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					                      LONDON BOROUGH MERTON

                       STATEMENT OF ACCOUNTS

                                 2005/06




CONTENTS                                            Page




  EXPLANATORY FOREWORD                              1-8

  MAIN FINANCIAL STATEMENTS
        Consolidated Revenue Account               9 - 20
        Consolidated Balance Sheet                 21 - 36
        Statement of Total Movements in Reserves   37 - 40
        Cash Flow Statement                        41 - 43

  ADDITIONAL FINANCIAL STATEMENTS
        Housing Revenue Account                    44 - 48
        Collection Fund                            49 - 51

  PENSION FUND ACCOUNTS                             52 - 61

  STATUTORY STATEMENTS
        Statement of Responsibilities              62 - 63
        Statement of Internal Control              64 - 71
        Statement of Accounting Policies           72 - 81
        Independent Auditor‟s Report               82 - 86

  GLOSSARY                                          87 - 95
  Statement of Accounts                       2005/06             EXPLANATORY FOREWORD

       EXPLANATORY FOREWORD BY THE DIRECTOR OF CORPORATE SERVICES


1.    Introduction

The Statement of Accounts for the year ended 31st March 2006 has been prepared
and published in accordance with the Accounts and Audit Regulations 2003 and the
2004 Code of Practice issued by the Chartered Institute of Public Finance and
Accountancy (CIPFA).The statement was approved by the General Purposes
Committee of the council on 26th June 2006.

The purpose of this foreword is to provide a guide to the most significant matters
reported in the Council's final accounts for 2005/06. The pages that follow comprise
the following sections:

Statement of Accounting Policies - This describes the practices that the Authority
has followed in preparing the figures within the accounts.

Consolidated Revenue Account - This shows the net cost for the year of the major
functions for which the Council is responsible, together with the income received
from fees and charges made by the Council, from local taxation and from Central
Government grants.

Housing Revenue Account - This reflects a statutory obligation to account
separately for local authority housing provision. It shows the major elements of
Housing Revenue Account expenditure and how these have been financed.

Collection Fund - This account reflects the statutory requirement for the Council to
maintain a separate Collection Fund. It shows the transactions of the Council as a
billing authority for Non-Domestic Rates and the Council Tax and illustrates the way
in which these have been distributed to the Greater London Authority and the
Council's own General Fund.

Consolidated Balance Sheet - The Consolidated Balance Sheet summarises the
financial position of the whole Council at the end of the financial year. It includes the
Housing Revenue Account and the Collection Fund.

Statement of Total Movements in Reserves - This brings together all the
recognised gains and losses of the Authority during the period and identifies those,
which have and have not been recognised in the Consolidated Revenue Account.
The statement separates the movements between revenue and capital reserves.

Cash Flow Statement - This consolidated statement summarises the inflows and
outflows of cash arising from revenue and capital transactions with third parties.

Pension Fund - The revenue account shows the contributions by members to the
fund and the benefits paid from it, together with details of investment activity. The
Net Assets Statement shows the financial position of the fund at the end of the
financial year.




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2.       Review of the financial year

2.1      General Fund

There has been further improvement in the Council's financial position during
2005/06. The Council added £2.01m to General Fund balances so that at the end of
2005/06 there are accumulated balances of £5.690m.

                                                                  2004/05      2005/06    2005/06
                                                                    Actual      Budget      Actual
                                                                     £000         £000       £000

Net Cost of Services                                              226,618      244,235    243,966
Corporate Expenditure and Income                                    4,313      (62,657)   (66,929)

Council Net Operating Expenditure                                 230,931      181,578    177,037

Addition to General Fund Balances                                      828       1,900      2,025
Contributions to Earmarked Revenue Reserves                          1,321           0      1,618
Contributions to (from) Capital and other                         (33,020)      28,472     31,016
Reserves
Transfer (from) Collection Fund                                     (526)            0          0
Transfer (from) HRA Balances                                        (274)        (152)        102
Total                                                             199,260      211,798    211,798

The Net Cost of Services has increased from £226.6 million in 2004/05 to nearly
£244 million in 2005/06 an increase of over £17 million.

The main variances against budget in 2005/06 were as follows –

     An under spend of £0.3 million on the Net Cost of Services

     An under spend on corporate items of £4.3 million. This was due mainly to higher
      than expected investment income and savings on interest costs.

     Revenue funding of capital expenditure from the General Fund of £2.5 million.

     Transfers in excess of budget of £2 million to General Fund, HRA and
      earmarked balances.

Effective budgetary control and financial prudence has allowed Merton to increase its
levels of General Fund balances from £2.32 million in 2001/02 to £5.69 million in
2005/06. The current level of balances exceeds the target set in the Medium Term
Financial Strategy.

                                           2001/02 2002/03 2003/04 2004/05 2005/06
                                              £000    £000    £000    £000    £000

General Fund Balances                         2,319       2,424        2,837      3,667     5,690

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2.2     Housing Revenue Account (HRA)

The HRA is concerned with transactions involving management of the Council's
housing stock. HRA spending cannot be subsidised by the General Fund. As at 31st
March 2006, HRA balances are £0.930m (£0.828m at 31st March 2005).

2.3     Capital

The Council incurred capital expenditure of £32.35 million in 2005/06, compared with
a budget of £32.66 million. This expenditure was financed from supported and
unsupported borrowing (32%), from usable capital receipts (14%), from capital
grants and contributions (44%) and from revenue (10%).

2.4     Summary of Reserves and Balances

The Council has fund balances and revenue reserves amounting to £17.156million.

                                                                  2004/05   2005/06
                                                                     £000      £000
General Fund balances                                               3,665     5,690
General Fund Reserves earmarked reserves                            6,883     8,501
Housing Revenue Account balances                                      828       930
Collection Fund balance                                               632     2,035
TOTAL                                                              12,008    17,156

5.      Accounting and financial changes

Changes in the 2005 SORP

There have been a number of changes in the 2005 SORP.

a)             The Council is required to include a statement on the system of internal
        control. This requirement replaces the requirement to include a statement on
        internal financial control. In fact, this requirement was met in the 2004/05
        accounts.

b)             There have been amendments to the guidance on the recognition of
        dividend income. However, these do not affect the way in which the Council
        accounts for dividends.

c)             There are changes to the Pension Fund Accounts following the issue of
        a revised Pension SORP.




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Other changes:

a)      Court Services

The Greater London Magistrates Court Service came into operation in April 2006.
This service is funded directly by the Government and the Council is no longer
required to make a contribution to the Magistrates Court Service.

However, the Council continues to receive a Government grant towards the financing
costs of its capital expenditure of the Wimbledon Magistrates Court and to be
responsible for contributing to the funding of the Coroners Court Service.

b)      Landfill Allowance Trading Scheme

The Waste and Emissions Trading Act 2003 places a duty on waste disposal
authorities (WDA‟s) to reduce the amount of biodegradable municipal waste (BMW)
disposed to landfill. It also provides the legal framework for the Landfill Allowances
Trading Scheme (LATS), which commenced operation in April 2005. Under this
scheme authorities are issued with allowances that restrict the amount of waste that
can be disposed of in this way. Allowances can be traded between authorities and, if
limits are exceeded, significant penalties may be imposed.

The transactions relating to the receipt and application of the allowances are
recorded in the Environmental Services revenue account.

c) Trading Accounts

The Translation Service and Print Unit have been reclassified as trading services
with effect from April 2006. Prior to April 2005 they were part of support services
and their costs were allocated to front line services.

d) Section 106

The Council receives contributions from developers under Section 106 of the Town
and Country Planning Act 1990. These unspent contributions have been reclassified
as Deferred Liabilities. Before 2005/06, they were shown as Capital Reserves.
Section 106 balances are used to support both capital and revenue expenditure.
This change has reduced the council‟s reported Net Worth.

4.      Borrowing and Investment Strategy

The Council‟s strategy is to minimise the cost of finance. In general terms, this is
effected by the redemption of debt using hitherto invested funds or by redemption
and replacement of debt by new borrowing at lower cost. The practicality of
implementing such transactions economically is dependent upon the level of current
and forecast borrowing and investment interest rates relative to those on existing
debt. The extent of such activity varies from one financial year to another.




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5.      Pensions Liability

The Council is required to show in a note to the Consolidated Balance Sheet the
aggregate value of the forecast assets and liabilities of the Pension Fund.

The Authority's actuary has estimated that as at 31st March 2006 future liabilities
amount to £407m with assets of £283m, implying a potential deficit of £124m. This
deficit represents the fund's assessed long-term position based on a market value of
assets affected by depressed equity values at the time of assessment. It is expected
that this value will recover over time, and the assessment does not imply any
difficulty in financing pension liabilities in the foreseeable future.

6.      Current and Future Developments which may impact in future accounts

The Government has a range of proposals over the coming years, which will have a
direct impact on the Council's financial affairs.

a)      Comprehensive Performance Assessment (CPA)

        A Council‟s CPA rating is based on assessments of the Council, its annual
        use of resources and its services. In June 2005, the Audit Commission
        published “CPA – The Harder Test” which sets out the new framework for
        comprehensive performance assessment of single tier and county councils
        from 2005 to 2008.

        The Audit Commission has changed the way it gives CPA ratings and it now
        has a star rating (of between one and four stars) rather than a one-word
        categorisation. The CPA framework is now a tougher test for councils, with a
        stronger focus on service users and value for money.

        The new CPA framework contains a new two-dimensional scoring scheme.
        The two dimensions are the overall level of performance and the direction of
        improvement. The overall level of performance has five new categories from
        0 to 4, with 4 being the highest. The direction of improvement has four labels
        or categories, which run from “not improving” through to “improving strongly.”

        The Council is committed to improving and is using the outcome of CPA and
        the recommendations in the corporate assessment report to continue the
        process of improvement through its “Journey to Excellence” programme.

b)      Three Year Local Government Finance Settlements

        From 2006/07, the government has introduced three-year settlements. These
        will enable authorities to publish forward indications of budget levels and
        council taxes, which will provide greater certainty to council taxpayers.




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c)      New School Funding Arrangements

        From 2006/07, schools spending will be financed through a ring fenced
        dedicated schools grant. Non-schools education grant will still be financed
        through formula grant.

d)      Local Authority Business Growth Incentive Scheme (LABGI)

        The LABGI was introduced by the Local Government Act 2003. The
        Government hopes that by allowing local authorities to retain some of the
        business rate revenues that are associated with a growing local tax base, the
        Scheme will create financial incentives for local authorities to encourage
        economic growth locally. The Scheme began in April 2005.

e)      Balance of Funding and Lyons Inquiry into Local Government Funding

        On average, local authorities receive 75% of their income from central
        government. This has led to local authority reliance on council tax for
        approximately 25% of its income. A consequence of this reliance is the well
        known 'gearing effect, whereby a 1% rise in expenditure which is not covered
        by government grants results in, on average, a 4% rise in council tax.

        A Balance of Funding Review was set up by the Government to consider the
        problems caused by this high level of central control. The Balance of Funding
        Review released its final report in July 2004. The Review concluded that there
        are strong arguments for shifting the balance towards more local funding and
        recognised that the balance of funding, particularly the problem of gearing, is
        a major problem for local authority accountability.

        The Government has established an independent inquiry into local
        government funding, chaired by Sir Michael Lyons. In September 2005, the
        Government extended his terms of reference to consider the strategic role of
        local government and how devolution and decentralisation could improve local
        service.

        Sir Michael Lyons published an interim report in December 2005 and his final
        report is expected by December 2006. The interim report concerns the role of
        local government (Part 1) and local government finance (Part 2).

 f)     Procurement Strategy

        The Council has a Procurement strategy and an Action Plan, which was
        approved in November 2005. The reasons for undertaking the project include
        the following-

               The DCLG‟s (formerly ODPM) requirement that the Council meets an
                annual efficiency target of 2.5% in each of the next three years;

               Meeting the Effective Merton objective for the Council to be efficient in
                its use of resources and provide value for money to residents.

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               Procurement forms part of the assessment of the Use of Resources
                element of the CPA score;

               The Council needs to meet the specific targets set out in the National
                Procurement Strategy for Local Authorities (NPS) and in respect of
                Implementing Electronic Government (IEG4) targets, which involve
                introducing electronic processes into procurement.

               The Council needs to address the specific procurement weaknesses in
                the Audit Commission audit of the Council‟s procurement
                arrangements;

        The procurement strategy includes the following elements-

           The establishment of a Strategic Procurement team. This team supports
            and co-ordinates departmental procurement teams.

           A comprehensive, but easy to understand, procurement guide which has
            been issued to officers involved in procurement.

           The corporate contracts database has been improved and the Council‟s
            Contract Standing Orders have been comprehensively reviewed.

           Purchasing cards have been introduced during 2005/06. These cards will
            be used by all Council departments.

           The establishment of an electronic (e) procurement strategy and business
            case, the selection of a suitable system for e procurements and a
            programme to introduce this system into all Council departments by March
            2007.

g)      Efficiency Targets

        A target of £6.45bn in efficiency gains has been set for the local government
        sector (including schools and the police). This must be achieved over the
        three years to 2007/08. The target translates into 2.5% annual efficiency gains
        against a 2003/04 baseline. This target resulted from the „Gershon Review‟
        (Releasing resources for the frontline), which was published in July 2004.

        The DCLG (formerly ODPM) issued a major document entitled “Delivering
        Efficiency in Local Services”, which contained detailed guidance as to how
        local services are to implement the Gershon efficiency review.         The
        achievement of efficiencies forms part of the new CPA framework.

        Merton‟s Annual Efficiency Target is approximately £3m.The first return for
        2005/06 was submitted in April 2005 to the DCLG in the form of an Annual
        Efficiency Statement (AES). The Council submitted a mid-year update of the
        AES in November 2005. In April 2006, the Council submitted its estimate of

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          efficiency gains for 2006/07 and in June 2006 will submit its final performance
          for 2005/06. The latter AES will be subject to audit by the Audit Commission.

h)        E-Government

          E-Government is part of the Government's modernising agenda. As part of
          that agenda, local authorities have been set a target for delivering all services
          electronically by 2005.

          Merton submitted its Implementing Electronic Government (IEG6) statement
          in April 2006. This documented Merton‟s achievement in delivering the 29
          required and 25 good priority service outcomes, and 818 other eServices
          required as part of eGov indicator BVPI 157. The latter included providing on
          line information, transactions, consultation, collecting revenue, benefits and
          grants, application for services, booking venues, procurement and providing
          access.

          The Council has made considerable investment in eGov, and more eServices
          will be rolled out and integrated into the wider business during 2006 and 2007.
          Key eServices will include geographical information systems (GIS), customer
          relationship management (CRM), eForms, and electronic document
          management (EDRMS). These technologies will be critical in delivering
          increased cost and work efficiencies, reduced duplication and better customer
          care. IT Services are leading a take-up and marketing campaign to raise
          awareness about eServices both internally in the council and to citizens.

i)        Accounts and Audit Regulations 2003

          These regulations are designed to keep up to date the rules on the keeping of
          local authority accounts, to reduce unnecessary administration and to improve
          local authority corporate governance and accountability.

          One major challenge has been the requirement to bring-forward the date by
          when the accounts of the Authority are approved and ready for audit. The
          regulations require that the accounts for the financial year ended 31 st March
          2006 and for all subsequent financial years should be approved and ready for
          audit by 30th June 2006.

j)        Whole of Government Accounts

          The purpose of the Whole of Government Accounts (WGA) framework is to
          produce a consolidated set of commercial style accounts for the entire UK
          public sector, including local government.      WGA will increase the
          transparency of Government finances and improve the completeness and
          comparability of public sector financial data.

          The first WGA return was in 2004/05. The 2005/06 WGA return will be the
          first one to be audited.



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Statement of Accounts             2005/2006            MAIN FINANCIAL STATEMENTS

CONSOLIDATED REVENUE ACCOUNT

The net cost of services is shown in accordance with the service expenditure analysis set
out in the Best Value Accounting Code of Practice.

    2004/05                                                          2005/06 2005/06         2005/06
         Net                                                           Gross    Gross             Net
 Expenditure                                                      Expenditure Income      Expenditure
       £000                                             Notes           £000     £000           £000
                   Continuing Operations                  1.
         3,528     Central Services to the public                      17,687    14,116         3,571
           157     Court Services                                         142         1           141
         8,694     Cultural Services                                   11,639     3,375         8,264
       105,277     Education Services                                 153,600    36,469       117,131
        14,376     Environmental Services                              24,375     8,797        15,578
        11,678     Highways and Transport                              20,868     8,181        12,687
        19,893     Housing Services                                   102,031    81,883        20,148
         2,305     Planning & Development Services                      7,866     5,561         2,305
        51,168     Social Services                                     84,591    31,761        52,830
         5,853     Corporate and democratic core                        7,130       371         6,759
         3,290     Non distributed costs                                5,929     1,377         4,552
                   Discontinued Operations
            399    Court Services –                                                                 0
                   Magistrates Court Service
       226,618     Net cost of services                               435,858   191,892       243,966
            722    Levies paid to other bodies                                                     763
            248    Surplus of trading undertakings        5.                                      (30)
       (15,876)    Asset Management Revenue               2.                                  (71,028)
                   Account
          (288)    Magistrates Court – capital                                                   (276)
                   financing grant
          8,588    Contributions to housing pooled                                               4,169
                   capital receipts                                                                  0
        (3,522)    Interest and investment income                                              (4,348)
             (1)   Provision for loss on investments                                                 0
          5,140    Pension Fund interest cost less                                               3,821
                   expected return on assets
          9,302    Premium paid to redeem debt                                                       0
       230,931     Net operating expenditure                                                  177,037
          (274)    Transfer to/(from) HRA balances        16.                                      102
        (2,236)    Transfer from Major Repairs                                                 (2,594)
                   Reserve
          1,314    Transfer to/(from) schools                                                   1,240
                   reserves
              7    Transfer to/(from) other                                                       378

            (50)
                   earmarked        revenue                                                         0
                   reserves
       (17,213)    Transfers (from) capital reserves       2.                                  41,470
                   of Section 106 balances
        (4,933)    Contribution from Capital              11.                                  (3,691)
                   Financing Account
        (8,588)    Contribution to (from) pension 17.                                          (4,169)
                   reserve.
                   Transfer from usable capital
                   receipts
       198, 958    Amount to be met from government grants and local                          209,773
                   taxation

       (76,207)    Revenue Support Grant                                                      (76,866)
       (53,711)    Non-domestic rates redistribution                                          (63,782)
       (69,342)    Demand on the Collection Fund                                              (71,150)
          (526)    Transfers from the Collection Fund                                                0
          (828)    Net General Fund surplus                                                    (2,025)
        (2,837)    Surplus on General Fund brought forward                                     (3,665)
        (3,665)    Surplus on General Fund carried forward                                     (5,690)



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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

1. Presentation

The 2004/05 figures have been re-presented to be comparable with the presentation in
0506. The main changes are that the balance of fully rechargeable overheads has been
included in Non Distributed Costs rather than in Central Services and the Magistrates Court
grant income has been included in Net Operating Income and Expenditure.

2. Capital Charges

The Council is required by the SORP to charge services for the use of their capital assets.
The Asset Management Revenue Account (AMRA) enables these charges to be reversed
(so that they do not affect the level of Council Tax or Housing Rents).

ASSET MANAGEMENT REVENUE ACCOUNT                                           2004/05     2005/06
                                                                             £000        £000
Income
Reversal of Capital Charges - HRA                                          (21,715)    (21,445)
Reversal of Capital Charges - Non-HRA                                      (26,689)    (32,795)
Transfers from Government Grants Deferred Account                                 0    (54,829)
                                                                           (48,404)   (109,069)
Expenditure
Amortisation of Intangible Assets                                                0         147
Impairment                                                                       0       4,894
Provision for depreciation                                                  19,077      20,161
External interest charges                                                   13,451      12,839
                                                                            32,528      38,041


Transfer to Consolidated Revenue Account                                   (15,876)    (71,028)

APPROPRIATIONS TO THE CAPITAL FINANCING ACCOUNT                            2004/05     2005/06
                                                                             £000        £000

Minimum revenue provision (MRP)                                               4,285       4,291
Depreciation and impairment                                                (12,040)    (17,926)

Excess of depreciation over MRP                                             (7,755)    (13,635)

Deferred Charges and intangible assets written off                          (1,275)     (2,833)

Contribution to offset transfer from deferred grants and                          0     54,829
contributions

Contribution to finance premium paid to redeem PWLB debt                    (9,302)          0

Revenue Contribution to Capital                                               1,119      3,109
Appropriation from Capital Financing Account                               (17,213)     41,470

The 2005/06 revenue contribution to capital was composed of a General Fund contribution
of £2,543,744 (2004/05 £746,363) and an HRA contribution of £565,527 (2004/05
£372,469).

