ACCOUNTING FOR PARTNERSHIPS by O5030Q

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									Draft Consultation Document




                              ACCOUNTING FOR PARTNERSHIPS
                              IN THE CONTEXT OF BEST VALUE


                                 A CONSULTATION PAPER




Comments on this consultation paper should be e-mailed to:

Sarah.Stacey@ipf.co.uk

Or sent to:

Sarah Stacey
CIPFA
3 Robert Street
London
WC2N 6RL

The deadline for the receipt of consultation comments is Friday 19 January 2001




December 2000

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                                         CONTENTS

                                                              Page

Consultation Questions                                         4

Executive Summary                                              8

Part 1. Introduction                                           12

Part 2. What do we mean by partnership?                        19

Part 3. What financial information does an authority need
to have about its partnership activities?                      20

Part 4. What options are there to account for partnerships?    23

Part 5. Which option is best and why?                          25

Part 6. Is the current guidance adequate?                      40

Part 7: What should the new guidance say and look like?        42

Part 8: Governance Issues?                                     48

Part 9: What is the status of the guidance?                    50




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APPENDICES

Appendix 1                        Sample of Authorities Consulted
Appendix 2                        Site Visit Record Pro-forma
Appendix 3                        Statements of Principles for Best Value
                                  Accounting – Code of Practice
Appendix 4                        Alternative Definitions of Partnership
Appendix 5                        Brief Summary of UK GAAP Group
                                  Accounts Disclosures
Appendix 6                        A Preliminary Discussion Paper from the
                                  CIPFA/LASAAC on the Options for
                                  Developing Group Accounting for Local
                                  Authorities
Appendix 7                        Brief Summary of Common Partnership
                                  Good Practice Recommendations made by
                                  the Audit Commission, CIPFA and DEMOS

TABLES

Table 1                           Partnerships that Local Authorities
                                  Participate in
Table 2                           The Criteria used by Local Authorities to
                                  decide whether to enter a Partnership
Table 3                           How Authorities Account for Partnerships
Table 4                           The Value Added by Group Accounts
Table 5                           Views about what the New Guidance on
                                  Partnership Accounting should include
Table 6                           How to improve how Partnerships are
                                  Accounted for
Table 7                           Partnership Governance Issues and Practices
                                  Identified

FIGURES

Figure 1                          Examples of Government Sponsored
                                  Partnership Arrangements
Figure 2                          Partnership Accounting at the centre of the
                                  modernising agenda
Figure 3                          An example of an explanatory note about a
                                  partnership
Figure 4                          Example of inconsistent recording under the
                                  current SRB guidance
Figure 5                          Example of the impact of extending LAAP 36
                                  guidance to other situation where a local
                                  authority is a formal Accountable Body
Figure 6                          Possible questions to ask to identify the
                                  substance of transactions for which it is the
                                  Accountable Body
Figure 7                          One authority’s case for having additional
                                  notes about partnership activity

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CONSULTATION QUESTIONS: Consultees are invited to give feedback on this consultation
paper with reference to the following questions that appear in the text of the attached paper.

                     Questions                                      Notes
Qu.1 Do consultees believe that Best Value
accounting and reporting should be constrained
by the SORP or should Best Value accounting
requirements be different from the SORP when
differences can be justified on grounds that they
facilitate the achievement of Best Value? (p17)

Qu.2 Do consultees agree that the recommended
definition for partnerships provides a
sufficiently clear and flexible definition?

If the definition is not considered adequate
consultees are invited to identify where it is not
adequate and suggest improvements? (p19)

Qu.3 Do consultees agree that options 1 to 4
represent the range of viable options that CIPFA
should consider as a possible basis for its
recommended approach to accounting for
Partnership and Joint Working Arrangements?

Consultees are invited to offer other options for
consideration? (p24)

Qu.4 Do consultees agree that if CIPFA
guidance does recommend either option 1 or
option 2 it will need to emphasise the
requirement for explanatory information and
offer guidance on what information should be
given? (p26)

Qu.5 Do consultees agree that Option 3 (Group
Accounts) is not a viable option at present and
will only be able to be fully assessed when
CIPFA/ LASAAC has fully worked up its
proposals taking the issues highlighted in this
paper into account?

Consultees are invited to suggest other factors
that CIPFA/ LASAAC should be asked to take
into account during its deliberations about the
application of Group Accounts to local
Authorities? Please refer to Appendix 6. It is a
preliminary discussion paper from the
CIPFA/LASAAC on the options for developing
Group Accounting for Local Authorities (p33)


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Qu.6 Do consultees agree that Options 1 and 2
are the only viable approaches to accounting for
partnerships at present? (p35)

Qu.7 Do consultees agree that Best Value
accounting should use lower materiality levels to
decide whether to allocate costs to different
divisions of service?

If yes should the lower materiality level relate to
misstatements of individual services expenditure
and of BVPI’s, rather than to the expenditure of
the Authority as a whole in line with current
advice in BVACOP? (p37)

Qu.8 Do consultees agree that the questions in
Figure 6 provide a helpful basis that would
guide decisions about whether to extend the
principles of LAAP bulletin 36 to other
situations where a local authority is a formal
Accountable Body?

Consultees are invited to suggest other key
questions? (p38)

Qu.9 Do consultees believe that the use of a
provision or of a contingent liability note is an
appropriate way of showing the substance of
potential liabilities that local authorities acting
as Accountable Bodies are exposed to? (p39)

Qu.10 Consultees are asked to indicate whether
they believe Authorities should account for
partnerships using:
     Option 1 (Stewardship) amended to
      clearly take account of FRS 12, or
     Option 2 (Accountability) amended to
      give clear guidance about when
      authorities need to gross in all the grant
      transactions that they are responsible for
      as Accountable Bodies? (p39)

Qu.11 Do consultees agree that the detailed new
guidance on accounting for partnerships should
be restricted to guidance about how to account at
the present time? (p41)




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Qu.12 Do consultees agree that the current
guidance on how to account for partnerships
(Annex C to Section 2 of BVACOP) needs to be
replaced by a clearer and fuller guidance note?
(p41)

Qu.13 Do consultees agree that the value of In
Kind contributions should be calculated on an
ongoing basis?

If yes:
 Should they be valued at commercial rates?
    and
 Once the value of the contribution is
    apparent should the authority determine the
    level of In Kind support it is prepared to give
    to each partner and make a grant award up to
    the agreed value? (p44)

Qu.14 Do consultees agree that the BVPP
should incorporate notes that explain an
authorities wider involvement in significant*
partnership arrangements?

If yes should the notes explain:

      The objectives of each significant
       partnership?               yes/no
      The authorities contribution to each
       significant partnership?   yes/no
      The full cost (including opportunity costs)
       of involvement with each significant
       partnerships?               yes/no
      The approximate spend by each
       partnership on local authority services?
       yes/no
      An indication of the outputs/ outcome
       from each partnership?       yes/ no
      Please list any other information that
       CIPFA should recommend is included in
       the notes to the BVPP.

*In the context of a Best Value performance
report significance has to be judged against
the anticipated interests of the readers of the
report. If the partnership is of interest
because of its size or its purpose it should be
disclosed. (p47)



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Qu.15 Part 8 of this paper summarises some
important Governance issues that relate to
partnerships. What other issues should the
Corporate Governance Panel consider? (p49)

Qu.16 Do consultees agree that:

      The chosen option for accounting for the
       partnership transactions that are included
       in the definition of total cost should be
       mandatory?
      There should be a best practice
       recommendation           to        include
       supplementary notes to the BVPP about
       each material partnership arrangement?
      The     detailed     contents    of    the
       supplementary notes to the BVPP about
       partnerships should be for guidance only?
      Compliance with the new guidance
       should be for accounting periods
       beginning on or after 1 April 2001. The
       first BVPP to incorporate it will be for
       2002/3? (p51)




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                                     EXECUTIVE SUMMARY

Background.

1.1    When CIPFA issued its Best Value Accounting Code of Practice (BVACOP) on 25 February
       2000 it acknowledged that it would need to develop its initial guidance on how to account for
       Partnerships because:

      The modernising agenda for government promotes partnership approaches. For example, the
       Local Government Act 2000 requires local authorities to prepare a community strategy.
      Local authorities are increasingly engaging in partnership approaches to service delivery.


1.2    This paper starts to meet the requirement for improved guidance on how to account for
       partnership activities by laying out CIPFA’s views on how authorities could approach this
       task and by seeking the views of authorities on the approach suggested. The paper is based on
       a wide range of research including visits to a cross section of 15 Local Authorities and one
       Police Force to ascertain:

      A workable definition of what a Partnership is.
      The range of partnerships that local authorities are involved with.
      How partnerships are currently evaluated.
      How authorities currently account for partnerships.
      How CIPFA should advise local authorities to account for partnerships to facilitate the
       achievement of Best Value.

A Definition of Partnership.

1.3    Research to identify existing definitions for Partnerships found that most definitions share
       three common features. Partnerships are:

      Voluntary.
      Between two or more separate bodies.
      By parties that share a common goal.

1.4    All of these features are present in the concise definition give in the Partnership Directory
       published by CIPFA’s Advisory Service on Best Value. It is therefore proposed that the
       definition of Partnerships to be included in the new guidance be:

    “A partnership is a voluntary relationship between two or more free and independent parties
    which is designed to secure some shared objective. It can take all sorts of forms, but is
    generally assumed to exclude the familiar relationships between client and contractor, and
    between employer and staff.”




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Evaluation of Partnership Activity

1.5   Research with the sample of authorities visited and a review of recent guides about good
      partnership working found that local authorities are already pursuing a wide range of
      partnership activities. They also expect the number and range to increase. Authorities are
      motivated to participate in partnerships for a wide variety of reasons. An examination of these
      reasons showed that to evaluate the cost effectiveness of partnerships properly local
      authorities need access to information normally beyond the scope of their traditional financial
      and management information systems. For example they need to know:

     The value of external funds levered in by each partnership.
     The value of economies achieved through individual partnerships.
     The extra costs (direct, indirect and opportunity) of different partnerships.
     The outputs or outcomes achieved by individual partnerships.


1.6   Authorities are therefore looking for advice from CIPFA that helps them to review the cost
      effectiveness of their partnership activities. Additional criteria against which proposals for
      partnership accounting were evaluated are that the proposals should be:

     Technically correct and comply with Generally Accepted Accounting Practice (GAAP).
     Practical for local authorities to implement.
     Understandable and clear to members of the public, councillors and other stakeholders in
      order to support the achievement of the four C’s (Consult, Compare, Challenge and Compete)
      of Best Value.


The Options Available for Accounting for Partnerships.

1.7   Four options were identified. They may be viewed as being on a spectrum that gradually
      widens the scope of what local authority accounting records include:

     Option 1          Where an authority records only the transactions that it as an entity in its own
      right is responsible for. This was referred to as the Stewardship Option.
     Option 2          Based on current guidance in Annex C to section 2 of BVACOP. It extends
      option 1 to include grant funds received and then passed on to other separate entities e.g.
      Single Regeneration Budget partnership funds, if a local authority is the Accountable Body.
      As the Accountable Body it is liable to repay any grant spent by another body that was not
      spent in properly. This was called the Accountability Option.
     Option 3          Is the use of Group Accounts. Paragraph 2.20 of the current BVACOP makes
      it clear that any move to Group Accounts must be preceded by changes to the SORP. Such
      changes are not planned for the 2001 SORP so at present this is not a viable option. The issue
      is, however, still under consideration for the 2002 SORP so this consultation paper is an
      opportunity for some of the issues, as they relate to Best Value, to be discussed publicly. This
      option was named the Group Accounts Option.
     Option 4          Where the contents of local authority financial records and performance
      reports are extended to include the gross expenditure of partnerships that the authority works
      with, facilitates or partly funds, and contributions made by other organisations towards the
      funding of the partnerships would be shown as income. This was labelled the Enabling
      Council Option.

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Appraisal of the Options.

1.8     The option appraisal concluded that Option 3 (Group Accounts) cannot be recommended
        without the SORP being amended first. How to apply group accounts to local authorities will
        also need careful consideration to ensure it promotes Best Value.

1.9     The extra information provided by Option 4 (Enabling) was considered to be consistent with
        the promotion of Best Value, but obtaining the information was not feasible at present. Option
        4 also exceeded the requirements of UK GAAP.

1.10 Option 1 (Stewardship) and Option 2 (Accountability) are, therefore, the only viable options
     at present. They are not, however, perfect solutions as they each fail to give the wider picture
     about a local authority’s partnership activity where it:

       Controls or influences a subsidiary, associate or other joint arrangement.
       Acts as a facilitator of activity by other wholly independent organisations.


1.11 They do not, therefore, provide all of the information that authorities ideally need to have to
     fully evaluate the cost effectiveness of the partnerships that they are involved with.

1.12 The recommended approach to accounting for Partnerships is, therefore, that local authorities
     use either Option 1 or Option 2, but supplement the chosen Option with extra information.
     The extra information would be presented as notes to the Best Value Performance Plan
     (BVPP). This allows many of the advantages of Option 4 to be achieved without the contents
     of the accounts of local authorities exceeding UK GAAP.

1.13 The choice between Options 1 and 2 is not straightforward and will not be made until
     feedback from this consultation paper has been assessed. In brief:

       Option 1 is a more reliable basis than Option 2 for inter-authority comparisons and does not
        require specific guidance about when to bring in the transactions, that an authority is the
        Accountable Body for, into its Service Expenditure Analysis (SEA).
       Option 2 has the advantage of being current practice for the majority of local authorities.
        Hence, it is the easiest option to implement. It also shows the substance of transactions for
        which an authority is the Accountable Body more accurately than Option 1, although if Option
        1 is preferred, contingent liability notes could be used to show the substance of the liability
        and, therefore, overcome this weakness.


1.14 The precise contents of the additional notes to the BVPP are also subject to consultation, but,
     could be expected to include the number, nature, cost, value and outputs of significant
     partnership arrangements.




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Status of the New Guidance.

1.15    This consultation paper has three main elements:

It asks consultees to choose, from Options 1 and 2, how authorities will account for partnership
transactions that are to be included in the definition of total cost. It is proposed that to ensure the
comparability of total cost between authorities the chosen option should be mandatory.
It recommends that notes about significant partnership arrangements should supplement the
financial summary in the BVPP. This is a best practice recommendation not mandatory.
It asks consultees to help define the detailed contents of the supplementary notes to the BVPP about
partnerships. It is proposed that these should be for guidance only as an authority may find that
some of the recommended information cannot be accessed through no fault of its own.


Future Developments.

1.16 In order to join up thinking about Best Value accounting with possible developments in the
SORP a preliminary discussion paper from the CIPFA/LASAAC on the options for developing
Group Accounting for Local Authorities is incorporated into the consultation paper as appendix 6.
It is hoped this will help to inform consultation responses about option 3.




