Statement of accounts for year ended 31 March 2011 and annual governance report 2010/11

Report: 6
Date: 15 September 2011
By: Treasurer

Summary

This report presents the Authority’s audited set of accounts for 2010/11 (Appendix 1), and the Audit Commission’s Annual Governance Report on the MPA audit 2010/11 (Appendix 2).

A. Recommendations

That Members

1. Approve the Statement of Accounts for 2010/11
2. Note the Audit Commission’s Annual Governance Report.
3. Approve the letter of representation (appended to the Annual Governance Report).
4. Agree the Annual Governance Report action plan (appended to the Annual Governance Report)

B. Supporting information

Background

1. The Authority’s statement of accounts for 2010/11 have now been audited and in accordance with the revised Account and Audit regulations 2011 are presented to members for approval (Appendix 1).

2. The Statement of Accounts for 2010/11 is the first to be prepared on an International Financial Reporting Standards (IFRS) basis. Adoption of the IFRS based Code has resulted in the restatement of various balances and transactions, with the result that some amounts presented in the financial statements are different from the equivalent figures presented in the Statement of Accounts for 2009/10.

3. The Statement of Accounts provides the formal presentation of the Authority’s financial position and it has been prepared in accordance with the CIPFA Code of Practice on Local Authority Accounting in the United Kingdom. This interprets the IFRS on which the accounts of the Police Authority are now based.

4. The Audit Commission’s annual governance report on the MPA audit for 2010/11 covering the audit for the year ended 31 March 2011 is attached at Appendix 2.

Outturn 2010 /11

5. Details of the provisional outturn position were presented to Finance and Resources Committee in June 2011. Despite there being a number of key challenges during 2010/11 including the need to meet the £28 million in-year grant reduction, the pressure on public order budgets from policing the various protests and the need for the MPS to start restructuring so it was in a position to deliver savings in 2011/12 an underspend of £5.6M was delivered. As agreed previously the underspend will be used to bridge the budget gap in future years.

6. The table below summarises the outturn position.

Key changes

7. As highlighted above this is the first year the Statement of Accounts have been prepared on an IFRS basis and there are therefore a number of changes to accounting regulations which impact on the format of the accounts. The key changes are as follows:

Leases

8. The accounting policy on finance leases has changed. A finance lease is now considered to be a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee (the Authority). These will now need to be included on the Balance Sheet together with a liability for the financing provided by the lessor.

9. This has resulted in 3 property leases being reclassified as finance leases, with the result that there are now 10 leases classified as finance leases with an overall value of £54.8M. These are now included on the balance sheet. In addition 15 leases have been reclassified as operating leases and removed from the balance sheet. Prior year comparatives in the Balance Sheet have also been restated.. The original value of finance leases in 2009/10 accounts was £75.2 M. After the addition of 3 leases and removal of 10 land leases the value in the 2010/11 accounts reduced to £55.4 M.

Employee benefits

10. The Authority is required to treat unused short term employee benefits such as holiday leave as a cost to the organisation in the year that they are earned by officers and staff. Accordingly £98.9M has been included in the Comprehensive Income and Expenditure Statement (CIES) to reflect the cost of unused rest days (for police officers only) and holiday leave and the same amount offset by taking it into a new accounting reserve named the Accumulated Absences Account to ensure there is no impact on the bottom line. The Accounts for 2009/10 have been restated on this basis.

Investment properties

11. The definition and accounting treatment for investment properties has changed. An investment property is now defined as property held solely to earn rentals or for capital appreciation or both and any changes in valuation treated as a charge to revenue and included in the CIES. The Accounts for 2010/11 have been restated on this basis. However the values of investment properties on the balance sheet did not change other than for their revaluations.

Grants and donated assets

12. These are now recognised immediately (once any conditions have been met) as revenue income, included in the CIES, and then transferred to appropriate reserves. Previously they were deferred until the grant was spent and included on the balance sheet as a liability.

Police Officer pension scheme

13. Following the Chancellor’s announcement in June 2010 public sector pension increases are now linked to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). The Police Officer Pension Schemes therefore now includes a past service gain of £2.3 billion in respect of the reduced pension increase payable to current and future pensioners of the schemes and is disclosed separately as an exceptional item on the CIES.

Assets held for sale

14. These are properties no longer in operational use which are being actively marketed for sale. The value shown in the balance sheet is the lower of their existing balance sheet value or their estimated sale price less costs to sell. As they are expected to be sold within 12 months, they are included in current debtors.

Statement of Accounts

15. The Statement of Accounts follows a format recommended by the CIPFA Code of Practice on Local Authority Accounting in the United Kingdom. The following paragraphs provide a brief commentary on each of the sections of the statement.

Foreword

16. The foreword provides contextual information to assist in 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, and includes an outlook for 2011/12.