The Asset Management Revenue Account and the Appropriations to/from Capital Financing
Account contain exceptional items.


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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

The Asset Management Revenue Account contains a transfer from the Government Grants
Deferred Account of £54,829,053. This is composed of the transfer of the accumulated
balance as at 31st March 2005 (£51,728,065) and the 2005/06 transactions (£3,100,988).

The Appropriations to/from Capital Financing Account contain a compensating transfer for
both of these transactions.

3.       Leasing

The table below shows the lease rentals charged to services.

                                                                               2004/05   2005/06
                                                                                 £000      £000

Operational leasing                                                              2,039     1,718
Exchange Hire Systems (EHS)                                                        248         0
Total                                                                            2,287     1,718

The existing operational lease agreements enable the Council to use assets (vehicles and
equipment), which are valued at £6.2 million. These agreements commit the Council to
make rental payments of £1,114,000 in 2006/07 and £652,000 in 2007/08.

                                                        Within 1 Within 2 to    Over 5     Total
                                                            year    5 years      Years
                                                           £000        £000       £000     £000
2006/07 Rental payments by length of
Commitment                                                    424       648        42      1,114
2006/07 Rental payments by length of
Commitment – Land & Property                                      74    158       183       415

The authority is committed to using prudential borrowing to meet current and future lease
rental costs.

The Exchange Hire Systems (EHS) agreements were for the financing of a mainframe
computer and information technology equipment and software. These agreements came to
an end in 2004/05.

4.       Outstanding Obligations arising from long-term contracts

The Council has undertaken a Private Finance Initiative (PFI) scheme to rebuild and run six
secondary schools.

The DCLG (formerly ODPM) has reformed the PFI grant as from 1 April 2005, which is now
to be paid on an annuity basis. The unitary payments are detailed in schedule 19 of the
agreement with the DCLG with a yearly inflationary increase of 2.5%.

The PFI scheme provides for the payment to New Schools (Merton‟s PFI Partner) of an
annual “unitary payment”. The first annual payment, linked to the completion of the first
school, took place in 2003/04.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

The annual amount and total amounts payable to New Schools are shown below.

                           Payments          2007/08              2008/09   Future Years     Total
                          to 2006/07                                        (To 2029/30)
                               £000             £000                £000            £000     £000
Unitary Payment                8,252            8,350               8,461        216,138   241,201

The funding of this Unitary payment will come from the Council‟s resources and a special
government grant called a PFI credit. Over the course of the PFI scheme, the Council will
receive PFI credits amounting to £126.7m.

The Unitary payment and the PFI Credit are accounted for within Education revenue
expenditure and income respectively.

During 2006/07 the number of schools in the PFI scheme will be reduced to four. (See Note
20 to Consolidated Balance Sheet – Post Balance Sheet Events).




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

5.       Trading Operations

The Council has established trading units where the service manager is required to operate
in a commercial environment and balance their budget by generating income from other
parts of the Authority or from other organisations. With effect from April 2006, trading
operations includes Printing and Graphic Design and the CHAS Team, (Contractors Health
and Safety Assessment Scheme) which is included under „Other internal trading services‟.

                                                                                  2004/05    2005/06
Included in Net Cost of Service                                                     £000       £000

Industrial Estates                                           Turnover                3,385      3,303
                                                             Expenditure             2,034      2,084
Sub Total excluding FRS17                                    (Surplus)/Deficit     (1,351)    (1,219)
                                                             FRS17                      28         12
Sub Total including FRS17                                    (Surplus)/Deficit     (1,323)    (1,207)

Included within Net Operating Expenditure                                         2004/05    2005/06
                                                                                    £000       £000
Printing & Graphic Design                   Turnover                                     0       830
                                            Expenditure                                  0       785
                                            (Surplus)/Deficit                            0       (45)
Refuse Collection                           Turnover                                3,906           0
                                            Expenditure                             4,078           0
                                            (Surplus)/Deficit                         172           0
Translation Services                        Turnover                                  250        236
                                            Expenditure                               289        303
                                            (Surplus)/Deficit                           39         67
Transport                                   Turnover                                6,490      8,959
                                            Expenditure                             6,490      8,918
                                            (Surplus)/Deficit                            0       (41)
Other Internal Trading Services             Turnover                                3,831        538
                                            Expenditure                             3,599        415
                                            (Surplus)/Deficit                       (232)      (123)
                                            Turnover                               14,477     10,563
                                            Expenditure                            14,456     10,421
Sub Total excluding FRS17                   (Surplus)/Deficit                         (21)     (142)
                                            FRS17                                     269        112
Sub Total including FRS17- to Net Operating (Surplus)/Deficit                         248        (30)
Expenditure

All Trading Operations                                                           2004/05     2005/06
                                                                                  £000        £000
Total - all trading operations before FRS17                  Turnover              17,862     13,866
                                                             Expenditure           16,490     12,505
                                                             (Surplus)/Deficit     (1,372)    (1,361)
FRS17 transactions                                                                     297        124
Total - including FRS17 transactions                         (Surplus)/Deficit     (1,075)    (1,237)




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

6.       Expenditure under Section 137, Local Government Act 1972

Section 137 of the Local Government Act 1972, as amended, empowers local authorities to
make contributions to certain charitable funds, not-for-profit bodies providing a public service
in the United Kingdom and mayoral appeals. The expenditure is limited to £5.30 per head of
population. The council was permitted to spend £0.99m in 2005/06 (£0.96m in 2004/05) and
its actual expenditure was £0.67m mainly on donations to voluntary bodies working in the
local area (£0.69m in 2004/05). The expenditure was as follows: -

                                                                             2004/05   2005/06
                                                                               £000      £000
Capital           -        Groundwork Trust                                       46        47
Revenue           -        Grants to Voluntary Groups                           647       627
Total                                                                           693       674

7.       Publicity Expenditure - Section 5, Local Government Act 1986

All local authorities are required to keep separate accounts of their publicity expenditure
under Section 5 of the Local Government Act 1986.

                                                                             2004/05   2005/06
                                                                               £000      £000
Recruitment Advertising                                                          727       870
Community Magazine/Council Press Publicity                                        80       143
Press and Public Relations Unit                                                  384       455
Publicity and Other Advertising                                                  281       219
Total                                                                          1,472     1,687




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

8.       Building Control Trading Account

The Building (Local Authority Charges) Regulations 1998 require the disclosure of
information regarding the setting of charges for the administration of the building control
function. However, certain activities performed by the Building Control Unit cannot be
charged for, such as providing general advice and liaising with other statutory authorities.
The statement that follows shows the total cost of operating the building control unit divided
between the chargeable and non-chargeable activities. The figures in the table do not
include the effect of FRS17.

                                                                                               Total
                                                                                     Non-   Building
  2004/05 Building Regulations                                    Chargeable   Chargeable    Control
    £000 Charging Account                                            2005/06      2005/06   2005/06
                                                                       £000         £000       £000
               Expenditure
       605     Employee expenses                                        424          173        597
        19     Transport                                                 15            4         19
        77     Supplies and services                                     68            0         68
       207     Central and support service charges                      153           29        182
       908     TOTAL EXPENDITURE                                        660          206        866

               Income
     (791)     Building Regulation charges                             (758)         (48)     (806)
      (10)     Miscellaneous income                                        0         (10)      (10)
     (801)     TOTAL INCOME                                            (758)         (58)     (816)
       107     (Surplus)/deficit for Year                               (98)         148         50


9.       Local Authorities Goods and Services Act 1970

The Council provides a payroll service for Further Education Colleges and to voluntary
bodies. The service to the voluntary bodies is provided without charge. The Council earned
income of £31,620 from Further Education colleges in 2005/2006.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

10.       Partnership Schemes


POOLED BUDGETS

                                               2004/05                           2005/06
                                                                    Learning      Community
                                                TOTAL             Disabilities     Equipment   TOTAL
                                                 £000                  £000             £000    £000
Income
Partners’ Contributions
Brought forward                                      55                  (10)             0       (10)
L B Merton                                        2,978                2,761            518     3,279
LB Merton via Government Grant                      241                    56           207       263
Sutton & Merton PCT                                 896                  881            279     1,160
Learning Disabilities Development
Fund                                                 71                  145               0      145
Total Contributions Income                        4,241                3,833           1,004    4,837

Expenditure
Joint Team                                          721                  777              0       777
Day Services                                      2,483                2,613              0     2,613
Learning Disabilities Development
Fund                                                 73                  112               0      112
Community Equipment Services                        778                     0          1,004    1,004
Management & Support Costs                          196                  273               0      273
Total Expenditure                                 4,251                3,775           1,004    4,779
NET (UNDER) / OVERSPEND                              10                  (58)              0      (58)

During 2005/06 the Council has continued to operate the Partnership Agreements
with Sutton & Merton Primary Care Trust for the following services:

         Learning Disabilities
         Integrated Community Equipment Services (ICES)

This includes the continued operation of the pooled funds in respect of these
services. At this stage the Learning Disabilities pooled fund covers day services, a
joint social work/community team and the Learning Disabilities Development Fund
(LDDF). In line with the provisions of the Partnership Agreement the under spend in
2005/06 will be carried forward as a reserve for use in 2006/07

Pooled Funds
The Council in 2005/06 continued to operate the Partnership Agreements with Sutton &
Merton Primary Care Trust (PCT) for the following services:-

         Learning Disabilities
         Integrated Community Equipment Services (ICES)

There was a continued operation of pooled funds in respect of these services.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

For Learning Disabilities this was the first of four planned phases of the integration agenda.
This phase covers day services, a joint social work/community team and the Learning
Disabilities Development Fund (LDDF).

For ICES this phase covers equipment provided by both agencies. In Merton‟s case it was
that element funded via the Access and Systems Capacity Grant. This was supplemented
by project management costs that were incurred in implementing the partnership
arrangement.

11.       Pensions

The Council pays the following sums into Pension funds on behalf of its employees.

11. 1 Teachers' Pensions

The Council pays employers' contribution of 13.5% to the Department for Education and
Skills (DfES) in respect of teachers. This is an unfunded scheme with pension costs
charged to the accounts based on a contribution rate set by the DfES, supported by a five-
year actuarial review.

                                                                             2004/05      2005/06
Teachers Pensions                                                              £000         £000

Employers' contributions                                                          4,997     6,260

11.2 Local Government Pension Scheme

Pension costs funded by employer contributions amounted to £13.3 million in 2005/06
compared with £11.7 million in 2004/05, an increase of £1.6million.

The increase in the amount paid by employers was due to

         an increase in the backfunding from £4.753 million in 2005/06 to £6.311 million in
          2006/07, an increase of £1.558 million

         an increase in the level of employer's contributions to 11.8% of employees'
          contractual pay compared with 11.5% in 2004/05




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

11.3      FRS17

The authority recognises the cost of retirement benefits relating to the LGPS (Local
Government Pension Scheme) in the net cost of services when employees earn them, rather
than when the benefits are eventually paid as pensions. However, the charge against
Council Tax is based on the cash payable in the year, so the real cost of retirement benefits
is reversed out of the Consolidated Revenue Account (CRA) after Net operating
Expenditure.

                                                                          2004/05         2005/06
                                                                             £000            £000
Net Cost of Services:
    Current Service Costs                                                    10,243       11,233
    Past Service Costs                                                          228          893
    Impact of Settlements and Curtailments                                      840        1,860

Net Operating Expenditure:
    Interest Cost                                                          17,645          18,701
    Expected Return on Assets                                            (12,505)        (14,880)

Amounts to be met from Government Grants and Local
Taxation
    Contribution from Pension Reserve                                        (4,933)      (3,691)

Amount Charged Against Council Tax for Pensions                               11,518       14,116
in the Year

         Employer‟s Contributions Payable Scheme                             10,962       13,348
         Unfunded discretionary benefits                                        556          768
                                                                              11,518       14,116


12.       Members' Allowances

Allowances paid to members' in 2005/06 amounted to £810,808 (£773,530 in 2004/05).

13.       Officers' Emoluments

          Remuneration                Remuneration                Employees             Employees
                From                            To                  2004/05               2005/06
                                                                        No.                   No.
               £50,000                       £59,999                     81                    91
               £60,000                       £69,999                     22                    30
               £70,000                       £79,999                     11                    21
               £80,000                       £89,999                      4                     2
               £90,000                       £99,999                      2                     2
              £100,000                      £109,999                      4                     1
              £110,000                      £119,999                      0                     1
              £140,000                      £149,999                      1                     0
              £150,000                      £159,999                      0                     1
                                                                        125                   149

14.       Related Party Transactions

During the year, transactions with related parties arose as follows:
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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT


14.1     Central Government and other local authorities

                                                                          Income      Expenditure
                                                                            £000            £000

Revenue Grants receivable
      Revenue Support Grant                                                76,866
      Receipts from NNDR pool                                              63,782

Preceptor: Greater London Authority                                                        18,253

Total                                                                     140,648          18,253

14.2     Other Public bodies

The Council undertook one project jointly with the Merton, Sutton and Wandsworth Health
Authority. The expenditure on this project by the Council amounted to £75,247 in 2005/06.
The Council is claiming £10,740 in grant for this from the Health Authority.

14.3    Members and Chief Officers

The Council issued 80 standard letters to Members (60) and senior officers (20). There
were responses from 58 Members and 20 Officers and there were 2 declared related-party
transactions.

The table below contains details of the declared related party transactions.


              Name                                    Title                     Details

          Sheila Knight                            Councillor        Works for Merton Mind which
                                                                     received a grant of £43,000 in
                                                                     2005/06
          Robert Hobbs                               Officer         Registrar – Merton and Sutton
                                                                     Joint Cemetery Board. Left
                                                                     London Borough of Merton
                                                                     early 2005/06

14.4    Subsidiary and associated companies and joint ventures.

There were no related party transactions.

14.5     Pension Fund

There were no related party transactions.


15.    Fees Payable to Audit Commission

The external audit services are those carried out by the appointed auditor under the Audit
Commission‟s Code of Audit Practice in accordance with Section 5 of the Audit Commission
Act 1998




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED REVENUE ACCOUNT

The fees payable for these services include fees payable for statutory inspection under
Section 10 of the Local Government Act, 1999. Those fees have not been separately
identified in the Audit Commission‟s billing.

                                                                            2004/05   2005/06
                                                                              £000      £000
 External audit services                                                       320       395
 Audit of certification of grant claims                                        105       100
 Other                                                                            2         0
 Total                                                                         427       495

The fees paid in 2005/06 (2004/05) relate to the audit of 2004/05 (2003/04).

The cost of the 2005/06 audit will be £422,000 along with an estimated £100,000 for grant
audit fees, making an estimated £522,000 in total.

16.   Transfer to HRA

The provision of council housing and ancillary services is accounted for within the Housing
Revenue Account. The expenditure, income, appropriations and surplus are also included
within the Consolidated Revenue Account. The net HRA surplus or deficit for the year is
transferred to or from the HRA working balance.

17.   Transfers from Usable Capital Receipts

When an asset is sold the sale proceeds are credited to the Usable Capital Receipts
Reserve. Under the Local Government Act 2003 when the disposal relates to an HRA
property, 75% of the proceeds of HRA dwellings and 50% of HRA land are transferred to
Government for inclusion in the national redistribution pool.

The 2005 Accounting Code of Practice requires any amount paid to the pool to be disclosed
as expenditure after Net Cost of Services, even though the capital receipts have not
themselves been recognised as an income item in the Consolidated Revenue Account. The
deficit is made good by an appropriation from usable capital receipts to the Consolidated
Revenue Account after Net Operating Expenditure. There are, consequently, two equal and
opposite entries, within the Consolidated Revenue Account, disclosing the payment to
Government and the appropriation from reserves to equalise the amount.




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Statement of Accounts             2005/2006            MAIN FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET

The Consolidated Balance Sheet shows the financial position of the Council at the end of the
financial year.
                                                                             st             st
                                                                            31 March       31 March
                                                                    Notes       2005           2006
                                                                                £000           £000
Intangible Assets                                                     1.            439           382
Tangible Fixed Assets                                                 2.
Operational Assets
        Council Dwellings                                                     418,188        401,681
        Other Land and Buildings                                              287,807        283,210
        Vehicles, Plant, Furniture and Equipment                               15,491         12,876
        Infrastructure Assets                                                  59,535         65,162
        Community Assets                                                          237            710
                                                                              781,697        764,021
Non-Operational Assets
       Investment Properties                                                   26,586         27,085
       Assets under Construction                                                    0              0
       Surplus Assets, held for disposal                                        4,067          4,036
                                                                              812,350        795,142
Long Term Prepayment                                                  3        16,945         16,132
Long Term Investments                                                               0              0
Long Term Debtors                                                     4         1,201          1,128
Total Long Term Assets                                                        830,496        812,402
Current Assets
        Stocks                                                        5             0             95
         Allowances                                                   6             0          1,145
        Prepayments                                                   7         3,791          3,446
        Debtors (Net of Bad Debt Provision)                           8        21,518         17,104
        Investments                                                   9        75,117         95,000
        Cash and Bank                                                 10       11,460          5,076
                                                                              111,886        121,866
Current Liabilities
        Borrowing Repayable on Demand or within 12 months             9        13,980            259
        Creditors and receipts in advance                             11       31,831         37,075
                                                                               45,811         37,334
Net Current Assets                                                             66,075         84,532
Borrowing Repayable after more than 12 months                         9       168,518        185,718
Provisions                                                            12        2,493          3,976
Deferred Liabilities                                                  13            0          6,772
Capital Grants and contributions not applied                          14        7,076          (597)
Deferred Capital Receipts                                             15          228            149
Liability related to defined benefit pension schemes                          127,391        124,075
Total Net Assets                                                      16      590,865        576,841
Represented by                                                        17
Capital Grants and Contributions Deferred                                       51,728          6,823
Fixed Asset Restatement Account                                                477,516        455,318
Capital Financing Account                                                      175,833        219,241
Usable Capital Receipts Reserve                                                      4          1,233
Capital Reserves                                                                 1,167          1,121
Pensions reserve                                                             (127,391)      (124,075)
Major Repairs Reserve                                                                0             24
                                                                               578,857        559,685


Fund Balances & Revenue Reserves

General Fund                                                                       3,665         5,690
Housing Revenue Account                                                              828           930
Collection Fund                                                                      632         2,035
Revenue Reserves                                                                   6,883         8,501

                                                                               12,008         17,156
Total Net Worth                                                               590,865        576,841




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

1.       Intangible Assets

                                                                   Software       Other Total
                                                                   Licences
                                                                       £000        £000       £000
Original cost                                                              0             0         0
Amortisations to 1 April 2005                                              0             0         0
Balance at 1 April 2005                                                  439             0       439
Expenditure in Year                                                       90             0        90
Written off to revenue in year                                         (147)             0     (147)
Balance at 31 March 2006                                                 382             0       382

2.       Tangible Fixed Assets

2.1      Capital Expenditure and Financing

Capital expenditure amounted to £32.2 million in 2005/06 (£36.8 million in 2004/05)

                                                                               2004/05       2005/06
                                                                                 £000          £000

EXPENDITURE
Expenditure adding to Intangible Assets                                            439            90
Expenditure adding to Tangible Fixed Assets                                     20,463        22,351
Expenditure not adding to value of Fixed Assets                                  5,489         7,751
Expenditure treated as deferred consideration                                    9,210             0
Expenditure treated as deferred charges                                            748         2,158
Unsupported Expenditure                                                            472             0
                                                                                36,821        32,350
SOURCES OF FINANCE
Credit Approvals Used/Supported Capital Expenditure                              7,072         4,790
Usable Capital Receipts Applied                                                 17,108         4,499
Capital Grants and Contributions                                                 6,162         8,820
Section 106                                                                        233         1,103
Major Repairs Allowance                                                          5,127         4,510
Financing from Revenue                                                           1,119         3,109
Unsupported Borrowing                                                                0         5,519

TOTAL                                                                           36,821        32,350




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

2.2      Movements and Classifications

                                         Other
                          Council        Land      Vehicles,          Infra-   Community         Non-       Total
                         Dwellings         and       Plant &      Structure       Assets   Operational
                                     Buildings    Equipment                                    Assets

                              £000        £000          £000          £000          £000         £000        £000