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PART 1. INTRODUCTION

Background.

1.1   CIPFA issued its Best Value Accounting Code of Practice (BVACOP) on 25 February 2000.
      The BVACOP provided the basis for all financial performance reporting under Best Value. Its
      launch was accompanied by LAAP bulletin 42, which identified three areas for future
      development:

     Apportionment methodologies.
     Accounting for cross service initiatives.
     Accounting for partnership activity.

1.2   This consultation paper fulfils the third of these development areas. The issues it raises and
      the questions it asks consultees to comment on are principally based on the views of fifteen
      Local Authorities and one Police Force (Listed at Appendix 1). The questions asked at each
      interview are attached as Appendix 2. The aim of each interview, which was semi-structured,
      was to ascertain:

     The range of partnerships that local authorities are or expect to be involved with.
     How authorities currently evaluate and account for partnerships.
     The views of practitioners on how CIPFA should advise local authorities to account for
      partnerships to facilitate the achievement of Best Value.

1.3   In addition to visiting the sixteen authorities:

     The DETR was consulted to ascertain how it sees the role of accounting for partnerships
      within the modernising agenda for local government and to find out about its plans to develop
      the BVPI’s that focus on partnership areas.
     A sample of Government Departments responsible for initiatives that promote Partnership
      working including New Deal, On Track and Single Regeneration Budget (SRB) were
      consulted to ascertain their views on what detail local authority accounting information
      should include about partnership working.
     The CIPFA web site pages for recording comments about and questions on the BVACOP
      were reviewed to identify relevant feedback from CIPFA practitioners about partnership
      accounting.
     The delegates at a Best Value Accounting seminar at CIPFA’s annual conference and all
      members of the IPF Finance Best Value Advisory Service were asked to identify current
      partnerships at their authority and how practical they consider the existing guidance to be.
     The Chairman of CIPFA LASAAC was consulted to ascertain what plans there are to revise
      accounting for partnerships under the SORP.
     A research paper Best Value Accounting – Accounting for Partnerships prepared for CIPFA
      in 1999, on the application of Group Accounts to local authorities was reviewed.

1.4   The findings from this research were summarised for and discussed with the members of
      CIPFA’s Best Value Review Group and its Best Value Steering Committee, which met on the
      19 July and 9 August respectively. Their views directed the shape of this consultation paper.




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Best Value Accounting Context.

1.5    In February 1999 CIPFA published a consultation paper A Modernised Framework for Local
      Government Accounting – Accounting for Best Value. It sought the views of local authorities
      about how local authority accounting information could best support and facilitate Best Value
      and led to the development by CIPFA of its seven Principles for Best Value Accounting (see
      Appendix 3). From the outset the consultation recognised three important challenges that are
      also relevant to this consultation paper. They were that developments in the accounting
      framework should be:

     Technically correct and comply with Generally Accepted Accounting Practice (GAAP).
     Practical for local authorities to implement.
     Understandable and clear to members of the public, councillors and other stakeholders.

1.6   In the context of Best Value it is also important that in being clear and understandable the
      new framework should be consistent with the Four C’s of Best Value. To this end it should
      provide information that:

     Facilitates Consultation with stakeholders
     Enables the Comparison of performance year on year and between authorities.
     Promotes Challenges to What authorities do and How they do it.
     Helps to demonstrate that an authority has a Competitive approach to service delivery.


The Modernising Government Context.

1.7   All new CIPFA guidance needs to take account of the modernising agenda. In brief the
      modernising agenda is intended to achieve local democratic renewal by ensuring that
      Council’s are accountable to, open with and responsive to local stakeholders. The Local
      Government Act 1999 (LGA 1999), which introduced the Best Value duty, and the Local
      Government Act 2000 (LGA 2000), which requires local authorities to prepare Community
      Strategies are intended to provide an infrastructure to ensure that Authorities.

     Have political processes that are efficient, transparent and accountable.
     Improve their services continuously.
     Actively involve and engage the local community.
     Are able to work with other bodies to ensure resources are deployed effectively to improve
      the economic, social and environmental Well-Being of the area.

1.8   Partnership working is particularly prominent in both the rhetoric and the reality of the
      modernisation agenda. Each is discussed, in turn, below.




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The Rhetoric of Partnership.

1.9 Examples of partnership rhetoric include:

   Research by Jupp for DEMOS Working Together – Creating a better environment for cross
    sector partnerships (May 2000) reported that the word “Partnership” was used 6,197 times in
    Parliament in 1999 compared to just 38 times in 1989. This indicates the increased emphasis
    being placed on Partnership working by policy makers.
   It is not uncommon to hear people talk about “Collaboration” as the fifth C of Best Value.
   Any quick review of a sample of local authority Best Value Performance Plans (BVPP) will
    reveal that it is now common practice for a local authority to state that Partnership Working is a
    core value that it is pursuing. This demonstrates a local commitment to partnership working.

1.10 As part of the research for this consultation paper the DETR was asked to outline how it
    believed partnership accounting could support Best Value and the wider modernisation agenda.
    In its reply the DETR outlined that:

   It is keen for local authorities to take the lead on community planning in their geographic areas.
    It believes this inevitably leads local authorities to engage in a range of strategic and operational
    partnerships.
   Its vision is that each local authority will act as a lead body for the joint provision and joint
    commissioning of seamless public services to meet local community needs. The implementation
    of this vision needs to be transparent. Hence, the accounting information and other performance
    reports need to demonstrate how it meets this role.
   It is seeking guidance from CIPFA that helps rather than hinders local authorities to fulfil this
    role, but also ensures transparency and accountability at a national and local level.

The Reality of Partnerships.

1.11 Examples of the rhetoric turning into reality includes the June 2000 DETR draft guidance
     Preparing Community Strategies. Paragraph 11 of the guidance emphasises that Partnership
     activity is expected to increase. It states:

    The key to an effective community strategy will, therefore, be successful partnership working
    and community involvement throughout the process.

1.12 Paragraph 15 of the guidance emphasises that Partnership activity is expected to demonstrate
     transparently that it is effective and efficient. The guidance states:

    Partnerships need to evaluate their effectiveness and adjust their membership and working
    arrangements accordingly.

1.13 As one of the main stakeholders in the process and the only stakeholder that could, using
     section 23 of the LGA 1999, make Best Value Accounting Regulations it is important that
     DETR views receive full consideration. In particular the guidance should seek to provide
     information to:

     Engage partners in consultation and community planning.
     Enable the cost effectiveness of partnerships to be evaluated.


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The Types of Partnerships Local Authorities are Involved With.

1.14   Research for this consultation paper has found that Local Authorities are already involved in
    a wide range of partnership arrangements. For example all 16 of the authorities visited said that
    they currently work with a range of partners and all expected that the number and range of
    partnership activity would increase. Table 1 is a summary of the responses.

Table 1: Partnerships that Local Authorities Participate In.
                      Partnership Forms:                              Number of Authorities:
 Subsidiary or Associate Companies and Trusts                              15 (94%)
 Joint Boards (including Education Action Zones)                            7 (44%)
 Joint Committees                                                           6 (38%)
 Advisory Groups                                                           10 (63%)
 Joint Consultative Committees                                              7 (44%)
 Partnerships with Suppliers                                                7 (44%)
 Accountable Body for a Partnership (e.g. SRB)                             10 (63%)
 Give Grants to partner organisations                                      15 (94%)
 In Kind support to partner organisations                                  11 (69%)
 Joint Working                                                              5 (31%)

1.15 In addition, an Internet search          More than 170 New Deal for the Unemployed
found that a large number                      schemes led by the employment service but
of Government sponsored                        involving local authorities.
partnerships exist and many are               More than 750 Single Regeneration Budgets
likely to involve local authorities.           often led by the local authority and nearly always
Figure 1 provides brief details                involving the local authority.
about the main ones identified.               From 1 April 2000 every local authority has an
Taken together table 1 and figure              Early Years Development and Childcare
1 serve to emphasise the scale of              partnership.
local authority involvement with              Sure Start, which aims to improve cross
partnerships and the wide ranging              departmental services for young people in
nature of that involvement. It is also         conjunction with community representatives.
                                              25 Education Action Zones led by local
clear that many of the partnerships
                                               authorities and involving other sectors.
are with what might be termed as
                                              24 On Track juvenile crime reduction
Subsidiaries, Associates or Joint              partnerships led by local authorities.
Arrangements and Joint Ventures.              375 Crime reduction partnerships including
UK GAAP has particular rules for               CCTV partnerships between police and local
how to account for each of these               authorities.
(notably FRS 2, FRS 5 and FRS                 From 1 April 2000 every local authority has a
9) that need to be taken into                  Youth Justice partnership.
consideration when rules for                  12 Sports Action Zones involving councils.
accounting for partnerships are               26 Health Action Zones involving all agencies
being framed. These relate first               including local authorities.
and foremost to the Local
Government SORP, rather than               Figure 1: Examples of Government Sponsored
the BVACOP.                                Partnership Arrangements.




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1.16 Since the first principle of Best Value Accounting is that “it will complement the SORP to
    ensure consistent financial reporting below Statement of Accounts level” (see Appendix 3) this
    guidance must take account of the current SORP approach to partnerships and plans to develop
    it.

Development of the Local Government SORP.

1.17 The CIPFA/LASAAC Joint Committee has been considering whether to extend the current
    group accounting requirements in the, SORP. It has not yet reached a consensus about this and
    does not expect to do so until the 2002 SORP at the earliest. This is a constraint on what this
    paper can recommend, but does not preclude a discussion of the group accounting issues
    relevant to Best Value. Consultees responses on the issues raised will help to inform the future
    SORP developments.

Conclusion.

1.18 It is clear from the above background and context sections that there is a momentum at both
     the national and local levels to:

     Better utilise existing partnership arrangements to achieve Best Value for local communities.
     Explore and enter into new partnership arrangements where these can provide best or at least
      better value.

1.19 Consequently the number and range of partnerships that local authorities are involved with
     will continue to increase. Guidance on how partnerships are accounted for is, therefore,
     particularly important now to ensure that the financial records of authorities and their
     performance reports are prepared on a consistent basis and promote the four C’s of Best
     Value.

1.20 It is also clear that Partnership Accounting is at the centre of three overlapping demands on
     Council financial information systems i.e. the SORP, BVPP and Community Strategies. See
     figure 2 below.




                                           Community
                                            Strategy



                                          Partnership
                                          Accounting
                              BVPP                          SORP




Figure 2: Partnership Accounting at the centre of the modernising agenda.



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      Figure 2 not only emphasises how important the guidance on Partnership Accounting will be
      but also makes the definition of the scope of this guidance particularly important.

Structure of the Consultation Paper.

1.21 After the scope of the guidance has been established the remainder of the consultation paper
     will deal with how Partnerships activity should be accounted for and reported in Best Value
     performance reports within the context of the modernising agenda detailed above. It will:

     Define what CIPFA means by a partnership.
     Identify the needs of a local authority in relation to its partnership activities.
     Identify the alternative options for accounting for partnership activity.
     Evaluate the options against the criteria identified in the Best Value Accounting context
      section (above) and recommend the most appropriate option.
     Assess the current Guidance (Annex C to Section 2 of BVACOP) in the light of practitioners’
      views and the recommended approach to accounting for partnerships.
     Discuss the main issues that new guidance must cover and suggest approaches to each issue.
     Briefly discuss the main Governance Issues related to partnership working.
     Make recommendations about the extent to which the new guidance should be mandatory.


      Each area is discussed in turn. Comments from consultees on all aspects of this paper are
      welcome. Specific questions are highlighted in boxes like this at appropriate points in the text.
      All responses should be returned to CIPFA by 19 January 2001.


Scope of the Guidance.

1.22 The scope of this consultation paper and the resulting guidance is limited to Best Value
     Performance Reporting only i.e. the BVPP and Best Value Performance Indicators (BVPI).
     Although similar issues affect the Local Government SORP and the development of
     Community Strategies they are beyond its scope because:

     The Local Government SORP is the responsibility of CIPFA/LASAAC.
     At present only draft guidance about developing Community Strategies exists.

1.23 The main output from this Consultation exercise will therefore be revised and improved
     guidance in BVACOP about how to account for Partnerships. The new guidance will
     supersede and replace the current Annex C - Partnerships and Joint Working Arrangements -
     to Section 2 of BVACOP.


Q1
      Do consultees believe that Best Value accounting and reporting should be
      constrained by the SORP or should Best Value accounting requirements be
      different from the SORP when differences can be justified on grounds that they
      facilitate the achievement of Best Value?



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PART 2:WHAT DO WE MEAN BY PARTNERSHIP?

2.1   As noted in the Part 1 above the word “Partnership” is much used today. Because the term is
      so popular it is quite possible that different people use it in different ways. It is therefore
      important to have a clear definition in the CIPFA guidance. This is essential to ensure that the
      scope of the guidance is clear to users.

2.2   Research for this consultation paper found three different authoritative definitions. They are
      detailed at Appendix 4:

     The first was developed for the DETR by Newchurch.
     The second was reported by Ben Jupp in the DEMOS publication Working Together –
      Creating a better environment for cross-sector partnerships.
     The third was developed in the Partnerships Directory published by CIPFA’s Best Value
      Advisory Service.

2.3   The main features of the three definitions are that partnerships are:

     Voluntary.
     Between two or more separate bodies.
     By parties that share a common goal.

2.4   All of these features are present in the concise definition give in the Partnership Directory. It
      is, therefore, proposed that the definition of Partnerships to be included in the new guidance
      be:


        “A partnership is a voluntary relationship between two or more free and independent parties
        which is designed to secure some shared objective. It can take all sorts of forms, but is
        generally assumed to exclude the familiar relationships between client and contractor, and
        between employer and staff.”


2.5   This definition is reasonably flexible and should therefore be able to accommodate novel
      approaches adopted by authorities in the future. It covers partnerships entered into to achieve
      a statutory objective. For example voluntary partnerships have been established for Early
      Years Development and Childcare so that Councils develop a strategy to ensure that
      Government targets for early years education were met.

2.6   The definition is also concise enough to encourage practitioners to use it and it is from a
      publication that many authorities are already reasonably familiar with.

2.7   CIPFA recognises that local authorities have a long history of forming consortia for specific
      purposes. For example many local authorities subscribe to joint advisory services and quality
      forums provided by IPF, numerous purchasing consortia exist and internal audit cover is
      sometimes procured via a consortium. All of these arrangements are potentially supportive of
      Best Value initiatives but do not have an immediate and direct front line service delivery
      objective. They therefore, seldom meet the definition of a partnership as defined in this paper.
      Regardless of the analysis in this paper authorities might wish to consider the role of such


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      consortia during BVR’s and any references to such working in BVPP’s.