Annual Governance Statement

17. The Annual Governance Statement 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.

18. Corporate Governance Committee approved the Annual Governance Statement in July and will be monitoring progress in implementing the actions on a quarterly basis.

Statement of responsibilities

19. This sets out the respective responsibilities of the Authority and the Treasurer in the production and approval of the final accounts. It also contains the Treasurer’s signed statement that the accounts present fairly the financial position of the MPA at 31 March 2011 and its income and expenditure for the reported accounting period.

Audit opinion

20. This sets out the Auditor’s opinion on the Statement of the Accounts following the conclusion of the audit. As with previous years an unqualified opinion has been issued.

21. The Auditor has also issued a statement which provides a value for money conclusion, indicating the Authority has put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources.

Comprehensive Income and Expenditure Statement

22. The Comprehensive Income and Expenditure Statement (CIES) shows the accounting cost in the year of providing services in accordance with generally accepted accounting practices and should be viewed alongside the movement in reserves statement to gain a true understanding of the Authority’s financial performance.

23. The notes to the CIES include details of the accounting policies that have been used in preparing the accounts. Revisions to accounting policies were approved by Corporate Governance Committee in March and accord with the requirements of the code.

Movement in Reserves Statement

24. This statement reconciles the CIES to the balance sheet position for the authority as at 31/3/2011. It also shows movements between the major reserves. The statement shows the general balance remained at £47.5M.

25. Reserves are reported in two categories. The first category of reserves are useable reserves, i.e. those reserves that the authority may use to provide services, subject to the need to maintain a prudent level of reserves and any statutory limitations on their use. (For example, the Capital Receipts Reserve may only be used to fund capital expenditure or repay debt). Useable reserves decreased from £302 million to £295 million.

26. The second category of reserves which cannot be used to fund future costs consists of a reserve that holds unrealised gains and losses (for example the Revaluation Reserve), a reserve for the cost of unused leave in respect of holiday and rest day and an accounting reserve for capital transactions which include provision of capital grant funding and depreciation and like charges against assets.

Balance Sheet

27. The balance sheet shows the value of the assets and liabilities of the Authority as at 31 March 2011, the net assets (i.e. assets minus liabilities) are matched by reserves held by the Authority. An explanation of the major variations between years include:

28. Vehicles, plant and equipment value increased by £21M due to an £114M investment in these assets during 2010/11 offset by the annual depreciation charge of £93M.

29. Investment properties do not incur depreciation charges nor have any additions during the year, increased by £6M due to revaluations.

30. Current assets increased by £45M, largely due an increase in short term investments of £15M and an increase in cash and cash equivalents of £39M.

31. Current liabilities increased by £30M mainly due to an increase in short term borrowing of £40M.

32. Provisions decreased by £16M due to a reduced value of accumulated absences (£10M) and reduced Third Party Liabilities (£6M). The latter relates to known liabilities regarding legal compensation and accident claims not covered by insurance and follows a review of the historical claims experience.

33. Long term borrowing increased by £73M to support the Authority’s capital investment programme and the need to maintain liquidity.

34. Capital grants receipts in advance reduced by £2M

35. Police Office pension liability (the actuarially calculated future cost of providing pensions for both serving and non-serving police officers, as well as those already in retirement) reduced by £2,365M. This reduction arose mainly due to the change in the calculation from using the Retail Price Index (RPI) to using the Consumer Price Index (CPI). This liability in the balance sheet is offset by a corresponding Police Officer pension reserve.

36. The revaluation reserve increased by £15M reflecting decreases arising from transfers (£7M) and revaluations (£6M), and an increase arising from redundant depreciation £29M

37. The useable capital receipts reserve reduced by £16M following the use of this fund to finance fixed asset investment £39M offset by disposals in the year of £23M

38. The earmarked capital reserve reduced by £3M and was used to finance fixed asset investment.

39. The earmarked revenue reserve increased by £13M mainly due to transfers to reserves relating to operational costs, budget pressures, support for the future capital programme and the modernisation programme and offset by transfers from reserves relating to operational costs.

40. The notes to the balance sheet include details of the accounting policies that have been used in preparing the accounts. These include details of two post balance sheet events.

41. The first post balance sheet event is the costs related to the second phase of the early departure scheme. These could, if there is 100% take-up of the voluntary exit programme amount to around £52m. The costs of these will be managed within existing budgets and earmarked reserves.

42. The second post balance sheet event is costs in relation to the Riot (Damages) Act 1886 arising from the events of 6 - 8 August 2011. Under the Act the MPA is liable to pay for certain losses caused by damage or destruction of buildings, and damage, destruction or theft of their contents which have occurred in the course of a riot in London (excluding the City).Although the Home Office has agreed to reimburse the MPA with the cost of claims from persons who were uninsured, and other government assistance may be agreed in respect of claims from insurers, there may be a cost to be borne by MPA reserves. The note does not include an estimate of the costs as it is difficult to estimate accurately at present, when the final number and value of claims and the extent of government assistance is unknown.