Cost or valuation
Certified valuation      448,665      319,711       27,433         66,061           237       30,653     892,760
     st
at 31 March 2005
Additions to fixed          5,210       9,991         5,460         8,849           592             0     30,102
assets
Disposals/Write           (5,213)      (2,105)             0              0           0             0     (7,318)
Offs
Expenditure not             (275)        (730)      (4,944)        (1,774)          (28)            0     (7,751)
adding to value of
fixed assets
Revaluations             (39,579)      (8,366)           0              0           (87)       1,172     (46,860)
As at 31 March           408,808      318,501       27,949         73,136           714       31,825     860,933
2006
Depreciation
Accumulated              (30,477)    (31,904)      (11,942)        (6,526)            0             0    (80,849)
depreciation
Depreciation for the      (7,127)      (7,747)      (3,131)        (1,448)           (4)        (704)    (20,161)
year
Disposals                      86            0             0              0           0             0         86
Revaluations              30,391        9,254             0              0             0            0      39,645
Impairments                     0     (4,894)             0              0             0            0     (4,894)
        st
As at 31 March            (7,127)    (35,291)      (15,073)        (7,974)           (4)        (704)    (66,173)
2006
Net book value of        418,188      287,807       15,491         59,535           237       30,653     811,911
             st
assets at 31
March 2005
Net book value of        401,681      283,210       12,876         65,162           710       31,121     794,760
             st
assets at 31
March 2006




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

2.3      Summary of Fixed Assets at 31st March 2006 (numbers)

These details are from the Council's corporate asset management records. In some
cases, the figures have been prepared on different bases.
                                                                         2004/05          2005/06
Operational Assets

Council Dwellings
Council Dwellings for rent                                                 6,670            6,612
Other Land and Buildings
Schools                                                                      55                53
Ancillary school premises - Crèches                                           3                 5
Adult Colleges                                                                2                 4
Residential Homes and Day Centres                                            13                12
Cemeteries (Buildings)                                                        4                 3
Offices, administrative buildings and associated land                        17                18
Off Street Car Parks                                                         13                13
Libraries                                                                     6                 7
Sports centres and swimming pools                                             3                 3
Public Halls                                                                  3                 3
Community Centres/Youth Clubs                                                13                12
Depots (Civic Amenity Site)                                                   4                 4
Allotments                                                                   18                18
Other Housing (HRA and non HRA)                                              11                18
Historic buildings-Theatre and Heritage Centre                                4                 2
Workshops                                                                     1                 1
Public Conveniences                                                           0                 0
Miscellaneous                                                                 0                10
Total                                                                       170               186
Community Assets
Parks                                                                            88            88
Cemeteries and crematoria (Land)                                                  4             1
Total                                                                            92            89
Non Operational Assets
Industrial property, shops and retail units and other                       439               434

2.4      Capital expenditure plans

The Council‟s current capital expenditure plans are as follows: -

                                                 CAPITAL PAYMENTS
                                              2006/07       2007/08      Later              Total
             Service                                                     Years        Expenditure
                                                 £000             £000    £000              £000
Libraries                                          224               0       0                224
Environmental Services &                         9,285               0       0             9,285
Regeneration & Leisure
Children, Schools & Families                     6,065        6,061          7             12,133
Community & Housing                              5,070        4,300      4,000             13,370
Other Services                                   3,599            0          0              3,599
Total                                           24,243       10,361      4,007             38,611


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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET



3.       Long Term Prepayments

                                                Balance at      Additional       Transfer       Balance at
                                             st
                                            1 April 2005      Expenditure/             to       31st March
                                                               (Discounts)       Revenue              2006
                                                      £000           £000           £000
                                                                                                       £000
Debt premiums                                        4,423               (3)        (282)             4,138
Contribution to New Schools                        12,522                  0        (528)            11,994
                       Total                       16,945                (3)        (810)            16,132

Premiums paid.

The Authority is redeeming expensive borrowing and replacing it with less expensive
debt. The redemption premiums are charged to revenue over the life of the
replacement borrowing. The charge to revenue in 2005/06 was £281,667 (£311,460
in 2004/05). The savings in interest from the debt redemption compensate for the
charge. Subject to further transactions, the annual charge will reduce progressively
in future years.

                                                                                  Contribution to New Schools

This is the capital schools contribution paid to the Council‟s PFI provider.                            The
contribution is charged to revenue over the life of the scheme


4.       Long Term Debtors

                                           Balance at         Increase         Repaid          Balance at
                                        1st April 2005                                   31st March 2006
                                                  £000            £000           £000               £000
Advances to Mortgagors
Private                                               34             0              4                    30
Council Houses                                       228             0             79                   149
Housing Associations                                   4             0              3                     1
Other Long Term Debtors
Greenwich Leisure                                   360             0               0                   360
Car Loans                                           209           111              84                   236
Wimbledon Theatre                                   300             0               0                   300
Other                                                66             0              14                    52
Total                                             1,201           111             184                 1,128

Greenwich Leisure Limited (GLL): GLL runs the Council‟s leisure centres. It is
responsible for repaying to this authority the debts of Merton Leisure, which used to
run the leisure centres.

Wimbledon Theatre (WT): The Ambassador Theatre Group (ATG) manages and
operates the WT. These functions were previously undertaken by the Wimbledon
Civic Theatre Trust (WCTT).

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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

Under the terms of the transfer, ATG are paying the creditors of WCTT, with the
Council advancing a loan to ATG to support the cash flow of this payment process.
This loan is unsecured, interest-free and subject to an agreed ten-year repayment
schedule.

5.       Stock

The stock budget represents the Council‟s share of the stock relating to the Partnership
Agreement with the Sutton and Merton Primary Care Trust (PCT) and Integrated
Community Equipment Services (ICES).

6.       Landfill Allowance

This balance represents the fair value of Landfill allowances allocated without charge by
DEFRA (Department for the Environment, Food and Rural Affairs). For 2005/06, the
value of these allowances has been calculated by DEFRA and is a weighted average of
the values at which allowances have been traded between authorities in 2005/06.

7.       Payments in advance

                                                                  31st March 2005 31st March 2006
                                                                             £000            £000
Lease rentals paid in advance                                                 102              42
Other payments in advance                                                   3,689           3,404
Total                                                                       3,791           3,446

8.       Debtors

                                                                  31st March 2005 31st March 2006
                                                                             £000            £000
General Fund
Government Departments                                                     3,770           3,088
Other Local Authorities                                                    (146)              11
HM Revenue and Customs                                                     3,382           3,312
Social Services                                                                9               9
Housing                                                                      913             664
Sundry Debtors                                                            13,420          11,361
Collection Fund
Community Charge                                                               73              72
National Non Domestic Rates                                                 1,845           1,455
Council Tax                                                                 5,067           5,085
NNDR Pool                                                                       0             556
Total                                                                     28,333          25,613
Less: Provision for Bad and Doubtful Debts                                (6,815)         (8,509)
Total                                                                     21,518          17,104

The provision for bad and doubtful debts has several elements. The Housing Benefit
provision provides for bad and doubtful debts within the debtors system and within the
benefits system. The General Fund provision provides for all other debts within the debtors
system.



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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET


                                 Balance at              Amount             Amount        Balance at
                              1st April 2005            set aside           charged 31st March 2006
                                        £000                 £000              £000            £000
General Fund
 - debtors system                       1,300                  561               342            1,519
 - housing benefits                       741                  259                 0            1,000
HRA                                       776                   33                72              737
Collection Fund                         3,998                1,888               633            5,253
Total                                   6,815                2,741             1,047            8,509

9.       Borrowing and Investments

Borrowing – Source                                                   31st March 2005   31st March 2006
                                                                                £000              £000
Public Works Loan Board                                                       84,548           102,548
Money Market                                                                  97,950            83,429
                                                                             182,498           185,977


Borrowing – Movement in year                                                                     £000

Borrowing at 31st March 2005                                                                  182,498
Change in temporary borrowing                                                                 (13,721)
Change in long term borrowing                                                                   17,200
Borrowing at 31st March 2006                                                                  185,977


Borrowing – Maturity Profile                                         31st March 2005   31st March 2006
                                                                                £000              £000
Less than 1 year                                                              13,980               259
Between 1 and 2 years                                                              0               143
Between 2 and 5 years                                                              0                57
Between 5 and 10 years                                                         8,000             8,000
More than 10 years                                                           160,518           177,518
                                                                             182,498           185,977


Of the total amount of debt maturing within one year, £0.259m relates to an
instalment payment on annuity borrowing, rather than temporary borrowing
undertaken in support of cash flow.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET




Investment Profile                                                         Balance at         Balance at
                                                                      st
                                                                    31 March 2005       31st March 2006
                                                                               £000                £000
Long term                                                                          0                   0
Short term                                                                    75,117              95,000
Total                                                                         75,117              95,000


Investments – Movement in year                                                                     £000

Investments at 31st March 2005                                                                   75,117
Change in investment managed internally                                                          19,883
Change in investments managed externally                                                              0
Investments at 31st March 2006                                                                   95,000

Investments –                                       Book Value       Market Value            Unrealised
                                                                                        Profits/(Losses)
                                                            £000               £000                 £000
Managed internally                                         95,000             95,000                   0
Managed externally                                              0                  0                   0
Total                                                      95,000             95,000                   0

10.      Cash and Bank

This balance includes sums advanced to schools under delegated schemes, the
balance on the Council's bank account and sums held as petty cash at other Council
establishments.

The banking transactions relating to the Pension Fund are made through the
Council's bank account.

11.      Creditors and Receipts in Advance

                                                                    31st March 2005     31st March 2006
                                                                               £000                £000
General Fund
Government Departments                                                          4,430             3,404
Inland Revenue                                                                      0                 5
Interest on long term borrowings                                                2,723             2,874
Sundry Creditors                                                               21,657            29,393

Collection Fund
National Non Domestic Rates Pool                                                1,064                 0
Receipts in Advance                                                             1,957             1,399

Total                                                                          31,831            37,075




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

12.      Provisions

                                         Balance at           Amount      Amount       Balance at
                                         st                                         st
                                       1 April 2005          Set aside    applied 31 March 2006

                                                 £000             £000      £000            £000
Insurance Fund                                   2,116            1,400       998           2,518
BMW                                                  0            1,085         0           1,085
Social Services                                    376                0         3             373
Benedict Club                                        1                0         1               0
                                                 2,493            2,485     1,002           3,976

Insurance Fund

The Insurance Fund provides an integral part of our risk management policy to meet
claims excluding catastrophic losses, which are insured by an external provider, and
also provides funding for invest to save initiatives to mitigate any manageable risks
emanating from the risk management process.

The expected timing of a future transfer of economic benefit depends upon the
settlement claims

Biodegradable Municipal Waste (BMW)

This balance represents the number of landfill allowances required to discharge
liability to DEFRA (The Department for the Environment, Fisheries and Rural Affairs)
for 2005/06 BMW landfill usage.

The liability for BMW land usage will be discharged in 2006/07 when the authority's
reconciled landfill usage is established.

Social Services

People who have been compulsorily detained under sections 3, 37, 45A, 47 or 48 of
the Mental Health Act 1983 (MHA) are entitled to "aftercare" services under section
117. These services need not continue indefinitely, rather „until such time as the
district health authority and the local social services authority are satisfied that the
person concerned is no longer in need of such services.‟ (MHA, section 117).

In 1999, the High Court decided that section 117 aftercare services must be provided
free of charge for people detained under the Mental Health Act 1983. This decision
was upheld by the Court of Appeal in July 2000 and by the House of Lords in July
2002. The Ombudsman‟s report (July 2003) advises authorities who have charged
for these services to make restitution.

Merton charged these clients for aftercare until April 2000 after receiving Local
Authority Circular (LAC (2002)15) advising social services to immediately stop
charging for these services.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

A provision has been made for reimbursement of clients. It is reviewed annually.
The size of any final settlement depends upon the Council locating these clients and
confirming the amount of each liability. It is not possible to determine the expected
timing of a future transfer of benefits.

13. Deferred Liabilities

This balance contains Section 106 balances. These are received through
agreements with developers and they are applied for capital and revenue purposes.

                                          Balance at           Amount     Amount        Balance at
                                       1st April 2005         received    applied 31st March 2006

                                                 £000             £000      £000             £000
Capital Contributions – S106                     7,186             886      1,300            6,772

                                                 7,186             886      1,300            6,772

In the financial year 2005/06, £1.104 million was applied to capital and £0.196 million
was applied to revenue.

14.      Capital Grants and Contributions not applied

This account contains the sums received to fund capital schemes. When sums are
used to finance capital schemes, they are transferred to the Capital Grants and
Contributions Deferred Account.

                                         Balance at            Amount     Amount       Balance at
                                         st                                         st
                                       1 April 2005           received    applied 31 March 2006

                                                  £000            £000      £000             £000
Government Grants                                 (348)           7,029     7,849          (1,168)
Capital Contributions - Other                       238           1,304       971              571
                                                  (110)           8,333     8,820            (597)


15.      Deferred Capital Receipts

Deferred Capital Receipts are sums due in future years.

The balance as at 31st March 2006 (£149,468) represents the amount owed on
mortgages granted upon the sale of council houses. When mortgage payments are
received, they are classified as usable and reserved capital receipts. In 2005/06
£78,929 was received, comprising £19,732 usable receipts and £59,197 reserved
receipts. This sum compares with £43,185 mortgage payments received in 2004/05,
comprising £10,796 usable receipts and £32,389 reserved receipts.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET



16.      Net Assets

The net assets are allocated as follows to the General Fund at HRA

                General Fund                                         HRA            Total
                        £000                                         £000            £000
                     163,416                                      413,425         576,841


17.      Capital and Revenue Reserves

17.1     General

The Statement of Total Movements in Reserves contains further details of each
reserve, including an analysis of the movements on each reserve. The notes below
are concerned with explaining the nature and purpose of each balance.


17.2     Capital Grants and Contributions Deferred Account

The Capital Grants and Contributions Deferred Account contains the balance of
government and other grants that have been applied to finance capital schemes in
2005/06. The reserve cannot be used to finance expenditure.

17.3     Fixed Asset Restatement Account and Capital Financing Account

These reserves are required as a result of the capital provisions of the SORP.

The Fixed Asset Restatement Account records the difference between the purchase
price of an asset and its current value.

The Capital Financing Account contains the sums applied to finance capital
expenditure and sums set aside to repay debt. Neither reserve can be used to
finance expenditure.

17.4     Usable Capital Receipts Reserve

This reserve contains the unused balance of usable capital receipts. Usable capital
receipts are so called because they can be used to finance capital expenditure.

17.5     Capital Reserves

These reserves relate to the Schools Standards Fund.

17.6     Earmarked Revenue Reserves

These contain sums set aside for specific purposes.



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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

Within the Consolidated Revenue Account, expenditure on these specific purposes
is recorded within the Cost of Services and the reserve is then applied to that
expenditure within the Appropriations Section. The use of, or addition to, such a
reserve is shown in this section as 'Transfers (from)/to earmarked reserves'.

17.7     Fund Balance

General Fund balances are unallocated balances available to the General Fund.

The Housing Revenue Account balance is available only to the Housing Revenue
Account.

The Collection Fund balance is available to the Council and to its preceptor, the
Greater London Authority. The Council can use its share of the balance to reduce its
demand upon Council taxpayers. The Council cannot use its share to finance
General Fund expenditure.

18.      Contingent Liabilities

18.1 Single status.

The Council is required to complete and implement the national 2004 Single Status
Agreement by no later than 31st March 2007. This agreement affects the majority of
Council staff, including those in schools.

The Council has prepared an indicative estimate of the potential financial implications,
which is based upon a number of assumptions. These financial implications will fall upon
three budget areas, the earmarked General Fund budgets for schools, the non-
earmarked General Fund budgets and the Housing Revenue Account.

The Council has not yet entered into detailed negotiations with the Unions. These
negotiations will lead to these estimates being refined. Therefore, these figures
should not be regarded as reliable evidence of the Council‟s future liability.

18.2 Adealon.

Adealon (a property development company) sued the Council for damages for unlawful
use and occupation of its land at Merantun Way, Merton, SW19. Adealon also sought a
declaration that it had an easement over the Day Centre located at 61-63 High Path, so
that it could access the highway in High Path. Adealon's predecessor sold off the Day
Centre land without reserving itself a right of way to High Path. Adealon now claims it
has no means of accessing a highway despite Merantun Way abutting its land to the
south.

Adealon sought damages and interest based on various assumptions. On 12th April
2006 the High Court ordered the Council to pay Adealon £35,945.27 damages for use
and occupation of its land (which includes interest). The High Court found that Adealon
had no easement as there is a highway abutting its land to the south, namely Merantun
Way, although it cannot access the highway until it obtains planning permission to do so.


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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

The High Court also ordered Adealon to pay 75% of the Council's legal costs, estimated
to be more than £22,000.00

Adealon has appealed the decision of the High Court, which is due to be heard on
27th and 28th November 2006.

Adealon seeks higher damages and interest of £136,150.00 (assuming the whole
site - the Council land and Adealon's land - was available for business use)

As an alternative, Adealon seek damages and interest of £71,325.00 (assuming its
land was available for business use in isolation from the Day Centre but with access
from High Path).

Adealon has appealed the decision about the easement. It continues to assert that it
has no easement to a highway (due to the need to obtain planning permission).

The Council has not made provision for any liability arising from this case.

18.3 Employment Tribunal Cases.

There are a number of outstanding employment tribunal cases where the Council
could be subject to financial liability through future decisions of Employment
Tribunals. The maximum liability under these cases is an estimated £180,000. The
Council has not made any provision for these cases.

19.      Approval of accounts

Regulation 10(3) of the Accounts and Audit Regulation (2003) requires that the
accounts must be approved by a committee of members. These accounts were
considered and approved by the General Purposes Committee; the Chair of the
committee signed the accounts on the 26th June 2006.

20.       Post Balance Sheet Events

Part termination of Schools’ PFI Scheme

It has been proposed that two of the six schools in the PFI scheme will become
Academies. The key elements of the proposals in respect of these schools are as
follows:

(a)      Mitcham Vale and Tamworth Manor will be withdrawn from he PFI Scheme.
         The leases granted to NewSchools over the land will be terminated. All
         buildings and other assets will revert to the Authority. NewSchools will no
         longer provide any services to these schools.

(b)      The Mitcham Vale and Tamworth Manor Land, buildings and other fixed
         assets will be transferred to the new Academy Trusts.

(c)      There will be no changes to the services provided to the other schools.


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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

(d)      DfES will underwrite an estimated £1.395million compensation to New
         Schools. This sum is composed of NewSchools‟ costs (£1.305m) and the
         London Borough of Merton‟s costs (£0.09million). NewSchools‟ costs
         comprise a Fixed Compensation element (£0.930 million) and a Variable
         Compensation element (£0.375 million). The actual sum paid in respect of the
         Variable Compensation element may be more or less than the estimate.

(e)      The PFI lease surrenders and Merton‟s transfer of land to each Academy will
         take place in September 2006.

21.      Trust Funds

The Council administers the accounts of a number of trusts. The fund balances are
invested internally. The Tamworth Recreation Foundation Trust balance excludes
the value of share investments held externally.

Trust Name                          Trust Value           Trust Value                     Purpose of
                                       2004/05               2005/06                            Trust
                                           £000                  £000
Rock Terrace –                              196                   182 To maintain within the area of
Recreation Ground                                                     benefit on the Phipps Bridge
Foundation Trust.                                                     Estate
Merton Association for                           22                22 To provide for the disabled in
Disabled People (MADP)                                                Merton.
Maintenance of Graves                            30                30 To maintain graves at certain
                                                                      sites within the borough.
Tamworth Recreation                                                   To maintain a park and
Ground                                           11                12 allotments      at   Tamworth
                                                                      Recreation Ground.
Other Trusts                                     2                  2
Total                                          261                248

MADP: A board of trustees manages this trust. The Council is represented on this
board.

Other trusts: The Council‟s records do not show the trusteeship arrangements
relating to the other trusts.

The Council is required by the SORP to disclose details of the nature and amount of
these trust funds where the authority acts as sole trustee. However, owing to the
lack of detailed records in respect of these trusts we are not able to determine
whether the Council is sole trustee.

The Council is seeking to have the balances on these trusts transferred to support
relevant services within the Council‟s General Fund. The Council has received
advice that enables it to do this in respect of Rock Terrace Recreation Ground
Foundation Trust.




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

22.      Preparation for the Euro

The Euro is the currency of the European Community.
The Council has not incurred any costs or entered into any commitments during
2005/06 in respect of any preparations for the United Kingdom to adopt the Euro
currency.

23.      Disclosure of Net Assets and Liabilities in LB Merton's Pension Fund

As part of the terms and conditions of employment of its officers and other
employees, the Authority offers retirement benefits. The scheme is a "funded
scheme", into which the Authority and its employees pay contributions into a fund to
a level that is estimated to balance pension liabilities with invested assets.

Although pension benefits are not actually payable until employees retire, the
Authority has a commitment to disclose the aggregate of the future pension
entitlement earned by its employees and which it is committed to pay to them.

In 2005/06, pensions‟ costs have been charged to the consolidated revenue account
on the basis of contributions payable for the year (based on a formal actuarial
valuation for 31st March 2004) and the pension payable in the year to retired officers.
However, as at 31st March 2006, the Authority had the following overall assets and
liabilities for pensions that have not been included in the balance sheet.