 Q2     Do consultees agree that the recommended definition for partnerships provides
        a sufficiently clear and flexible definition?

        If the definition is not considered adequate consultees are invited to identify
        where it is not adequate and suggest improvements?




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PART 3: WHAT FINANCIAL INFORMATION DOES AN AUTHORITY NEED TO HAVE
ABOUT ITS PARTNERSHIP ACTIVITIES?

    3.1 One of the main objectives of the research carried out with the sample of authorities visited
        was to identify what information local authorities need to have about partnership activity so
        that the evaluation of the options for accounting for partnerships takes these needs into
        account.

          To this end each authority was asked:

          Why do they choose to enter into partnerships?
          How do they currently account for partnership activity?


Why do local authorities enter into partnerships?

3.2       This was a relevant question as partnerships are one option available to local authorities as
          they strive to provide Best Value services. Directly providing services itself and traditional
          contract based outsourcing are the obvious other alternatives. It is reasonable to assume that
          any guidance that CIPFA gives about how to account for partnerships should aim to help
          authorities with the financial aspects of decisions about:

         The choice of service provision option i.e. whether to enter a partnership or not.
         The continued value of a particular partnership arrangement i.e. whether to continue with a
          partnership or not.

3.3       This point is further emphasised by a response to a questionnaire sent to all members of the
          IPF Finance Best Value Advisory Service. 98 authorities returned the questionnaire. Of these
          57 authorities reported their intention to review the effectiveness of the partnerships that they
          are engaged in. The full responses were:

         33 already review the effectiveness of partnerships regularly.
         24 plan to review the effectiveness of partnerships in the future.
         34 do not have plans to review the effectiveness of partnerships.
         7 made no comment on this question.


3.4       In order to identify what information CIPFA should advise each authority needs to identify, to
          inform its partnership related decisions, each of the authorities visited was asked:
           What criteria does it use to decide whether to enter into a partnership?



3.5       Although only two authorities had formal set criteria for this each authority outlined the main
          criteria it used in practice. Table 2 details any criterion reported by two or more of the
          authorities.




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Table 2: The Criteria used by local authorities to decide whether to enter a partnership.

                       Criterion Used:                               Number of Authorities:
Access to additional external funds.                                          13
Improve service quality and access to services.                                7
Achieve economies of scale/efficiency gains.                                   6
Required as a part of a national initiative.                                   5
Promote the aims and objectives of the Council/Force.                          4
Promote community involvement.                                                 3
To access expertise not available within the Council/Force.                    2

3.6   Table 2 shows that financial based criteria are the most commonly used criteria. Therefore,
      the accounting records required or recommended by the new guidance will ideally help local
      authorities to easily identify:

     External resources accessed through partnership working.
     Efficiency gains achieved through partnership working.
     Any extra costs associated with any of the non-financial criteria. For example, entering a
      partnership to bring in expertise not available in the council is reasonable as long as the
      associated extra costs do not exceed, for example, the costs of buying in the expertise.

3.7   The responses summarised in table 2 indicate that identifying the impact of a partnership on
      the individual authority/force is desirable, as this will enable scale economies and cost
      effectiveness to be assessed. It also suggests that if decisions about the financial impacts of
      partnerships are to be fully informed they should take account of the full cost implications of
      a partnership, including, In Kind contributions and Opportunity costs. Finally if it is possible
      to capture the data that table 2 indicates it will be desirable to be able to identify and quantify
      external funds accessed as a result of partnerships.


How do local authorities currently account for partnership activities?

3.8   This question aimed to identify current good practice that CIPFA could recommend to all
      authorities to help raise standards overall. In fact the research revealed that authorities
      currently have fairly consistent and fairly conventional practices. The responses are
      summarised at table 3.

Table 3: How authorities account for partnerships.

                    Current Accounting Practice:                                Number of
                                                                                Authorities:
Record their own transactions only. Separate holding accounts are
used where the authority is an Accountable Body.                                      4

Record all transaction in SEA that an authority is Accountable for.                  11
Currently record their own transactions only but plan to include all
that they are accountable for in the future.                                          1




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3.9   Given the guidance that is currently in the code it is not surprising that most authorities
      account for all transactions that they are accountable for. This means that in accordance with
      LAAP bulletin 36 (March 1999) they record their own transactions with and contributions to
      partnerships and additionally where they are the formal Accountable Body e.g. in the case of
      Single Regeneration Budgets (SRB), they record:

     All the grant received from Government in their SEA as income.
     All distributions of grant to other SRB partners in their SEA as expenditure.

3.10 A few authorities (four) do not follow the guidance in LAAP bulletin 36. Instead they use a
     holding account to record SRB grant received and SRB grant passed on to other bodies. They
     only show the net difference i.e. their own transactions financed by SRB within their SEA.

3.11 It was also notable that none of the sample of authorities quantifies the benefits of partnership
     working, except for five authorities that attempted to so for SRB partnerships where
     information about benefits has to be provided as a condition for grant payments. This is a
     worrying finding in terms of Best Value because without a robust way of assessing the
     benefits of partnership working there is an increased risk that some partnerships will not
     provide good value for money.

3.12 The current accounting practices provide two options that can be evaluated in detail in Part 5:

     Option 1 where an authority records only the transactions that it as an entity in its own right is
      responsible for. This very much reflects the traditional stewardship for public funds role of
      local authorities. Hereafter this will be referred to as the Stewardship Option.

     Option 2, which reflects the current guidance in Annex C to section 2 of BVACOP It
      extends option 1 to include the funds and transactions of separate entities i.e. SRB funds
      belong to the partnership not the Accountable Body. This extension would only apply where
      the local authority is formally identified as being the Accountable Body and therefore bears a
      financial risk. For example, an SRB Accountable Body is liable to repay any grant spent by
      another body that was not spent in accordance with the conditions of the grant. Hereafter this
      will be called the Accountability Option.


3.13 For clarity it is worth noting that option 2 is only slightly broader than option 1 and arises
     primarily because of the advice in LAAP bulletin 36 referred to above.


3.14 Part 4 will now consider if there are any other options that warrant further consideration in
     this consultation paper.




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PART 4: WHAT OPTIONS ARE THERE TO ACCOUNT FOR PARTNERSHIPS?

4.1    Part 3 above has provided two options. They are based on current practice and do not take
       CIPFA guidance forward from its current position. It is, therefore, appropriate to consider
       what other more radical options exist.

4.2    A third option is the use of Group Accounts. Currently the SORP only requires that “local
       authorities with, in aggregate, material interests in subsidiary and associated companies
       should prepare, as supplementary information, summarised group accounts”. The contents of
       these group accounts are specifically excluded from the definition of total cost. Paragraph
       2.20 of section 2 of the current BVACOP, however, raises the possibility that this situation
       may change. It says:


    From April 2001, total cost will, subject to amendment of the SORP, also include an authorities
    proportional share of costs arising as a consequence of associate, subsidiary or joint venture
    transactions. Amendments to the SORP will follow consultation and consideration by the
    CIPFA/LASAAC joint committee and will reflect the developing use of partnerships in
    commissioning and procuring services.




4.3    Paragraph 2.20 of BVACOP makes it clear that any move to Group Accounts must be
       preceded by changes to the SORP. As noted earlier such changes are not planned for the 2001
       SORP so at present this is not a viable option. The issue is, however, still under consideration
       for the 2002 SORP so this consultation paper is an opportunity for some of the issues, as they
       relate to Best Value , to be discussed publicly. Hereafter this third option will be referred to
       as the Group Accounts Option.

4.4    None of the three options so far identified offer much information that will help:

      A local authority to assess the attractiveness of or continued viability of different partnership
       arrangements including the true costs of partnerships including Opportunity costs and
       contributions In Kind.
      Demonstrate an authority’s role as a facilitator of activity to promote the economic, social and
       environmental Well Being of its area as desired by the DETR.

4.5    A fourth option needs, therefore, to be discussed. That is that the scope of an authorities
       financial records and the performance reports be widened to include the:

      Gross expenditure of partnerships, that the authority works with, facilitates or partly funds, as
       expenditure. This, if it could be identified, would enable a local authority to demonstrate the
       wider role that it has in stimulating better services for and the Well Being of its area.
      Contributions made by other organisations towards the funding of the partnerships would be
       shown as income. This, if possible, would allow funds levered into local public services from
       other public sector organisations, the voluntary sector and the private sector to be identified.

       Hereafter this fourth option will be called the Enabling Council Option.


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Conclusion

4.6   Four options have been identified for further consideration in Part 5. In summary they are:

     Option 1 The Stewardship Option.
     Option 2 The Accountability Option.
     Option 3 The Group Accounts Option.
     Option 4 The Enabling Council Option.



Q3      Do consultees agree that options 1 to 4 represent the range of viable options that CIPFA
        should consider as a possible basis for its recommended approach to accounting for
        Partnership and Joint Working Arrangements?

        Consultees are invited to offer other options for consideration?




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PART 5: WHICH OPTION IS BEST AND WHY?

5.1   To identify which of the four options, from Part 4 CIPFA will include in its revised guidance
      on Accounting for Partnership and Joint Working Arrangements each option will be
      evaluated.

The Evaluation Criteria.

5.2   The framework for the evaluation is based on the three challenges that have been recognised
      from the outset of consultation about best value accounting i.e. that the accounting framework
      should be:

     Technically correct and comply with Generally Accepted Accounting Practice (GAAP).
     Practical for local authorities to implement.
     Understandable and clear to members of the public, councillors and other stakeholders.

5.3   In the Best Value context “clear and understandable” is taken to mean that the new
      framework should be consistent with the four C’s of Best Value i.e. it should where possible:

     Facilitate Consultation with stakeholders
     Enable the Comparison of performance year on year and between authorities.
     Promote Challenges to What authorities do and How they do it.
     Help demonstrate that an authority has got a Competitive approach to service delivery.


Options Appraisal.

5.4   As explained above option 1 (Stewardship) and option 2 (Accountability) are similar. Each
      basically restricts local accounting records and reporting to the boundaries of each authority
      as an entity. Because they are similar they are evaluated together.


Option 1 (Stewardship) and option 2 (Current Position) Compared with UK GAAP:

5.5   Neither option 1 or 2 fully comply with UK GAPP:

     Neither takes any account of the group accounting requirements required by FRS 2
      (Accounting for Subsidiary Undertakings) nor FRS 9 (Associates and Joint Ventures). They
      also ignore the element of FRS 5 (Reporting the Substance of Transactions) that refers to the
      treatment of quasi-subsidiary organisations i.e. a company, trust, partnership or other
      arrangement that is controlled by an authority even though it is not a subsidiary.

     Option 1 further fails to take account of the main provisions of FRS 5 as it does not reflect the
      substance of the transactions that a local authority, acting as an Accountable Body for an SRB
      or similar arrangement, is responsible for. LAAP bulletin 36 (March 1999) provides guidance
      on the accounting treatment where a local authority is an Accountable Body for SRB and is
      therefore responsible to the grant giving body for any loses regardless of whether the loss was
      incurred by the local authority or another partner. The bulletin requires all income and
      expenditure handled by the local authority acting as an Accountable Body to be disclosed in
      its accounts. This means potential liability is reflected in the authority’s accounts. LAAP


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      bulletin 36 does not cover other situations where an authority can be a designated
      Accountable Body (e.g. European Funds). Option 2 would therefore need to clarify this if it
      was chosen.

How Practical are Options 1 (Stewardship) and 2 (Current Position)?

5.6   In their favour both option 1 and option 2 are highly practical. All of the sample authorities
      visited could easily apply either approach. Eleven authorities currently apply option 2, but,
      could easily identify SRB transactions and deal with them in a holding account instead.
      Similarly, the four authorities that follow option 1 already have the information that they need
      to comply with option 2, from a holding account, if they were required to do so.


How Clear and Understandable are Options 1 (Stewardship) and 2 (Current Position)?

5.7   Clarity and simplicity are a further strength of both options. It is easy for the public, other
      stakeholders and local authority finance staff to understand that under these options the
      accounts basically present the transactions of the authority as an entity (slightly extended in
      option 2). It is clear that under these options other sources of information will need to be used
      if the:

     Wider impact and influence of the authority is to be assessed.
     Financial impact of partnership activity e.g. external funds levered in are to be identified.

5.8   Depending on internal cost allocation systems options 1 and 2 may also understate the costs
      of each partnership to an authority as they may not recognise the costs of In Kind
      contributions and or the Opportunity costs of officer time liaising with partners.

5.9   In terms of the four C’s options 1 and 2 fair quite well, but need to be supplemented by
      additional information as follows.

Consultation.

5.10 Both options provide a reasonable basis for consultation with the public or other stakeholders
     if the costs recorded are placed in the context of the outputs or outcomes achieved with the
     public funds recorded and spent by the Best Value Authority. Indeed this provides a good
     basis for cost effectiveness measures per £ of public money spent.

5.11 As noted above options 1 and 2 do not give information about the wider activity, influence
     etc. of a local authority. Some of the cost effectiveness indicators could therefore be very
     difficult to understand, unless the authority gave supplementary information about its
     partnership activity to place its cost indicators per £ of public money in context. Existing
     guidance on the contents of a BVPP (DETR circular 10/99) already urges local authorities to
     accompany its BVPI’s and locally determined PI’s with an explanatory commentary. This
     advice is particularly important under options 1 and 2.


Q4      Do consultees agree that if CIPFA guidance does recommend either
        option 1 or option 2 it will need to emphasise the requirement for
        explanatory information and offer guidance on what information should be
        given?

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Comparison.

5.12 Both option 1 and option 2 could be very supportive of comparison exercises, although, any
     judgement about how supportive will depend upon the view taken about what comparison
     exercises should seek to identify. If comparisons are aiming to:

     Highlight the financial impact, to an authority, of different service delivery arrangements then
      options 1 and 2 are effective. This is because each option only reflects the costs of the
      authority. Therefore, any decisions that lowers or raises costs, because of the cost efficiency
      of a partnership arrangement, will be reflected in unit cost indicators.
     Eliminate differences in the financial impact, to an authority, of different service delivery
      arrangements so that performance indicators can become efficiency measures then options 1
      and 2 are less effective.


5.13 This issue was discussed at the CIPFA Best Value Review Group meeting on 19 July 2000.
     The view of the Group was that comparison should show the impact of decisions on the cost
     base of the Best Value Authority, rather than seek to equalise the comparison base between
     authorities. The group felt this:

     Encouraged innovation as innovative partnerships that lower costs or increase output would
      be highlighted and the good practice could be shared more widely.
     The impact of partnership arrangements on funds available for other priorities is central to
      decisions about whether to enter into or continue participating in a partnership.

