ICAEW has welcomed proposed changes to local government finance regulations that clarify that local authorities should charge minimum revenue provision (MRP) on all debt-financed capital spending and that capital receipts should not be used in place of a charge to revenue. These changes should provide greater clarity to local authorities, but as ICAEW’s response to the government’s consultation on changes to the capital framework makes clear, they do not address wider issues in how councils budget and account for the delivery of local public services.

The MRP is a mechanism within the local authority budgeting system to ensure that local authorities provide for repayment of their borrowing to fund capital expenditure. Councils are required to approve an MRP policy on an annual basis and make a charge to revenue in line with statutory guidance.

ICAEW’s response comments that incorrectly calculated MRP charges are often indicative of wider financial management or financial sustainability issues within a local authority. A recent example is Slough Council, where the Section 151 Officer (Chief Financial Officer) issued a Section 114 ‘bankruptcy’ notice following the identification of prior period errors in the MRP calculation that meant usable reserve balances were misstated.

Despite supporting the changes, ICAEW argues that the concerns about MRP calculations are “symptomatic of wider weaknesses with the local government finance system”, illustrated by complicated accounting requirements and boilerplate disclosures in financial statements that make it difficult for readers to understand how councils are performing.

ICAEW calls for local authorities to be more transparent about their MRP policy and the key judgements made in its calculation within financial statements and other financial reports. A sample of local authority financial statements looked at by ICAEW did not include any accounting policy or significant judgement disclosures concerning their MRP despite its potential importance in calculating usable reserve balances. ICAEW suggests that CIPFA/LASAAC, the standard setter for local authority financial statements, clarify the importance of disclosing significant methodologies and judgements such as MRP in the next revision of the accounting code and the accompanying guidance.

ICAEW also sees a key role for the planned system leader within the proposed Audit, Reporting and Governance Authority (ARGA). Echoing many of the points in its response to the Department for Levelling Up, Housing and Communities’ (DLUHC’s) technical consultation on the local audit framework, ICAEW calls for ARGA to set up a local authority equivalent of the Corporate Reporting Review Panel and share examples of good practice in audit approaches.

Describing the proposals as a “missed opportunity to simplify local authority finances”, ICAEW calls for the government to explore ways to simplify the calculation and ensure the guidance is readily understandable.

In addition, ICAEW called on DLUHC to work with CIPFA/LASAAC to better align local authority budgeting and accounting rules as part of the planned accounts streamlining project. Sir Tony Redmond found that the complexity of local authority accounts made them “impenetrable” and identified the differences between budgeting and accounting rules as one of the main causes of this complexity.

Oliver Simms, Manager, Public Sector Audit & Assurance, at ICAEW, commented:

“We support the proposed changes to the local authority capital framework to clarify the rules governing the minimum revenue provision and the clarity this should bring to local authorities seeking to apply the current guidance.”

“However, we believe that the issues are symptomatic of the wider weaknesses in a local government finance system in need of an overhaul. Resolving these particular problems in the calculation of the minimum revenue provision will not address more fundamental problems including a lack of transparency in annual reports, complexity created by differences between accounting and budgeting requirements, and a significant disconnect between the areas of most audit interest to regulators and those using the accounts to hold local authorities accountable.”

You can read ICAEW’s response to the consultation on changes to the capital framework here.