1.1. This report provides an update on key activities related to the remit of the Audit Committee.

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1 Subject: Executive Director of Finance and Corporate Services Update Meeting date: 19 January 2016 Report to: Audit Committee Report of: Gerry Murphy, Executive Director of Finance and Corporate Services This report will be considered in public 1. PURPOSE 1.1. This report provides an update on key activities related to the remit of the Audit Committee. 2. RECOMMENDATION 2.1. The Committee is asked to note this report. 3. FINANCE 3.1. A finance improvement plan has been underway since November 2014 to address control weaknesses in LLDC systems and processes Finance restructuring. Recruitment of a Financial Accountant, the final permanent role in the new Financial Controls structure, is underway and an offer of employment was recently accepted pending administrative formalities The second phase of the Finance re-organisation, dealing with business partnering and planning, is underway. Two posts remain to be recruited the Head of Business Planning role (currently under review and now likely to be a Director of Finance role) and a permanent Business Partner for Park Operations and Venues/Regeneration (currently covered by an interim) Finance system implementation. Phase 1 of Oracle Fusion Financials went live on 13 May 2015 (General Ledger, Accounts Payables and Receivables and Purchasing). Since then the key focus has been on the upload and testing of historical data, training and familiarisation with the system (particularly for heavy users within the Finance team) and the development of reporting for the business and management As a cloud-based system, Oracle Fusion Financials is subject to a monthly patching cycle (minor updates including security upgrades and bug fixes) and yearly version upgrades (major updates including changes to system functionality and/or the user interface). To date, the monthly patches have been applied with little or no issues for LLDC. Since the last Audit Committee

2 meeting the system has been upgraded to the next version. The Finance Team undertook significant testing both prior to and post-upgrade to ensure any impact was identified and addressed as appropriate. The next major upgrade, likely to occur in summer 2016, is expected to include significant changes to both functionality and appearance the recent upgrade was therefore a useful exercise for the Finance Team in preparation for this Looking ahead, the planned Phase 3 implementation consisting of cash receipting, fixed assets and planning and budgeting modules has been reassessed on business need and impact and we have concluded that the Finance Team s time and effort is better focused on consolidating the implementation of Phase 1 and embedding the accompanying business processes. At this time, the added benefit of implementing the additional modules is not deemed significant enough to justify the investment of resources, both staff time and financial Further work is however underway to further secure and automate the interactions between the Finance System and LLDC s internet banking improving controls in this area. This work is expected to conclude in Q The Finance Team also continue to engage with the wider business, particularly Finance Practitioners, to ensure that they are properly supported in their use of the system and wider processes and working with the business to improve management reporting. 4. ACCOUNTING ISSUES 4.1. There are a number of accounting issues that affect the 2015/16 statutory accounts (and beyond) and which the Finance Team is currently working to address ahead of the financial year-end. Engagement is being sought with the external auditors (EY) and other key stakeholders, such as Department for Communities and Local Government (DCLG) and GLA. These are set out below Corporation Tax The audit of LLDC s 2014/15 statutory accounts was complicated by an issue regarding deferred tax. Investment property (land) held by LLDC for development was revalued upwards; as the value of the asset increased, there was a commensurate increase in LLDC s deferred tax liability in line with International Accounting Standards (IAS) 12. However, in posting the deferred tax, the accounting requirements for local government as set out in the relevant legislation depart from the requirements of Generally Accepted Accounting Practice in the UK (UK GAAP) as would be applied to a company. In summary, this resulted in the deferred tax being charged to LLDC s General Fund (a revenue cost) Regulation 23 of The Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 sets out highly defined restrictions on the use of capital receipts by local authorities. Payment of a tax liability is not included amongst the items that can be funded from capital receipts. At the time when these regulations were drafted, the existence of a Mayoral Development Corporation as a type of local government body which, uniquely, is subject to corporation tax, does not appear to have been envisaged In 2015/16 actual capital receipts of c 11.1m are forecast on the Chobham Manor development, and, all else being equal a tax charge of 1-2m will crystallise, which LLDC will not be able to fund from the capital receipt (and

