item 7 ISA 260 RESPONSE by VII9jovw


									                                                                   BLACKPOOL COUNCIL
                                                      2010/2011 ISA 260 - MANAGEMENT RESPONSE

Number Risk                                 Issue and Recommendation                                                Management Response

  1     1     Land and building revaluations - strategic assets
              For 2010/11, the Authority has valued the Tower and Winter Gardens using the      Formal paper to be produced stating the basis of
              Depreciated Replacement Cost (DRC) methodology.                                   valuation for these assets and justification for that
              This has resulted in an increase of £13.1 million for the Tower and £54.3
              million for the Winter Gardens when compared to 2009/10.                          Paper to be presented to KPMG by mid February 2012
                                                                                                for response by end of February 2012 before any
              The Code of Practice 2010/11 indicates that all land and buildings, should be     valuations take place.
              valued at fair value based on existing use value (EUV). DRC should only be
              used if EUV cannot be determined.
                                                                                                Officers Responsible:
              Whilst we accept that there are some difficulties in valuing these strategic      Stephen Waterfield and David Fish
              assets at EUV, we believe that the cost of the assets represents a fairer value
              than DRC. The Authority accepts this position and has therefore reverted to
              holding these assets at cost adjusted for depreciation and additions.

              We recommend that management prepare a paper setting out the chosen
              valuation method, clearly explaining how this complies with the latest Code of
              Practice. We would expect all four assets to classified as ‘other land and
              buildings’ and to be valued at fair value based on EUV.

              If it is not possible to value the assets at EUV, the reasons should be clearly
              explained and we recommend that the Authority seek the opinion of an
              independent valuer to support this position.
Number Risk                                 Issue and Recommendation                                                 Management Response

  2     2     Land and building revaluations - other
              Valuations of land and buildings must comply with IFRS and Code of Practice
              accounting rules. UK GAAP and SORP guidelines have been superseded.

              We identified several errors in the valuation of land and buildings due to
              non compliance with the Code of Practice 2010/11. These can be categorised
              into three groups:

              a) Community Assets: Community Assets should not be revalued, they                 An action point has been included in the year end project plan
              should instead be held at depreciated historic cost. Our audit work has            that these assets are not revalued.
              identified that the Authority has revalued one Community Asset in error.

              b) Investment Properties: Investment Properties should be revalued                 Finance and Asset & Estates officers to liaise over the timing
              annually. There are approximately 250 investment properties that have not          of the valuation. Action point to be brought in the year end
              been revalued in 2010/11 with a net book value of approximately £9                 project plan that these assets require annual valuations.
              In addition, upward and downward revaluations of Investment Properties             Capital Finance team to pass movement in valuations to
              should be recognised in income and expenditure as 'Finance and                     Karen Tomlinson for inclusion in The Comprehensive Income
              Investment Income'. The Council have recognised an upward revaluation              and Expenditure Statement.
              of £260,000 in revaluation reserve in error.

              c) Assets not revalued: Other Land and Buildings should be revalued at least       Capital Finance Team to provide Asset Management with a
              every five years. We identified five buildings that have not been revalued         list of all assets due for revaluation each year. Included in
              in the last five years.                                                            year end action plan. Revaluations are carried out every 4
              The value of these errors is not material, however there is a risk that material
              errors will occur in future.
                                                                                                 Officers Responsible:
              We recommend that management review the latest Code of Practice and                Stephen Waterfield and David Fish
              ensure that land and building valuations are compliant.

              Management should pay particular attention to changes from the old UK GAAP
              and SORP guidelines.

  3     2     Council houses - component accounting
              The Authority is required to account for new and revalued assets at a              Old components will be derecognised before replacement
              component level from 1 April 2010. The new rules make clear that old               components are capitalised in future in line with
              components must be derecognised before a replacement component can be              accounting standards.
              capitalised.                                                                       An action point has been included in the year end project plan.

              At the beginning of the year, the Authority revalued its Council Dwelling stock.
              In addition, £19.5m of improvements have been capitalised which includes the
              replacement of components such as kitchens and bathrooms, however the              Officers Responsible:
              Authority has not derecognised any of the old components.                          Lisa Murphy and David Fish

              Whilst the value of the old components is not material it is important that the
              Authority follows the correct accounting treatment in future.

