Annual statement of minimum revenue provision

Report: 06
Date: 23 October 2008
By: Treasurer and Director of Resources

Summary

The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 came into force on 31 March 2008. The Regulations require the Authority to approve an Annual Statement of Minimum Revenue Provision (MRP). This is the amount that must be set aside from revenue funds to meet the repayment of borrowing undertaken to support capital investment.

The Regulations require retrospective approval to be given to the arrangements operating in 2007/08 and approval of an Annual Statement for calculating MRP for 2008/09. For 2009/10 onwards Full Authority will be asked to approve the Annual Statement as part of the formal setting and analysis of the Prudential Indicators. The Annual Statement will subsequently be included in the Treasury Management Strategy.

A. Recommendations

That members agree that:

• for 2007/08 the Authority made a MRP in accordance with the capital financing requirement method;
• for 2008/09 the Authority makes a MRP in accordance with:
  1. the capital financing requirement method for borrowing undertaken prior to 2008/09, and any borrowing undertaken during the year supported through the revenue grant settlement; and
  2. the depreciation method for unsupported borrowing undertaken in 2008/09 as permitted by the flexibilities provided under the Prudential Code.
• the Annual Statement detailing how MRP should be calculated for future years should form part of the formal setting and review of the Prudential Indicators. The Annual Statement will subsequently be included in the annual Treasury Management Strategy.

B. Supporting information

1. The Minimum Revenue Provision (MRP) is an amount set aside from revenue to meet the repayment of borrowing. Under the previous regulations this was calculated as 4% of the Authority’s capital financing requirement (CFR).

2. The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 came into force on 31 March 2008 and have amended the requirement to make MRP. Authorities are now required to make an amount of MRP they consider to be prudent. No definition of a “prudent provision” is given. However, guidance has been issued that makes recommendations as to how the MRP can be calculated.

3. An Annual Statement on MRP will need to be approved by Full Authority on an annual basis. For 2008/09 approval will need to given for both 2008/09 and 2007/08 retrospectively. For 2009/10 onwards the statement will be approved prior to the beginning of the financial year. The intention is that for 2009/10 onwards this will be approved as part of the setting and review of the Prudential Indicators.

4. Options for calculating the MRP are as follows:

1. Regulatory Method;
2. Capital Financing Requirement Method;
3. Asset Life - either Equal Installment Method or Annuity Method;
4. Depreciation Method

Options

Option 1 - Regulatory Method

5. MRP is calculated as 4% of the Authority’s capital financing requirement. However, an adjustment is made to ensure that the impact on the revenue account is no greater than when calculated under the regime prior to the introduction of the Prudential Code. This adjustment is known as adjustment A.

6. The intention is that this option should normally only be used for government supported borrowing, i.e. borrowing for which we receive support through revenue support grant. However, the guidance allows for this option to be used both for supported and unsupported borrowing for 2007/08. From 2008/09 this option can only be used for supported borrowing.

Option 2- Capital Financing Requirement Method

7. This is a simplified version of option 1. MRP is calculated at 4% of CFR. No adjustment is made to the calculation. This is the option currently used by the Authority.

8. This option applies only to supported borrowing. However, it may be used for both supported and unsupported borrowing for 2007/08.

Option 3- Asset Life Method

9. This option applies to borrowing that is being self-financed i.e. there is no government support. MRP is calculated over the life of the asset for which the borrowing has been undertaken. There are two methods by which the asset life can be calculated: the equal installment method or annuity method.

10. Equal installment method – As the name indicates equal installments are charged to the revenue account over the lifetime of the asset.

11. Annuity method – MRP is linked to the flow of benefits from an asset, where the benefits are expected to increase in later years and would see the amount charged increase each year.

Option 4 - Depreciation Method

12. This option again applies to borrowing that has been self-financed. MRP is made in accordance with the standard rules for depreciation accounting, and a depreciation provision is set-aside over the life of the asset for which the borrowing has been undertaken.

