Accounting Errors at CCC - Post 3/15 in a series - How Local Authorities should account for Capital Grants

3 - How local authorities should account for 

capital grants

Each year, CCC’s published statement of accounts contain the following statement under the section on the Chief Finance Officer’s responsibilities:

The Chief Finance Officer is responsible for the preparation of the Council's Statement of Accounts in accordance with proper practices as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the Code).

The Code has been prepared under International Financial Reporting Standards (IFRS), which since 2010 have been adopted as the basis for public sector accounting in the UK.  Therefore, the Code is consistent with IFRS.

The fundamental accounting principle in the Code and IFRS is accruals base accounting.  That means that income and expenditure are recognised in the Comprehensive Income & Expenditure Statement (CIES) in the financial period to which they relate.  This is made explicit in the section headed “Accounting policies, general principles” in CCC’s published financial statements:

ACCRUALS OF INCOME AND EXPENDITURE Revenue accounts are maintained on an accruals basis. Expenditure is charged to the revenue accounts in the year in which goods and services are received and, similarly, income is credited in the year to which it relates, regardless of the timing of cash payments or receipts. For example, accrued income is recognised where an amount is earned in the current accounting year, but is expected to be received in a subsequent year. Deferred income reflects any income which has been received in advance of it being earned, and is recognised when it can be matched with the year in which it is earned.

Accruals base accounting for recognising capital grants is also made explicit in paragraph 2.3.2.8 of the CIPFA Code:

The word “immediately” above relates only to the year of account.  It means that if the authority has satisfied the grant conditions for that year, but the grant payment has still not been received, then the grant receivable in that financial year may be recognised in that year’s Comprehensive Income and Expenditure Account.  

It does not mean that the authority can recognise the revenue from future years’ grants before those grants become receivable.  To do so would breach the fundamental principle of accruals base accounting and materially distort the financial statements.