              We recommend that management ensure old components are derecognised
              before replacement components are capitalised.
Number Risk                                 Issue and Recommendation                                                  Management Response

  4     2     Fixed asset register
              The four strategic assets (Tower, Winter Gardens, Tussauds and Golden Mile          Assets will be listed separately in asset register for 2011/12.
              Centre) are grouped together on the fixed asset register as one 'leisure asset’.

              In the draft financial statements we identified an error of £266,000 in the
              calculation of depreciation on the Tussauds and Golden Mile Centre assets.          Officer Responsible:
                                                                                                  David Fish
              This error was caused by the assets being grouped together, rather than listed

              We recommend that each asset is listed separately on the fixed asset register.
              This will reduce the risk of accounting errors.

  5     2     General debtors - bad debt provision
               It is Council policy to recognise a bad debt provision of 35% for all debts less   Paper to be produced identifying level of risk of debts &
              than one year old. This policy can result in provisions being recognised for        collection history to justify levels of Bad Debt Provision.
              debts that are not yet overdue. For example, invoices that are within their
              payment terms or loans that are being repaid on time.

              The total value of general debtors less than one year old is £9.8 million, at 35%   Paper to KPMG in mid February 2012 for response by
              the value of the bad debt provision is £3.4 million.                                mid March 2012

              While we accept that it is prudent to provide for outstanding debt, we do not
              believe it is appropriate to recognise a provision where there is no indication     Officer Responsible:
              that the debt will go bad.                                                          Karen Tomlinson

              We recommend that debts not yet overdue should only be provided for where
              there are genuine concerns over recoverability.

  6     3     Fixed asset register to general ledger reconciliation
              The Fixed Asset Register is not formally reconciled to the General Ledger. We       This reconciliation was completed at the year end.
              would expect this reconciliation to be performed at least annually.                 KPMG agreed on 17th November 2011 that this
                                                                                                  recommendation is no longer required.
              We recommend that the reconciliation is formally documented and signed as
              prepared and reviewed. Any variances should be clearly identified and
              investigated as appropriate.
Number Risk                                Issue and Recommendation                                                Management Response

  7     3     Reconciliation of rent rebates per benefits system to rent rebates per
              rent system
              The rent rebates reconciliation has not been performed since October 2010         Reports are now being produced to enable this reconciliation
              and was not performed at March 2011 year-end.                                     to take place.

              In October 2010 Blackpool Council switched to the new Academy benefits
              system, likewise Blackpool Coastal Housing switched to the new Orchard rent       Officer Responsible:
              system.                                                                           Louise Jones

              The reconciliation is normally performed monthly but has not been performed
              since October.

              We recommend that the rent rebates reconciliation is performed on a regular
              basis throughout the year to ensure that problems are identified and dealt with
              on a timely basis. As a minimum this reconciliation should be performed at the
              year end.

  8     3     Journal controls
              Our review of journal entries identified that one journal was posted to an        Reminder to be sent to all Finance staff that journals
              incorrect general ledger code. This resulted in an error of £251,000 in the       should be signed off by senior accountants and the journals
              financial statements                                                              must be checked in Cedar after input/upload.

              We recommend that journals are reviewed for accuracy and authorised by a          Officer Responsible:
              senior accountant prior to being posted to the ledger.                            Louise Jones
                                                                         FOLLOW UP OF PRIOR YEAR RECOMMENDATIONS
Number Risk                                 Issue and Recommendation                                                     Management Response                            Status As At September 2011

  1     2
              Fixed Asset Revaluations
              The Authority is required to perform a five year revaluation programme                 The two assets will be revalued in 2010/2011 in line with          Neither the Talbot Road nor the
              for all fixed assets. The valuation basis for each asset type is set out within        the SORP.                                                          Illuminations Depot have been
              the SORP. The valuation method generally depends on whether an asset                                                                                      revalued in 2010/2011.
              is operational or non-operational, specialised or non-specialised.                     Year end action plan to included action to ensure that asset
                                                                                                     valuation methods are reviewed each year.                          In addition a number of other land
              During our audit we identified two assets that were incorrectly valued. Both                                                                              and buildings have not been revalued
              assets were valued using market valuation method during 2009/10:                       Asset Management Team to provide Capital Accounting Team           during the year.
                                                                                                     with a list of revaluations to be carried out each year. Capital
              Talbot Rd Car Park was allocated a market value of £2.2m. The asset is                 Accounting Team can then ensure the revaluation has been
              operational and specialised and therefore should be valued using the                   done and can check the basis of the revaluations to the SORP.
              depreciated replacement cost method.

