MPA accounts for the year ended 31 March 2008

Report: 8
Date: 26 June 2008
By: the Treasurer

Summary

This report presents the Authority’s draft set of accounts for 2007-08 (Appendix 1 circulated as a separated document with this agenda members only and also available on the MPA website), which are subject to audit. The report identifies key features of the accounts and explains the structure of the statements. These accounts have been scrutinised by the Corporate Governance Committee at its meeting on 12 June and are forwarded to the full Authority for approval. The accounts now presented reflect the Corporate Governance Committee’s comments. In addition some minor amendments have been made to some of the accounting policies and notes to ensure the accounts fully reflect best practice.

A. Recommendation

That

1. the draft statement of accounts 2007/08, following previous review and scrutiny by the Corporate Governance Committee, for onward submission to the Authority’s external auditors be agreed, and

2. agree that the Treasurer be given delegated authority to make any minor amendments necessary to the draft accounts prior to finalisation of the audit.

B. Supporting information

1. This report presents and comments on the Authority’s draft accounts for the year ended 31 March 2008.

Approval process

2. The Accounts and Audit Regulations 2003 require the Authority to approve the final accounts for the year ending 31 March 2008 by the following 30 June, prior to the external auditor providing his opinion.

3. The draft accounts were presented to the Corporate Governance Committee on 12 June for scrutiny and their comments are reflected now before the Authority for approval.

4. 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 scheduled meeting of the Authority before the statutory deadline.

5. 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 the Corporate Governance Committee by 31 December. 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

6. 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.

7. The main changes in the presentation of the accounts for 2007-08 relate to those arising from the 2007 CIPFA SORP. The key impacts are:

• Replacement of the Statement of Internal Control with an Annual Governance Statement as required by the revised framework – Delivering Good Governance in Local Government;
• Implementation of Financial Reporting Standard FRS 29 for Financial Instruments – a financial instrument is any contract that gives rise to a financial asset of one entity and financial liability of another, for example, borrowings, bank deposits, loans receivable and investments. The MPA does not actively use financial instruments as part of its financial risk management. It is exposed to the usual credit risk and cash flow risk associated with financial transactions and manages this through debtors’ credit control procedures. The nature of its financial instruments means that they are not subject to price risk or liquidity risk. The MPA does not use hedge accounting. Its policy is to finance fixed assets through fixed rate borrowings, as and when necessary, for a term broadly expected to match the useful economic lives of the assets. The Authority does not consider any other risks attached to the use of financial instruments to be material to an assessment of its financial position.
• The amalgamation of the Fixed Asset Restatement Account and Capital Financing Account into a new account known as the Capital Adjustment Account, and the creation of the new Revaluation Reserve. The Revaluation Reserve, created with a zero opening balance, records unrealised revaluation gains arising since April 2007 from holding fixed assets. The Capital Adjustment Account consolidates past revaluation gains up to 31st March 2007 and, as a consequence, will show a large credit balance over the medium term. It also provides a balancing mechanism between the rate at which assets are consumed and the rate at which assets are financed. These are non-cash based accounts and are not resources that are available to the Authority.

8. Further changes are anticipated with the adoption of international accounting standards to the local authority Statement of Recommended Practice (SORP) from 2008-09. The MPA will be required to adopt International Financial Reporting Standards (IFRS) for their 2010-11 accounts and will also be required to restate 2009-10 accounts using IFRS to provide comparative information.

Outturn

9. The provisional revenue outturn for 2007-08 was reported to the Finance Committee on 19 June. The provisional outturn represents an underspending against budget of £17.9m, after taking account of proposed transfers to reserves totalling £78.8m. Of this total, Finance Committee were asked to specifically consider new transfers as follows:

Table 1: New transfers for the consideration by the Finance Committee

Following the possible creation of these earmarked reserves, £17.9m will be available for transfer to the General Reserve. In October 2007 the Finance Committee agreed that as part of the closing of the 2007/08 accounts it would consider if some underspend should be set aside in an earmarked reserve to facilitate further modernisation of the service. This will increase the transfer to earmarked reserves and reduce the underspend of £17.9m against budget. The timing of Finance Committee has meant that it is not possible to reflect the outcome of their decision in this report. The Treasurer will therefore provide a verbal update to the Authority.