Policy for 2007/08 and 2008/09

13. For supported borrowing there are two options for calculating MRP. As noted previously, the Authority has used the Capital Financing Requirement Method over recent years and it is recommended that this continue. Ease of calculation outweighs the small saving that would be achieved should the regulatory method be adopted.

14. For unsupported borrowing there are again two methods of calculation. However, broadly identical results arise from both methods due to the straight-line depreciation policy used by the Authority for ‘writing down’ the value of fixed assets. It is therefore recommended that the Depreciation Method is used because of ease of calculation.

15. For financial year 2007/08 MRP, as noted within the Statement of Accounts, was calculated using the Capital Financing Requirement Method. It is recommended that formal approval is given to this as the appropriate method of calculation for the MRP in 2007/08.

16. Appendix 1 summarises the MRP calculation for 2008/09 and future years using the Capital Financing Requirement and Depreciation Methods in respect of supported and unsupported borrowing respectively. Different forecast MRP payments are derived as a result of unsupported borrowing financing assets with short, medium or long-term depreciation periods. An example using a mix of depreciation periods is also provided. For comparison the MRP payment that would have been made under previous arrangements is shown, as well as the present revenue budget amount.

17. Assets with long-term depreciation periods most closely match the MRP payments that would have been made under the previous arrangements. Consequently, it is recommended that all unsupported borrowing that is undertaken be used to acquire assets with long terms of depreciation. This will provide some degree of certainty over future expenditure in terms of the level of MRP to be paid over coming years.

18. It is important to note that for some financial years it may not prove possible to link all unsupported borrowing with assets with long-term depreciation periods. This would occur when there are insufficient assets of this classification being purchased/acquired in any one financial year. If this happens assets with the next longest depreciation period would be utilised.

Annual Statement on MRP

19. The setting and monitoring analysis of all Prudential Indicators will take place twice during the financial year. These will be:

• as part of the formal budget submission in November; and
• following the confirmation of the capital expenditure outturn in June/July.

The Annual Statement on MRP will be set as part of the preparation of the Prudential Indicators for the formal budget submission in November. The Statement will then be reviewed in June/July. All information will be also be acknowledged and referenced within the annual Treasury Management Strategy Report. This will ensure that the governance arrangements within the Treasury Management Strategy are suitably addressed in respect of borrowing policy and the effect that MRP will have in the setting of appropriate borrowing limits.

Legal implications

20. There are no immediate or anticipated legal implications arising from proposals contained within this report. The report has been prepared in response to the publication of secondary legislation – SI 2008/414.

C. Race and equality impact

There are no specific race, equality or diversity implications arising from this report.

D. Financial implications

1. It is proposed that MRP is calculated:

• for 2007/08 on the basis of the capital financing requirement method
• for 2008/09 on the basis of
  • the capital financing requirement method for borrowing undertaken prior to 2008/09 and any borrowing undertaken during the year supported through the revenue grant settlement
  • the depreciation method for unsupported borrowing undertaken during the year.

2. The impact of these proposals against the currently approved budget if projected for future years, and having regard to current capital plans, can be summarised as follows:

These savings will, if the proposal is approved, be built into the 2009-12 budget to be considered by the Authority in November. The methodology change will also result in a saving of £3.7m in the current year, which will be reflected in future monitoring reports.

3. While the proposed methodology for calculating future MRP closely aligns with the sums which would have been payable under the old regulations, additional expenditure to a maximum of £0.5m per annum is predicted to be incurred until 2011/12. This is based on capital expenditure being at 100% of the budgeted sum. For years after 2011/12 a reduction in MRP is recorded.

4. The figures shown at Appendix 1 have been calculated based upon the Borrowing and Capital Spending Plan 2008/09 to 2014/15, as approved by the Authority in March 2008. Once the capital programme for 2009/10 to 2015/16 has been finalised it will be possible for revised figures to be calculated. However, it is to be noted that the updated information will show results in similar ratios to those noted at Appendix 1.

E. Background papers

•  Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2008 [S.I. 2008/414].

F. Contact details

Report author(s): Ken Hunt – Treasurer, MPA and Anne McMeel – Director of Resources, MPS

For more information contact:

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

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