5.14 Options 1 and 2 can, therefore, be seen to be consistent with the desire for authorities to have
     good information to base decisions on partnership activity. The weakness with both options in
     this respect is that:

     The arguments in their favour assume that output/outcome information can be accessed to
      place the increase/decrease in local authority spending in perspective. This may not always be
      so.
     They take no account of external funds levered in. This was a key criterion for local
      authorities when deciding whether to enter into a partnership.
     They do not guarantee that the non-cash contributions to a partnership e.g. In Kind
      Contributions and the Opportunity costs associated with officer time are transparent.


Challenge.

5.15 On one level both options 1 and 2 assist Challenge as each allows the cost to the local
     authority of a partnership arrangement to be compared to the costs of providing the service
     without a partner. Thus if quality of service and output information is available an informed
     choice about alternative service provision options can be made.




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5.16 On a second level, as observed above, each option fails to identify:

     The non-financial benefits or costs of partnership working.
     Funds levered in through partnership working.
     The wider influence of a local authority’s activities.

5.17 Once again to fully support Best Value it seems that options 1 and 2 would each need to be
     supplemented by additional information not available from a local authorities own accounting
     system or records.


Competitiveness.

5.18 Both option 1 and option 2 are able to show the relative cost of a partnership arrangement
     against alternatives so they could help to demonstrate competitiveness.


Conclusion about Options 1 and 2.

5.19 Options 1 and 2 do not fully comply with UK GAAP, but are highly practical, relatively clear
     and understandable and fairly supportive of the four C’s of Best Value. If chosen option 1
     needs to be adapted to show the potential liability a local authority, acting as an SRB
     Accountable Body, is exposed to. Option 2 better shows this potential liability, but additional
     advice is needed to apply it appropriately to all situations (i.e. in addition to SRB) where an
     authority is an Accountable Body.

5.20 Both options fail to give information about funds levered into the public sector, the value of
     non-financial benefits of partnership arrangements or the wider influence and impact of a
     local authority’s partnership activity. If either was, therefore, to be recommended they would
     need to be supported by supplementary information about partnerships. The information
     would probably be in the form of notes to the BVPP and is likely to be drawn from
     information from a wide range of sources over and above a local authority’s financial
     information system.


Option 3 (Group Accounts) Compared with UK GAAP.

5.21 Group Accounts are considered here as option 3 because the application of Group Accounts
     to local authorities would overcome the principal perceived weakness with options 1 and 2,
     by bringing local authority accounts closer into line with UK GAAP. Under UK GAAP
     Group Accounts reporting requirements are governed by:

     FRS 2 Subsidiary Undertakings. (briefly summarised in Appendix 5)
     FRS 5 Reporting the Substance of Transactions. (briefly summarised in Appendix 5)
     FRS 9 Associates and Joint Ventures. (briefly summarised in Appendix 5)

5.22 Group Accounts show the transactions that an authority controls or influences through
     subsidiaries, associates and other joint arrangements. Arguably, in Best Value terms, any



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      accounts, financial summaries or performance reports that do not include these transactions
      do not fully represent the activities of a local authority and are not a reliable basis for:

     Consultation with stakeholders as a full picture is not provided to consultees.
     Comparison between authorities as significant activity relating to a Council’s role in its local
      community is excluded.
     Challenging what a local authority does and how it does it as its full range of activity is not
      reported.

5.23 Since authorities are entering into an increasingly wide and innovative range of partnership
     arrangements the chance that performance reports, that centre on the authority as an entity,
     will exclude significant activity that relates to BVPI’s increases. Group Accounts may be a
     valid way of reducing this risk.


How Practical is Option 3 (Group Accounts)?

5.24 As stated above option 3 can only be implemented if Group Accounts become the prime
     accounting statements, for a local authority, under the SORP. The short answer, therefore, is
     that at present this is not a practical option as the 2001 SORP does not require Group
     Accounts to be primary statements. They remain as supplementary summary statements only.
     They continue to be kept separate from the SEA and, therefore, do not affect the BVPP or the
     BVPI’s. A longer-term question that is relevant to Best Value accounting is:


        How practical would it be to make these supplementary accounts the prime accounting
        statements for Best Value reporting?


5.25 Discussions at the sample of authorities visited and a review of a 1999 research paper for
     CIPFA on the application of Group Accounts to local authorities, suggests that it is possible
     to apply Group Accounts to local authorities. The application is not, however, a simple case
     of changing the status of the current supplementary Group Accounts to make them primary
     accounts with equal status to the current local authority consolidated revenue account and
     balance sheet. This is because:

     Currently the SORP only requires the profit or loss after tax of a subsidiary to be incorporated
      into an authority’s Group Revenue Accounts and the investment to be included in the Group
      Balance Sheet. This does not comply with FRS 2. It requires that the trading, assets and
      liabilities of a parent and its subsidiaries should be presented as if the group was a single
      entity. Hence, to follow UK GAAP CIPFA guidance will need to require that subsidiaries are
      consolidated on a line by line basis.

     Currently very few local authorities produce supplementary Group Accounts. This is because
      at present the aggregate activities of local authority subsidiary and associate companies are
      not material when considered in the context of the overall accounts of most authorities.
      Hence, making Group Accounts a primary statement would not actually result in many
      authorities giving out fuller information unless the materiality definition was altered. To
      capture more authorities the new materiality guidance would need to relate to individual
      divisions of service in the SEA and individual BVPI’s.


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     Authorities can have quasi-subsidiaries, associates and joint ventures where there is no
      element of share ownership e.g. a joint committee. In these cases an objective means of
      calculating an authority's share of the associate etc. is needed.

     Accounting standards require that for associates taxation should be disclosed. Local authority
      accounts have no appropriate place to disclose taxation. The application of FRS9 would
      therefore, need tailoring for local government.

How Clear and Understandable is Option 3 (Group Accounts)?

5.26 To assess how clear and understandable Group Accounts are the sample of authorities visited
     was asked whether they felt that Group Accounts would add value in the Best Value context
     by giving fuller information about activity that would:

     Inform consultation with stakeholders.
     Inform comparisons between authorities.
     Stimulate challenge if better informed stakeholders questioned more things.


5.27 Two of the authorities declined to give an opinion and some offered more than one view. Of
     the fourteen that did offer an opinion two already maintained supplementary Group Accounts
     and one expected to do so in the future. The views expressed were mixed and are summarised
     in table 4:

Table 4: The value added by Group Accounts.

                              Opinion Expressed:                               Number of
                                                                               Authorities:
      Generally valid (but need supporting explanatory notes).                     2
      Valid only if activity by associates etc. is material.                       4
      Valid in theory very difficult in practice.                                  4
      Not valid. (They add very little value and may even confuse).                6
      They do not add value, but if they are required by the SORP the              2
      BVACOP should be consistent with it.


5.28 Table 4 shows that some local authorities have considerable concerns about the clarity of
     group accounts and the value they would add to the pursuit of Best Value. Some significant
     issues that were raised include how Group Accounts could distort rather than clarify local
     authority accounts. For example some comments suggested that Group Accounts do not fully
     support :

     Comparisons between local authorities.
     The information presented as the basis for consultation.
     Challenges to the competitiveness of current partnership arrangements.




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Comparison.

5.29 One authority noted that it was possible for a local authority to have a subsidiary company
     that for example operated a £ multi-million airport. The inclusion of such transactions in its
     accounts could make comparisons with other local authorities difficult particularly where any
     large transactions affected the SEA and an associated BVPI.

5.30 Another authority noted that to be practical the transactions of subsidiary and associate
     companies would need to be charged into the SEA or excluded from it. This would be straight
     forward sometimes, but, not always. For example the SEA may need new lines to take
     account of activities carried out by local authority companies.

5.31 Take the airport example. Under the current SORP it would be shown as a subsidiary not
     related to any service. This means it would not affect any BVPI’s or any service comparisons.
     Alternatively the SEA could be amended to include a line for airports. Each option is easy to
     administer, but may not present a full picture. Most authorities may not run airports, but they
     do:

     Support the transport infrastructure.
     Promote tourism.
     Seek to generate the local economy.


5.32 If the support of the airport was related to some of these wider objectives that all authorities
     do record expenditure for and may link to BVPI’s there is a case for splitting the costs over
     the appropriate headings. However, an objective basis for such a split does not exist at
     present.


Consultation.

5.33 Group accounts would extend the scope of a local authority's accounts to show the extent of a
     local authority's influence and control. This is much wider than options 1 and 2 and if in
     addition, the separate contributions of the entity itself were distinguished separately from the
     contributions of subsidiaries, associates, joint arrangements etc. it would provide a fuller
     picture to consultees.

5.34 One authority commented that consolidating an authority’s share of subsidiary and associate
     organisations would not, on its own, improve the information base for consultation. Notes
     would be required to explain what was included and why.




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5.35 The authority also felt that similar notes explaining an authority’s partnership activity would
     be equally informative without the need to actually consolidate the revenue account and
     balance sheet on a line by line basis. It felt this was the Best Value solution as the information
     was presented to the public, but a complex consolidation process was not necessary. Figure 3
     gives an example taken from the annual accounts of Leeds City Council of what such a note
     could look like.

        Leeds Bradford International Airport Ltd. (Companies House registration no, 2065958)

        Nature of the Business:
        The principle activity of the company is the operation of a Regional and International
        Airport.

        Relationship with the Council:
        The Council has invested in the company by way of a debenture loan (current balance
        £1,020k see explanatory note 15 on page 29). In 1998/99 payments received on the
        denture amounted to £104,565 for interest and £36,466 principal. The Authority is
        considered liable for 40% of all deficits the Airport may incur.

        Financial Performance:
        In 1998/99 the Airport made an net profit before tax of £4,063 and a net profit after tax of
        £2,837 (in 1997/98 £2,889 and £2,088 respectively) and has net assets of £27,523
        (£24,686 in 1997/98)

        Transactions and services with the Company:
        In addition to the long term investment the following services are provided and charged
        to the airport:
        - Engineering services               £69, 738
        - Noise monitoring                   £74,321
        - Interest on variable loans         £482,021

        Accounts:
        The Financial Accounts of Leeds Bradford International Airport can be obtained from
        Leeds and Bradford International Airport Ltd, Yeadon, Leeds, LS19 7TZ.

        Figure 3: An example of an explanatory note about a partnership



Competitiveness and Challenge.

5.36 Like options 1 (Stewardship) and 2 (Accountability) option 3 does not show the value of the
     non-financial benefits of being involved in a partnership or the full value of external funds
     levered into local public services. This makes a full evaluation of the competitiveness of a
     partnership arrangement and challenges to its continued value difficult.


        Figure 3: An example of an explanatory note about a significant partnership.



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Option 3 Conclusion.

5.37 Overall it seems that the Group Accounts proposals need to be worked up in much more
     detail by the CIPFA/LASAAC Joint Committee before its application as the basis for Best
     Value financial information could be adopted. The CIPFA/LASAAC Joint Committee should,
     however, be asked to take into account the feedback from this consultation exercise when it
     considers the cases for and against making Group Accounts the primary accounting
     statements under the SORP. The main issues to consider are:

     The local authority application of Group Accounts for subsidiary organisations needs to be
      brought into line with FRS 2.
     An appropriate materiality definition related to the SEA and BVPI’s needs to be developed so
      that most local authorities produce Group Accounts.
     An objective approach to the calculation of an authority's share of associates etc. needs to be
      determined.
     The presentation of the Group Accounts needs to be tailored to take account of taxation
      differences and to clearly show the different contributions of the authority and each
      subsidiary, associate etc. to the group.
     An adequate mechanism for allocating or apportioning associate and other joint venture and
      joint arrangement costs across the SEA is required.
     The minimum requirements for disclosure notes explaining the group accounts and the details
      contained within them need to be specified.


Q5      Do consultees agree that Option 3 is not a viable option at present and will
        only be able to be fully assessed when the CIPFA/LASAAC Joint Committee
        has fully worked up its proposals taking the issues highlighted in this paper
        into account?

        Consultees are invited to suggest other factors that the CIPFA/LASAAC Joint
        Committee should be asked to take into account during its deliberations
        about the application of Group Accounts to local authorities? Please take
        account of Appendix 6 - a preliminary discussion paper, from the
        CIPFA/LASAAC, on the options for developing Group Accounting for Local
        Authorities when answering this question.




Option 4 (The Enabling Council).

5.38 Option 4 the Enabling Council option is included for consideration because none of the other
     options adequately show the full value of the activities that a local authority sponsor,
     stimulate or facilitate in its area. If an authority’s accounts and or performance reports could
     be developed to show the value of activities by other groups that the council supported or
     facilitated in some way:

     The DETR’s desire to see more clearly what each authority was achieving for the economic,
      social and environmental Well Being of its area would be met.
     The value of funds levered into public services could be estimated.


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Option 4 (The Enabling Council) compared to UK GAAP.

5.39 The application of option 4 would extend the accounts of local authorities and performance
     reports about them well beyond current practice. It would involve the inclusion of
     transactions by other organisations not necessarily controlled or influenced by a local
     authority, in a local authority’s accounts. As such it would significantly exceed the
     requirements of UK GAAP and would not seem to meet the challenge, outlined at paragraph
     1.5 above, to be “Technically correct and comply with GAAP.”

5.40 It also means that any requirement for local authorities to follow option 4 could only apply to
     Best Value reporting, as the SORP must follow UK GAAP. The financial summary in the
     BVPP and the calculation of BVPI’s could follow option 4, but this would be inconsistent
     with the Harmonisation Principle of Best Value Accounting that requires:


    The reporting requirements for financial, statistical and performance purposes should be
    harmonised wherever possible. (See Appendix 3 – Statement of Principles)


How Practical is Option 4 (The Enabling Council)?

5.41 Even if it was deemed desirable to exceed UK GAAP in financial aspects of Best Value
     performance reports it is difficult to see how the transactions of other organisations not
     controlled by a local authority could be reliably identified, verified and included in the
     accounts of an authority. Authorities would be:

      Placing a high level of trust in the organisations supplying the information.
      Relying on the goodwill of other organisations to supply the information.
      Unlikely to satisfy auditors that the information supplied was reliable enough to show a true
       and fair view.


5.42 The sample of authorities visited was almost unanimous. They shared the opinion that
     grossing in the transactions of other organisations into their accounts was not practical.


How Clear and Understandable is Option 4 (The Enabling Council)?

5.43 Although option 4 exceeds UK GAAP and is not considered to be practical some authorities
     were sympathetic to the aim of giving a clearer picture, to stakeholders, about the partnership
     activity of an authority. They could see that additional information about the number of,
     nature of and performance by partnerships could:

      Better inform consultation exercises by showing the full range of activities that a local
       authority is involved with.
      Help explain apparently unusual performance indicators by providing a fuller context against
       which performance can be considered.
      Stimulate questions about and challenges to current partnership activity.
      Demonstrate the range of service delivery options used by an authority to achieve a
       competitive position.