Statement of Accounts

10. 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

11. 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.

12. The forward includes a table detailing capital expenditure for 2007/08. This highlights an underspend on the C3i project of £14.7m, which was 48.1% of the 2007/08 budget. This is due to the rephasing of several projects, combined under Hendon MetCall. Further details of this rephasing over future years will be included in the revised capital programme report due to be considered by Finance Committee in July.

Audit opinion

3. 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.

14. In addition there is a separate requirement for the Auditor to give a value for money conclusion, indicating whether the Authority has put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources.

Statement of responsibilities

5. 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 2008 and its income and expenditure for the reported accounting period.

Annual Governance Statement

16. The Annual Governance Statement (previously the Statement of Internal Control) includes 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. An MPS Annual Assurance Statement, signed by the Commissioner, supports the statement.

Accounting policies

17. The accounting policies accord with the requirements of the SORP. Since the accounts were considered at Corporate Governance Committee the accounting policies have been revised to ensure that they accurately reflect the policies of the accounts rather than providing notes of the policies, which brings them into line with the expectation of the SORP. The context has remained the same despite rewording the narrative.

Revenue Accounts

18. For 2007-08 there have been no changes to the format of the presentation of the Authority’s income and expenditure for the year.

19. The revenue accounts are:

• The Income and Expenditure Account - summarising the resources generated and consumed in the year
• Statement of the Movement on the General Fund Balance - showing how the balance of resources generated and consumed in the year links with the statutory requirements for raising funding through council tax;
• Statement of Total Recognised Gains and Losses - bringing together the gains and losses in the balance sheet with the outturn on the income and expenditure account to show the total movement in the Authority’s net worth for the year;

To gain a true understanding of the Authority’s financial performance for the year it is necessary to view all three statements together. The income and expenditure account, as shown at page 27 of the accounts, shows a deficit of £955m, however following accounting adjustments and transfers to reserves, as detailed in the statement on the movement on the general fund balance and the statement of total recognised gains and losses, the deficit, subject to any decision on a transfer to a Modernisation Fund, translates to a surplus of £17.9m which is transferred to the general reserve (subject to Finance Committee decisions).

Balance sheet

20. The balance sheet shows the financial position of the Authority as at 31 March 2008.

21. The Authority’s debtors position increased by almost £12m to £165.6m, primarily the result of increases in the amounts owed by government departments (£17.6m) offset by reductions in amounts due from the Greater London Magistrates’ Court Authority (£3.3m) and Customs and Excise (£3.9m).

22. Creditors increased by £11.9m to £349.6m, due to increases in general creditors (£24.4m) offset by reductions in receipts in advance (£8.6m) and amounts due to the Greater London Magistrates’ Court Authority (£4.5m).

23. Short-term investments have increased significantly during 2007-08, from £139m to £233m. Long-term borrowing has reduced by £5m to £37.3m due to debt maturing during the year.

24. ‘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 £12.2 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 and the Home Office has responsibility for pensions payments. If the pension liability is excluded the Authority’s net worth would show a modest increase from £1.67 billion in 2007-08 to £1.7 billion in 2008-09.

25. Earmarked capital reserves, including the C3i/Airwave reserve, have increased from £4.9m in 2007 to £7.1m in 2008.

26. Earmarked revenue reserves, excluding the emergencies contingency fund, are shown as £136.7m at 31 March 2008 compared with £75.2m twelve months earlier. The increase in reserves is mainly due to proposed transfers into the operational costs, property related costs and budget pressures reserves and the proposed creation of a capital programme re-phasing reserve. Transfers from reserves during the year were mainly in relation to the communications project and Proceeds of Crime Act.

27. The General Reserve of £56.8m is supported by another uncommitted reserve – the emergencies contingency fund of £23.1m – totalling £79.9m, which is 2.9% of net budgeted expenditure.

Cash flow statement

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

Notes to the Financial Statements

29. Notes accompany these accounts to provide explanations of specific lines as well as additional information in accordance with the requirements of the code.

