Draft MPA accounts for the year ended 31 March 2004

Report: 6
Date: 19 July 2004
By: Treasurer

Summary

This report presents the Authority’s draft set of accounts for 2003-04 (Appendix 1) which are subject to audit. The report identifies key features of the accounts and explains the structure of the statements. The accounts will be forwarded to the next full Authority with any comments from this committee.

A. Recommendation

That members scrutinise the draft statement of accounts 2003-04 and agree any comments to be conveyed to the full Authority.

B. Supporting information

Introduction

1. This report presents and comments on the Authority’s draft accounts for the year ended 31 March 2004. This is the fourth set of annual accounts produced by the MPA.

Approval process

2. The Accounts and Audit Regulations 2003 require the Authority to approve the final accounts for the year ending 31 March 2004 by the following 31 August, prior to the external auditor providing his opinion. This approval date is earlier than in previous years (formerly 30 September) and over the next two years the reporting deadlines will become progressively earlier such that, by 2006, the accounts will have to be approved by 30 June.

3. A requirement under the regulations is for the accounts to be signed and dated by the chair of the committee at which that approval is given. The accounts will therefore be presented to the full meeting of the MPA on 29 July 2004, the last scheduled meeting before the statutory deadline. The role of this committee is to scrutinise the draft accounts and advise the Authority.

4. The external auditor will then complete his audit, provide his audit opinion on the accounts and publish his annual audit letter. His intention is to report the audit letter to the meeting of this committee scheduled for 2 December 2004. Members will appreciate that, until the audit is completed, there remains the possibility that the accounts will have to be amended.

Basis of the accounts

5. The accounts are compiled and presented in accordance with the Statement of Recommended Practice (SORP) – The Code of Practice on Local Authority Accounting published by the Chartered Institute of Public Finance and Accountancy (CIPFA), which has statutory force as representing proper accounting practice.

Outturn

6. The provisional revenue outturn for 2003-04 was reported to the Finance Committee on 24 May 2004, with the final outturn being reported on 22 July. The outturn represents an overspending against budget of £5.6 million, after reflecting the transfer to reserves to meet 2004-05 expenditure (£18.9 million) and before taking account of the underspending on pensions of £27.7 million. The Committee agreed that the pensions underspending did not need to be transferred to the pensions reserve in full, and therefore approved a number of further transfers to earmarked reserves and to the general reserve in order to maintain it at its minimum policy level. These are now reflected in the final accounts.

Statement of accounts

7. The Statement of Accounts follows a format prescribed by the SORP. The following paragraphs provide a brief commentary on each of the sections of the statement.

Foreword

8. The foreword provides contextual information to assist the understanding of the accounts. In particular, it refers to the budgetary setting within which the financial position reported in the accounts has been managed.

Audit opinion

9. This remains blank in the draft accounts awaiting the conclusion of the audit. Members will be aware that the auditor issued an unqualified opinion on last year’s accounts for the first time. I expect this position to be maintained for the 2003-04 accounts.

Statement of responsibilities

10. This sets out the respective responsibilities of the Authority and the Treasurer in the production and approval of the final accounts. It also contains my signed statement that the accounts present fairly the financial position of the MPA at 31 March 2004 and its income and expenditure for the reported accounting period.

Statement on the system of internal control

11. This statement builds upon the statement of internal financial control included in the accounts for 2002-03 and reflects a developing situation in relation to the effectiveness of internal control and risk management.

Accounting policies

12. The accounting policies accord with the requirements of the SORP. In 2003-04 the full implementation of FRS17 accounting policy has had a material effect on substantial parts of the statement of accounts relating to police officer pensions. This includes recognition of the net asset / liability and a pensions reserve on the balance sheet and entries in the revenue account for movements in the asset / liability (with reconciling entries back to the actual amounts payable for precept purposes).

Revenue account and notes to the revenue account

13. The revenue account summarises the Authority’s income and expenditure for the year 2003-04. The statutory presentation, as required by the Best Value Accounting Code of Practice and set out on page 15, is an objective analysis of net expenditure by broad policing activity. Note 1 to the revenue account shows a supplementary subjective analysis of net expenditure by input costs.

14. The notes to the revenue account provide explanations of specific lines as well as additional information in accordance with the requirements of the Code.

15. The methodology for generating the Best Value accounting analysis is based on activity based costing methodology used to produce the Home Office return. This is a development from the 2002-03 accounts where the analysis was based on data supplied by Finance and Resource Managers in the OCUs. The change in methodology has resulted in some significant variations between the years in net costs allocated to policing activity.

16. The full implementation of FRS17 means that the cost of police officer retirement benefits is now recognised when the benefits are earned by employees, rather than when the benefits are eventually paid as pensions. However, the charge the Authority is required to make against the precept is based on the cash payable in the year so the real cost of retirement benefits is reversed out of the revenue account by way of a reserves transfer.

Balance sheet and notes to the balance sheet

17. The balance sheet shows the financial position of the Authority as at 31 March 2004. Again, the notes provide additional information as well as clarification of specific figures in the balance sheet.

18. ’Police Officer Pension Liability’ and ‘Police Officer Pension Reserve’ are new entries in the balance sheet and reflect the full implementation of FRS17. The pension liability shows the underlying commitments that the Authority has in the long run to pay retirement benefits. Recognition of the total liability of £9.376 billion has a substantial impact on the net worth of the Authority as recorded in the balance sheet. However statutory arrangements for funding the deficit mean that the financial position of the Authority remains healthy because finance is only required to be raised to cover police pensions when they are actually paid. If the pension liability is excluded the Authority’s net worth would show a modest increase from £1.6 billion in 2002-03 to £1.8 billion in 2003-04. Corresponding amounts have been incorporated into the balance sheet at 31 March 2003, in accordance with required accounting practice, to facilitate valid comparison between the two balance sheet positions.

19. Earmarked capital reserves have decreased from £41.4 million at 31 March 2003 to £14.2 million in 2004. The decrease reflects the release of C3i/Airwave capital reserve to support capital expenditure during the year.

20. Earmarked revenue reserves are shown as £112.5 million at 31 March 2004 compared with £78.3 million twelve months earlier. This increase arises from the specific decisions of the Authority in relation to the general and earmarked reserves.

Statement of total movements in reserves

21. This statement provides detailed information on the Authority’s reserves. The accounting reserves reflect the requirements of the capital accounting arrangements and do not represent real resources. The usable capital reserves support the funding of the Authority’s five year capital programme. The earmarked revenue reserves relate to purposes that have been approved by the Finance Committee and the majority are expected to be utilised in the short term. The requirement for pensions reserves will be reviewed during 2004/05 in the light of changes to the police pension financing arrangements.

Cash flow statement and notes to the cash flow statement

22. This statement summarises the inflows and outflows of cash arising from transactions with third parties.

C. Equality and diversity implications

None specific to this report.

D. Financial implications

None other than comments included in the report above.

E. Background papers

Code of Practice on Local Authority Accounting in the United Kingdom 2003 - A Statement of Recommended Practice

F. Contact details

Report author: Peter Martin, MPA.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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