                                                                  31st March 2005    31st March 2006
                                                                             £000               £000
Estimated liabilities in scheme                                          (344,299)          (407,277)
Estimated assets in scheme                                                 216,908            283,202
Net asset/(liability)                                                    (127,391)          (124,075)

The liabilities have been assessed on an actuarial basis using:

a)       the projected unit method;
b)       an estimate of the pensions that will be payable in future years dependent on
         assumptions about mortality rates, salary levels, etc.

Barnett Waddingham LLP, an independent firm of actuaries, has undertaken this
assessment. The main assumptions used in their calculations are:

Local Government Pension Scheme                                       2004/05                2005/06
                                                                        % pa                   % pa
Rate of inflation                                                         2.9                    3.0
Discount rate (pre retirement)                                            5.4                    4.9
Discount Rate (post retirement)                                           5.4                    4.9
Expected return on assets                                                 6.8                    6.3
Rate of increase in salaries                                              4.7                    4.8
Rate of increase in pensions                                              2.9                    3.0
Rate for discounting scheme liabilities                                   5.4                    4.9




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED BALANCE SHEET

Assets to the Pension Fund are valued at fair value, principally market value for
investments, and consist of the following categories by proportion.

                                            2004/05               2004/05         2005/06     2005/06
                                        Long-term                  Market      Long-term     Market
                                     rate of return                Value    rate of return     Value
                                         expected                               expected
                                     % per annum                    £000    % per annum         £000
Equities                                      7.5                 154,281             7.0     201,329
Gilts                                         4.5                  50,841             4.2      58,539
Other bonds                                   5.3                       0             4.9           0
Property                                      7.0                  10,603             6.5      13,320
Cash                                          4.3                   1,184             4.0      10,014
Total                                                             216,909                     283,202




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

STATEMENT OF TOTAL MOVEMENTS IN RESERVES

The Statement of Total Movements in Reserves brings together all the recognised
gains and losses of the Authority during the period and identifies those which have,
and have not, been recognised in the Consolidated Revenue Account. The
statement separates the movements between revenue and capital reserves.

                                                                      Notes       2004/05    2005/06
                                                                                    £000       £000
 Surplus/(deficit) for the year:                                       1,2
 - General Fund                                                                       828      2,025
 - Housing Revenue Account                                                          (274)        102
 - Collection Fund                                                                    175      1,403
 - Movement on schools revenue reserves                                             (447)      1,240
 - Movement on other revenue reserves                                                   7        378
 Total increase/(decrease) in revenue reserves                                        289      5,148

 - Movements on pensions reserve
 - Actuarial gains (losses) relating to pensions                                   (4,933)    (3,690)
 - Change in accounting methodology relating to                                     32,595      7,006
   previous year liabilities.                                                     (55,083)          0

 Total increase/(decrease) in pension fund reserve                      3         (27,421)     3,316

 - Increase/(decrease) in usable capital receipts                                 (10,137)     1,229
 - Increase/(decrease) in capital reserves                                           1,948       (46)
 - Prior Year Adjustment – Reclassify S106 balances                                (7,186)          0
 Total increase/(decrease) in realised capital resources                4         (15,375)     1,183

 Gains/(losses) on revaluation of fixed assets                                     60,057    (14,880)
 Impairment losses due to general changes in the price of                               0           0
 fixed assets
 Total increase/(decrease) in unrealised value of fixed                 5          60,057    (14,880)
 assets

 Value of assets sold, disposed of or decommissioned                    5         (11,555)    (7,318)

 Capital receipts set aside                                                         17,108      4,558
 Revenue resources set aside                                                      (19,124)   (15,978)
 Movement on capital grants and contributions                                        9,193      9,923
 Movement on Major Repairs Reserve                                                       0         24
 Total increase/(decrease) in amounts set aside to                      6            7,177    (1,473)
 finance capital investment

 Total recognised gains and losses                                                 13,172    (14,024)

 Balance at 1st April 2005                                                        577,693    590,865
 Balance at 31st March 2006                                                       590,865    576,841




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

STATEMENT OF TOTAL MOVEMENTS IN RESERVES

    1. Fund Balances

The table below shows the movements on the Council's fund balances.

                                       General       HRA          Collection    Schools         Other            Total
                                         Fund                       Fund       Reserves      Revenue
                                                                                             Reserves

                                          £000       £000             £000          £000            £000         £000
Movement on reserves (net)                2,025       102             1,403         1,240            378         5,148


Balance brought forward at                3,665        828               632        5,727           1,156    12,008
1st April 2005
Balance at 31st March 2006                5,690        930            2,035         6,967           1,534    17,156

    2. Schools Reserves

Schools reserves comprise the following balances.

                                                                                   31st March        31st March
                                                                                         2005              2006
                                                                                         £000              £000
Balances held by schools                                                                 1,755             3,281
Schools‟ standards fund                                                                    526               632
Schools‟ PFI Balance – unapplied PFI credits                                             3,446             3,054
Total                                                                                    5,727             6,967

    3. Pension Fund Reserve

The actuarial gains identified as movements on the Pensions Reserve in 2005/06
can be analysed into the following categories.

                                 2002/03              2003/04               2004/05                 2005/06
                                £000     %          £000     %            £000     %             £000       %
Difference between the
expected and actual
return on assets             (49,761)        32    19,044           10     7,671       4.0       44,556      15.7
Experience gains and
losses    arising  on
scheme liabilities                    0        0          0          0   28,576        8.3           0             0
Changes        in     the
demographic           and
financial assumptions
used        to   estimate
liabilities                         0          0 (5,667)          (2.0) (3,652)      (1.1) (37,550)              (10)
Totals                       (49,761)            13,377                 32,595                7,006




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

STATEMENT OF TOTAL MOVEMENTS IN RESERVES

    4. Movements in realised capital resources

                                                       Usable capital     Standard          Total
                                                            receipts          Fund
                                                                £000
                                                                             £000           £000
Movement on reserve                                               1,229       (46)          1,183

Balance brought forward at 1st April
2005                                                                  4      1,167          1,171
Balance carried forward at 31st March                             1,233      1,121         2,354
2006

The usable capital receipts balance includes £1,132,832, which can only be spent for
purposes of affordable housing or regeneration works and £100,315, which can be
spent on any purpose.

The Section 106 balances have been reclassified as deferred liabilities rather than
capital reserves.

    5. Movements in unrealised capital resources

                                                                                      Fixed Asset
                                                                                     Restatement
                                                                                         Account
                                                                                             £000
Gains/(losses) on revaluation of fixed assets      - Operational assets                  (16,052)
                                                   - Non Operational assets                1,172
Impairment losses on fixed assets due to general changes in prices
Total increase/(decrease) in unrealised capital resources in 2005/06                     (14,880)

Value of assets sold, disposed of or decommissioned

Net amounts written off for disposals in 2005/06                                          (7,318)
Total movement on reserve in 2005/06                                                     (22,198)

Balance brought forward at 1st April 2005                                                477,516
Balance carried forward at 31st March 2006                                               455,318




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Statement of Accounts            2005/2006            MAIN FINANCIAL STATEMENTS

STATEMENT OF TOTAL MOVEMENTS IN RESERVES

    6. Movements in amounts set aside to finance capital investment

                                                                              Capital     Government
                                                                           Financing       Grants and
                                                                            Account           Capital
                                                                                             Deferred
                                                                                  £000           £000
Capital receipts set aside in 2005/06
   Receipts set aside to reduce indebtedness                                         59             0
   Usable receipts applied                                                        4,499             0
Total capital receipts set aside in 2005/06                                       4,558             0

Revenue resources set aside in 2005/06

    Capital expenditure financed from revenue                                   3,109               0
    Reconciling amount for provision for loan repayment                      (13,635)               0

    Reconciling difference between Major Repairs                              (2,618)               0
    Allowance received and HRA depreciation.

   Contribution to fund deferred charges                                      (2,158)               0
   Contribution to fund amortisation of long term prepayment                    (528)               0
   Contribution to fund amortisation of intangible asset                        (148)               0
Total revenue resources set aside in 2005/06                                 (15,978)               0

Write down of capital grants and contributions                                54,828          (54,828)
Capital Grants and Contributions applied to capital investment                     0             9,923

Total increase/(decrease) in amounts set aside to finance                     43,408          (44,905)
capital investment
Balance brought forward at 31st March 2005                                   175,833           51,728
Balance carried forward at 31st March 2006                                   219,241            6,823




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Statement of Accounts           2005/2006           MAIN FINANCIAL STATEMENTS

CASH FLOW STATEMENT
This statement summarises the inflows and outflows of cash arising from transactions with
third parties for revenue and capital purposes.

                                                                  Note          2004/05     2005/06
Revenue Activities
                                                                  s                £000        £000
Cash Outflows
Cash paid to and on behalf of employees                                         159,034     145,445
Other operating cash payments                                                   139,607     177,229
Housing Benefits paid out                                                        19,657      23,445
National non-domestic rate payments to national pool                             52,214      56,960
Precepts paid                                                                    17,415      18,253
Payments to the Capital Receipts Pool                               5.            7,644       4,193
                                                                                395,571     425,525
Cash Inflows
Rents (net of rebates and refunds)                                           (10,901)       (11,330)
Council Tax receipts net of refunds                                          (77,410)       (81,146)
National non-domestic rate receipts from national pool                       (53,711)       (63,782)
Non-domestic rate receipts net of refund                                     (51,609)       (56,253)
Community Charge receipts net of refunds                                            0              0
Revenue Support Grant                                                        (76,207)       (76,866)
DWP grant for benefits                                                       (54,134)       (60,958)
Other government grants                                             4.       (29,924)       (31,559)
Cash received for goods and services                                         (45,748)       (65,954)
Other operating cash receipts                                                 (7,778)        (7,101)
                                                                            (407,422)      (454,949)
(Inflow)/Outflow from Revenue Activities                            1.       (11,851)       (29,424)
Returns on Investments and Servicing of Finance Cash
Outflows
Interest paid                                                                    13,886      12,299
Cash Inflows
Interest received                                                                (3,486)     (4,934)
(Inflow)/Outflow from the Servicing of Finance                                   10,400        7,365
Capital Activities
Cash Outflows
Purchase of fixed and intangible assets                                          27,738      29,248
Purchase of long-term investments                                                     0           0
Other capital payments                                              5.           19,260       2,158
Cash Inflows
Sale of fixed assets (net of costs)                                             (15,516)    (10,148)
Sale of long term investment                                                           0           0
Capital grants and contributions                                                 (7,337)     (8,333)
Other capital cash receipts (Section 106)                                          (795)       (886)
(Inflow)/Outflow from capital activities                                          23,350      12,039
Net cash (Inflow)/Outflow before financing                                        21,899    (10,020)
Management of Liquid Resources
Net increase (decrease) in short term deposits                      3.          (50,157)     19,883
                                                                                (50,157)     19,883
Financing
Cash Outflows
Repayments of long term borrowing                                   3.           23,075     (17,200)
Capital element of finance leases                                                     0            0
Cash Inflows
New loans raised                                                                       0           0
New short term loans                                                             (6,994)     13,721
                                                                                  16,081     (3,479)
Net (increase)/decrease in cash                                                 (12,177)       6,384




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Statement of Accounts           2005/2006           MAIN FINANCIAL STATEMENTS

CASH FLOW STATEMENT

1.        Reconciliation of Consolidated Revenue Account Surplus to Revenue
          Activities Net Cashflow

This table shows year on year changes in the Council's cash balances.
                                                                                  2004/05       2005/06
                                                                                    £000          £000

Surplus/(deficit) for the year - Consolidated Revenue Account                         828         2,025
Minimum revenue position                                                            4,286         4,291
Net change in provisions                                                               83         1,482
Net change in reserves (See note below)                                             6,023         7,610
Net change in deferred revenue costs                                                (799)           285
Net change in allowances                                                                0       (1,145)
Revenue funding of capital                                                          1,119         3,109
Items on an accrual basis
Change in long term debtors (adjusted for deferred capital receipts)                   226            54
Net change in reductions in stocks                                                       1          (95)
Net change in debtors and payments in advance                                      (4,067)        4,760
Net change in creditors (after adjustment for capital creditors)                   (6,199)          130
Net change in Deferred Liabilities                                                    (50)        (196)
Revenue costs charged against capital receipts                                           0        (248)
Financing items shown later in the Cash Flow statement                             10,400         7,365

Net cash flow from revenue activities                                              11,851        29,427
                                                                                  2004/05       2005/06
                                                                                    £000          £000

Net change in reserves

HRA                                                                                 (274)           102
Collection Fund                                                                       175         1,402
Earmarked revenue reserves                                                          1,321         1,618
Schools Capital Reserves                                                                0           (46)
Major Repairs Allowance                                                             4,801         4,534

Net cash flow from revenue activities                                               6,023         7,610

2.        Reconciliation of Changes in Cash and Bank

                                     Balance         Movement       Balance Movement          Balance
                                    31/3/2004       in the Year    31/3/2005 in the Year     31/3/2006
                                         £000              £000         £000        £000          £000
     Net cash (inflow)                                  (12,177)                   6,384
     outflow
     Balance in hand
     (overdrawn)                          (717)                      11,460                       5,076




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Statement of Accounts           2005/2006           MAIN FINANCIAL STATEMENTS

CASH FLOW STATEMENT


3.        Reconciliation of items within the Financing and the Management of
          Liquid Resources Sections of the Cash Flow Statement to the related
          items in the Balance Sheet

                                    Balance          Movement      Balance      Movement          Balance
                                     31/3/04        in the Year     31/3/05    in the Year         31/3/06
                                       £000                £000       £000            £000           £000
Short term investments              125,624             (50,157)     75,467         19,533          95,000
Provision for loss of value            (350)                   0      (350)            350               0
on investments
Long term borrowing                (191,593)              23,075   (168,518)     (17,200)         (185,718)
Short term loans                     (6,986)             (6,994)    (13,980)       13,721             (259)
Outflow from financing              (73,305)            (34,076)   (107,381)       16,404          (90,977)

4.        Other Government Grants Received

This table shows the main government grants received (net of repayments).

                                                                               2004/05             2005/06
                                                                                 £000                 £000
Standards Fund                                                                   5,439               6,731
Learning Skills Council-Schools and Student Support                                  0               3,853
Supporting People                                                                    0               3,567
Learning Skills Council-Adult Education                                          6,170               2,015
Access and Systems Capacity                                                      1,551               1,961
Drug Action Team                                                                   392               1,235
Mental Illness Specific Grant                                                      999               1,101
Surestart                                                                          461               1,043
Other Grants                                                                    14,912              10,053
Total                                                                           29,924              31,559

     5.      Payments to Housing Pooled Capital Receipts

The 2004/05 cash flow figures have been reclassified to show payments in respect of
Housing Pooled Capital Receipts as revenue payments. The 2004/05 cash flow
statement showed these as capital payments. The 2005/06 statement conforms to
the SORP.




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Statement of Accounts   2005/2006     MAIN FINANCIAL STATEMENT

THE HOUSING REVENUE ACCOUNT

The Housing Revenue Account (HRA) summarises the transactions relating to the provision,
maintenance and sale of Council houses and flats and reflects a statutory obligation to
account separately for local authority housing provision.

The account must be self-financing and there is a legal prohibition on the account financing,
or being financed by, Council Tax payers.

                                                                    Notes   2004/05    2005/06
                                                                              £000       £000

Dwelling Rents                                                              (22,004)   (22,355)
Non-dwelling Rents                                                             (420)      (412)
Charges for Services and Facilities                                          (2,860)    (2,394)
HRA Subsidy Receivable (including MRA)                             1           (162)      (118)
Other Income                                                       1               0      (358)

Total Income                                                                (25,446)   (25,637)

General Management                                                            9,265      7,877
Special Services                                                              2,520      2,582
Repairs and Maintenance                                                       5,496      4,758
Rents, Rates, Taxes and Other Charges                                            10         48
Subsidy Limitation Transfer to General Fund                         1           620          0
Transfer of Assumed Surplus to ODPM                                 1         3,230      5,178
Increased Provision for Bad and Doubtful Debts                      2           118         33
Cost of Capital Charge                                              3        14,678     14,318
Depreciation and Impairments on Fixed Assets                      3,6&7       7,037      7,127
Debt Management Costs                                               3            43         41

Total Expenditure                                                             43,017     41,962
NET COST OF SERVICES                                                          17,571     16,325
Net HRA Income on the AMRA                                         3        (14,678)   (14,318)
Pensions Interest Cost less expected return on Pension             9             295        172
Assets
Amortised Premiums Payable and Discounts Receivable                3             134        121
HRA Investment Income                                              3           (701)      (728)
NET OPERATING EXPENDITURE                                                      2,621      1,572
HRA Share of Contributions to/from Pension Reserve                 9           (483)        353
Revenue Contribution to Capital Expenditure                        8             372        566
Transfer to/from Major Repairs Reserve                            3&7        (2,236)    (2,593)

HRA (Surplus)/Deficit for the Year                                               274      (102)
Surplus Brought Forward                                                      (1,102)      (828)
Balance Carried Forward                                            10          (828)      (930)




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Statement of Accounts         2005/2006     MAIN FINANCIAL STATEMENTS

NOTES TO THE HOUSING REVENUE ACCOUNT (continued)


1.      HRA Subsidy

The Government pays a subsidy to the HRA. It is based on a notional account representing
the Government's assessment of what the Council should be collecting and spending. From
2005/06 onwards the rent rebates element is no longer part of HRA Subsidy or the HRA.
Rent Rebates are part of the General Fund. In 2005/06 the notional HRA below shows that
the assumed income is greater than the assumed expenditure by £5.178m (excluding
Housing Defect Grant, which is separately accounted for). Thus £5.178m is paid back to the
ODPM under the HRA Subsidy rules. The Housing Defect Grant is income paid by ODPM to
Merton.

Further, as a result of the impact of Housing Subsidy and Rent Restructuring changes
£0.620m was transferred to the General Fund in 2004/5 (i.e. Subsidy Limitation Transfer to
the General Fund under Total Expenditure). However in 2005/6 a refund to Merton from
OPDM was made totalling £0.358m (i.e. Other Income under Total Income)

                                                                        2004/05       2005/06
                                                                           £000          £000
Management Allowance                                                       3,735         3,722
Maintenance Allowance                                                      6,860         6,835
Major Repairs Allowance (MRA)                                              4,800         4,534
Admissible Allowance                                                         146             97
Anti-Social Behaviour Allowance                                                 1             0
Charges for Capital                                                        1,226         1,317
Rent Rebates                                                                    0             0
Guideline Rent Income                                                   (19,970)      (21,679)
Interest on Receipts                                                         (28)          (19)
Less Previous Years Housing Subsidy Refund to Merton                            0            15

HRA Subsidy (excluding Housing Defect Grant) –                           (3,230)        (5,178)
(i.e. amount payable to ODPM)
see Note A below
Housing Defect Grant - see Note A below                                      162            118
HRA Subsidy (including Housing Defect Grant) –                           (3,068)        (5,060)
(i.e. net amount payable to ODPM)
see Note A below

Note A: In 2004/5 and 2005/6 the HRA Subsidy excluding Housing Defect Grant (£3.230m &
£5.178m respectively) is the amount that Merton pay to the ODPM and this appears under
the Total Expenditure section on the previous page (Transfer of Assumed Surplus to
ODPM). However the Housing Defect Grant (£0.162M & £0.118M respectively), which is
income to Merton, appears under the Total Income section (HRA Subsidy Receivable).




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Statement of Accounts         2005/2006     MAIN FINANCIAL STATEMENTS

NOTES TO THE HOUSING REVENUE ACCOUNT (continued)

2.      Rent Arrears

During the year 2005/06, rent arrears (former and current) increased by £11,895 from
£1,085,673 at 31st March 2005 to £1,097,568 at 31st March 2006. Provision has been made
in the accounts in respect of potentially uncollectable rent arrears.

                                                                        2004/05    2005/06
                                                                          £000       £000
Rent Arrears                                                              1,086      1,098
Provision for bad and doubtful debts                                      (776)      (737)

3.      Capital Charges

The 2005/06 net capital charges were £4.0m as detailed below.