30. The notes to the income and expenditure account include details of net expenditure, including details of police staff wages and salaries. As of 31st March 2008 these increased from £469.674m to £523.805m, an increase of 12%. Part of the increase is due to the police staff pay award and incremental increases. The remainder is due to an increase in PCSO numbers from 3,683 to 4,226 an increase of approximately 15%.

31. Staffing numbers for 2007/08 and 2006/07 were as follows:-

 Table 2: Staffing numbers for 2007/08 and 2006/07

32. Net expenditure also indicates an increase in capital charges from £96.846m to £120.742m as at 31st March 2008. This is due an increase in depreciation, which had been exceptionally low in prior years and the inclusion of impairment charges, which until 2007/08 did not need to be included in the accounts.

33. The notes to the income and expenditure accounts also include details of the National Policing Services (NPS), which represents the costs of national, international and capital city functions and also includes an overhead calculation. This is currently calculated by dividing total spend into three categories; overheads, national policing activities and borough policing. Overheads are then apportioned to NPS and borough policing on the basis of total spend. A proportion of the revised NPS is then allocated to borough policing using the Activity Based Costing model as the basis of allocation.

34. It is recognised that the current methodology for NPS could be improved. Therefore a review is being undertaken within the MPS to develop a more robust method of calculating NPS.

35. The sources of capital finance (included as part of the notes to the balance sheet) highlights a number of differences as to how capital was financed in 2007/08 in comparison to 2006/07. An explanation of the main variances is as follows:-

• Unsupported borrowing – the reduction from £29.9m in 2006/07 to £7.5M in 2007/08 was mainly due to a reduction in the level of spend on the safer neighbourhood programme.
• Other contributions – in 2007/08 this reduced to £4.5m due to a reduction received from third parties, including the Home Office, to support major schemes of work.
• Capital grants – the reduced spending on C3i and Airwave meant that utilisation of capital grant reduced from £66M in 2006/07 to £37m.
• Capital receipts – increased levels of disposals coupled with a new policy to use increased levels of capital receipts to fund capital expenditure meant that the level of receipts used to fund capital expenditure increased from £13m in 2006/07 to £54m in 2007/08.
• Revenue contribution to capital expenditure increased in 2007/08 mainly due to the use of the NTL compensation fund to finance the C3i programme.

Police Pension Scheme Statements

6. The statements provide information on the accounting transactions of two pension schemes – the Police Pension Scheme, set up in 1987, and the New Police Pension Scheme, created by the Home Office under the Police Pension Regulations 2006.

37. The Police Pension Fund Regulations 2007 specify the statutory transfers between the police fund and the police pension fund. The essence of the regulation is that any year-end deficit or surplus on the police pension fund is transferred back to the police fund revenue account. There was a deficit of £7.5m that has been so transferred. The Secretary of State is responsible for reimbursing year-end deficits and a Home Office debtor of £7.5m has been set up in the balance sheet to recover this sum. The effect is therefore budget neutral.

38. On the 30 May 2008 the Home Office issued Circular 11/2008 introducing new factors for calculating lump sums payable to police officers. The factors increase the lump sums payable to officers under the 1987 Police Pension Scheme, the impact of which is back dated to 1 October 2007.

39. Current estimates are that the Authority will need to pay £8m for lump sums that relate to retirements between 1 October 2007 and 31st March 2008, and there may also be a liability for interest payments of £0.2m.

40. CIPFA are still working on draft guidance, but the latest indication is that these transactions are post balance sheet events that, where material, will need to be reflected in the accounts. Adjustments will need to be made both to the Authority’s accounts and Police Officer Pension Fund Account in relation to the lump sums. However as the Home Office reimburse pension lump sum payments the net revenue impact on the “bottom line” will be zero. The £0.2m interest payments are not considered material, and it is therefore not proposed to adjust the accounts for this element.

41. There will also be a requirement to assess the impact on the FRS17 liability statements (paragraph 24 above) and the Authority’s actuaries are being instructed to provide an urgent assessment. Delegated authority is sought to allow the Treasurer to make the necessary changes to the accounts when the piece of work is complete.

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 2007 - A Statement of Recommended Practice

F. Contact details

Report author(s): Ken Hunt, Treasurer, MPA

For more information contact:

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

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