From next April, councils are likely to have to compile registers of fixed assets, such as schools and housing stock. Most will have to be shown on balance sheets at current value - net current replacement cost - and be revalued at five-yearly intervals. Depreciation charges based on these amounts will then be shown in the accounts.
However, two categories of fixed assets - infrastructure assets, including roads and footpaths, and community assets, such as parks and museum exhibits - will be shown at historical cost, net of depreciation. This is because these features are closely identified with the council and are regarded as 'sunk costs', with the current value of little relevance.
The proposed changes are contained in a paper published in February by the Chartered Institute of Public Finance and Accountancy (Cipfa) and the joint Local Authority (Scotland) Accounts Advisory Committee on a revised code of practice on local authority accounting.
Since these two bodies, along with the Accounting Standards Board, have endorsed its recommendations, the document is expected to be approved soon after the consultation period ends on 19 April. The way will then be clear for what Martin Evans, head of Cipfa's technical division, calls a revolution in the way councils account for their fixed assets. Such a momentous move has not come easily. The publication of the document is the culmination of a six-year-long process that included a two-year study of the practical implications.
The two-year study, carried out with funding from the Department of the Environment and in close association with the Royal Institution of Chartered Surveyors (RICS), concluded that the changes were practicable and could be implemented in a cost-effective manner. Based on a pilot study in Solihull and supplementary projects in Bury St Edmunds in Suffolk and the London borough of Croydon, Cipfa estimates the total cost of introducing the changes in England, Wales and Scotland to be just pounds 7m.
Mr Evans accepts that many involved in local government finance believe this figure is too low. But he thinks that this may be because they are including in it the cost of establishing an asset register - and also overestimating that cost.
The RICS pointed out, for instance, that there were 'professionally acceptable short cuts' in valuing, which meant that officers did not have to visit every school. The majority of the work could be done in the office, with just one or two schools visited, to make sure that the basis for the calculations was correct.
Likewise, there were established ways of valuing large housing stocks that took account of such issues as tenants' right to buy at a certain price, while vehicles, plant and equipment did not have to be revalued at all.
'If you think of the amounts that local authorities will have to spend on compulsory competitive tendering, this is a drop in the ocean,' says Mr Evans.
Nor is the investment in staff time considerable, he believes. The Solihull study took up 241 person days, of which about a fifth related to development work that other authorities will not have to do. Maintenance of the register and the rolling programme of revaluations are expected to take up about half the annual working hours of one valuer.
Although the great concern about the changes has contributed to the length of time spent on drawing up the plans, he adds that the arrival of such concepts as competitive tendering has contributed to a change of climate in local government. 'People recognise that we've got to do something about this,' he says.
Not least because, Mr Evans believes, the current system distorts the true cost of services, and so hinders both comparability with outside agencies and accountability for the efficient use of resources. The size of the problem is demonstrated by the findings of the Solihull study. Fixed assets, previously listed in the council's balance sheet at pounds 117m, would rise to pounds 588m under the new system, with the charges to service revenue accounts more than doubled, to pounds 32m.
The reasons for a situation that he describes as 'to say the least, unsatisfactory' are historical. Because of governments' wish to control local government expenditure, the accounting treatment of fixed assets has depended on how they were financed rather than how they were used.
Not only does this lead to 'inconsistent and arbitrary charges' to service revenue accounts which bear no relationship to the cost of the assets, it also means that the balance sheet is, in effect, meaningless.
Instead of this, there should be, from the financial year 1994/95, a system that separates accounting for capital financing transactions from accounting for fixed assets. As a result, the balance sheet will have more useful information about the fixed assets held by the council. There will also be a revenue statement that will include a measure of the cost of fixed assets used in the provision of services.
On the balance sheet, most fixed assets will be shown at current values, partly because there is little historical cost information about the local authority fixed assets. But the main reason is that current values are a better basis upon which to assess the financial position or performance of the council, or to compare them with others.
It is all part of an effort to make accounting in the public sector more consistent with that in business. Mr Evans - who before joining Cipfa worked at the Accounting Standards Board's (ASB) predecessor, the Accounting Standards Committee - sees no reason why standards developed for companies will not normally be applicable to local authorities and other government bodies. And the ASB last month proposed that companies should, at regular intervals, revalue most of the assets shown in their accounts.
Mr Evans points out that council accounts will still have a different format from their corporate counterparts because they supply services and then work out how they will raise the cost of them, rather than the other way around, like companies. He nevertheless believes these different requirements should merely overlay the usual accounting standards.
'We're hoping that the framework of accounting information can be integrated with financial management arrangements to improve the understanding of finances,' he says. While recognising that such an approach might have an impact only at the margin, he stresses that in the current conditions benefits at the margin are critical.
Property managers seem to have seen the advantages, but others are not so sure, taking the view that it is something by and for accountants. However, Mr Evans insists that the new approach is not an attempt to change the service side of councils, but a way of using accounting to get a much-needed true picture of the situation. 'They ought to know what the levels of subsidy are, even if they are not charging the proper rate.'
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