                                                                            2004/05      2005/06
                                                                              £000         £000
Service Expenditure
Cost of Capital Charge                                                       14,678       14,318
Depreciation                                                                  7,037        7,127
Debt Management Expenses                                                         43           41
Operating Expenditure and Income
Net HRA Income on Asset Management Revenue Account
       Reverse capital charge                                             (14,678)     (14,318)

Premiums Payable                                                                137          121
Discounts Receivable                                                             (3)           0
Interest on Notional Cash Balance                                             (117)        (135)
Interest on Mid Year Credit Ceiling                                           (563)        (577)
Mortgage Interest                                                              (21)         (16)
Appropriations
Appropriations - HRA contribution to MRP                                           0            0
Transfer from Major Repairs Reserve                                          (2,236)      (2,593)
Total Capital Charges                                                          4,277        3,968

The Cost of Capital Charge reflects the cost of capital tied up in HRA Assets (£14.318m in
2005/6). The depreciation charge (£7.127m in 2005/6) shows the consumption of those
assets over their useful life. The Cost of Capital Charge is reversed out of the HRA through
the Capital Asset Charges Accounting adjustment (-£14.318m in 2005/6) so that it does not
impact on the amount of income to be generated to achieve a balanced budget.

The net effect of the Cost of Capital Charge and the Capital Asset Charges Accounting
adjustment is to charge the HRA with its share of interest costs.

4.      Housing Stock

The Council was responsible for managing, on average 6,641 rented units during 2005/06.
The stock at the year-end was made up as follows:

                                                                        2004/05    2005/06
Houses/Bungalows                                                          2,654      2,634
Flats/Maisonettes                                                         4,016      3,978
Stock at 31st March                                                       6,670      6,612


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Statement of Accounts         2005/2006     MAIN FINANCIAL STATEMENTS

NOTES TO THE HOUSING REVENUE ACCOUNT (continued)


5.      Valuations

The total balance sheet value (as at 1st April in the year) of HRA assets is summarised
below.

                                                                    2004/05        2005/06
                                                                      £000           £000
Operational Assets:
Dwellings                                                           419,365        406,081
Garages                                                               3,005          3,005

Non-Operational Assets                                                   553            553

Total HRA Balance Sheet Value at 1st April                          422,923        409,639

As at 1st April 2005 the Vacant Possession Value of the HRA dwellings was £1,098 million.
The balance sheet value of these dwellings as at 1st April 2005 was £406 million. The
difference between the Vacant Possession Value and the balance sheet value shows the
economic cost to Government of providing council housing at less than open market value.
This amounts to £692 million.

The total balance sheet value (as at 31st March in the year) of HRA assets is summarised
below.

                                                                    2004/05        2005/06
                                                                      £000           £000
Operational Assets:
Dwellings                                                           418,188        384,667
Garages                                                               3,005          3,005

Non-Operational Assets                                                   553            553

Total HRA Balance Sheet Value at 31st March                         421,746        388,225


6.      Depreciation

With the introduction of resource accounting from 2001/02, the Council is required to charge
depreciation. The total depreciation charged for HRA assets is summarised below.

                                                                         2004/05       2005/06
                                                                           £000          £000
Operational Assets:
Dwellings                                                                  7,037          7,127
Other Land and Buildings                                                       0              0
Non Operational Assets                                                         0              0
Total depreciation for HRA assets                                          7,037          7,127




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Statement of Accounts         2005/2006     MAIN FINANCIAL STATEMENTS

NOTES TO THE HOUSING REVENUE ACCOUNT (continued)


7.      Major Repairs Reserve

An analysis of the movement on this Reserve is shown below.

                                                                        2004/05       2005/06
                                                                          £000          £000
Major Repairs Reserve at 1st April
Opening Balance                                                           (326)               0
HRA depreciation                                                        (7,037)        (7,127)
HRA Capital expenditure financed by Major Repairs Allowance               5,127          4,510
Transfer from Major Repairs Reserve to HRA                                2,236          2,593
Major Repairs Reserve at 31st March                                           0            (24)

8.      HRA Capital Expenditure

HRA capital expenditure in 2005/06 was £5.2m and this was financed from various sources
as follows:

                                                                        2004/05    2005/06
                                                                          £000       £000
Total HRA capital expenditure                                             6,210      5,210

Financed by:
Discretionary Funding                                                        90          90
Usable Capital Receipts                                                     179           0
HRA Revenue Contributions                                                   372         566
Capital Contributions                                                       442          44
Major Repairs Reserve                                                     5,127       4,510
Total Financing                                                           6,210       5,210

The net HRA capital receipts in 2005/06 were £5.248m. Of this, £3.869m is payable to the
ODPM with £1.379m retained as usable capital receipts (i.e. for Merton‟s use).

                                                                     2004/05       2005/06
                                                                       £000           £000
Capital Receipts                                                      11,937          6,648
Less Administration & improvement costs                                (404)          (248)
Less Capital Allowances (which are earmarked for future                    0        (1,152)
Affordable Housing & Regeneration schemes)
Total HRA Capital Receipts                                              11,533       5,248
    - Of which Capital Receipts payable to ODPM                          8,588       3,869
    - Of which Usable Capital Receipts (Merton)                          2,945       1,379

9.      Pensions Reserve

The effect of FRS17 is to reduce total expenditure by £0.353m. The transfer to the Pensions
Reserve of £0.353m ensures that the FRS17 transactions have no net effect on the HRA.

10.     HRA Balances

The HRA balances as at 31st March 2005 total £0.828m and as at 31st March 2006
total                                                                 £0.930m.


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Statement of Accounts            2005/06           ADDITIONAL FINANCIAL STATEMENTS

COLLECTION FUND

This statement represents the transactions of the Collection Fund, a statutory fund
separate from the General Fund of the Council. The Collection Fund accounts
independently for income relating to Council Tax and National Non-Domestic Rates
on behalf of those bodies (including the Council's own General Fund) for whom the
income has been raised. The costs of administering collection are accounted for in
the General Fund.

  2004/05                                                                  Notes     2005/06
    £000                                                                               £000

               Income

          Council Tax:                                                       1.
   77,586 Income from Council Tax Payers                                              80,574
   10,709 Transfer from General Fund Council Tax Benefit                              11,336

   52,972 National Non-Domestic Rates                                        2.       55,620
        0 National Non-Domestic Rates (adjustment to previous                          (523)
          year)
        0 Community Charge                                                   3.            0
  141,267 Total Income                                                               147,007

               Expenditure

          Precepts and Demand:
   69,343 The Council (London Borough of Merton)                                      71,150
   17,285 Greater London Authority                                                    18,253
   86,628                                                                             89,403

          National Non-Domestic Rates:
   52,677 Payment to National Pool                                           2.       54,817
      295 Cost of Collection Allowance                                                   280
   52,972                                                                             55,097

      836 Provision for non-payment of Council Tax                           4.        1,104
      130 Payment to preceptors of previous year's surplus                                 0
  140,566 Total Expenditure                                                          145,604

     (701) (Surplus) for the year                                                    (1,403)

     (457) (Surplus)/deficit brought forward                                           (632)

       526 Transfer to General Fund of Collection Fund surplus                             0
     (632) Surplus as at 31st March                                          5.      (2,035)




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Statement of Accounts                          2005/2006          ADDITIONAL FINANCIAL STATEMENTS

NOTES TO THE COLLECTION FUND

1.         Council Tax

Council Tax income is derived from charges on the value of residential properties.
There are eight separate valuation bands. These bands are based on valuations
taken in April 1991 for this specific purpose.

The Council estimates the amount of income, which it requires from the Collection
fund for the forthcoming year. The Council Tax base is calculated. This is the total
number of properties in each of the eight valuation bands adjusted by a set
proportion to convert to the Band D equivalent for that band, (adjusted for discounts).
The Band D Charge is the required income from the Collection Fund divided by the
Council Tax base. An individual amount due for each Band is calculated by
multiplying the Band D charge by the proportion that is specified for each particular
band.

The Council Tax base in 2005/06 is 71,689 (71,627 for 2004/05). The derivation of
this is shown in the table below. The Council Tax charge for a Band D property was
£1,243.91 in 2005/06 compared to £1,206.49 in 2004/05

                   Number of                    Number of                           Equivalent
Council           Dwellings on                Dwellings after           Ratio    Number of Band D
  Tax          Valuation Officers             Discounts and              To         Properties
 Band                 List                     Exemptions              Band D
               2004/05    2005/06           2004/05   2005/06                    2004/05    2005/06
A adjust              4          4                 4          4            5/9          2          2
A                 1,057      1,040               905        886            6/9        603        590
B                 7,703      7,663             6,493      6,465            7/9      5,050      5,029
C                19,281     19,377            16,888     17,052            8/9     15,012     15,158
D                26,343     26,420            23,858     24,003            9/9     23,857     24,003
E                12,839     12,835            11,681     11,719           11/9     14,277     14,323
F                 4,641      4,667             4,236      4,274           13/9      6,118      6,174
G                 3,851      3,847             3,543      3,541           15/9      5,905      5,900
H                 1,403      1,414             1,313      1,322           18/9      2,627      2,644
Total                                                                              73,451     73,823
Allowance for non-collection                                                      (1,829)    (2,141)
Defence properties                                                                      5          7
Council Tax Base                                                                   71,627     71,689


2.       National Non-Domestic Rates (NNDR)

The Council is responsible for collecting rates due from the business ratepayers in its
area. The Inland Revenue sets the rateable value. These values are then multiplied
by a Uniform Business Rate, which is set by Central Government.
The proceeds are paid into a pool administered by the Government. The
Government then redistributes the sums paid into the pool back to local authorities'
General Funds. This is done on the basis of a fixed amount per head of population.

The table below contains information relating to National Non-Domestic Rates. The
large increase in rateable value is due to the 2005 revaluation of properties. The



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Statement of Accounts                          2005/2006            ADDITIONAL FINANCIAL STATEMENTS

NOTES TO THE COLLECTION FUND

revaluation of non-domestic properties is carried out by the Valuation Office every
five years.

                                                                              31 March       31 March
                                                                                  2005           2006
Non-domestic rateable value at year end                                       £137.1m         £169.9m
Number of Hereditements                                                         5,248           5,355
Uniform Business Rate (in the £)                                                45.6p           42.2p

The amounts included in the Collection Fund in respect of national non-domestic
rates were as follows: -

                                                                                  2004/05      2005/06
                                                                                     £000         £000
Gross Rates payable (including net amounts for previous years)                     61,499       68,849
Mandatory and discretionary reliefs                                                (6,011)      (7,057)
Transitional relief                                                                (2,383)      (5,519)
Provision for bad and doubtful debts                                                 (133)        (653)
Cost of collection                                                                   (295)        (280)
Net contribution to NNDR pool                                                      52,677       55,340

The contribution to the pool in 2005/06 (£54,817,317) is composed of £55,340,167
in respect of 2005/06 and an adjustment of £522,850 in respect of 2004/05.

3.       Community Charge

The Council collected net receipts of £120 in 2005/06 (£21 in 2004/05). These have
been transferred to the Council's General Fund.

4.       Provision for Bad and Doubtful Debts

The movements in the provision for bad and doubtful debts for the financial year
under review were as follows.

                                             Balance at           Provision   Amounts        Balance at
                                               1st April              made     charged       31st March
                                                   2005                         against            2006
                                                                              provision
                                                    £000              £000        £000           £000
Council Tax                                         3,450             1,104         454          4,100
Community Charge                                       72                 0           0             72
National Non-Domestic Rates                           475               653          47          1,081
TOTAL                                               3,997             1,757         501          5,253




5.       Collection Fund Surpluses and Deficits

There is an accumulated surplus of £2,034,647 on the Collection Fund (£631,993 in




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Statement of Accounts                          2005/2006          PENSIONS FUND ACCOUNTS

PENSION FUND
The Local Government Pension Scheme Regulations require authorities to maintain
specified pension arrangements for eligible employees. This may include those in certain
associated organisations, known as Admitted and Scheduled Bodies.

The Pension Scheme is financed by contributions from employees and the employers,
together with income and proceeds from investment of a Pension Fund administered by the
Council in accordance with the Local Government Pension Scheme (Management and
Investment of Funds) Regulations. The rates of contribution paid by employees and
employers are also determined by Regulations.

A Panel of Council Members supervises the Fund. The Director of Corporate Services is
responsible for the administration. The Authority takes professional advice on investment
policy and strategy.

FUND ACCOUNT

                                                                                   2004/5    2005/6
                                          PENSION FUND ACCOUNT            Notes
                                                                                    £000      £000
Member and Employer transactions                                          6.1

Contributions receivable:                                                  3       15,370    17,999

Transfers In                                                               5        5,136     5,820

Total Income                                                                       20,506    23,819

Benefits Payable                                                           4       11,647    13,007

Payments to and on account of leavers                                      5        4,403     3,692

Administration                                                            6.2        240       270

Total Expenditure                                                                  16,290    16,969

Net additions (withdrawals)                                               6.1       4,216     6,850
From dealing with members

Return on Investments:

            Income received                                              8.8       4,601     4,990
            Management Expenses                                          8.3       (602)     (440)
            Change in Market Value                                       8.4      17,627    50,936

Net Returns on Investments                                                         21,626    55,486

Net (Increase) in Fund during year                                                 25,842    62,336

Assets at start of Year                                                           203,055   228,897

Net Assets at end of Year                                                         228,897   291,233




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Statement of Accounts                            2005/2006                   PENSION FUND ACCOUNTS

PENSION FUND

NET ASSETS STATEMENT

The Net Assets Statement shows how the assets of the Pension Fund are invested.

     As at                                                          As at 31st March 2006         As at
    st                                                                                          st
 31 March                                                                Direct        Unit   31 March
                     Net Assets Statement                    Note
     2005                                                           Investment       Trusts       2006
     £000                                                                 £000        £000        £000
                  Investment Assets                          8.4

                  Equity Investments:
         93,840   UK                                                   83,368       37,911      121,279
         13,451   Other European                                        7,564        8,962       16,526
         13,039   American                                              8,731        7,937       16,668
          6,372   Japanese                                              4,398        4,205        8,603
         25,633   Other Overseas                                       30,765        4,219       34,984
          7,590   Developing Markets                                    9,964            0        9,964
          2,253   Asset Allocation Funds                                2,733            0        2,733

                Fixed Interest Securities:
         16,871 Public Sector: UK                                      18,765            0           18,765
         12,740                Overseas                                13,712            0           13,712
                Other                                                       0            0                0

                  Index Linked: Securities
         24,040          UK                                            25,393            0           25,393
              0          Overseas                                           0            0                0

         11,189 Property Managed Fund/Units                 8.5             0       13,161           13,161
            630 Development Capital                       8.6/1.3         553            0              553

          1,381 Cash UK                                                  1,230           5            1,235
            328 Accrued Dividends/Interest                                 305           0              305



    229,357 Investments at Market Value                               207,481       76,400      283,881

          (460) Net Current assets                           7                                        7,352

    228,897 Net Assets                                                                          291,233




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Statement of Accounts                            2005/2006                  PENSION FUND ACCOUNTS

PENSION FUND (continued)

RECONCILIATION OF THE MOVEMENT IN NET ASSETS OF THE FUND

The increase (decrease) in the market value of the fund is attributable as follows:

                                                                  2004/05   2005/06      Movement
                                                                    £000      £000           £000
Market Value of investments                                       229,357   283,881        54,524
Net Current Assets                                                  (460)     7,352         7,812
                                                                  228,897   291,233        62,336
Major movements
Scheme revenue income (note 6.3)                                                            6,850
Investment Income (note 8.7)                                                                4,990

Management Expenses (note 8.3)                                                              (440)
Change in market value (note 8.4)                                                          50,936
                                                                                           62,336



1.       Accounting Policies

         Accounts
1.1      The accounting policies conform to the CIPFA Code of Practice on Local Authority
         Accounting in Great Britain and the Statement of Recommended Accounting
         Practice (SORP) 1, 'Pension Scheme Accounts'.

1.2      The Fund Account is operated on an accruals basis except where otherwise stated.
         The Fund does not take into account liabilities to pay pensions and benefits after 31 st
         March 2006. The ability to meet these liabilities is considered by the actuarial
         valuation.

         Investment
1.3      The investment assets in the Net Asset Statement are all listed securities with the
         exception of Development Capital.

1.4      Investment managers value securities and foreign currency transactions using an
         independent stock exchange valuation service. Securities are valued at mid-market
         prices with any deficit or surplus on valuation being reflected in the year-end net
         asset balance.

1.5      The valuation of development capital investments is undertaken by the investment
         manager in accordance with the British Venture Capital Association Guidelines for
         the valuation and disclosure of Venture Capital portfolios.

1.6      The investment managers convert foreign currency transactions to sterling at London
         closing rates.

1.7      Investments are recorded at the cost of acquisition (book value).




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Statement of Accounts                            2005/2006        PENSION FUND ACCOUNTS

PENSION FUND (continued)

2.       Contributors and Beneficiaries

                                                                      2004/05    2005/06
                                                                        £000       £000

Number of Contributors                                                  3,178      3,347
Pensioners                                                              2,586      2,640
Deferred Pensioners                                                     1,930      2,075

Employers' contribution rates:                                             %           %
      Scheduled bodies:
             LB Merton                                                  11.5       11.8
             Wimbledon & Putney Commons Conservators                    18.4       20.9
             Colleges                                                   13.5       15.7
      Admitted bodies;
       Pollards Hill Housing Association                                12.8       15.0
       Greenwich Leisure                                                10.0       10.0
       Central & Cecil Housing Trust                                    17.0       19.5
Employees' contribution rates:
       Manual workers – protected                                        5.0         5.0
                                                                          6.0         6.0
       Other

3.       Contributions Receivable

                                                                     2004/05     2005/06
                                                                       £000        £000
Employers
London Borough of Merton
Normal                                                                 6,347       7,037
Special                                                                    0           0
Additional                                                             4,760       6,311

Scheduled Bodies                                                         464         577
Admitted Bodies                                                          117         124
                                                                      11,688      14,049
Members
London Borough of Merton
Normal                                                                 3,422       3,686
Additional Voluntary Contributions                                         0           0
Scheduled Bodies                                                         200         216
Admitted Bodies                                                           60          48
                                                                       3,682       3,950
Total                                                                 15,370      17,999

Additional Voluntary Contributions (AVC‟s) paid by scheme members are not included within
the pension fund accounts as specialist AVC fund providers (Bristol and West PLC and
Prudential PLC) manage these independently of the fund.




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Statement of Accounts                            2005/2006         PENSION FUND ACCOUNTS

PENSION FUND (continued)

4.       Benefits Payable (all valid claims paid during year)

                                                                        2004/05     2005/06
                                                                          £000        £000

Pensions Payable
London Borough of Merton                                                  9,293        9,969
Scheduled Bodies                                                            273          280
Admitted Bodies                                                              59           67
                                                                          9,625       10,316
Lump Sum Benefits Payable
London Borough of Merton                                                  1,968        2,688
Scheduled Bodies                                                             51            0
Admitted Bodies                                                               3            3
                                                                          2,022        2,691
Total                                                                    11,647       13,007

5.       Payments to and on account of leavers

Transfer values are sums paid to, or received from other pension schemes, relating to
periods of previous pensionable employment. These have been included on the basis of
when payments were made or receipts received. As at 31st March 2006, there were no
outstanding obligations for transfer payments or amounts receivable for 2005/2006.

Refunds of contributions have been brought into the accounts on the basis of all valid claims
paid during the year rather than the date of leaving or date of retirement.

Where members of the pension scheme have no choice but to receive a refund or single
cash sum on retirement, these accounts have included any material amounts as accruals.

Transfers values received and paid are in respect of individual member transactions. There
are no group transfers.

                                                                        2004/05     2005/06
                                                                          £000        £000

Transfer value Received                                                   5,136        5,820

Payments to and on account of leavers
Transfer Value payable                                                    4,307        3,592
Refunds of Contribution                                                      49           29
State Scheme Premiums                                                        47           71

                                                                          4,403        3,692

6.       Revenue Transactions

6.1    Dealing with Members
Income from employer and employee contributions (£18 million) now exceeds expenditure
on pensions and benefits (£13 million) as a result of action taken to increase the employer
contribution.

The underlying surplus fluctuates with transfer values paid and received. In 2005/06, the net
position was £2.1 million inflow compared to a £0.7m net inflow in 2004/05.

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Statement of Accounts                            2005/2006                  PENSION FUND ACCOUNTS

PENSION FUND (continued)

6.2      Administration Costs

The Authority is permitted to charge scheme administration costs to the fund.

                                                                                  2004/05   2005/06
                                                                                    £000      £000

Salaries                                                                             185       201
Running Costs                                                                         55        69
                                                                                     240       270

6.3      Net Revenue Income

Net revenue income finances current benefits in payment. The fund‟s revenue income
remains adequate to finance pensions/benefits currently payable without the need for
withdrawals from investment holdings. The Authority is permitted to charge scheme
administration costs to the fund.