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Option 4 Conclusion.

5.44    Option 4 the enabling council option cannot be recommended. It is clearly not practical and
        it departs from UK GAAP and from the Harmonisation principle of Best Value Accounting.

5.45    Option 4 is, however, strong where the other three options are weak. The information it
        potentially offers about a local authority’s partnership activity would be highly supportive of
        the four C’s of Best Value. It also fits well with the DETR community strategies guidance
        and could be explored as a possible basis for the financial information necessary to support
        the development of the Community Strategies that are required under the LGA 2000.


Overall Conclusion from the Option Appraisal.

5.46 Option 3 (Group Accounts) and option 4 (Enabling) cannot be recommended at present.
     Option 3 is the only option that is close to complying with UK GAAP, but it cannot be
     implemented without the SORP first being amended. The SORP cannot be amended until how
     to apply Group Accounts to local authorities, to ensure they promote Best Value, has received
     careful consideration. The extra information provided by option 4 is consistent with the
     promotion of Best Value, but it cannot be recommended as it is not feasible at present and
     exceeds UK GAAP.

5.47 Option 1 (Stewardship) and option 2 (Accountability) are, therefore, the only viable options at
     present although they each fail to give the wider picture about a local authority’s partnership
     activity where it:

      Controls or influences a subsidiary, associate or other joint arrangement.
      Acts as a facilitator of activity by wholly independent organisations.


5.48 The recommended way forward for local authorities is, therefore, to use either option 1 or
     option 2, but to supplement them with extra information. The extra information will probably
     be presented as notes to the BVPP. The precise contents of these notes are discussed in Part 6,
     but, could include the number, nature, cost, value and outputs of partnership arrangements.

5.49 The choice between options 1 and 2 is not straightforward and will not be made until
     feedback from this consultation paper has been assessed. Options 1 and 2 are compared in
     more detail below to inform consultation responses.



       Do consultees agree that Options 1 and 2 are the only viable approaches to
Q6
       accounting for partnerships at present?




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Which Option is Best – Option 1 or Option 2?

5.50 Option 1 is a better basis for year on year comparisons. Unlike option 2 it will not be distorted
     by the start or finish of an SRB scheme (or similar) for which the authority is the Accountable
     Body, but not actually responsible for much of the activity funded by the SRB. Having said
     this, under option 2, the reason for any year on year change would be easy to explain and
     could be disclosed in explanatory notes.

5.51 A more serious weakness with option 2 compared to option 1 is that it could make inter-
     authority comparisons less valid for no other reason than the organisational arrangements for
     the SRB Accountable Body happen to be different. For example, figure 3 below gives a
     hypothetical example that features two authorities. Each participates in the same £3M SRB
     scheme. The scheme has an education and an economic regeneration dimension. It covers the
     geographic area of the two local authorities.

       Authority A is the Accountable Body.
       Authority B simply participates in the scheme.
       Each Authority actually provides £100,000 of special educational needs activity, to a deprived
        area within its own area, which is funded by the project.
       The remaining £2.8 million is passed on to a variety of private and voluntary organisations
        that aim to stimulate the local economy.


5.52 Under option 2 (accountability) the accounts of the two bodies that have basically fulfilled the
     same role in the same SRB project will be very different:

        Authority A will show £3M income and £2.8M of economic development expenditure and
         £200,000 special educational needs support.
        Authority B will simply show £100,000 income and £100,000 special educational needs
         expenditure.
        Total spending by local authorities on the scheme will appear to be £3.1M i.e. £3M by
         Authority A and £100,000 by Authority B

    Figure 4: Example of inconsistent recording under the current SRB guidance.




5.53 Figure 4 shows that in terms of comparison current guidance on how to account for SRB
     schemes can distort gross expenditure comparisons. Comparisons based on net figures remain
     comparable. It also shows that overall some spending by local authorities is effectively double
     counted. This is potentially misleading for a stakeholder that wishes to review spending by a
     range of local authorities. Given that Government has a long-term aim to produce Whole of
     Government Accounts rules to eliminate such double counting will be needed.

5.54 A related issue, that LAAP Bulletin 36 actually highlights, is that SRB schemes tend to be
     quite diverse. The £2.8M non-education spending may in fact include some expenditure that
     actually relates to promoting tourism, some which improves transport etc. LAAP 36 indicates
     that in these circumstances the grant distribution should be split between the relevant
     divisions of service. This may not be easy and LAAP 36 states that the effort to make the split

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      accurately will depend on the materiality of the transactions in relation to the Accounting
      Statements of the authority.

5.55 In Best Value accounting terms a materiality level based upon the Accounting Statements is
     too high. If option 2 was recommended by CIPFA the guidance would need to specify that
     material accuracy relates to the performance indicators (national or local) affected by any
     inaccuracy. The impact of current guidance is that the impact of SRB will most often be
     shown in the Government Initiatives sub-division of Economic Development Services. The
     only advantage of this treatment is that the distorting impact of SRB can, at least, be easily
     isolated.


Q7    Do consultees agree that Best Value accounting should use lower materiality
      levels to decide whether to allocate costs to different divisions of service?

      If yes should the lower materiality level relate to misstatements of individual
      services expenditure and of BVPI’s, rather than to the expenditure of the
      Authority as a whole in line with current advice in BVACOP?




5.56 On a similar theme one authority in the research sample was very concerned about the
     prospect of any extension, for example to European Funding, of the requirement for
     Accountable Bodies to gross in the full grant transactions of a scheme that they are
     accountable for beyond SRB partnerships. Figure 5 illustrates the authority’s point:


      The Council described how it was the lead Accountable Body in the distribution of asylum
      seekers funding in Wales. It received around £40 Million per annum, but passed the majority
      on to other Councils. In its view a requirement for it to show £40 Million for asylum seekers in
      its SEA would be grossly misleading.

      Figure 5: Example of the impact of extending LAAP 36 guidance to other situation where
      a local authority is a formal Accountable Body.


5.57 If option 2 (Accountability Option) is to continue to be CIPFA’s recommended approach to
     accounting for partnerships, then guidance will need to be given about when the advice to
     include all the transactions, that an Accountable Body is responsible for, in the SEA applies.

5.58 Figure 6 below shows some questions that could be asked to help ascertain the substance of
     the transactions by an Accountable Body. They are designed to help to indicate a potential
     liability for an authority and therefore whether it should consider including all the grant
     received as income and all the grant distributions as expenditure in its SEA. Any yes answer
     indicates that the authority should consider including all transactions in its SEA, but the
     ultimate decision should be in taken the context of all three answers and other relevant
     information.




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      Do the transactions being considered relate to:

           Activities or transactions by the authorities own staff or its appointed agents?
           Work done within the geographic area for which the authority is normally responsible?
           Work to be funded by a grant for which the authority is the Accountable Body and where
            a decision by the grant giving department, not to pay in full, will leave the authority
            responsible for a debt?

      Figure 6: Possible questions to ask to identify the substance of transactions for which it
      is the Accountable Body.



Q8    Do consultees agree that the questions in Figure 6 provide a helpful basis that
      would guide decisions about whether to extend the principle of LAAP bulletin
      36 to other situations where a local authority is a formal Accountable Body?

      Consultees are invited to suggest other key questions?



Adapting Option 1 to Show the Substance of Potential Liabilities.

5.59 Another alternative is to adapt option 1 (Stewardship), if it was preferred to option 2
     (Accountability), but could not be selected due to its distance from UK GAAP. The
     adaptation would involve need to show the potential liabilities (the substance) associated with
     being an Accountable Body transparently. One possible approach would be to follow FRS 12
     (Provisions, Contingent Liabilities and Contingent Assets). Under FRS 12 liabilities arising
     because a local authority was an Accountable Body could be shown as either a provision or as
     a contingent liability.

5.60 FRS 12 defines a provision as:

          “A liability that is of uncertain timing or amount, to be settled by the transfer of economic
          benefits”

5.61 A provision would be made where a reasonable estimate of the amount likely to be owed to
     the grant paying department could be made.

5.62 FRS 12 defines a contingent liability as:

      “Either a possible obligation arising from past events whose existence will be confirmed only
      by the occurrence of one or more uncertain future events not wholly within the entity’s control;
      or a present obligation that arises from past events but is not recognised because it is not
      probable that a transfer of economic benefits will be required to settle the obligation or
      because the amount of the obligation cannot be measured with sufficient reliability”

5.63 A contingent liability note appears to match the likely circumstances where a grant paying
     departments was threatening not to pay the grant due in full.

          Do consultees believe that the use of a provision or of a contingent liability
Q9        note is an appropriate way of showing the substance of potential liabilities
          that local authorities acting as Accountable Bodies are exposed to?
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Conclusion.

5.64 Although Options 1 and 2 have many similarities they can result in significantly different
     costs being disclosed in both the annual accounts and the BVPP. Consultees need to consider
     the relative merits of each option. In brief:

     Option 1 is a more reliable basis than option 2 for inter-authority comparisons and does not
      require specific guidance about when to bring in the transactions, that an authority is the
      Accountable Body for, to its SEA. It does, however, need adapting to more accurately show
      the substance of the liabilities that an authority acting as an Accountable Body may be
      exposed to.
     Option 2 has the advantage of being current practice for the majority of local authorities.
      Hence, it is the easiest option to implement. It also shows the substance of transactions for
      which an authority is the Accountable Body more accurately than option 1, although, option 1
      can easily be adapted to show these liabilities if FRS 12 is applied to it.



Q10     Consultees are asked to indicate whether they believe Authorities should
        account for partnerships using:

           Option 1 (Stewardship) amended to clearly take account of FRS 12, or
           Option 2 (Accountability) amended to give clear guidance about when
            authorities need to gross in all the grant transactions that they are
            responsible for as Accountable Bodies?




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PART 6: IS THE CURRENT GUIDANCE ADEQUATE?

6.1   Since the recommended approach to accounting for partnerships is very similar to current
      practice it is crucial that the current BVACOP guidance (Appendix C to section 2 in
      BVACOP) is reviewed and improved. To assess this the sample of authorities visited was
      asked how useful the existing guidance on accounting for partnerships was?


How useful is the existing guidance on accounting for partnerships?

6.2   Only fourteen of the sample authorities expressed an opinion about this. Two expressed two
      opinions. The verdict on the current guidance was fairly critical as detailed below:

     1 said it was perfectly clear and reflected its current practice.
     9 said it was unclear. (notably they were unsure what was “attributable to the authority” and
      how to calculate “an authority’s share”)
     3 said they were concerned about how practical it was to gross in the costs of partners into the
      local authorities accounts.
     3 felt authorities were unlikely to apply it consistently.


6.3   Additional research was carried out at the Annual CIPFA Conference in Brighton. Delegates
      at a seminar about Best Value Accounting were asked how practical they felt the BVACOP
      approach to partnership accounting was. Again the opinion was that the approach could be
      improved:

     3 delegates said the approach was very practical.
     23 delegates said the approach was fairly practical.
     7 delegates said the approach was not practical.
     12 delegates did not feel able to comment


6.4   Detailed discussions with the sample of authorities visited about the reasons for each response
      revealed that part of the concern being expressed stemmed from an unfounded belief that the
      current guidance required authorities to account in more detail than they do at present. In
      particular 11 authorities noted that any proposal that requires extra details to be disclosed
      about partnerships could be difficult to comply with as the authorities will be dependent on
      partner organisations supplying accurate and timely information. Not all partners are able or
      willing to do this. This raises issues about the effective governance and evaluation of
      partnership arrangements (see part 8)

6.5   This unfounded concern arises because paragraphs C4 onwards in the current guidance
      discuss future scenarios when the transactions of other entities may be consolidated with
      those of a local authority e.g. under Group Accounting proposals. Many readers had not
      picked up the move from guidance about the present in paragraphs C1 to C4, to speculation
      about the future from paragraph C5 onwards.




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6.6   To avoid similar confusion in the future it is proposed that the new guidance on accounting
      for partnerships will be restricted to guidance about how to account at the present time. No
      detailed reference will be made to future scenarios, although, readers may be made aware of
      planned future developments.


Q11     Do consultees agree that that the detailed new guidance on
        accounting for partnerships should be restricted to guidance about
        how to account at the present time?

Conclusion:

6.7   It is clear that although the recommended approach to accounting for partnerships very much
      reflects current practices the current BVACOP guidance needs to be updated and improved.

6.8   Part 7 will consider the detail of the improvements that need to be made.


Q12     Do consultees agree that the current guidance on how to account
        for partnerships (Annex C to Section 2 of BVACOP) needs to be
        replaced by a clearer and fuller guidance note?




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PART 7: WHAT SHOULD THE NEW GUIDANCE SAY AND LOOK LIKE?


7.1    As the sample of authorities visited were critical of the current guidance they were asked:

      What the new guidance should say and look like?
      What needs to be done to improve how partnerships are accounted for in order to promote
       Best Value?
      If they report more information about partnerships in the BVPP compared to the accounts?


What should the new guidance say and look like?

7.2    Table 5 details all the suggestions that were made by two or more authorities.

Table 5: Views about what the new guidance on partnership accounting should include.

                           Suggested Contents:                          Number of Authorities:
      Clearly state what the code applies to.                                     9
      Define what is meant by a partnership.                                      8
      Give “how to” examples or case studies.                                     5
      Explain how to deal with “in kind” contributions.                           3
      Be consistent with the “SORP”.                                              2
      Require notes that disclose partnership activity NOT require                2
      partners expenditure to be grossed into the councils accounts.
      Offer options. It should not be prescriptive.                                 2

7.3    The three most popular responses all really reflect the perception of authorities that the
       current guidance is unclear. This guidance that this consultation paper will lead to will clarify
       some of the uncertainty as it will:

      Clearly state that the scope of the guidance is Best Value reporting only. The annual accounts
       continue to be governed by the SORP.
      Include a definition of Partnership given in Part 2 above.
      Reject options (3 and 4) that do not follow the SORP.
      Recommend that notes be added to the BVPP to explain an authority’s involvement with
       partnerships. The possible contents of these notes are discussed below.
      Discuss which aspects of the guidance will be mandatory and what will be optional.

7.4    This leaves how to deal with In Kind contributions to partnership arrangements and the
       inclusion of case studies in the guidance notes as outstanding issues. Each is discussed below.

In Kind Contributions to Partnerships.