              The Illuminations Depot was allocated a market value of £7m. This asset
              should be valued using the existing use value.                                         Officer Responsible:                                               Status
                                                                                                     Stephen Waterfield                                                 Not Implemented
              All assets should be valued as part of the quinquennial valuation cycle.
                                                                                                     Due Date:                                                          Response
              The Authority's asset management team should review asset valuation                    31st March 2011                                                    Assets will be revalued in 2011/2012.
              methods to ensure that they are consistent with the SORP. The specific                                                                                    (See 2 above)
              assets identified above should be revalued in 2010/2011 to ensure that correct
              valuation is reported within the financial statements.

  2     2     Accounting for Strategic Acquisitions
                                                                                                                                                                        We received management's paper
              During March 2010 the Authority purchased the Blackpool Tower, the Winter              Assets to be revalued in 2010/2011 on an appropriate               setting out the proposed methodology
              Gardens and Golden Mile assets including Tussaud's as strategic asset                  basis in line with the SORP. These valuations are to               on 18 August 2011.
              acquisitions.                                                                          be reviewed each year.
                                                                                                                                                                        Management proposed that the Tower
              Within the 2009/10 financial statements, these assets are held at cost valuation       Paper to be prepared setting out valuation methodology             & Winter Gardens be valued using a
              due to the fact they were only owned for three days of the 2009/10 financial year.     and the accounting treatment for the associated costs              depreciated replacement cost (DRC)
              This valuation is supported by the financial models which forecast that these assets   before 31st March 2011.                                            method.
              and the associated businesses can be run profitably given the acquisition price.
                                                                                                                                                                        The decision to value at DRC was
              Going forward, these assets will need to be valued as part of the Authority's          Officer Responsible:                                               taken by management based on the
              ongoing valuation programme. The Authority must therefore select an appropriate        Stephen Waterfield                                                 old UK GAAP and SORP accounting
              valuation methodology for each of these assets and ensure that this is consistent                                                                         guidelines. However, these have been
              with the defined SORP treatment.                                                                                                                          superseded by IFRS & the Code of
                                                                                                     Due Date:                                                          Practice, the new guidelines state that
              In addition, there are a number of costs associated with maintaining and improving     31st March 2011                                                    the assets should be valued at fair
              these assets. It is currently unclear how these costs will be accounted for within                                                                        value, based on existing use value
              future financial statements.                                                                                                                              (EUV). DRC should only be used
                                                                                                                                                                        where it is not possible to value at EUV.
              It is therefore recommended that the Authority's asset management team                                                                                    Status
              prepare a paper setting out the proposed valuation methodology for each asset                                                                             Not Implemented
              along with the accounting treatment in relation to association costs. This should
              be presented to the external audit team for agreement.                                                                                                    Response
                                                                                                                                                                        See 1 on 2010/2011 response
Number Risk                                 Issue and Recommendation                                                            Management Response                       Status As At September 2011

  3     2     Capitalisation of Revenue Expenditure

              During the audit we identified revenue expenditure that had been incorrectly                CIPFA guidance on revenue and capital expenditure               During the 2010/2011 audit we again
              capitalised and included within the fixed asset additions balance. This included            to be recirculated to project managers in particular, £15,000   identified revenue expenditure that
              expenditure on items which could be considered clearly trivial.                             threshold unless integral part of defined capital scheme.       has been incorrectly capitalised.

