MPA accounts for the year ended 31 March 2006

Report: 7
Date: 29 June 2006
By: Treasurer

Summary

This report presents the Authority’s draft set of accounts for 2005-06 (Appendix 1), which are subject to audit. The report identifies key features of the accounts and explains the structure of the statements. The accounts have been scrutinised by the Corporate Governance Committee at its meeting on 19 June and are forwarded to the Full Authority for approval. The accounts now presented reflect the Corporate Governance Committee’s comments.

A. Recommendation

That Members approve the draft statement of accounts 2005-06 following review by the Corporate Governance Committee, for onward submission to the Authority’s external auditors.

B. Supporting information

1. This report presents and comments on the Authority’s draft accounts for the year ended 31 March 2006. This is the sixth 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 2006 by the following 30 June, prior to the external auditor providing his opinion. Over the last few years this approval date has been getting progressively earlier and has now reached the date that all future accounts will need to be approved.

3. The draft accounts were presented to the Corporate Governance Committee on 19 June for scrutiny and their comments are reflected in the draft accounts now before the Authority for approval. 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. This is the last meeting scheduled before the statutory deadline.

4. The external auditor will then complete his audit, provide his audit opinion on the accounts and publish his annual audit letter. His audit letter will then need to be considered by Corporate Governance Committee by December 31st before being reported to this Committee. Members will appreciate that, until the audit is completed, there remains the possibility that the accounts may 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 2005-06 was reported to the Finance Committee on 15 June. The provisional outturn represents an underspending against budget of £7.5 million, after taking account of a contribution to reserves of £7m to aid the budget in 2006/07 and £3m for the creation of a new dilapidations provision.

7. It was agreed by Finance Committee on 15 June that the underspend of £7.5m be transferred to reserves in respect of the following:

Statement of accounts

8. 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

9. 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

10. 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 second time. I expect this position to be maintained for the 2005-06 accounts.

11. For the first time this year there is a separate requirement for the Auditor to give a value for money conclusion, whereby they will be required to indicate whether the Authority has put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources. No drafts of the wording are presently available.

Statement of responsibilities

12. 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 2006 and its income and expenditure for the reported accounting period.

Statement on the system of internal control

13. We have been required to include a Statement of Internal Control in our financial statements since 2003/04, which should include details of the system of internal control and risk management, the key controls, and how effectively they are being deployed, highlighting any significant internal control issues and the relevant actions being taken to address them. The statement is backed by a MPS statement of internal control signed by the Commissioner.

Accounting policies

14. The accounting policies accord with the requirements of the SORP.

Revenue account and notes to the revenue account

15. The revenue account summarises the Authority’s income and expenditure for the year 2005-06. The statutory presentation, as required by the Best Value Accounting Code of Practice 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.

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

17. The methodology for generating the Best Value accounting analysis is based on activity based costing methodology used to produce the Home Office return.

Balance sheet and notes to the balance sheet

18. The balance sheet shows the financial position of the Authority as at 31 March 2006. Again, the notes provide additional information as well as clarification of specific figures in the balance sheet.

19. The Authority’s Debtors position increased by £3.26m to £137.981m, primarily the result of increases in the bad debt provision (£1.8m) and payments in advance (£9.2m), offset by a reduction in debts owed by government departments (£5.4m) and general debtors (£2.2m).

20. Creditors increased by £14.4m, primarily due to increases in amounts owed by government departments (£22.9m) offset by a reduction in general creditors (£14.3m).

21. Short term investments have reduced significantly during 2005/06, due to reserves being used to fund expenditure, and unfunded borrowing being used to finance capital expenditure. Long term borrowing has reduced to £57.3m due to £13.5m of debt maturing this year.

22. Police Officer Pension Liability’ and ‘Police Officer Pension Reserve’ reflect the full implementation of Financial reporting Standard 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 £14.7 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 was only required to be raised to cover police pensions when they were actually paid. If the pension liability is excluded the Authority’s net worth would show a modest increase from £1.7 billion in 2004-05 to £1.8 billion in 2005-06.

23. Revenue Account pension arrangements have changed with effect from April 2006, with the risks associated with pensions and lump sum volatility now lying with the Home Office through the new pensions account. Therefore it is proposed the pension reserve is reduced to £5m, which is felt to be adequate to deal with any risks from unusual volatile discretionary pension payments.

24. Earmarked capital reserves have decreased from £23.7 million at 31 March 2005 to £8.7 million in 2005. The reduced balance reflects the fact that spending has increased on C3i/Airwave.

25. Earmarked revenue reserves are shown as £102 million at 31 March 2006 compared with £114 million twelve months earlier. The decrease in reserves is mainly due to the earmarked reserves being used during the year to fund specific expenditure.

26. Other significant changes in earmarked reserves this year include the reduction of the pensions reserve following the introduction of the new pension arrangements and reduction of the Budget Resilience Reserve A proportion of these reserves have been used to create a new Emergencies Contingency Fund of £20.1m which has been established to support operational requirements during exceptional circumstances. With the balance being used to fund adjustments in other earmarked reserves

27. The General Reserve is shown at £28.8 million, which is 1% of the total net expenditure, its agreed minimum level.

Statement of total movements in reserves

28. 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.

Cash flow statement and notes to the cash flow statement

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

C. Race and equality impact

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 2004 - A Statement of Recommended Practice

F. Contact details

Report author: Annabel Adams, MPA

For more information contact:

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

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