7.5    Table 1 (Part 1 above) showed that 11 of the sample authorities frequently offer support to
       partners in the form of subsidised premises or by donating the time of its officers. Often this
       type of support is offered to the voluntary sector. Seven of the authorities in the sample
       currently ignore the value of such contributions. Some justify this on grounds of materiality,
       others agree that it effectively understates the value of contributions to partnerships. How
       serious is this?
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7.6   Depending on the value of non-cash contributions involved a failure to account for the non-
      cash costs of partnerships could easily lead to poor decisions about whether to enter into or
      continue with an existing partnership. So as a matter of principle CIPFA would encourage
      authorities to include In Kind contributions in its appraisal of partnership arrangements. How
      to do this is the question?

7.7   The sample of authorities was asked how they would recommend that In Kind contributions
      were taken into account. Their responses are summarised below:

     One suggested that reports about partnership activity should describe the In Kind support
      without putting a monetary value on it.
     Three suggested that a bill should be sent to the partner for the premises used or officer
      support given. If the bill was not paid support could be withdrawn.
     Five suggested that the work to identify the costs would exceed the benefits of knowing them
      and would continue to ignore these costs if they had the option.
     Seven said that a fair premises rent or an appropriate hourly rate for officer time should be
      calculated and used as the basis for a dummy bill to the partner. The whole bill or the share
      that the authority was prepared to pay would then be paid by a dummy grant to the partner
      organisation.

7.8   The advantages of the last option are that it:

     Makes the full support to the partner organisation transparent.
     Is relatively easy to administer.
     Does not involve any risk that the debt raised will not be paid.


7.9   It is therefore proposed that the new guidance on accounting for partnerships will recommend
      that the value of In Kind support is calculated. The basis of the calculation should be
      commercial rates. The value of the authority’s contribution to the cost of in kind contributions
      should be recognised by the award of a grant up to the value of approved support. Any costs
      over and above the agreed level of grant should with the partners agreement be charged on an
      agreed basis. The obvious disadvantage of this is the administration necessary and it is
      possible to argue that partnerships will be picked up by the Best Value Review cycle and that
      establishing the full cost as a part of these reviews is sufficient.


      Do consultees agree that the value of In Kind contributions should be
      calculated on an ongoing basis?
Q13
      If yes:
       Should they be valued at commercial rates? and
       Once the value of the contribution is clear should the authority determine
          the level of In Kind support it is prepared to give to each partner and
          make a grant award up to the agreed value?




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Case Studies.

7.10 Since the recommended approach to accounting for partnerships very much reflects current
     practices it should be possible to provide case studies or examples where they add value to the
     explanation. Having said this some aspects of the guidance are straightforward and probably
     do not warrant case study illustrations. CIPFA will consider where case studies would
     significantly add value to the final guidance that it issues following this consultation exercise.

What needs to be done to improve how partnerships are accounted for in order to promote
Best Value?

7.11 The authorities made a wide range of suggestions. Table 6 summarises the suggestions that
     were made by two or more authorities.

Table 6: How to improve how partnerships are accounted for.

                          Improvement Suggested:                           Number of Authorities:
      Key issue is to compare the cost associated with particular                    8
      outputs i.e. national or local BVPI’s and supply a narrative
      explanation.
      Notes to the accounts/BVPP should detail the partnership                         9
      activity. This would be more informative than grossing costs
      and income into an authority's revenue accounts.
      To obtain consistency CIPFA or the DETR need to prescribe                        3
      exactly how partnerships should be accounted for.
      Regular reviews of the effectiveness of partnerships should be                   2
      carried out and reported.


7.12 A notable feature of the responses to this question was that no authority put forward the
     suggestion that the full cost of service delivery including the costs incurred by partners
     needed to be calculated. The attitude of authorities tended to be that costs will vary according
     to choices about methods of service provision i.e. an authority levering in more resources
     from partners should appear lower cost. The test is to compare that lower cost to the end
     outputs and outcomes.

7.13 Some authorities felt that suggestions that the costs of partners should be grossed into an
     authority’s accounts (option 4 earlier) in order that its costs would be comparable with an
     authority choosing to provide everything directly with its own staff could actually discourage
     innovation. These authorities reasoned that because the comparisons would not highlight, in
     cost terms, the benefits of an innovative partnering arrangement there would be less incentive
     to make the arrangement in the first place.

7.14 It is worth noting that research was carried out with the government representatives
     responsible for national partnership initiatives such as Sure Start, New Deal etc. It did not find
     any desire by government sponsors for local authorities to include anything in their accounts
     other that the expenditure or grant that they are responsible for. The bottom line for most
     sponsors is that local authorities must meet the grant conditions. Thereafter, their interest in
     local authority accounts ends.



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7.15 The responses were also quite supportive of the recommendation at the end of Part 5 (The
     option Appraisal) that the financial summary in the BVPP should be supported by notes that
     explain each authorities wider involvement in partnership arrangements. In order to gauge
     support for this suggestion authorities were asked:


    If they currently include additional notes about partnerships in their BVPP's?



Do authorities report more information in the BVPP compared to the accounts?

7.16 Part 5 recommended that notes about partnership activities should be added to local authority
     BVPP’s. None of the authorities consulted had reported anything more in its BVPP about
     partnership activity compared to its annual accounts, although, four said they planned to in
     the future. In each case the extra detail planned would be about the nature of, objectives of
     and performance of the partnership. The planned extra disclosure of information was not
     overtly financial.


7.17 The response to this question can be seen to be picking up on the theme from the previous
     question i.e. some authorities believe the key Best Value issue is not how much is spent.
     Rather it is what a Best Value Authority achieves in return for a particular contribution or cost,
     supplemented by notes that show how the local authority contributes more widely to the
     “Well Being” of its community as:

     The DETR would like to see.
     Is necessary to fully inform consultations.
     Is necessary to show comparisons in context.
     Is necessary to promote challenges to current service provision arrangements.


7.18 A key issue for consultees to consider at this point is the extent to which the best value
     performance reports of local authorities should:

   Only show what that authority has spent, earned and is accountable for.
   Attempt to show the full range of all the activities that the authority facilitates and or
    participates in even where it is not accountable which was the conclusion to Part 5 above.


7.19 Central to this debate is the existence of the Best Value Authority. Should the Best Value
     performance reports be restricted to the transactions of the Best Value Authority or does the
     promotion of Best Value justify a wider range of activities being included in the form of notes
     to the BVPP. Figure 7 gives an example from one authority of the type of perceived distortion
     that can occur under options 1 and 2.




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    The authority is involved with two theatres:

    It runs theatre A itself. It incurs all the costs associated with A and keeps income from ticket sales.
    It grant aids theatre B approximately £100,000 per annum. This effectively funds the theatre’s
    deficit.

    The authority pointed out that if another similar authority also supported two theatres, but, ran
    both internally, or grant aided both its gross costs and income would appear vastly different even
    though the two authorities were achieving a similar level of service for their respective
    populations.

    The authority was therefore keen that its performance reports disclosed the support it gives to
    theatres that it did not run.

    Figure 7: One authority's case for having additional notes about partnership activity.




7.20 There could be a wide variety of additional information in notes about a local authorities
     partnership arrangements and views are sought on what these notes should as a minimum
     include. The authorities visited have made the following suggestions:

     The objectives of each partnership?

     The Authority’s financial contribution to each partnership?

     The full costs of the authority’s involvement with the partnership including the costs of
      officer time supporting the partnership?

     The approximate spend by the partnership on local authority services?

     An indication of the outputs/outcomes from the partnership?




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        Do consultees agree that the BVPP should incorporate notes that explain an
Q14     authorities wider involvement in significant* partnership arrangements?

        If yes should the notes explain:

           The objectives of each significant partnership?                             yes/no
           The authorities contribution to each significant partnership?
               yes/no
           The full cost (including opportunity costs) of involvement with
            each significant partnerships?
                                                                                        yes/no
           The approximate spend by each partnership on local authority
            Services?                                                                   yes/no
           An indication of the outputs/outcome from each partnership?
                                                                                        yes/no
           Please list any other information that CIPFA should recommend
            is included in the notes to the BVPP.

        * In the context of a Best Value performance report significance has to be
        judged against the anticipated interests of the readers of the report. If the
        partnership is of interest because of its size or its purpose it should be disclosed.




Conclusion.

7.21 Responses to the questions in this part of the consultation paper will help to shape the new
     guidance on accounting for partnerships that will be issued to replace the current Annex C to
     section 2 of BVACOP. Notably it will affect:

     The approach to accounting for In Kind contributions to partnerships.

     The detailed guidance on what the partnership related notes to the BVPP should include.




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PART 8: GOVERNANCE ISSUES?

What are the main corporate governance issues that relate to partnerships?

8.1   The project brief asked that research into accounting for partnerships with authorities
      “identify key governance issues … for review and development by the Corporate Governance
      Panel.” The project brief stated that Partnership Governance was not a major part of this
      review. However, good governance requires good information so there are links between the
      governance of partnerships and the accounting information about them.

8.2   To identify the main Governance issues that relate to partnerships each authority was,
      therefore, asked what it considered to be the main governance issues. Additionally three
      authoritative documents on partnership working were reviewed:

     Building Effective Partnerships, by CIPFA (1997).
     Working Together – Creating a better environment for cross sector partnerships, by DEMOS
      (May 2000)
     A Fruitful Partnership, Effective Partnership Working – Checklist for action, by Audit
      Commission (November 1998)


8.3   Appendix 7 summarises very briefly the main messages from each of the publications that
      were reviewed. The three documents display some significant similarities. For example they
      all emphasise that:

     Decisions to enter into a partnership should be carefully evaluated to ensure the authority will
      benefit. This implies that very careful selection of partners is important.
     To be successful partnerships must benefit all the parties involved.
     To be successful partners must trust each other.
     To be successful clear objectives for the partnership should be identified from the outset.
     Structures to manage the partnership and report its activities to the partners are crucial.
     Review mechanisms including knowing the true costs (direct, indirect and opportunity) of
      partnerships are important.
     Partnership reviews should result in learning and adaptation of the partnerships.


Links between partnership governance and accounting for partnerships.

8.4   Parts 1 to 7 have shown:

     That at present the financial information that most local authorities have would not fully
      inform the identification of the financial benefits of each partnership. This clearly affects the
      decisions to enter partnerships and their on going evaluation.
     Local authorities often doubt that partners are willing or able to supply reliable information.
      This highlights a possible lack of trust between partners and suggests that the selection of
      partners should include an evaluation of the ability to provide information that facilitates
      ongoing monitoring of the effectiveness of the partnership.

8.5   These findings lend further weight to the earlier recommendations that extra information
      should be collected about significant partnerships and included in the notes to the BVPP
      because:
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     The discipline required to identify what information needs to be collected will make each
      partner focus on what the joint objectives of the partnership are.
     The discipline needed to collect the information identified will also provide information to
      that will inform management decisions about whether to enter into new partnerships or
      continue with existing ones.
     The exchange of information by the partners should develop the openness and trust that has
      been identified as crucial to the success of partnerships.

8.6   Table 7 summarises the responses given by the sample of authorities visited.

Table 7: Partnership governance issues and practices identified.

                              Governance Issue                            Number of Authorities
       Clear partnership agreements are needed from the start.                     9
       A strategic approach is required. A central group is needed to
       co-ordinate and monitor partnership activity.                                  2
       Need internal guidance for officers about partnership working.                 4
       Need to ensure Best Value Reviews cover partnerships.                          3
       Need to assure audit access rights where the authority is the
       “accountable” body.                                                            3
       Ensure members or officers are on the Boards etc. of
       partnership bodies.                                                            4
       Ensure members or officers that are on the Boards etc. of
       partnership bodies have guidance on potential conflicts of                     6
       interest.

8.7   Table 7 contains several very practical suggestions for governing partnerships effectively. In
      terms of accounting for partnerships it shows that authorities are acutely aware of the need to
      carefully manage and monitor partnership agreements. This awareness highlights that to
      properly evaluate partnership arrangements authorities need financial and other performance
      information about the partnerships that is not available within a local authority’s accounting
      and other information systems. This further emphasises the need to collect additional
      information about partnerships to ensure that they are adequately governed and evaluated.

Conclusion.

8.8   The research of partnership governance issues carried out to inform this review of accounting
      for partnerships has identified:

     A number of interesting issues that the CIPFA Corporate Governance Panel can consider and
      further develop.
     That the information that this paper has recommended be collected for inclusion in notes to
      the BVPP about partnership activity is an essential component of good partnership
      governance arrangements, in addition to informing consultation and comparisons.

      Q15
              Consultees are invited to put forward any other views or issues that they
              would like the Corporate Governance Panel to consider?



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PART 9: WHAT IS THE STATUS OF THE GUIDANCE?

9.1   The new guidance on how to account for partnerships will, like the rest of the BVACOP be
      recognised as Proper Practice with regard to consistent reporting below the financial
      accounts level. Statutory guidance issued under sections 5 and 6 of the Local Government Act
      1999 (DETR Circular 10/99 and Welsh Assembly circular 14/00) confirms this position.

9.2   There is, however, still the question of what is mandatory and needs to be stated in the text of
      section 2 of BVACOP and what is optional and will only need to be outlined in the revised
      Annex C to section 2 of BVACOP.

9.3   The Consultation paper contains many detailed points, but fundamentally it asks consultees
      two key questions. First it asks consultees to choose the basis on which costs will be recorded
      in the accounting records of the authority and, therefore, form the basis for all key financial
      reports including:

     The financial summary in the BVPP.
     The Service Analysis included in the Consolidated Revenue Account.
     The national and local BVPI’s.


9.4   The choice is between option 1 (Stewardship Option) and option 2 (Accountability Option).
      Once the choice is made CIPFA believes that it should be mandatory that all local authorities
      account for partnerships on the same basis to safeguard the integrity of comparisons between
      authorities.

9.5   Second, it asks consultees to help shape the detail of the supplementary notes to the BVPP
      about the wider partnership activities of a local authority. These notes will give information
      over and above that which the authorities have in their own financial management
      information systems. As such the ability to report the information that is recommended will
      not be fully under the control of the authority. CIPFA therefore feels that:

     The inclusion of notes in the BVPP should be a recommended best practice, not mandatory.
     The detailed contents of the notes can only be for guidance as an authority may not be able to
      comply with the recommendation through no fault of its own.



Implementation Date.

9.6   It is proposed that the new guidance on accounting for partnerships is accounting periods
      starting on or after 1/4/2001. The first BVPP covered will be for 2002/3.




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Q16     Do consultees agree that:

           The chosen option for accounting for the partnership transactions
            that are included in the definition of total cost should be
            mandatory?
           There should be a best practice recommendation to include
            supplementary notes to the BVPP about each material partnership
            arrangement?
           The detailed contents of the supplementary notes to the BVPP
            about partnerships should be for guidance only?
           Compliance with the new guidance should be for accounting
            periods starting on or after 1/4/2001. The first BVPP covered will be
            for 2002/3?


Future Developments.