                                                                                  2004/05   2005/06
                                                                                    £000      £000

Net additions/withdrawals from dealings with members                                4,216     6,850
Investment income net of expenses                                                   3,999     4,550
                                                                                    8,215    11,400

7.       Net Current Assets

                                                                                  2004/05   2005/06
                                                                                    £000      £000

Debtors                                                                               925       983
Creditors                                                                         (1,373)     (438)
Cash and short term deposits                                                         (12)     6,807

Net Current Assets                                                                  (460)     7,352

Debtors include employer and employee contributions of £972,000 (£877,000 in 2004/05).
There are no contingent liabilities.

8.       Investments

8.1      Fund Management Arrangements

Investment management is delegated to external investment managers as reflected in the
following table. These figures are based upon investments at market value.

                                                                        2004/05             2005/06
                                                                    %     £000       %        £000

RREEF - Property                                               0              0       2       7,747
Aberdeen Asset Management Ltd                                 51        118,053       47    134,403
UBS Global Asset Management Ltd                               48        110,674       50    142,178
English Growth Fund                                             1           630        1        553
                                                             100        229,357      100    283,881

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Statement of Accounts                            2005/2006                PENSION FUND ACCOUNTS

PENSION FUND (continued)

8.2      Statement of Investment Principles

The authority‟s policy for investment, and the conditions within which investment activities
are to be carried out is described in a Statement of Investment Principles (SIP). The SIP
also reports the extent to which the Authority‟s principles comply with a prescribed standard
of best practice, (the Myners principles), and is a key point of reference in the Corporate
Governance of the fund. Investment managers and advisers to the authority are required to
adhere to the principles set out in the SIP.

8.3      Fund Management Expenses

These include fees paid in respect of investment management agreements, which relate the
charge to the value of the fund, and so allow recognition of manager‟s performance.

                                                                                  2004/05      2005/06
                                                                                    £000         £000
Salaries                                                                             151          126
Investment managers' charges                                                         451          314
                                                                                     602          440


Income from managed/unitised funds

Fund Manager                                 Managed              Unitised                  Total
                                              %    £000            %       £000             %     £000

Aberdeen Asset Management                     57       1,919       92    1,488          68       3,407
UBS Global Asset                              36       1,228        8      126          27       1,354
Other income                                   7         229        0        0           5         229
Income - managed/unitised                    100       3,376      100    1,614         100       4,990

8.4      Value of Investments

The valuation of investments at year-end incorporates the value of purchases, gains/losses
realised on the sale of investments, and changes in the assessed market value of
investments retained in the portfolio.

Purchases and sales of investments at cost                                    2004/05          2005/06
                                                                                 £000             £000
Investment at cost at 1st April                                               195,800          219,625
Purchase of Investments                                                       119,103            61,442
Sale of Investments                                                           (95,278)         (46,377)
Investments at Cost at 31st March                                             219,625          234,690

Change in market value of value of investment                                     2004/05      2005/06
                                                                                    £000         £000
Value of investments at cost                                                      219,625      234,690
Market value of investments                                                       229,357      283,881
Unrealised profit/(loss) on investments                                             9,732       49,191

Unrealised losses accounted for in previous years                                   4,993       (9,732)
Realised net profit/(loss) on investments                                           2,902       11,477
Net change in value of investments                                                 17,627       50,936


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Statement of Accounts                            2005/2006                      PENSION FUND ACCOUNTS

PENSION FUND (continued)

8.5      Property Investments

The Council invests in property through unit trusts and a property managed fund rather than
directly by the purchase of property. Therefore, any interest in property developments is
accounted for through the value of the unit trust investment and the property managed fund.

8.6      Development Capital Investments

In 2005/06, Barings English Growth Fund is the manager responsible for undertaking
development capital investments.

8.7.      Investment Assets

Some of the investment value shown under Unit Trusts (Pooled Investments) is undertaken
by the Authority‟s investment managers via unitised insurance (Life) vehicles. This is done,
where and when appropriate, for investment efficiency in particular markets. It does not
imply the arrangement of a conventional insurance policy or investment in conventional
insurance policies.

8.8      Investment Income

                                                                                   2004/05     2005/06
                                                                                     £000        £000
Net Interest Receivable, including short term deposits                               1,023         303
Dividends and interest on treasury notes                                             3,578       4,687
Total Investment Income                                                              4,601       4,990

Source of Investment Income                                             Total                      Total
                                                                  Investment                 Investment
                                                                      Income                     Income
                                                                    Received                   Received
                                                                     2004/05                    2005/06
                                                          %             £000        %              £000

Equity Investments:
        UK                                               52.30         2,407        54.55         2,722
        Other European                                    4.15           191         3.11           155
        Japanese                                          0.03             1         0.00             1
        Other Overseas                                    0.03             1         0.33            16

Bond Investments
UK                                                       14.39           662        17.62           879
International – Non Specific                              0.00             0
UK Index Linked                                           0.00             0        12.78           637

Dividends                                                 3.49           160         4.46           223
Property                                                  6.00           276         1.62            81
Cash and Market Instruments                              19.42           894         4.21           210
Bank/Cash Interest Received                               0.19             9         0.05             3
Reclaimed Income                                          0.00             0         1.27            63

Investment Income                                       100.00         4,601        100.0         4,990

The equity income (dividends) was received from specific investments (£2.332million) and
from pooled vehicles (£0.662million).
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Statement of Accounts                            2005/2006                      PENSION FUND ACCOUNTS

PENSION FUND (continued)

9.       Actuarial Valuation

The assets and liabilities of the Fund are valued at three yearly intervals by the Council's
Actuary (Barnett Waddingham LLP). The main purpose of the actuarial valuation is as
follows:

(i)      to determine the accrued position of the fund (for which the valuation of assets is
         based on the 'assessed value approach') and;
(ii)     to establish appropriate contribution arrangements required to support accruing
         benefits (for which the 'projected unit' method has been adopted).

Regulations require the Actuary to set the employer's contribution rate for the Authority so
that it is sufficient to meet 100% of existing and prospective liabilities including pension
increases.

The valuation of the Fund is underpinned by 'economic' and 'statistical' assumptions. The
major 'economic' assumptions relate to the rate of price inflation, general pay escalation and
the rate of dividend growth. The 'statistical' assumptions cover matters such as future rates
of withdrawal and retirement from service, rates of mortality, the proportion of members
married and the progression of pensionable pay from age to age, attributable to increasing
responsibility and promotion.

The latest actuarial valuation was carried out in January 2005 and this gave an assessment
of the value of the fund as at 31st March 2004.

This actuarial valuation showed that the assessed value of the assets held by the Fund at
31st March 2004 was £204.2 million whilst the liabilities accrued in respect of pensionable
service were £272.5 million. This funding deficiency of £68.4 million is equivalent to 25% of
the accrued liabilities, compared to 14% as at the time of the 2001 valuation.


                                                           2001 Valuation           2004 Valuation
 Funding Level %                                                86%                      75%
 Funding (Deficit) £m                                          (32.8)                   (68.4)

An explanation of the change in the funding position is provided in the table below: -

                                                          Funding Position             Funding Level
                                                                       £m                         %
 Deficit at 2001 Valuation                                             (32.8)                     86
 Interest on Deficit                                        (6.3)                     (1.9)
 Investment return experience                              (44.9)                    (13.9)
 Salary increase expenditure                                (2.5)                     (0.8)
 Pension increase expenditure                                 2.2                       0.7
 Deficit funded                                               9.1                       2.8
 Other experience items                                       2.3                       0.7
 Change in market conditions                               (10.3)                     (3.2)
 Change in funding model                                     16.2                       5.0
 Change in ill health, mortality                            (1.4)                     (0.4)
 assumptions etc
 Deficit at 2005 Valuation                                             (68.4)                        75

The funding deficiency has been addressed by increasing the employers‟ contribution rate
and additional contributions to the fund in respect of past service deficiencies.

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Statement of Accounts                            2005/2006           PENSION FUND ACCOUNTS

PENSION FUND (continued)

10.      Changes in Local Government Pension Scheme Benefits

With effect from 1 April 2006, SI (Statutory Instrument) 2006/966 gives members the right to
elect to take an enhanced tax-free lump sum in return for a reduced annual pension. There
is a net benefit to employers if scheme members elect to take enhanced lump sums.

This right is a non-adjusting post balance sheet event. It is not yet possible to quantify the
effect of this on the fund deficit in future years. This is because, at the date of approval of
these accounts, there is insufficient experience of the „take up‟ of this new right.




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Statement of Accounts       2005/06                       STATEMENT OF RESPONSIBILITIES

DIRECTOR OF CORPORATE SERVICES’ STATEMENT OF RESPONSIBILITIES
FOR THE STATEMENT OF ACCOUNTS
The Authority’s Responsibilities

The Authority is required:

   To make arrangements for the proper administration of its financial affairs
    and to ensure that one of its officers has the responsibility for the
    administration of those affairs. In this Authority, that officer is the Director
    of Corporate Services.

   To manage its affairs to secure economic, efficient and effective use of
    resources and to safeguard its assets.

   To approve the Statement of Accounts.

The Director of Corporate Services’ Responsibilities

The Director of Corporate Services is responsible for the preparation of the
Authority‟s Statement of Accounts, which, in terms of the CIPFA/LASAAC
Code of Practice on Local Authority Accounting in Great Britain (“the Code”),
is required to present fairly, the financial position of the Authority at the
accounting date and its income and expenditure for the year ended the 31 st
March 2006.

In preparing this Statement of Accounts, the Director of Corporate Services
has: -

   Selected suitable accounting policies and then applied them consistently;

   Made judgements and estimates that were reasonable and prudent;

   Complied with the Code.

The Director of Corporate Services has also: -

   Kept proper accounting records which were up to date;

   Taken reasonable steps for the prevention and detection of fraud and
    other irregularities.




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Statement of Accounts       2005/06                       STATEMENT OF RESPONSIBILITIES

DIRECTOR OF CORPORATE SERVICES’ STATEMENT OF RESPONSIBILITIES
FOR THE STATEMENT OF ACCOUNTS

Certification of Responsible Finance Officer

I hereby certify that the statement of accounts on pages 9 to 61 present fairly
the financial position of the authority at the accounting date and its income
and expenditure for the year ended 31 March 2006.




M Parsons
Director of Corporate Services                                Date:


Interested members of the public had a statutory right to inspect the accounts before
the audit commenced. The availability for inspection was advertised in the local
press.

Further information about the accounts is available from:

Director of Corporate Services
8th Floor
Merton Civic Centre
London Road
MORDEN
Surrey
SM4 5DX

Or alternatively, please ask for Stephen Bowsher on 020 8545 3531.




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    Statement of Accounts                         2005/06                      SIC

    The London Borough of Merton’s Statement of Internal Control

SCOPE OF RESPONSIBILITY
1     The London Borough of Merton is responsible for ensuring that its business is
      conducted in accordance with the law and proper standards, and that public
      money is safeguarded and properly accounted for, and used economically,
      efficiently and effectively. The London Borough of Merton also has a duty under
      the Local Government Act 1999 to make arrangements to secure continuous
      improvement in the way in which its functions are exercised, having regard to a
      combination of economy, efficiency and effectiveness.

2     In discharging this overall responsibility, the London Borough of Merton is also
      responsible for ensuring that there is a sound system of internal control, which
      facilitates the effective exercise of Merton‟s functions including arrangements
      for the management of risk.

THE PURPOSE OF THE SYSTEM OF INTERNAL CONTROL

3     The system of internal control is designed to manage risk to a reasonable level
      rather than to eliminate all risk of failure to achieve policies, aims and
      objectives; it can therefore only provide reasonable and not absolute assurance
      of effectiveness. The system of internal control is based on an ongoing process
      designed to identify and prioritise the risks to the achievement of Merton‟s
      policies, aims and objectives, to evaluate the likelihood of those risks being
      realised and the impact should they be realised, and to manage them
      efficiently, effectively and economically.

4     The system of internal control has been in place at the London Borough of
      Merton for the year ended 31 March 2006 and up to the date of approval of the
      annual report and accounts.

THE INTERNAL CONTROL ENVIRONMENT
5     The key elements of the internal control environment include:
       The London Borough of Merton operates under the constitution of the Council,
         which is updated annually and facilitates policy and decision-making by
         setting the framework of operation that is reviewed by the Monitoring Officer.
         Amendments to the constitution must be recommended by the Council‟s
         General Purposes Committee upon reference of the Chief Executive as the
         statutory Head of Paid Service, the Head of Civic and Legal Services as
         statutory monitoring officer and the Council‟s Standards Committee;

       The Executive leads the preparation of the Council's policies and budget and
         makes recommendations to the full Council on the major policy plans and the
         budget and Council Tax. The Executive takes decisions within this
         framework of plans and procedural rules to implement them. A forward plan
         is published which sets out details and the proposed timing of key decisions
         (as defined by law and the constitution) to be made by the Council;




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    Statement of Accounts                         2005/06                         SIC

    The London Borough of Merton’s Statement of Internal Control
       Council adopted the national framework document of Corporate Governance
         commended by the Chartered Institute of Public Finance and Accountancy
         (Cipfa) and the Society of Local Authority Chief Executives (SOLACE) as its
         own local code of corporate governance;

       Merton‟s Best Value Performance Plan was published in early 2005 and gives
         details of priorities and targets for 2005/06 in all the key service areas. These
         are provided in the context of an assessment of past performance so that
         continuous improvement can be demonstrated and is underpinned by
         Merton‟s “Golden Thread” process and the Journey to Excellence process.
         The Best Value Performance Plan for 2005/06 was published on Merton‟s
         website in full and is available in all libraries;

       A Risk Management Strategy is in place with all services contributing to a
         corporate risk register linked to departmental Service Plan initiatives and the
         Council‟s core values as contained in the Business Plan. This process is
         coordinated by the Corporate Risk Management Group who meet on a
         quarterly basis. In addition, reporting arrangements are in place where major
         risks are reported through departmental management teams, to the
         Corporate Management team and then through to Cabinet;
         (http://intranet/risk_management_strategy.doc)

       The Departmental Planning Framework requires Heads of Service to identify
         key priorities for a twelve-month period with indicators and targets for each
         priority. These priorities support those in Merton‟s Performance Plan and
         Business Plan as well as the key priority areas agreed by the Executive and
         Chief Executive. In addition, priorities and targets related to the particular
         service areas, whether internally or externally driven, are included;

       The Council has designated the Head of Civic and Legal Services as
         Monitoring Officer. It is the function of the Monitoring Officer to ensure
         compliance with established policies, procedures, laws and regulations;

       The Council‟s Section 151 Officer, currently the Director of Corporate
         Services, is responsible for ensuring that appropriate advice is given on all
         financial matters, for keeping proper financial records and accounts and for
         maintaining an effective system of internal financial control. The system is
         based on a framework of regular management information, financial
         regulations and administrative procedures (including segregation of duties),
         management supervision and a system of delegation and accountability.
         These are detailed in the Council‟s Constitution and associated
         supplementary documentation;

       Thorough reviews are undertaken by external auditors, external agencies,
         select committees, internal audit and the Performance Improvement team.
         Merton constantly seeks ways of ensuring the economical, effective and
         efficient use of resources, and for securing continuous improvement in the
         exercise of its functions. The introduction of Merton‟s VFM and Procurement
         Teams will significantly enhance Merton‟s efficiency.


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     Statement of Accounts                        2005/06                        SIC

     The London Borough of Merton’s Statement of Internal Control
REVIEW OF EFFECTIVENESS

6     The London Borough of Merton has the responsibility for conducting, at least
      annually, a review of the system of internal control. The review of the
      effectiveness of internal controls is informed by the work of the internal auditors
      and the senior managers within the authority, who have responsibility for the
      development and maintenance of the control environment, and also by
      comments made by the external auditors and other review agencies and
      inspectorates.

7     The Council‟s Executive received a report on 5th September 2005 from the
      S151 Officer and the Monitoring Officer detailing the Ethical Governance Audit.
      The overall conclusion of the review was that although the corporate
      governance arrangements continue to meet most aspects of the Code of
      Corporate Governance, there have been significant issues identified in internal
      control during 2005/06.

8     The Council‟s Standard‟s Committee encompasses the roles and
      responsibilities of the audit function and receives regular detailed reports on the
      work undertaken by Internal Audit, including internal control reviews.

9     The Statement of Internal Control review of 2005/06 has found some
      improvements since 2004/05; however the majority of the areas previously
      identified still feature as risks to be addressed.
10    The Council‟s ambitious programmes for development are being brought
      together in an improvement programme. In order to protect the Council‟s
      interests, it is essential that during this time of change good standards of
      corporate governance continue to be maintained and the importance of internal
      control is recognised.

11    This enables them to find about more about the rationale behind the decision, to
      challenge the decision taker and to consider whether the decision was
      appropriate. As a result of this work, they may ask the Executive to reconsider
      the decision in light of their views. Furthermore, the scrutiny process includes
      in-depth reviews of council services or issues of local concern allowing scrutiny
      members to undertake a full examination of the issue and identify areas for
      improvement and potential solutions for problems. Scrutiny also has a specific
      role in overseeing the development of the Council‟s Business Plan and budget;

       Following a full external and internal review of overview and scrutiny
        procedures at Merton completed in March 2006, the structure and processes
        have been revised and will be implemented in 2006-2007. It is anticipated that
        this will enable the scrutiny function to maximise its contribution to the
        Council‟s good governance and improvement agendas. The impact of these
        revisions will be monitored over the course of the year;
       There is a Standards Committee whose terms of reference include the
      monitoring of corporate governance arrangements, approving the internal audit
      plan and receiving reports from the internal and external auditors;



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      Statement of Accounts                       2005/06                       SIC

      The London Borough of Merton’s Statement of Internal Control
        The Director of Corporate Services is designated as the Council‟s responsible
         financial officer (S151 Officer) and the Head of Legal Services is designated
         as the Council‟s Monitoring Officer and they are responsible for the functions
         as set out in the Council‟s Constitution;
        Internal audit is undertaken in accordance with the Code of Practice for
         Internal Audit in Local Authorities in the United Kingdom (published by CIPFA)
         as required by the Accounts and Audit Regulations 2003. Internal Audit has a
         direct reporting line to the Standards Committee. The Council‟s external
         auditors, who report to the Council through their annual audit letter, assess
         the internal audit function annually. For year ended 31 March 2005 the
         internal audit function was assessed as an “effective” service;
        The review of internal controls for Merton for 2005/06 was carried out using
         evidence obtained from the Corporate Governance review, external
         inspections, documented internal arrangements, and internal audit reviews;

12.     Officers have been advised on the implications of the result of the review of
        the effectiveness of the system of internal control by the Executive and Audit
        and Governance Committee, and a plan to address weaknesses and ensure
        continuous improvement of the system is being prepared.




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    Statement of Accounts                         2005/06                         SIC

    The London Borough of Merton’s Statement of Internal Control
SIGNIFICANT INTERNAL CONTROL ISSUES

    13       Appendix 1 highlights significant internal control issues that have been
             identified and the following actions are included in Merton‟s improvement
             programme.
      a.      Implement a protocol to ensure that the Council‟s policies and procedures
              are kept up to date both in hard copy and electronically (both public web
              site and Intranet as appropriate) and communicated to all those who need
              to know in an appropriate manner.
      b.      Continue to develop the performance management framework and
              performance monitoring arrangements and communicate the value of
              these arrangements throughout the Council
      c.      Continue to develop the risk management arrangements taking account of
              the recommendations of the Corporate Risk Management Group
      d.      Introduce control self assessment by services as a means of ensuring that
              services recognise the need for and accept ownership of the internal
              control environment.
      e.      Review the staff code of conduct so that it fully supports the national code
              of conduct to be issued by the Office of the Deputy Prime Minister; now
              Department for Committees and local Government.
      f.      Review the arrangements for declaration of interests and receipt of gifts
              and hospitality to ensure that a consistent approach is adopted across the
              Council and that it is adequately communicated throughout the
              organisation.
      g.     Continue to publicise the anti-fraud and anti-corruption strategy and
              whistle blowing policy as part of the Council‟s arrangements to address
              the risk of fraud and corruption.
      h.     Review Financial Regulations, Financial Procedures and Financial
             Management Arrangements to ensure a consistent approach is adopted
             across the Council and improve internal control.
      i.      Review Health & Safety arrangements to ensure they reflect Corporate
             Management Team‟s (CMT) ultimate accountability both for implementing
             policy and putting in place improvements required by the Health & Safety
             Executive (Health & Safety Intranet pages http://intranet/cs-index/cs-
             who/auditandsupport/corporatesafetyandrisk/corporate_policy_documents.
             htm
      j.      Review management structures and ownership of systems to achieve
             benefits of those systems whilst ensuring that an adequate and effective
             control environment is in place.
      k.     Introduce a robust monitoring process of the benefits and savings
             identified for the VFM reviews.




