repayment of principal on loans, but not any interest on loans.

The Capital Grants Unapplied Account holds capital grant that has been received but not yet used to fund capital expenditure, or capital receipts held pending their funding of specific expenditure as permitted by Scottish Ministers.

Local authorities also hold a number of unusable reserves, that is reserves which are not backed by cash resources and cannot be used to fund services. Unusable reserves include a Revaluation Reserve, where increases in the value of fixed assets are recorded. This reserve is not usable as an increase in value of an asset will not be realised until the asset is sold. Other unusable reserves include sums deferred or set aside as statutory adjustments which are used to ensure the Annual Accounts of a local authority reconcile to statutory requirements. As these are unusable reserves, they are not discussed in this publication. However this data is collected as part of the Local Financial Returns and is available in the published LFR 23 workbook. A summary of the movement in each unusable reserve in 2020-21 is also provided in the 'SLGFS 2020-21 – Additional Analysis – Reserves' supporting excel file.

A change in accounting practice in 2018-19 (IFRS 9) resulted in unrealised gains in the value of investments held by local authorities being included in the General Fund / HRA / Harbour reserve balances, rather than in an unusable reserve as before. This gain is unrealised as the investment is still held and any gain will only be realised if the investment is sold. The unrealised gain is therefore required to be earmarked and is not available to fund future revenue expenditure or to fund capital investment. The value of usable reserves presented in this publication therefore exclude any IFRS 9 unrealised gains held as part of the General Fund / HRA balances.

Table 4.1 sets out the movements across all reserves in 2021-22. Figures relating to the General Fund (including Harbour Account figures) and HRA were also presented in Chapter 2.4.

Local authorities had an increase of £276 million in their revenue reserves, and a decrease of £55 million in their capital reserves in 2021-22. This means local authorities' usable reserves increased by £221 million overall, from £4,045 million at 1 April 2021 to £4,266 million at 31 March 2022.

Please note that level of reserves held at 1 April and 31 March exclude amounts relating to unrealised gains that are included in revenue reserves in statutory Annual Accounts applying IFRS 9: Financial Instruments.

Source: LFR 23

The majority of the increase in usable reserves relates to an increase in the General Fund of £304 million between 1 April 2021 and 31 March 2022.

As part of the annual budget setting process, the Scottish Government commits to providing a level of funding to Councils in the form of general and specific revenue and capital grants.

Specific revenue grants must be used to meet a specific Scottish Government priority and any unused specific grant can only be carried forward with the consent of the Scottish Ministers. General Capital Grant must be spent in the year received and any unspent General Capital Grant is required to be returned to the Scottish Government at the end of the financial year and may not be held in reserves. In both cases therefore, if this funding is not otherwise utilised within the financial year by the Scottish Government, then it will be reported within reserves as part of the Scottish Government Consolidated Accounts. If consent is provided to carry forward a specific revenue grant this will be disclosed in the local authority's annual accounts as an earmarked reserve.

Earmarked reserves are held for a specific purpose, the majority of which will be fully committed to existing spend programmes and represent the extent to which resources are received or generated in advance of the actual spend.

Local authorities are able to earmark, or set aside, part of their General Fund reserves for future use for a specific purpose. At 31 March 2022, local authorities' had earmarked 81.3 per cent, or £2,269 million of the £2,790 million General Fund reserves. These figures exclude amounts relating to unrealised gains that are included in revenue reserves in statutory Annual Accounts applying IFRS 9: Financial Instruments.

Councils may hold an additional unearmarked amount to mitigate financial risk. This amount equated to £521 million as at 31 March 2022, or 2.4% of Gross Service Expenditure (£21,626 million).

Table 4.2 sets out the level of reserves held across all local authorities in Scotland at 31 March from 2017-18 to 2021-22. Over this five year period, the most significant change is between 2019-20 and 2020-21, caused by Covid-19 pandemic money provided late in 2019-20.

Please note the following:

Figures exclude amounts relating to unrealised gains that are included in revenue reserves in statutory Annual Accounts applying IFRS: Financial Instruments.

Figures for 2020-21 may not match the 1 April 2020 figures shown in Table 4.1 due to restatements in local authorities' accounts between years.

Source: LFR 23

4.2 Fixed Assets

Capital expenditure creates local authority assets. In 2021-22, the value of local authority fixed assets was £53,269 million, an increase of 6.0 per cent, or £3,035 million, from 2020-21. The value of local authority fixed assets from 2017-18 to 2021-22 is shown in Table 4.3.

Source: LFR CR for 2019-20 to 2021-22, CR Final for all other years

Operational assets are assets a local authority can use when providing services, such as a school, council houses, vehicles etc. Almost all of local authorities' fixed assets are operational assets and the value of these has increased by 6.4 per cent, or £3,059 million, from 2020-21 to 2021-22.

Non-operational assets are assets that a local authority cannot currently utilise, for example an asset that is still under construction or an asset that is being held for disposal. Intangible assets are non-physical assets, such as computer software. Non-operational assets and intangible assets together accounted for 4.4 per cent of local authorities' total fixed assets in 2021-22.