9.6   Finally Appendix 6 (A preliminary discussion paper from the CIPFA/LASAAC on the
      options for developing Group Accounting for Local Authorities) is included to give
      consultees a view of how local authority accounts could look if Group Accounts were
      adopted. Consultees are invited to comment on the applicability of Group Accounts to local
      authorities.


Consultation Responses.

9.8   Consultees should note that all responses should be returned to CIPFA by the end of 8
      January 2001.




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                                                                         APPENDIX 1

                              SAMPLE OF AUTHORITIES CONSULTED

                 Visit                       Type         Date Visited
                Eden DC                     District       30/5/2000

         South Bedfordshire DC              District       13/6/2000

              Stevenage BC                  District       23/6/2000

              Coventry City               Metropolitan     30/6/2000

            Birmingham City               Metropolitan     19/6/2000

               Leeds City                 Metropolitan     1/6/2000

               LB Lambeth                London Borough    27/6/2000

              LB Lewisham                London Borough    21/6/2000

           LB Tower Hamlets              London Borough    20/6/2000

               Reading BC                   Unitary        12/6/2000

         Surrey County Council              County         21/6/2000

        Cambridgeshire County               County         21/6/2000.

                 Newport                     Welsh         26/6/2000

            Glasgow Council                 Scottish       4/7/2000

           Edinburgh Council                Scottish       5/7/2000

         Thames Valley Police             Police Force     9/8/2000




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                                                                APPENDIX 2

                              SITE VISIT RECORD PRO-FORMA
Authority:                                     Date

Contact(s)

      Partnership Questions:                          Answer:

Define a partnership?

When does a cross cutting issue
become a partnership in your view
or definition?

What     partnerships    is    your
Authority currently involved in?


How is each type of partnership
constituted? e.g. a:

   Trust.
   Industrial & Provident Society.
   Company.
   Joint board.
   Joint committee.
   Advisory group/steering group.
   Joint consultative committee.
   Partnership with suppliers
   Grants given
   In Kind Support e.g. Free use
    of premises.
   Etc. note others down.

What plans do you have to enter
into new partnerships in the future?


If no specific plans would you
expect partnership activity to
increase or decrease?

What criteria would you use to
decide whether it was beneficial to
enter a partnership rather than
provide a service independently?

How do you currently account for
the costs and benefits of each type
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of partnership?

Probe the systems that are used e.g.
time sheets, other returns from
partners, cost benefit analysis etc.

Do you account for different types
of partnerships in different ways?



Do you account for partnerships
differently in your BVPP (or other
reports) compared to the annual
accounts?

(Expect SRB accountable bodies
will)

What is your view of the current
guidance (Annex C) in the
BVACOP?


What questions do you feel it
leaves unanswered?


How do you/could you deal with:

Partners that have to comply with
different accounting regulations?
(e.g. NHS Trusts Manual of
Accounts)

Partners that have a different
financial year?

Partnerships        where      your
contribution is not a monetary one?
e.g. free use of an asset.

A partnership generating intangible
extra resources e.g. volunteers
time.



Do you feel that in best value
reporting terms any of your
practices need to improve to:

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   Promote the 4 C’s
   Show      full    picture       to
    stakeholders

What particular issues arise when
you have a partnership with:

One or more other LA?

One or more private companies?

One or more voluntary sector
organisations?

A combination          of     different
organisations?

Form a company to carry out the
partnership?


What other partnership issues you
would like to discuss?

As a minimum ask about:
 The main Governance and
   Monitoring issues that CIPFA
   guidance should cover?


   The role and validity of Group
    Accounts as the main basis for
    reporting Partnership activity?




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                                                                                     APPENDIX 3



                                STATEMENT OF PRINCIPLES

                                               FOR

                     BEST VALUE ACCOUNTING - CODE OF PRACTICE



OVERALL OBJECTIVES

The aim of this code is to modernise the system of local authority accounting and reporting to
ensure that it meets the changed and changing needs of modern local government; particularly the
duty to secure and demonstrate best value in the provision of services to the community. It will
provide guidance on financial reporting for stakeholders but will exclude guidance on the Statement
of Accounts as the existing Code of Practice on Local Authority Accounting in Great Britain
(Statement of Recommended Practice (SORP)) provides the definitive guidance on the production
and content of the Statement of Accounts.

The overall framework adopted (see appendix 1), will support the objective to establish the widest
range of financial reporting requirements, in order that data consistency and comparability is
achieved. The Best Value Accounting Code of Practice will in particular aim to meet the demands
of the best value regime and its various stakeholders.

The Best Value Accounting Code of Practice will be developed from the following key principles,
which are based on the key issues identified in the consultation paper ’A Modernised Framework
for Local Authority Accounting – Accounting for Best Value’; and based on the responses received
to the consultation exercise. It is recognised that the overall framework will need to be responsive
to change and the guidance provided within it will need to be dynamic in nature.




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           STATEMENT OF                                   ADDITIONAL INFORMATION
             PRINCIPLES


1     The Best Value Accounting         It will complement the SORP to ensure consistent financial
      Code of Practice should be         reporting below Statement of Accounts level.
      recognised as “proper
      accounting practice”.             It will not cover “internal management accounting” or “budgeting”
                                         other than when this information is used to produce the financial
                                         reporting data required by the various best value reporting
                                         mechanisms. In such circumstances its principles should be
                                         followed.

                                       [internal management includes primarily accounting for decision
                                       making]


2     The REPORTING                        Harmonisation of information requirements for the Statement of
      REQUIREMENTS for                       Accounts, Best Value Performance Plans, Individual Performance
      financial, statistical and             Indicators (Pi) and statistical returns will be aimed for
      performance purposes should
      be harmonised wherever
      possible.
                                        
3     The definition of TOTAL              Total Cost will be defined in both gross and net terms with rules
      COST will be consistent with           developed to deal with the treatment of exceptional income and
      the financial accounting               abatement of expenditure
      framework established by the
      SORP.                             Capital charges will be included within Total Cost

      The definition of Total Cost         Corporate and Democratic Core will be split into Corporate
      will include all support               Management and Democratic Management and Representation
      service costs and capital              with clear and explicit guidance on the scope of these activities.
      charges. The non-allocable             The latter should include all councillor-based activities.
      costs will include a redefined         Consideration needs to be given to determining a contribution
      Corporate and Democratic               from the HRA and other principal non general fund activities
      Core and clearly defined               (e.g. pension funds) to these costs.
      unapportionable overheads.           Unapportionable overheads should be retained and further
                                             consideration be given to more items being included.
                                           SSR should be abolished as a general principle and replaced only
                                             where service specific requirements demand it e.g. strategic
                                             management for schools

                                            Reporting of Total Costs at a level below that specified in the
                                             Segmental Reporting Guidance should follow the principles set
                                             out within the Total Cost guidance (eg for individual Pi)




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4     There will be SEGMENTAL           Segments of service should be defined at the lowest practical
      REPORTING of Total Costs.          possible level with the objective of them being sufficiently flexible
                                         to have multipurpose uses including the focusing on service
                                         outcomes on a cross cutting basis. This requires higher quality
                                         definitions than are currently available.

                                        The Accounting for... series and the DETR RO/CO forms reflect
                                         many years of development and provide a good starting point.

                                        This system will be designed on an objective basis but a broad
                                         system of subjective analysis should be retained for the purposes
                                         of input analysis for whole authority and national statistics.

                                        The approach should facilitate rather than inhibit comparisons
                                         with equivalent private sector providers.


                                       
5     TRADING ACCOUNTS                       An alternative description to trading accounts should be
      should be maintained for all             considered.
      services subjected to external
      competition or offering a              Trading accounts should continue for all existing CCT services
      service at a quoted price.               until the end of the current contract period unless the method of
                                               service provision is significantly altered
      [England and Wales only - in           Trading accounts should be an integral part of local authority
      Scotland existing                        accounts but not subject to the separate reporting regime of CCT
      arrangements apply]                      accounts
                                            The use of internal recharging of support services on a
                                               predetermined cost basis for internal management purposes
                                               should be excluded from the requirement to produce trading
                                               accounts.


                                       
5A    The guidance on the                     There should be a materiality threshold for the separate reporting
      reporting of TRADING                     of trading account information.
      ACCOUNTS will be dealt
      with in the Code of Practice     
      on Local Authority
      Accounting in Great Britain
      (the SORP)




6     PARTNERSHIP AND                   Clear criteria required for when partnership accounting is to be
      JOINT WORKING                      used
      ARRANGEMENTS will be
      accurately and consistently       Consistency must be achieved between the Statement of Accounts
      accounted for.                     and the reporting of Total Cost
      .
                                       
7     The Best Value Accounting         A formal review mechanism should be recommended
      Code of Practice should be
      reviewed on a regular basis.




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                                                                           APPENDIX 4


                ALTERNATIVE DEFINITIONS OF PARTNERSHIP

Definition 1:

“At the centre of the idea of partnership is collaboration. Partners retain separate
identities, but they work together to meet a common goal. They share both objectives and
rewards.”


Source: Jupp Ben (2000) Working Together –Creating a better environment for cross-
sector partnerships, DEMOS, p13 and attributed to Michael Clarke and John Stewart.


Definition 2:

“A partnership is a voluntary relationship between two or more free and independent
parties which is designed to secure some shared objective. It can take all sorts of forms,
but is generally assumed to exclude the familiar relationships between client and
contractor, and between employer and staff.”


Source: Partnership Directory, (2000) CIPFA Advisory Service on Best Value and
Quality


Definition 3:

“A local authority partnership is a process in which a local authority works together with
partners for the purpose of delivering services for which the Local Authority has a
statutory duty to provide, in order to achieve better outcomes for the local community, as
measured by the needs of the local stakeholders, and involves bringing together or
making better use of resources. This working together requires the development of a
commitment to a shared agenda, effective leadership, a respect for the needs of the
partners and a plan for the contributions and benefits of all the partners. The dynamic
aspect of the process requires specific goals of partnership working to be identified,
performance to be evaluated and the assessment of the continuing fit between partnership
activities and community needs and priorities.”

By local stakeholder Newchurch mean business, the voluntary sector and other local
people.

Source: Published by Newchurch, 2 November 1999.




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                                                                         Appendix 5
                            A Brief Summary of
                     UK GAAP Group Accounts Disclosures:

  Type Of Partnership     Relevant              Disclosure Required
                            FRS
Subsidiaries              FRS 2      Trading, assets and liabilities of the parent
                                     and the subsidiary should be presented as if
                                     the group was a single entity. All internal
                                     trading and balances between the parent
                                     and the subsidiary should be eliminated.

Quasi-Subsidiaries        FRS 5      Trading, assets and liabilities of the parent
                                     and the subsidiary should be presented as if
                                     the group was a single entity. All internal
                                     trading and balances between the parent
                                     and the subsidiary should be eliminated.

Associates                FRS 9      Parents share of:
                                      Operating Profits.
                                      Interest.
                                      Exceptional items.
                                      Taxation.
                                      Net Assets

Joint Ventures            FRS 9      Investors share of:
                                      Turnover (distinguished        from    the
                                        group).
                                      Operating profit.
                                      Interest.
                                      Exceptional items.
                                      Taxation.
                                      Gross assets.
                                      Gross liabilities.

Joint Arrangements        FRS 9      Each party to the joint arrangement
                                     accounts for its own share of:
                                      Turnover.
                                      Trading results.
                                      Assets.
                                      Liabilities.


Appendix 6 gives CIPFA/LASAAC’s first thoughts on how group accounts could be
developed to apply to local authorities.


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                                                  APPENDIX 6




                 A PRELIMINARY DISCUSSION PAPER
              FROM THE CIPFA/LASAAC JOINT COMMITTEE
                  ON THE OPTIONS FOR DEVELOPING
             GROUP ACCOUNTING FOR LOCAL AUTHORITIES




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INTRODUCTION

1. The requirement for local authorities to produce group accounts was introduced under
the Code of Practice on Local Authority Accounting (the SORP) for accounting periods
commencing 1 April 1996. Changes in statutory regimes, in particular Best Value and the
modernisation agenda in local government, have raised partnership arrangements from a
peripheral factor to a cornerstone of local authority working.

2. The current Best Value Accounting Code of Practice was written on the assumption
that Group Accounting will be developed further within the SORP and used to support
Best Value accounting arrangements (e.g. paragraph 2.20). The Consultation Paper on
Accounting for Partnerships in the Context of Best Value has thrown this issue into sharp
relief. This paper, issued on behalf of the CIPFA/LASAAC Joint Committee, seeks to
respond by setting out some of the issues surrounding the development of group
accounting and sketch a way forward. It will also help to inform responses to CIPFA’s
consultation paper Accounting for Partnerships in the Context of Best Value.

GROUP ACCOUNTING IN THE PRIVATE SECTOR

3. It is not the purpose of this paper to set out in detail the requirements of generally
accepted accounting practice within the UK (GAAP). However in order to explain the
context in which developments to local authority accounting practices take place a
simplified summary is provided in this section.

4. Under FRS 2 a company/other entity that has subsidiaries is required to prepare group
accounts, if it:

   Controls a majority share holding in the subsidiary,
   Can appoint a majority of its directors, or
   Exercises a dominant influence over the subsidiary.

5. The group accounts are prepared as though the group is, in effect, a single company,
with the effect of intra-group transactions and balances being eliminated. FRS5 Reporting
the Substance of Transactions widens the meaning of ‘dominant influence’ as set out in
FRS2 through the introduction of the concept of a ‘quasi-subsidiary’. A ‘quasi-
subsidiary’ is a company, trust, partnership or other vehicle that, though not a subsidiary,
is directly or indirectly controlled by the reporting entity and gives rise to benefits for that
entity that are in substance no different from those that would arise if it was a subsidiary.

6. Under FRS 9 a company/other entity has an associate company if it holds a significant
minority interest and exercises significant influence in another company. The investor
company includes in its group accounts its share (in proportion to its equity holding) of
the associate’s results and assets, after exclusion from the associate’s accounts of the
profit or loss element of any transactions between the two companies. Balances between
the companies are not eliminated on consolidation, however. This technique is known as
the “equity method”. A joint venture company (one in which the investor exercises joint


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control with one or more other parties) is accounted for in a similar way, but with
additional disclosures. However where a partnership is merely operating through a joint
arrangement that is not an entity in its own right, each participant accounts for its own
assets, liabilities and cash flows, measured according to the terms of the agreement
governing the arrangement.

LOCAL AUTHORITY REQUIREMENTS

7. Section 6(1) of the Accounts and Audit Regulations 1996 requires the preparation of
local authority accounts on a “consolidated” basis in England and Wales. Equivalent
requirements apply to Scotland and Northern Ireland. However this requirement is
generally held to refer to the different funds of the authority, rather than to its interests in
other entities. The requirement for local authorities to prepare group accounts thus arises
from the statutory requirements that they follow proper accounting practice, as set out in
the SORP.