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    Statement of Accounts                         2005/06                                     SIC

    The London Borough of Merton’s Statement of Internal Control




    Mike Parsons
    Director of Corporate Services
    September 2006




    Ged Curran                                                        David Williams
    Chief Executive                                                   Leader of the Council
    September 2006                                                    September 2006




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     Statement of Accounts                         2005/06                                     SIC

     The London Borough of Merton’s Statement of Internal Control


 Appendix 1
     Significant Internal Control Issues.

Weakness and Potential Impact             Action Plan for improvement.
A number of the Council‟s Human           The HR function has been rightly criticised
Resources‟ policies and procedures were   in the past as an under-performing area of
revisited,      following   weaknesses    the council. The high level of internal audit
highlighted in past years.                inspection reflects the previous
The areas reviewed were:-                 performance levels. However, significant
Recruitment procedures                    steps and progress has been made in the
Redeployment Pool                         past 18 months, which is demonstrated by
Travel and Subsistence                    the positive follow-up inspection by the
Statutory sick pay                        Audit Commission in April 2006.
Criminal Records Bureau Checks            Additionally, the restructure of HR and
                                          several senior appointments, during
These are sensitive areas where the
                                          2005/06, have increased the capacity to
Director of Corporate Services requires a
high assurance level.                     address the issues identified.
                                                    The senior HR Management Team (Head
                                                    of HR, Learning and Development
                                                    Manager and Business Partnerships
                                                    Manager) has adopted a risk-based
                                                    approach to the issues raised by Internal
                                                    Audit. A central register and action plan is
                                                    maintained and actions on the highest
                                                    levels of risk have been identified and
                                                    appropriate actions taken.
                                                    Recent actions include the following:
                                                            Actions to address issues around
                                                             CRB checks including a centralised
                                                             register for all staff and the supply of
                                                             reports to senior managers and
                                                             schools
                                                            As part of the centralised agency
                                                             contract, conduct a review of CRB
                                                             checks for contractors working with
                                                             children and vulnerable adults
                                                            Implement web-based e-forms and
                                                             revised emailed management
                                                             reports for line managers to support
                                                             revised absence policies
                                                            An extensive review of recruitment
                                                             procedures is underway and is due
                                                             to report in September 2006.




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     Statement of Accounts                         2005/06                                  SIC

     The London Borough of Merton’s Statement of Internal Control



                                                         However, there is, and will continue to
                                                         be, a number of lower level risk areas
                                                         that have yet to be addressed or will be
                                                         addressed by other large-scale
                                                         initiatives. Such an example is the
                                                         changes to travel and subsistence are
                                                         related to the overall review of reward
                                                         and the implementation of Single
                                                         Status.
                                                         Overall, the actions and plans are
                                                         monitored against key milestones and
                                                         target dates.

Controls in relation to Contracts and               Action Plans have been agreed with
procurement were inadequate in a number             relevant Departments. In addition the
of areas and this could lead to potential           formation of the Procurement Board and
corrupt activities.                                 Forum and the identification of Key
                                                    Procurement Champions in each
                                                    Department will help ensure good practices
                                                    are rolled out across Departments.
The level of financial control within the           The Director of Children, Schools and
school environment is exhibiting a                  Families has agreed to the provision of
downward       trend.    Financial  control         extra training to be delivered to schools to
weakness in establishments can lead to              reverse this trend. The introduction of the
significant financial loss and a failure to         DFES Financial Management Standard
meet service delivery requirements.
                                                    and Tool Kit is also to be introduced during
                                                    2006/7, which will ensure standards are
                                                    improved.
Risk Register Items. The top items are              Corporate Champions have been identified
Stress Management, violence against                 by CMT and action plans to mitigate the
employees, Recruitment and Retention.               identified risks have been drawn up.
I.T. disaster recovery, record keeping              Members are now included in the
systems, partnerships and control of                Corporate Risk Management Group.
expenditure,




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



1.      General Principles

The purpose of this statement is to explain the basis for the recognition,
measurement and disclosure of transactions in the accounts.

Accounting policies are the principles applied by an authority that specify how the
effects of transactions are to be reflected in its accounts. An accounting policy will
specify the basis upon which an item is to be measured.

Estimation techniques are the methods adopted by an authority to arrive at
estimated monetary amounts. Where there is uncertainty over the monetary amount
corresponding to that basis, the amount will be arrived at using an estimation
technique.

The Accounts and Audit Regulations 2003 require that the principles adopted in
compiling these accounts should be stated in the published Statement of Accounts.
The principles followed in these accounts are those recommended by CIPFA in the
„Code of Practice on Local Authority Accounting in Great Britain: A Statement of
Recommended Practice‟ unless stated otherwise. The 2005 Code of Practice, or
SORP, applies to accounting periods beginning on or after 1 st April 2005.

The SORP prescribes the accounting treatment and the minimum level of
disclosures for all normal transactions of a local authority.       It incorporates
Statements of Standard Accounting Practice (SSAPs) and Financial Reporting
Standards (FRSs) which are produced by the Accounting Standards Board (ASB) to
the extent that they comply with specific legal requirements and are relevant to the
activities of the local authority.

2.      Accounting Principles (FRS18 Accounting Policies)

The selection and application of accounting policies and estimation techniques
should take into account fundamental accounting concepts or principles. These
principles comprise the qualitative characteristics of financial information, materiality
and three further principles-accruals, going concern and the primacy of legislative
requirements - which play a pervasive role in financial statements.

Qualitative characteristics of financial information: Financial information must have
the following qualitative characteristics:-

    Relevance - The objective of financial information is to provide information about
     the Authority's financial performance and position, such that it is useful for
     assessing the stewardship of funds and for taking decisions.

    Reliability - Financial information is reliable if: it reflects the substance of
     transactions rather than their formal legal character; it is complete and accurate
     (within the bounds of materiality); and if it has been prudently prepared.
     Prudence is required in the recognition and measurement of

    assets, liabilities, income and expenditure because of uncertainty about their
     existence or the amount at which they are to be measured.

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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES




    Comparability - The information in financial statements can be compared with
     similar information for the same organisation from previous periods or with similar
     information from other authorities.      Comparability requires consistency in
     accounting policies.

    Understandability - Financial statements should be as easy to understand as
     possible. The SORP requires that, wherever possible, the Statement of Accounts
     should be written in plain language and technical jargon used sparingly.
     Technical terms should be explained in a glossary.

        Materiality:    The accounts must include significant transactions.          A
         transaction is significant if its omission or misstatement might reasonably be
         expected to influence an assessment of the Authority's stewardship or
         comparisons with other organisations based upon the financial statements.

        Accruals: This concept means that expenditure and income are recognised
         in the accounts in the period in which they are incurred or earned, not as
         money is paid or received. The concept is also concerned with matching
         income with associated costs and expenses when a relationship can be
         established or justifiably assumed.

        Going Concern: A local authority's Statement of Accounts should be
         prepared, on the assumption that the authority will continue in operation for
         the foreseeable future.

        Primacy of Legislative Requirements: The financial and accounting
         framework of local authorities is closely controlled by primary and secondary
         legislation. It is a fundamental principle of local authority accounting that
         legislative requirements shall take precedence when specific legislative
         requirements and accounting principles conflict.

3.       Accounting Policies and Estimation Techniques

Accounting policies are the principles and practices that are applied by an authority
that specify how the effect of transactions and other events will be reflected in its
financial statements. An authority must select the accounting policies, which are
most appropriate to its circumstances.

An accounting policy will specify the basis on which an item is to be measured. In
some cases, it may be necessary to use estimation techniques to determine these
amounts.




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



4.       LB Merton accounting policies and estimation techniques

The accounting policies and estimation techniques disclosed are those, which are
significant to an understanding of the Statement of Accounts.

4.1      Reserves and provisions

Provisions and Contingencies (FRS 12): Where there are significant liabilities of
uncertain timing or amount, provisions have been recognised in the accounts.
These provisions meet the following three criteria:-

     The Authority has a present obligation (legal or constructive) as a result of a past
      event;
     It is probable that a transfer of economic benefits will be required to settle the
      obligation;
     A reliable estimate can be made of the obligation.

On grounds of prudence, the Authority also makes provision for bad and doubtful
debts. These provisions are shown as a reduction in the value of debtors.

The Authority may make provision where the market value of investments is below
their book value. Such provision will be deducted from the value of investments.

Where a material contingent loss cannot be accurately estimated, or because the
event is not considered sufficiently certain, it has not been included within the
financial statements, but disclosed as a note to the accounts. Contingent gains are
not accrued for within the accounting statements.

Reserves: Reserves are a method of identifying funds for future use. The SORP
requires that the purpose, usage and the basis of transactions should be clearly
identified for each reserve.

4.2      Fixed Assets

Tangible Fixed Assets The figure for fixed assets in the Consolidated Balance Sheet
contains expenditure on the acquisition, creation or enhancement of tangible fixed
assets.

Tangible fixed assets include: -

     Acquisition, reclamation, enhancement or laying out of land;
     Acquisition, construction, preparation, enhancement or replacement of roads,
      buildings and other structures;
     Acquisition, installation or replacement of movable or immovable plant,
      machinery, and apparatus.




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



Enhancement means the carrying out of works, which are intended to:

   Lengthen substantially the useful life of an asset; or
   Increase the open market value of the asset; or
   Increase substantially the extent to which the asset can or will be used for the
    purposes of, or in conjunction with, the functions of the local authority concerned.

Under this definition, expenditure on improvement works and structural repairs is
treated as expenditure on fixed assets, whereas expenditure on routine repairs and
maintenance, which simply maintains a previously assessed level of performance, is
charged to revenue.

The salary costs of Council staff have been included in the value of fixed assets
where there is a direct relationship between the work of that member of staff and the
bringing of the fixed asset into working condition for its intended use.

Where a fixed asset is acquired for other than a cash consideration, or where
payment is deferred, the asset is recognised and included in the Consolidated
Balance Sheet at fair value.

Intangible Assets: This category covers purchased intangible assets such as
software licences and those balances previously classified as deferred charges.

Valuation of fixed assets:

Fixed assets are classified into categories required by the 1998 Code of Practice.

Except where indicated, the Council maintains a detailed register for each category
of asset.




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



The valuation bases are recommended by CIPFA. The categories of fixed assets
and their valuation bases are as follows: -


           Category
                                                               Valuation Basis

   Council Houses                     Valued at Existing Use Value for Social Housing;
   Other Land and                     Operational properties (specialised): Valued at
    Buildings                          depreciated replacement cost, i.e. what it costs to
                                       reinstate the asset or to acquire a modern equivalent;
                                       Operational properties (non specialised): Valued on
                                       the basis of existing use value (EUV), i.e. the open
                                       market value of equivalent assets of a similar type and
                                       condition and continuing in current use.

                                       Valued at historic (original) cost. Records each type of
   Infrastructure                     infrastructure.
   Intangible Assets                  Valued at historic (original) cost.

   Vehicles                           These are valued at the lower of net current costs or
                                       net realistic value. From 2005/06, the Council began
                                       to buy these items rather than lease them.

                                       These assets are incorporated with fixtures and
   Plant and Equipment                fittings.

                                       There is no separate register of fixtures and fittings. A
   Fixtures and fittings              set percentage is applied to the assessed value of
                                       each property. This percentage has been obtained
                                       from a detailed study of Council properties.
   Community Assets                   These are normally valued at £0.             Where an
                                       operational property is located within a community
                                       asset, it is valued separately.
   Investment Properties              These are valued at the lower of net current
                                       replacement cost or net realisable value. This will
                                       normally be open market value (OMV).
   Assets Under                       These should be valued at lower of the net current
    Construction                       replacement cost or net realisable value.
   Assets Surplus To                  These are valued at the lower net current replacement
    Requirements.                      cost (Open Market Value (OMV).

The changes to asset values arising on the initial and subsequent valuations have
been credited or debited to the Fixed Asset Revaluation Account.

All assets are valued individually at least once in every five years.

HRA Properties (Council Houses and certain non-operational properties)



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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



The last full revaluation was in April 2005. The valuation was carried out by
Countrywide Surveyors, Vandyke House, 19 Lydden Road, Wandsworth, London
SW18 4LT. After this date, the valuation is updated using the Land Registry Index.

Other land and Buildings – One fifth of the properties are valued each year. The
Director of Environment and Regeneration carries out this work.

Depreciation: This is provided for on the gross value of all fixed assets with a finite
useful life. It is calculated on a straight-line basis over the asset‟s estimated useful
economic life. When an asset is re-valued, any accumulated depreciation is written
out of the accounts. Depreciation is not charged on land, on assets, which are
acquired nor on any additional expenditure arising in the current year on existing
assets.

Amortisation: Intangible assets are amortised over their economic lives, which will
normally be five years. The useful economic life of intangible assets is reviewed at
the end of each accounting period. The method of amortisation should reflect the
expected pattern of depletion.

The useful economic life for each asset class is as follows-

Category                                                Estimated Useful Life
 Council Houses                                        60 years.
 Other Land and Buildings                              40 years
 Infrastructure                                        40 years.
 Intangible Assets                                     3 years
 Plant and Equipment                                   10 years
 Fixtures and Fittings                                 10 years
 Community Assets                                      None.
 Vehicles                                              3-7 years

Impairment: Impairment reflected by a significant fall in the market value of an asset
is accounted for as part of the revaluation of assets. Impairment due to physical
damage or a deterioration in the quality of the service provided by an asset is
accounted for through the charge for depreciation.

Capital Charges: The Council's service revenue accounts are charged with a capital
charge for all fixed assets used in the provision of services. The total charge
provides for depreciation together with a capital financing charge determined by
applying a specific notional rate of interest to the value of the assets employed in the
service.
The capital charges are reversed in this account and so have no overall effect on the
amounts required from local taxpayers.

External Interest: Financing costs (interest paid to lenders) are charged to the Asset
Management Revenue Account.




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



4.3     Receipts arising from the sale of fixed assets

The Council accounts for capital receipts on an accruals basis.

Where a fixed asset is disposed of for other than a cash consideration, or payment is
deferred, an equivalent asset is recognised and included in the Consolidated
Balance Sheet at its fair value.

Capital receipts are available either for financing new capital expenditure (usable) or
available for payments to the DCLG (formerly ODPM) for the pooling of housing
capital receipts.

4.4     Grants (SSAP 4)

Revenue Grants: Revenue grants are matched with the expenditure to which they
relate in the period in respect of which they are payable.

Capital Grants: Capital grants received or receivable but not yet applied are held in
the Capital Grants and Contributions Unapplied Account. This account balance is
part of the Council‟s liabilities.

When these grants have been applied, they are transferred to the Capital Grants and
Contributions Deferred Account, in accordance with the SORP.

Sums due to the Authority in respect of Government grants are the best estimate
based on the data available at the time the accounts are closed. All amounts due are
subject to audit of the final claim.

Where a fixed asset is financed wholly or in part by a Government grant or other
contribution, the amount of the grant or contribution is credited to the Capital Grants
and Contributions Deferred Account. For depreciating assets, the grant is transferred
to the Asset Management Revenue Account over the useful life of the asset.

4.5     Interest Charges

Interest payable on external borrowing and interest income are accrued and
accounted for in the accounts of the period to which they relate on a basis which
reflects the overall economic effect of the borrowing.

4.6     The redemption of debt

When debt is redeemed before its notional maturity date, the lender may charge a
premium in respect of loss of future income.

The SORP requires that premiums be recognised in the Consolidated Revenue
Account in the period in which they occur although in certain circumstances,
premium costs can be recognised over the life of the replacement borrowing.
These circumstances are when the redemption of borrowing is coupled with
refinancing or restructuring of borrowing with substantially the same overall
economic effect when viewed as a whole.

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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



Where the premium for the redemption of debt has been charged to the
Consolidated Revenue Account in the year in which they occur, regulations have
allowed this expenditure to be financed by capital receipts. This funding entry is
shown as a contribution from the Capital Financing Account.

Where premium costs are charged over the life of the borrowing, the amortised cost
is included in external interest in the Asset Management Revenue Account.

4.7      Leases, covenants and similar schemes (SSAP 21)

The capital value of leased assets is not included with the value of other capital
assets shown in the Balance Sheet.

Operating lease rentals are charged to the revenue account on an accruals basis.
Further details are provided in the notes of the Consolidated Revenue Account.

4.8      Long Term Contracts

Leisure Services The Council has a long-term agreement with Greenwich Leisure
Limited (GLL), which manages the Council's leisure centres. The agreement
provides for the Council to pay a net annual sum to GLL comprising:-

     A sum payable to GLL to manage the Council's leisure centres
     A sum payable by GLL to the Council to pay off the debts of Merton Leisure Ltd,
      which are held within the accounts of this Authority.

Secondary Schools The Council has also entered into a Private Finance Initiative
(PFI) scheme to rebuild and run six secondary schools. The scheme is being
accounted for under FRS5.

Capital – The schools are leased to the PFI partner, the NewSchools consortium,
which will refurbish and run the schools and retains ownership of them. The Council
has removed the value of the schools from the figure for “Other Land and Buildings”
in the Consolidated Balance Sheet.

The Council has made a significant capital contribution to NewSchools towards the
cost of these works from the proceeds of land sales. The effect of these contributions
is to reduce the annual unitary payments to NewSchools for running the schools.
These capital contributions are retained in the Council‟s Consolidated Balance Sheet
as Long Term Prepayments and are being amortised to revenue in equal instalments
over the life of the PFI scheme.

Revenue – The PFI scheme involves the payment to NewSchools of an annual
„unitary payment‟ which forms part of Education net revenue expenditure in the
Consolidated Revenue Account.




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



4.9   Significant estimates including significant estimates in debtors and
creditors

The accounts include sums due from specific government grants. These sums are
based upon grant claims, which have not yet been audited.

The various provisions for bad and doubtful debts are based upon estimates of
future levels of collection.

There are no other significant estimates for debtors and creditors.

4.10    Stocks and works in progress (SSAP9)

Stocks and stores are valued at, or at an approximation of, the lower of cost and net
realisable value.

4.11    Support Services

The accounting treatment of support services (or overheads) follows CIPFA's
recommendations. These are as follows: -

   Services should be charged with the cost of the overheads used to provide those
    services.
   The cost of the Corporate and Democratic Core and Non Distributed Costs are
    held in separate service headings and not apportioned further.

Charges for support services are made in accordance with Service Level
Agreements (SLAs) or apportioned on a suitable basis. Any unapportioned balances
are included within Non-Distributed Costs.

4.12    Pensions

Local Government Pension Scheme: The London Borough of Merton pays a
percentage contribution based on its employees' pay. An independent actuary
assesses the Council's contribution every three years to ensure that it covers the
cost of pensions, pension increases, and lump sum payments.

The scheme is funded by employees' and employer's contributions, which are held
as investments managed by the Director of Corporate Services on the advice of
Fund Managers.

Teachers' Pension Scheme: Employees' and employer's contributions are paid over
to the Teachers Pension Agency, which administers the scheme and pays pensions.




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Statement of Accounts                2005/06        STATEMENT OF ACCOUNTING POLICIES



4.13    Investments

These are valued at cost less provision, where appropriate, for loss in value.
Dividends are credited to revenue when receivable.




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Statement of Accounts      2005/06                          INDEPENDENT AUDITOR’S REPORT

INDEPENDENT AUDITORS REPORT TO LONDON BOROUGH OF MERTON

Independent auditor’s report to the Members of London Borough of Merton

Opinion on the financial statements

    I have audited the financial statements and pension fund accounts of the London
    Borough of Merton for the year ended 31 March 2006 under the Audit Commission Act
    1998. The financial statements comprise the [Consolidated Revenue Account, the
    Housing Revenue Account, the Collection Fund, the Consolidated Balance Sheet, the
    Statement of Total Movements in Reserves, the Cash Flow Statement] and the related
    notes. The pension fund accounts comprise the Fund Account, the Net Assets
    Statement, and the related notes. The financial statements and pension fund accounts
    have been prepared under the accounting policies set out within them.
    This report is made solely to London Borough of Merton in accordance with Part II of the
    Audit Commission Act 1998 and for no other purpose, as set out in paragraph 36 of the
    Statement of Responsibilities of Auditors and of Audited Bodies prepared by the Audit
    Commission.
Respective responsibilities of the Chief Finance Officer and auditors

    The Chief Finance Officer‟s responsibilities for preparing the financial statements,
    including the pension fund accounts, in accordance with applicable laws and regulations
    and the Statement of Recommended Practice on Local Authority Accounting in the
    United Kingdom 2005 are set out in the Statement of Responsibilities.
    My responsibility is to audit the financial statements in accordance with relevant legal
    and regulatory requirements and International Standards on Auditing (UK and Ireland).
    I report to you my opinion as to whether the financial statements and the pension fund
    accounts present fairly, in accordance with applicable laws and regulations and the
    Statement of Recommended Practice on Local Authority Accounting in the United
    Kingdom 2005:
        the financial position of the Council and its income and expenditure for the year; and
        the financial transactions of its pension fund during the year and the amount and
         disposition of the fund‟s assets and liabilities, other than liabilities to pay pensions
         and other benefits after the end of the scheme year.