              Our analysis of fixed asset balances identified that the total value of capital additions   Issue to be raised at middle managers financial                 We have provided a breakdown of
              during the year which were less than £1,000 is £1.4m.                                       training sessions                                               2009/10 and 2010/ expenditure to
              Management should ensure that appropriate controls are in place to prevent revenue          We have requested a breakdown of the expenditure
              expenditure being correctly capitalised.                                                    and when this has been received we will be able                 Status
                                                                                                          to identify if any areas to target for re- training on this     Not Implemented
              Although not material in 2009/10, this is particularly important as this incorrect          issue.
              treatment has a direct impact on the Authority's levels of general fund reserves.                                                                           Response
              Any future reversals could reduce the level of working balances available to the            Officer Responsible:                                            We disagree that only amounts over
              Authority.                                                                                  Steve Thompson                                                  £15,000 should be charged to capital.
                                                                                                                                                                          It is reasonable for individual amounts
                                                                                                                                                                          relating to a capital scheme to be
                                                                                                          Due Date:                                                       less than £15,000 but the total
                                                                                                          31st March 2011                                                 scheme is over £15,000.

  4     2     Impairment Review

              Although council dwellings are revalued on an annual basis, the Authority's                 Future revaluations to be considered by the Corporate           Excluding council dwellings, the
              remaining land and buildings are revalued as part of a five year rolling cycle (20% of      Asset Management Group.                                         Authority experienced impairments of
              assets valued each year). Excluding council dwellings, the Authority experienced                                                                            £7.2 million during 2010/2011.
              impairments of £12.9m during 2009/2010. This does not however take into account             All discussions/decisions on impairment trends
              any potential impairments that may be required in the 80% of assets which have              and extrapolation across the Council's asset base to be         The Corporate Asset Management
              not been reviewed this year.                                                                included in Group minutes.                                      Group reviewed impairments and
                                                                                                                                                                          concluded that no extrapolations are
              To identify assets that may require impairment, the Authority's Asset Management            The Council has changed its accounting policy, due to           required in 2010/2011. These
              Steering Group meets on a monthly basis. This group looks for specific indicators of        the introduction of IFRS, to a four year rolling cycle for      decisions were not formally minuted
              impairment such as vacant properties and insurance claims. However, findings are             revaluations from 2010/2011                                    however, and therefore we
              not formally documented to support the value of impairment incurred during the year.                                                                        recommend that in future these
                                                                                                          Officer Responsible:                                            discussions should be formally
              In addition to documenting existing processes, the steering group should consider           Stephen Waterfield                                              documented so that a clear audit
              the results of the formal valuation to consider whether any impairment trends exist                                                                         trail exists.
              which should be extrapolated across the Authority's residual asset base.
                                                                                                          Due Date:                                                       Status
                                                                                                          31st March 2011                                                 Partially implemented

                                                                                                                                                                          For future meetings this will be
Number Risk                                Issue and Recommendation                                                      Management Response                       Status As At September 2011

  5     3     Education Un-presented Cheques Ledger Code

              Our audit work around the bank reconciliation has identified a ledger code classified   The journal for this amount has now been found. The          We are satisfied with management's
              as "Education Un-presented Cheques" where the balance has not been satisfactorily       amount was coded to ZG0001960C but should have been          explanation of what this balance
              explained.                                                                              coded to ZG0001960G.                                         relates to.
                                                                                                      The £45k is made up of 18 debtor accounts which is why
              Although the value of this code is not material (£45,000) the balance is included       a search of the total amount came back with a nil balance.   However, the correcting journal
              within the bank reconciliation as a balancing item to ensure the reconciliation                                                                      has not been posted to the ledger
              balances. It is unclear what this balance relates to and there has been no movement     This relates to amounts being paid to the Council which      yet.
              over the last few financial years.                                                      need to be posted to debtor accounts. ZG0001960G is a
                                                                                                      holding code until the debtor account is known. In all       Status
              It is recommended that management investigate this balance to obtain a full             cases the debtor has been correctly cleared from the         Not Implemented
              understanding of its contents. If appropriate management should consider writing this   debtors account. Journal to be posted to correct code.
              balance off to ensure that the bank reconciliation represents only bona-fide                                                                         Response
              transactions.                                                                                                                                        Journal has now been done

                                                                                                      Officer Responsible:
                                                                                                      Karen Tomlinson

                                                                                                      Due Date:
                                                                                                      30 November 2010

              All other issues and recommendations in the prior year follow up have been implemented

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