8. The SORP sets out the requirement for local authorities with, in aggregate, material
interests to prepare group accounts, i.e. a revenue account and balance sheet, as
supplementary statements. Pension and trust funds administered by the authority are
excluded from the group accounts. The basis of consolidation differs from UK-GAAP in
that instead of the profit and loss account and balance sheet figures of subsidiaries being
added together on a “line by line” basis they are accounted for using the equity method.
This mirrors the consolidation of associates and joint ventures. Local Authority group
accounts start with the authority’s Net Cost of Services, and the results of group
companies are set out within Net Operating Expenditure, analysed by service where
applicable.

9. The SORP specifically excludes Trusts and similar Funds (and, in Scotland, the
‘common good’) from the group accounts even where an authority exercises ‘dominant
influence’ over such Funds. This represents a departure from GAAP, where such Trusts
and Funds would be considered ‘quasi-subsidiaries’.

10. Where it is judged necessary for fair presentation subsidiaries can be consolidated on
a “line by line” basis additional disclosures are required to show where statutory
requirements impact on the content of the accounts.

POSSIBLE DEVELOPMENTS & ISSUES

11. The CIPFA/LASAAC Joint Committee believes it is desirable to bring local authority
accounting as closely into line with GAAP as possible. Accordingly it is now thought
necessary to look again at the arrangements for local authority group accounts. A number
of possible approaches are discussed below.




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Enhancing the Status of Group Accounts

12. As partnership working of all kinds becomes more common the importance of group
accounting will increase. To reflect this the status of group accounts should be raised. At
present the SORP states that group accounts are supplementary information. Stating that
group accounts are primary statements would most easily raise their status. However
where authorities do not prepare group accounts on the grounds of materiality this would
not lead to greater use of group accounts.

Increased Disclosures

13. At present the SORP requires only that a group revenue account and group balance
sheet be prepared, along with necessary supporting information. The preparation of a
group cash flow statement and statement of total movements in reserves is currently
discretionary. These statements could be made mandatory elements of the group
accounts. This would bring local authorities financial statements closer into line with
GAAP.

Developing the Materiality Concept

14. Successive Audit Commission Annual reports on Stewardship and Governance have
suggested that few local authorities prepare group accounts. This may, in part, be due to
the current materiality threshold. The threshold, described in paragraph 7 above, echoes
that in FRS2. However local authority subsidiaries, joint ventures and associates are often
local or limited in scope, and may be involved in only one service of the authority. As
such they are individually very unlikely to be material to the authority as a whole, and in
large authorities may not be material in aggregate.

15. The current approach has tended to be applied by viewing materiality quite narrowly,
in relation to the ‘bottom line’. A wider view of materiality may be required, which
emphasised a comprehensive view of the ways in which stewardship has been exercised.
This accords with the view of materiality taken in the ASB’s Statement of Principles for
Financial Reporting and the ‘qualitative’ view of materiality in SAS210. Such an
approach would be justified if this better reflected the specific circumstances of the local
authority sector.

16. Anecdotal evidence suggests that a related reason why many authorities are not
preparing group accounts is that share holdings are frequently below that suggested as the
guideline for associate status (20%). This may be because authorities in England and
Wales frequently keep their equity holding below this level, to avoid the company
becoming “regulated” by the Local Authorities (Companies) Order, or because influence
is exercised in other ways (e.g. the appointment of members to the board, falling short of
subsidiary status).




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17. Because of the specific circumstances of local authorities the ‘threshold’ approach
may be too narrow. There is a case for adopting an approach that stresses the requirement
for group accounts is based on a judgement on the significance of the relationship and the
level of control or influence, not on crude mathematical thresholds. This approach would
be compliant with the intent of GAAP in recognising the substance of the relationship.
However there could be considerable practical difficulties in determining an authority’s
share of such other entities where influence was exercised without an equity stake.

‘Groups’ Without Subsidiaries

18. There is no requirement in the Companies Act for a company without subsidiaries,
but with associates/joint ventures, to prepare group accounts. However FRS9 does
require that in such a case the information relating to associates/joint ventures that would
be included in Group Accounts (if they were required) be disclosed. This is potentially
very relevant for local authorities, where joint ventures or similar arrangements are
increasingly common, but subsidiaries may be less frequently encountered.

19. Where an authority’s involvement in other entities was in the form of joint ventures it
could be argued that preparing group accounts would be misleading, as it could be seen
as implying a level of control that was greater than the control actually exercised by the
authority. The requirements of Best Value may be that unless joint ventures/associates
are included, the requirement to report total cost may not be achieved. Therefore there
may be a need to require the production of group accounts even where no subsidiaries
exist. This requirement would not be entirely beyond UK GAAP as FRS9 allows for the
disclosure of joint venture/associate data through the preparation of additional financial
statements.

Adopting Full Consolidation

20. At present local authorities’ subsidiaries are being not consolidated strictly according
to the requirements of GAAP. If the SORP were to require use of the full consolidation
for subsidiaries this would bring local authority practice much more closely into line with
GAAP. Such a development would not be complete adoption of GAAP, as differences in
accounting policies (e.g. capital accounting) would affect the manner of consolidation.
More consideration of how a subsidiary that did not relate to a particular service could be
consolidated, and how a relationship with more than one service could be satisfactorily
dealt with but similar issues are encountered in other sectors and practical solutions
found.

Full Inclusion in Services

21. It would also be possible to include subsidiaries, associates and joint ventures in
service lines, using the equity method. The main advantage of this would be to show the
full cost of the group’s activities in a given service area. This is the option advocated in
the current Annex C to the Best Value Accounting Code of Practice in that it would allow
the definition of “total cost” to be adjusted to include group items.



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22. Including associates and joint ventures in service lines would not accord with UK
GAAP, in that associates and joint ventures are identified separately in group accounts.
To address this concern these items could be included within net cost of services, both
shown separately and associated with a specific service. This could be achieved by a
form of columnar presentation, an example of which is at Annex 1. (Because this format
still uses the equity method the treatment of group entities in the other group financial
statements would not change from the current treatments).

23. Group entities not attributable to any service present few problems for Best Value, as
their consolidation would by definition not impact on any service. Such entities could be
accounted for within Net Operating Expenditure, as at present. Group entities attributable
to more than one service present considerable difficulties. Two solutions to this issue
present themselves:

   Allow “unattributable” group entities to be accounted for within Net Operating
    Expenditure. However certain group structures could result in items not being
    included in “total cost” under this option.
   Require “unattributable” group entities to be apportioned across services. This would
    cause difficulties in achieving comparability unless the method of apportionment was
    rigorous.

Other Issues

24. A key conceptual issue is the treatment of group surpluses and losses. Where a local
authority group included loss-making group entities the group revenue account could
show an overall deficit for the year. Equally an authority showing a General Fund deficit
could be converted into a group showing an overall surplus. Although the Consolidated
Revenue Account for the authority would presumably continue to be the main regulatory
tool, the likely use of group accounts in best value (see paragraph 2) would make this a
potentially significant issue for a few authorities.

25. The Government Resources & Accounts Act 2000 provides for the eventual inclusion
of local government within the scope of Whole of Government Accounts. The approach
taken by the Government’s Resource Accounting Manual goes beyond GAAP in that it
sets two additional tests that must be satisfied before an entity is treated as a subsidiary,
associate or joint venture. The first criteria is a that the entity is not on a list of excluded
types of entity. The second is that the entity is subject to in-year budgetary and spending
controls by the government department. This is a significantly narrower approach than
that in the SORP, and it is not clear how these approaches could be reconciled.

26. The Joint Committee would welcome authorities’ views on the appropriateness of
including trusts and similar funds and, in Scotland, the ‘common good’ in local authority
group accounts where the level of influence exercised is dominant.




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PRACTICAL ISSUES

27. The CIPFA/LASAAC Joint Committee is acutely aware that there may be significant
practical issues in the extension of group accounting facing authorities. Two issues in
particular have been identified, and these are discussed below:

Information Capture.

28. Where an authority has a subsidiary company it would not normally be difficult to
procure the information necessary to conduct a consolidation. However in a few cases
where the authority has an associate or joint venture this could be more complex. This
issue is addressed in FRS9, which states that in such cases preparers of accounts should
consider whether they do, in fact exercise significant influence or joint control. The
CIPFA/LASAAC Joint Committee recognises that, as such arrangements will often
involve commercial partners, there may be difficulties in gathering commercially
sensitive information.

29. A particular aspect of this issue is the requirement upon local authorities to prepare
their accounts within 6 months of their year-end date. A form of group accounting, when
coupled with the requirement for more detailed accounting statements for the local
authority itself, could lead to an added burden on some authorities.

30. The Joint Committee would be interested to hear the views of practitioners on:

 Whether it was felt likely that gathering the required information would present
authorities with particular problems.
 The practicality of producing group accounts by the deadline set by the regulations
applicable for their territory (30 September for England and Wales).

Skill Base

31. It is unclear how much practical experience of group accounting exists in local
government. Small authorities with limited accounting resources, in particular, may have
difficulty accommodating further complex changes at a time of already considerable
upheaval. The Joint Committee would also be interested in hearing practitioners’ views
on workload implications and on the training or guidance practitioners might need.




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THE WAY FORWARD

32. The CIPFA/LASAAC Joint Committee has decided that there have not been
sufficient developments in the wider accounting standards context to warrant a new
edition of the SORP for 2001. Such adjustments to the SORP as are necessary will be
issued by way of a bulletin. As a result no change to the group accounting requirements is
planned for implementation before the 2002 SORP.

33. For reporting periods starting on or after 1 April 2002 the Joint Committee is minded
to increase the status of the group accounts to that of principal financial statements for all
authorities with material group interests. They would not replace the authorities own
statements but would be expected to have substantially equal prominence in the annual
statement of accounts. At this stage the Joint Committee is minded to move towards
GAAP, and facilitate the inclusion of group items within total cost, possibly by
introducing a columnar presentation.

34. The Joint Committee welcomes the views of authorities, practitioners and other
stakeholders. Responses could address possible developments in the form and content of
group accounts, the legal or practical issues, or any other aspect of group accounting.
Further consultation will be undertaken as work in this area progresses. Comments may
be addressed to Kieran Rix, Technical Manager (Accounting & Financial
Reporting) at CIPFA.




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                                                                                        ANNEX 1

A Possible Format for the Local Authority Group Revenue Account

                                           Authority     Subsidiaries    TOTAL        Consolidated
                                            Only         Associates & (Authority       Revenue
                                                        Joint Ventures & Group)         Account
                                            £'000            £'000        £'000          £'000
Education                                     11,267                 100     11,367
Highways & Transportation                      2,205                   -      2,205
Social Services                                6,425                   -      6,425
Waste Collection & Disposal                    2,302             (1,100)      1,202
Other Services                                 3,316                   -      3,316
Net Cost of Services                          25,515             (1,000)     24,515          25,515

Share of Other Group Entities:
                       Subsidiary, Y Ltd                                      (910)
Transfer from AMRA                                                          (1,683)         (1,683)
Interest & Investment Income                                                  (103)           (493)
Net Operating Expenditure                                                   21,819          23,339

Contribution To Capital Reserves                                               652              652
                                                                            22,471           23,991

Revenue Support Grant                                                      (11,078)        (11,078)
Non Domestic Rate                                                           (7,353)         (7,353)
Council Tax                                                                 (5,560)         (5,560)
(Surplus)/Deficit for the Year                                              (1,520)               0

Reserves at 1 April 2002
General Fund Reserve                                            12,427                       12,427
Share of Subsidiaries' Reserves                                  2,250
Share of Associate's Reserves                                      125
                                                                            14,802

Reserves at 31 March 2003
General Fund Reserve                                            12,427                       12,427
Share of Subsidiaries' Reserves                                  3,870
Share of Associate's Reserves                                       25
                                                                            16,322

Because this format uses the equity method the treatment of group entities in the other
group financial statements would not change. The Consolidated Revenue Account
Line is included in the above for information only.

(See over for the group accounting data used to prepare this example.)




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Group Accounting Data

Local Authority Interests
                                         X              Y              Z
                                       £'000          £'000          £'000
Percentage Stake                          100%            70%            25%
Valuation in LAs Balance Sheet              200            700          1,000
Dividend Received                           250            140              0

Status                              Subsidiary     Subsidiary     Associate
Related to Service                  Waste          None           Education
                                    Collection

Other Interest & Investment Income = £103,000

Company Accounts
Net Assets                                 4,610          2,800         4,100
Share Capital                              2,000          1,000         4,000
Profit & Loss Account                      2,610          1,800           100

Profit/(Loss) After Tax                    1,100          1,300         (400)
Dividend                                     250            200             -
Retained Profit                              850          1,100         (400)
Profit & Loss Account B/f                  1,760            700           500
Profit & Loss Account C/f                  2,610          1,800           100




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                                                                        APPENDIX 7

   BRIEF SUMMARY OF COMMON PARTNERSHIP GOOD PRACTICE
             RECOMMENDATIONS MADE BY THE
            AUDIT COMMISSION, CIPFA AND DEMOS

  Audit Commission (1)               CIPFA (2)                      DEMOS (3)
Have a clear reason to seek Know your own strengths         Ensure all partners will
a partner.                  and the reasons for             benefit (including your own
                            entering a partnership.         organisation).
                            Ensure      an       internal
                            commitment          to      a
                            partnership         approach
                            exists.
Identify        appropriate Identify        appropriate     Ensure all partners will
partners carefully.         partners carefully.             benefit      (including   all
                                                            partners).
Establish    a     suitable    Make the partnership work Structures are important but
structure      for      the    by establishing plans, must be flexible and meet
partnership.                   structures and monitoring local needs.
                               arrangements.
Set clear     and   mutual     Set clear shared objectives Develop clear objectives and
objectives.                    and     trial   run     the an action plan to meet the
                               partnership.                 objectives.
Delegate sufficient power      Make the partnership work
to the partnership so it can   by establishing plans,
decide and act.                structures and monitoring
                               arrangements.
Build trust at every           Build trust during the trial Understand the different
opportunity.                   run.                         cultures and build trust.
Review success including       Review success.              Build in evaluation of the
the identification of costs                                 partnership.
(direct,    indirect   and
opportunity) and benefits.
Learn from experiences.     Look to the future.



The above is a very brief summary of the points of similarity between three
authoritative practitioner guides to partnership working. In each case a full
appreciation of the contents can only be achieved by reviewing the original
documents:

1. A Fruitful Partnership, Effective Partnership Working – Checklist for action, by
   Audit Commission (November 1998)
2. Building Effective Partnerships, by CIPFA (1997).
3. Working Together – Creating a better environment for cross sector partnerships,
   by DEMOS (May 2000)



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