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Statement of Accounts      2005/06                          INDEPENDENT AUDITOR’S REPORT

INDEPENDENT AUDITORS REPORT TO LONDON BOROUGH OF MERTON

    I review whether the statement on internal control reflects compliance with CIPFA‟s
    guidance „The Statement on Internal Control in Local Government: Meeting the
    requirements of the Accounts and Audit Regulations 2003‟. I report if it does not comply
    with proper practices specified by CIPFA or if the statement is misleading or inconsistent
    with other information I am aware of from my audit of the financial statements. I am not
    required to consider, nor have I considered, whether the statement on internal control
    covers all risks and controls. I am also not required to form an opinion on the
    effectiveness of the Council‟s corporate governance procedures or its risk and control
    procedures
    I read other information published with the financial statements, and consider whether it
    is consistent with the audited financial statements. This other information comprises only
    the Explanatory Foreword. I consider the implications for my report if I become aware of
    any apparent misstatements or material inconsistencies with the financial statements.
    My responsibilities do not extend to any other information.


Basis of audit opinion

    I conducted my audit in accordance with the Audit Commission Act 1998, the Code of
    Audit Practice issued by the Audit Commission and International Standards on Auditing
    (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination,
    on a test basis, of evidence relevant to the amounts and disclosures in the financial
    statements. It also includes an assessment of the significant estimates and judgments
    made by the Council in the preparation of the financial statements, and of whether the
    accounting policies are appropriate to the Council‟s circumstances, consistently applied
    and adequately disclosed.
    I planned and performed my audit so as to obtain all the information and explanations
    which I considered necessary in order to provide me with sufficient evidence to give
    reasonable assurance that the financial statements are free from material misstatement,
    whether caused by fraud or other irregularity or error. In forming my opinion I also
    evaluated the overall adequacy of the presentation of information in the financial
    statements.




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Statement of Accounts      2005/06                          INDEPENDENT AUDITOR’S REPORT

INDEPENDENT AUDITORS REPORT TO LONDON BOROUGH OF MERTON

Opinion

    In my opinion:


    The financial statements present fairly, in accordance with applicable laws and
    regulations and the Statement of Recommended Practice on Local Authority Accounting
    in the United Kingdom 2005, the financial position of the Council as at 31 March 2006
    and its income and expenditure for the year then ended; and


    The pension fund accounts present fairly, in accordance with the Statement of
    Recommended Practice on Local Authority Accounting in the United Kingdom 2005, the
    financial transactions of the pension fund during the year ended 31 March 2006 and the
    amount and disposition of the fund‟s assets and liabilities as at 31 March 2006, other
    than liabilities to pay pensions and other benefits after the end of the scheme year.




    Derek Elliott
    District Auditor
    Audit Commission
    Millbank Tower
    Millbank
    London SW1P 4HQ


    Date




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Statement of Accounts      2005/06                          INDEPENDENT AUDITOR’S REPORT

INDEPENDENT AUDITORS REPORT TO LONDON BOROUGH OF MERTON


Conclusion on arrangements for securing economy, efficiency and
effectiveness in the use of resources

Council’s responsibilities

    The Council is responsible for putting in place proper arrangements to secure economy,
    efficiency and effectiveness in its use of resources, to ensure proper stewardship and
    governance, and to regularly review the adequacy and effectiveness of these
    arrangements.
    Under the Local Government Act 1999, the Council is required to prepare and publish a
    best value performance plan summarising the Council‟s assessment of its performance
    and position in relation to its statutory duty to make arrangements to ensure continuous
    improvement in the way in which its functions are exercised, having regard to a
    combination of economy, efficiency and effectiveness.
Auditors' responsibilities

    I am required by the Audit Commission Act 1998 to be satisfied that proper
    arrangements have been made by the Council for securing economy, efficiency and
    effectiveness in its use of resources. The Code of Audit Practice issued by the Audit
    Commission requires me to report to you my conclusion in relation to proper
    arrangements, having regard to relevant criteria specified by the Audit Commission for
    principal local authorities. I report if significant matters have come to my attention, which
    prevent me from concluding that the Council has made such proper arrangements. I am
    not required to consider, nor have I considered, whether all aspects of the Council‟s
    arrangements for securing economy, efficiency and effectiveness in its use of resources
    are operating effectively.
    I am required by section 7 of the Local Government Act 1999 to carry out an audit of the
    Council‟s best value performance plan and issue a report:
        certifying that I have done so;
        stating whether I believe that the plan has been prepared and published in
         accordance with statutory requirements set out in section 6 of the Local Government
         Act 1999 and statutory guidance; and
        where relevant, making any recommendations under section 7 of the Local
         Government Act 1999.




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Statement of Accounts      2005/06                          INDEPENDENT AUDITOR’S REPORT

INDEPENDENT AUDITORS REPORT TO LONDON BOROUGH OF MERTON

Conclusion

    I have undertaken my audit in accordance with the Code of Audit Practice and I am
    satisfied that, having regard to the criteria for principal local authorities specified by the
    Audit Commission and published in July 2005, in all significant respects, the London
    Borough of Merton made proper arrangements to secure economy, efficiency and
    effectiveness in its use of resources for the year ending 31 March 2006 except for the
    failure to put in place arrangements for the management of its asset base.
Best value performance plan

    I issued my statutory report on the audit of the Council‟s best value performance plan for
    the financial year 2005/06 on 19 December 2005. I did not identify any matters to be
    reported to the Council and did not make any recommendations on procedures in
    relation to the plan.
Auditors’ responsibilities

    Auditors have a duty under the Audit Commission Act 1998 to consider whether, in the
    public interest, to report on any matter that comes to their attention in the course of the
    audit in order for it to be considered by the body concerned or brought to the attention of
    the public. I have no matters to report.
Certificate

    I certify that I have completed the audit of the accounts in accordance with the
    requirements of the Audit Commission Act 1998 and the Code of Audit Practice issued
    by the Audit Commission.


    Derek Elliott
    District Auditor
    Audit Commission
    Millbank Tower
    Millbank
    London SW1P 4HQ
    Date




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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




ACCOUNTING CODES OF PRACTICE

These are designed to support consistent standards of financial accounting in local
authorities. There are two accounting codes.

The Code of Practice on Local Authority Accounting: A Statement of Recommended Practice
(the SORP for short) supports consistent financial reporting at the level of the formal
statements of accounts.

The Best Value Accounting Code of Practice (BVACOP for short) supports consistent
financial reporting between local authorities below the level of the formal statement of
accounts. In particular the BVACOP is designed to support consistency and comparability in
reporting the cost of individual services and activities.

The SORP requires that the analysis of services in the Consolidated Revenue Account
should follow that prescribed by the BVACOP.

ACCRUALS

The concept that income and expenditure are recognised as they are earned or incurred, not
as money is received or paid. This concept is reflected in the accounts by the inclusion of
debtors and creditors.

ACTUARIAL GAINS AND LOSSES

For a defined benefit pension scheme, the changes in actuarial deficits or surpluses that
arise because:

(a)     events have not coincided with the actuarial assumptions made for the last valuation
        (experience gains and losses); or
(b)     the actuarial assumptions have changed.

BALANCES

Balances are maintained to meet expenditure pending the receipt of income and to provide a
cushion against expenditure being higher or income lower than expected.

Contributions to balances can be either a planned contribution from the revenue budget or a
transfer of any revenue surplus at the year-end. The maintenance of an appropriate level of
balances is a fundamental part of prudent financial management.

BUDGET

Statement of the spending plans for the year.

CAPITAL CHARGES

Charges to service revenue accounts to reflect the cost of fixed assets used in the provision
of services.




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CAPITAL EXPENDITURE

Expenditure on the acquisition of a fixed asset or expenditure, which adds to, and not merely
maintains, the value of an existing fixed asset.

CAPITAL RECEIPTS DEFERRED

Amounts receivable in the future from mortgages granted on the sale of Council houses.

CAPITAL FINANCING ACCOUNT (CFA)

A reserve required as a result of the introduction of asset rents. It is not a reserve that can
be used, but contains the balance of depreciation against the MRP, additional debt
repayments over the MRP, reserved capital receipts and usable capital
receipts/grants/planning gains applied to meet capital expenditure.

CAPITAL RECEIPTS

Proceeds from the sale of fixed assets and repayments of capital grants and loans. These
are divided into reserved and usable parts.

CHARTERED INSTITUTE OF PUBLIC FINANCE AND ACCOUNTANCY (CIPFA)

The institute produces standards and codes of practice that must be followed in preparing
the Council‟s financial statements.

COLLECTION FUND

This is a statutory „ring fenced‟ account. It records income and expenditure on Council Tax,
Non Domestic Rates, payments to the precepting authorities and transfer to the Council‟s
General Fund.

COMMUNITY ASSETS

Assets that the local authority intends to hold in perpetuity, which have no determinable
useful life and which may have restrictions on their disposal. Examples include parks and
historic buildings.

CONTINGENT ASSETS AND LIABILITIES

A contingent asset is a possible asset, which may arise in the future if certain events take
place. A contingent liability is a possible loss or charge, which may arise in the future if
certain events take place. In both cases, these events may not be wholly within the control of
the authority.

Contingent liabilities are not recognised in the accounts but should be disclosed by way of a
note if there is a possible obligation, which may require payment or a transfer of economic
benefits.




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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




CORPORATE AND DEMOCRATIC CORE

The corporate and democratic core comprises all activities, which local authorities engage in
specifically because they are elected, multi-purpose authorities. It has two elements,
corporate management and democratic representation and management. The activities
within the corporate and democratic core are in addition to those, which would be carried out
by a series of independent, single purpose bodies managing the same services. There is,
therefore, no logical basis for apportioning these costs to services.



CORPORATE GOVERNANCE

Corporate Governance is the system by which local authorities direct and control their
functions and relate to their communities.

COUNCIL TAX

This is the main source of local taxation to local authorities. It is levied on households within
the authority‟s area and the proceeds are paid into the Collection Fund for distribution to
precepting authorities and to the authorities own General Fund.

CREDIT APPROVAL

Authorisation given by the Secretary of State to use credit to finance capital expenditure
which permits the use of borrowing or other credit arrangements. As from the 1st April 2004,
Central government support has been delivered in a new way. Supported Capital
Expenditure (Revenue) SCE(R) known as Single Capital Pot element, replaces Basic Credit
Approvals (BCA). Supported Capital Expenditure (Capital) SCE (C) for ring-fenced support,
replaces Supplementary Credit Approvals (SCA).

CREDITORS

Money owed by the Council, which is due immediately or in the short term. Accordingly, it
does not include money on taxation to the Council. Creditors are an example of the concept
of accruals.

CURRENT SERVICE COST (PENSIONS)

The increase in the present value of a defined benefit scheme's liabilities expected to arise
from employee service in the current period.

CURTAILMENT COSTS

For a defined benefit scheme, an event that reduces the expected years of future service of
present employees or reduces for a number of employees the accrual of defined benefits for
some or all of their future service. Curtailments include:

(a)     termination of employees' services earlier than expected, for example, as a result of
        closing a factory or discontinuing a segment of a business; and
(b)     termination of, or amendment to, the terms of a defined benefit scheme so that some
        or all future service by current employees will no longer qualify for benefits or will
        qualify only for reduced benefits.

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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




DCLG

The Department for Communities and Local Government, formerly the Office of the Deputy
Prime Minister (ODPM).

DEBTORS

Money that is due to the Council but which has not yet been received.

DEFERRED CHARGES

This is expenditure, which is funded from capital resources, but which cannot be classified
as fixed assets.

DEFINED BENEFIT SCHEME

A pension or other retirement benefit scheme other than a defined contribution scheme.
Usually, the scheme rules define the benefits independently of the contributions payable,
and the benefits are not directly related to the investments of the scheme. The scheme may
be funded or unfunded (including notionally funded).

DEPRECIATION

Depreciation is a charge to revenue account to reflect the reduction in the useful economic
life of a fixed asset. The reduction in the value of a fixed asset in the balance sheets in line
with the expected useful life.

DISCRETIONARY BENEFITS

Retirement benefits which the employer has no legal, contractual or constructive obligation
to award and are awarded under the Authority's discretionary powers, such as The Local
Government (Discretionary Payments) Regulations 1996, The Local Government
(Discretionary Payments and Injury Benefits) (Scotland) Regulations 1998, or The Local
Government (Discretionary Payments) Regulations (Northern Ireland) 2001.

EMOLUMENTS

All sums paid to, or receivable by, an employee, and sums due by way of expenses
allowances (as far as those sums are chargeable to UK income tax) and the money value of
any other benefits received other than in cash.

EXCEPTIONAL ITEMS

Material items, which derive from events or transactions that, fall within the ordinary activities
of the authority, but which are not expected to recur frequently or regularly. Exceptional
items should be shown as part of the Net Cost of Services to which they relate or on the face
of the Consolidated Revenue Account if that degree of prominence is necessary to give a
fair representation of the accounts.

FAIR VALUE

The fair value of an asset is the price at which it could be exchanged in an arm's length
transaction less, where applicable, any grants receivable towards the purchase or use of the
asset.

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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




FINANCIAL YEAR

The year of account, which runs from the 1st April to the following 31st March.

FIXED ASSETS

Tangible assets that yield benefits to the local authority and the services it provides for a
period of more than one year. These can be tangible or intangible.

FIXED ASSET RESTATEMENT ACCOUNT

Balance of surpluses or deficits arising on periodic revaluation of fixed assets

GENERAL FUND

The main fund of the Council, from which all expenditure is met and all income is paid with
the exception of those items, which by statute have to be taken to some other account.

GOVERNMENT GRANTS

Financial assistance, by government and other bodies, in the form of cash transfers to an
authority in return for compliance with certain conditions relating to the activities of the
authority.

GROSS EXPENDITURE

The total expenditure of a fund or account.

HOUSING REVENUE ACCOUNT (HRA)

This is a statutory account that shows all income and expenditure relating to the provision,
management and maintenance of the Council‟s housing stock. The government defines the
items of income and expenditure that must be included in the account. This account is ring
fenced under the Local Government and Housing Act 1989, thereby preventing any cross
subsidy with the General Fund.

IMPAIRMENT

The loss of value in a fixed asset arising from physical damage, deterioration in the quality of
service provided by the asset or from a general fall in prices.

INCOME AND EXPENDITURE ACCOUNT

Accounts which show all money receivable or payable by the Council in the accounting
period to which they relate. Accounts that record receipts and payments are converted to
income and expenditure by the inclusion of debtors and creditors.

INFRASTRUCTURE ASSETS

Fixed assets that are inalienable, expenditure on which is recoverable only by continued
use, e.g. highways and footpaths.




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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




INTANGIBLE ASSETS

Intangible assets are defined in FRS10 as „non financial fixed assets that do not have
physical substance but are identifiable and are controlled by the entity through custody and
legal rights‟ as such they may provide the authority with access to future economic benefit
which are controlled by the local authority.

INTEREST COST (PENSIONS)

For a defined benefit scheme, the expected increase during the period in the present value
of the scheme liabilities because the benefits are one period closer to settlement.

INVESTMENTS (PENSION FUND)

The investments of the pensions fund will be accounted for in the statements of that fund.
However, authorities (other than district councils in Northern Ireland) are also required to
disclose, as part of the disclosures relating to retirement benefits, the attributable share of
pension scheme assets associated with their underlying obligations.

INVESTMENTS (NON-PENSION FUND)

A long-term investment is an investment that is intended to be held for use on a continuing
basis in the activities of the Authority. Investments should be so classified only where an
intention to hold the investment for the long term can clearly be demonstrated or where there
are restrictions as to the investor's ability to dispose of the investment.

Investments, other than those in relation to the pensions fund, that do not meet the above
criteria should be classified as current assets.

LEASING

This facility is a means to obtain the use of vehicles, plant and computer equipment without
actually owning these items.

LEVY

An amount levied by a local authority or other statutory body, which is paid by the Council.

MINIMUM REVENUE PROVISION (MRP)

The Council is required by statute to set aside a minimum revenue provision for the
redemption of external debt. The MRP is split into the provision for depreciation (within the
Asset Management Revenue Account) and a balancing figure (part of the Contribution to
Capital/Financing Reserve).

NET BOOK VALUE

The amount at which fixed assets are included in the balance sheet, i.e. their historical cost
or current value less the cumulative amounts provided for depreciation.




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NET CURRENT REPLACEMENT COST

The cost of replacing or recreating the particular asset in its existing condition and in its
existing use, i.e. the cost of its replacement or of the nearest equivalent asset, adjusted to
reflect the current condition of the existing asset.

NET REALISABLE VALUE

The open market value of an asset in its existing use (or open market value in the case of
non-operational asset), less the expenses required realising the asset.

NON DISTRIBUTED COSTS

These are overheads for which no user now benefits and these costs should not be
apportioned to services.


NON DOMESTIC RATE

A levy on businesses based on national „rateable value‟ of the premises occupied. NDR is
collected by the Council in line with national criteria, paid into a national pool and then
redistributed to all local and police authorities on the basis of population.

NON-OPERATIONAL ASSETS

Fixed assets held by a local authority but not directly occupied, used or consumed in the
delivery of services. Examples of these assets are investment properties and assets that
are surplus to requirements, pending sale or redevelopment.

OPERATIONAL ASSETS

Fixed assets held and occupied, used or consumed by the local authority in the direct
delivery of those services for which it has either a statutory or discretionary responsibility.

PAST SERVICE COST

For a defined benefit scheme, the increase in the present value of the scheme liabilities
related to employee service in prior periods arising in the current period as a result of the
introduction of, or improvement to, retirement benefits.

POST BALANCE SHEET EVENT

These are events, which arise after the end of the accounting period. They can be
divided into –

       Adjusting events, which provide further evidence of conditions which existed
        at the end of the accounting period and which may require changes to the
        accounts.

       Non Adjusting Events, which are indicative of conditions that arose
        subsequent to period end, which are reported by way of a note to the
        accounts.

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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




PRECEPTS

An amount collected by the Council as part of the Council Tax on behalf of another statutory
body.

PRIOR PERIOD ADJUSTMENTS

Prior period adjustments are material adjustments relating to the accounts of previous years
and which arise from changes in accounting policies or from the correction of fundamental
errors. A fundamental error is one that is of such significance as to destroy the validity of the
financial statements. Prior period adjustments do not include normal recurring corrections or
adjustments of accounting estimates made in prior years.

PROVISIONS

Amounts set aside for any liabilities or losses, which are likely to be incurred, but which are
uncertain as to the amounts or the dates on which they will arise.

RESERVES

These are amounts set aside for specific purposes. The Council has discretion in whether it
wishes to set aside these amounts as distinct from sums set aside in provisions.

REVENUE EXPENDITURE

Expenditure incurred on day to day running costs and confined to accounts within one
financial year.

SCHEME LIABILITIES

These are the liabilities of a defined benefit scheme for outgoings due after the valuation
date. Scheme liabilities measured using the projected unit method reflect the benefits that
the employer is committed to provide for service up to the valuation date.

SETTLEMENT COSTS

An irrevocable action that relieves the employer (or the defined benefit scheme) of the
primary responsibility for a pension obligation and eliminates significant risks relating to the
obligation and the assets used to effect the settlement. Settlements include:

(a)     A lump-sum cash payment to scheme members in exchange for their rights to
        receive specified pension benefits;
(b)     the purchase of an irrevocable annuity contract sufficient to cover vested benefits;
        and
(c)     the transfer of scheme assets and liabilities relating to a group of employees leaving
        the scheme.

SORP (Statement of Recommended Practice)

See Accounting Codes of Practice.

STOCKS

The amount of unused or unconsumed supplies held in expectation of future use.

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Statement of Accounts       2005/2006               STATEMENT OF ACCOUNTING POLICIES




SUPPORT SERVICES

These are services that are not statutory local authority services but which give support to
those services.

SUPPORTED CAPITAL EXPENDITURE

This is the term for central government support for local authority capital expenditure with
effect from 1st April 2004. Under the new system, central government will provide allocations
to replace the previous system of credit approvals. The allocations enable services to borrow
to finance capital schemes. The services will also receive revenue funding through the
revenue support grant to pay for the borrowing.

USEFUL LIFE

This is the period over which the local authority derives benefit from the use of a fixed asset.

VESTED RIGHTS

In relation to a defined benefit scheme, these are: -

(a)     for active members, benefits to which they would unconditionally be entitled on
        leaving the scheme;
(b)     for deferred pensioners, their preserved benefits;
(c)     for pensioners, pensions to which they are entitled.

Vested rights include where appropriate the related benefits for spouses or other
dependents.




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DOCUMENT INFO