Cash Flow Statement

43. This shows the changes in cash and cash equivalents of the authority during the reporting period, indicating how the authority generates and uses cash and cash equivalents by classifying cash flows as operating, investing and financing activities.

44. The amount of net cash flows arising from operating activities is a key indicator of the extent to which the operations of the authority are funded by way of taxation and grant income or from the recipients of services provided by the authority. The net inflow increased by £12M, from £25M to £37M in comparison to 2009/10.

45. Investing activities represent the extent to which cash outflows have been made for resources which are intended to contribute to the authority’s future service delivery. These increased by £41M in comparison to 2009/10.

46. Cash flows from financing activities are useful in predicting claims on future cash flows by providers of capital (i.e. borrowing) to the authority: During 2010/11 there was a net cash inflow to the Authority of £62 million

47. Monitoring of the cash flow during the year identified that external borrowing was required and the Treasurer approved an extra £90m. This was within the approved borrowing limits for the Authority and was primarily to finance the capital programme.

Annual Governance Report

48. Attached at Appendix 2 is the Audit Commission’s annual governance report on the MPA audit for 2010/11. This is the annual governance report covering the audit of the Authority for the year ended 31 March 2011 and is presented by the District Auditor.

49. The Audit Commission is required by the Audit Commission’s statutory Code of Audit Practice for Local Government bodies (the Code) to issue a report to those charged with governance summarising the conclusions from their audit work. Progress in implementing the recommendations will be monitored by Corporate Governance Committee on a regular basis.

50. The Audit Commission is required by professional auditing standards to report to the Authority certain matters before it gives its opinion on the financial statements. The section of their report covering the financial statements fulfils this requirement.

51. The main purposes of the governance report are:

• To reach a mutual understanding of the scope of the audit and the respective responsibilities of the auditor and the Corporate Governance Committee;
• To share information to assist both the auditor and those charged with governance to fulfil their respective responsibilities; and
• To provide the Corporate Governance Committee with recommendations for improvement arising from the audit process.

52. In undertaking its audit, the Audit Commission’s responsibilities are to view and report on, to the extent required by the relevant legislation and the requirements of the Code:

• The Authority’s financial statements; and
• Whether the Authority has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources.

53. Subject to the satisfactory completion of outstanding audit work the District Auditor is proposing to issue an unqualified audit opinion by 30 September.

54. The areas of audit testing that are still being undertaken are:

• testing the Authority's group accounts submission to the GLA and Whole of Government Accounts (WGA) submission to Communities and Local Government;
• reviewing a revised set of statements to ensure finance officers have made all agreed audit adjustments; and
• receiving the signed Letter of Representation following Authority consideration on 15 September 2011.

55. The audit testing is planned to be completed before the opinion deadline of 30 September 2011. If any matters arise in concluding the outstanding work, that need to be reported, they will be raised with the MPA Treasurer, MPS Director of Resources and the chair of the Corporate Governance Committee as appropriate.

56. The auditors have not requested that any material adjustments are made to the accounts, they have however proposed several minor amendments to improve the presentation of the financial statements which have been accepted by officers. Details of these are included in the appended report. In addition they have made a number of recommendations to strengthen our accounting arrangements in the future. These along with proposed responses are included in the action plan (appended to the Annual Governance Report) that members are asked to approve.

57. The District Auditor has again awarded the Authority an unqualified Value for Money conclusion, stating that the Authority has maintained adequate arrangements to secure economy, efficiency and effectiveness in its use of resources in 2010/11.

C. Other organisational and community implications

Equality and Diversity Impact

1. There are no equality and diversity implications arising from this report, however equality impact implications were identified in respect of key decisions made in 2010/11 through our normal decision making processes.

Consideration of Met Forward

2. Having proper arrangements in place to deliver economy, efficiency and effectiveness in the use of resources is key to the delivery of MetForward.

Financial implications

3. The financial implications are set out in the main body of the report and the Statement of Accounts.

Legal implications

4. Regulatory requirements of the Authority and Treasurer are set out in Statement of Responsibilities for the Accounts.

Environmental Implications

5. There are no direct environmental implications arising from this report

Risk Implications

6. The Annual Governance Report highlights specific risks the Auditors had identified in their audit plan and their corresponding findings.

D. Background papers

• Treasury Management Strategy 2010/11 – MPA Resources and Productivity Committee Report 1 March 2010
• Treasury Management Quarterly Updates 2010/11 - MPA Resources and Productivity Committee Reports 13 September 2010, 6 December 2010 and 3 February 2011

E. Contact details

Report authors: Annabel Adams, MPS

For more information contact:

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

Send an e-mail linking to this page

Feedback