3 will consequently require revenue funding). This represents a significant funding risk to LLDC and consequently to the GLA Through the last year-end audit process LLDC exhausted discussions with CIPFA on this matter; in summary, the accounting is correct in the context of the current legislation. Two options to help resolve either the accounting or funding issues are being pursued, in the first instance, with DCLG via colleagues at the GLA: The Local Government Capital Finance Regulations are amended by statutory order, or The Secretary of State is asked to make a direction in respect of LLDC s accounts The amendment to the Regulations could be quite simple; either Regulation 23 could be amended so that capital receipts can be used to pay any corporation tax arising on the capital gain upon the disposal of the asset, or Regulation 25 (1) could be amended, so that corporation tax on capital gains is added to the list of revenue items that can be funded from capital under statute. Neither would represent a fundamental relaxation of the restrictions on use of capital receipts, they would merely be a logical response to a scenario that could not have been envisaged at the time the regulations were made A Secretary of State direction under s16 of the Local Government Act 2003 could work similarly, by instructing LLDC to treat corporation tax as capital, allowing tax arising on capital gains to be funded from capital receipts. This would avoid the requirement for secondary legislation Olympicopolis - The Olympicopolis development is currently in the design stage, with negotiations on lease terms continuing with all parties bar UCL. However, there is now enough certainty around the funding package and the terms of the leases to allow LLDC to set out proposals for accounting for the project. These proposals have been submitted in detail to EY for their review at the time of writing we are awaiting their response. In summary the proposing accounting treatment is set out in the table below: Institution Transaction Accounting proposal UCL Lease Capital receipt premium Costs Expensed. Costs that exceed income to be treated as Revenue Expenditure Funded from Capital under Statute (REFCUS) Income Recognised in line with performance of obligations (IAS 18) UAL Costs Expensed. Costs that exceed income to be treated as REFCUS Income Recognised in line with performance of obligations (IAS 18) V&A, Sadler s Wells Costs Expensed, and treated as REFCUS Smithsonian Costs Held on balance sheet as AUC as part of PPE (Property, Plant and Infrastructure and public realm Costs Equipment) Held on balance sheet as AUC as part of PPE

4 4.9. E20 Working Capital - In 2015/16 an estimated working capital contribution of 2.7m is required by E20 from LLDC. This contribution will take the form of a capital contribution in line with the Members Agreement and accounted for as capital expenditure in the same way as pre-concession capital contributions (and therefore be subject to an annual impairment review). If impaired, the working capital contributions will be charged to the Comprehensive Income and Expenditure Statement (CIES) but reversed out of the General Fund to the Capital Adjustment Account, via the Movement in Reserves Statement (MiRS). As this is the first year LLDC will be making capital contributions for working capital, as opposed to pre-concession costs, a technical paper detailing this has been submitted to EY for their review; EY have indicated they are content with this approach. 5. BUSINESS PLANNING 5.1. Ten Year Plan and Budget Submission: The revised Ten Year Plan provides the long-term context for the budget figures and deliverables, and has been reviewed by the Investment Committee at its meeting on 10 November 2015 and the Board on 24 November The 2016/17 Budget, based on this Plan, was approved by the Board for submission to the GLA and our budget proposals were submitted to the GLA on 27 November LLDC and the GLA met subsequently and agreed the final revenue and borrowing numbers for the 2016/17 Budget, which delivers a balanced revenue budget and sufficient borrowing headroom to deliver the LLDC s objectives in the year. Additional ongoing revenue funding has been allocated to the LLDC, however significant savings and commercial revenue will need to be delivered to bridge the remaining funding gap. LLDC are reviewing long term capital receipts to ensure surpluses are sufficient to repay the lottery without GLA subsidy The budget proposals form part of the Mayor s Consolidated Budget which goes out for public consultation at the end of December. The London Assembly must approve the final Mayor s Consolidated Budget by February 2016, after which the Mayor and LLDC s Board will be asked to approve the updated Ten Year Plan and 2016/17 Budget. 6. PROGRAMME MANAGEMENT AND ASSURANCE 6.1. Olympicopolis Integrated Assurance. Funders and partners of the Olympicopolis programme have agreed to the principle that the assurance of the programme will follow recognised best practice of the three lines of defence model and there will be an integrated assurance approach for the programme, delivered by LLDC but accountable to the partners (through the Olympicopolis Programme Board, being the board responsible for oversight of the programme) and to the partners governance structures. The purpose of the integrated assurance activities is to provide assurance to the programme board and funders, partners and other key stakeholders that that appropriate capabilities, systems and controls are in place to ensure that the programme objectives are delivered efficiently and effectively and will deliver the agreed project outcomes. The chair of the Olympicopolis Risk and Assurance Board has been appointed The procurement of the independent third line of defence has concluded and the supplier appointed, subject to contract.

5 6.3. The Olympicopolis change control process is now in place. This is based on the successful LLDC corporate change control process A programme wide report has been developed and this report now goes to the Olympic Programme Board and Investment Committee on a regular basis Freedom of Information: There are six FOI / EIR requests open at the moment, plus four active internal reviews and the appeal to the ICO for the West Ham concession agreement (see below). Of the 53 FOI/EIR requests received since April, 51 have been answered on time, the two which were answered late were because of delayed approval due to holidays Following a Freedom of Information complaint relating to the Stadium Concession agreement between LLDC and West Ham United for the use of the Olympic Stadium the Information Commissioner made a judgment on 3 September 2015 that LLDC disclose an un-redacted version of the agreement The Legacy Corporation has since lodged an appeal against the Information Commissioner s judgment. This follows careful consideration, informed by legal advice, and is limited to a smaller number of redactions. The appeal relates only to information which if released could significantly reduce the level of financial return to the taxpayer as it would undermine negotiations with future users of the Stadium and other partners. We have listened to the Commissioner s comments and as a public body are committed to maximising transparency. As a result we have now published more details of the agreement with West Ham United in all areas that fall outside the scope of our appeal. The appeal date has been set for late January and written statements developed for submission late December. 7. IT AND INFORMATION MANAGEMENT 7.1. Information Management. As part of the plan to ensure effective information management in LLDC the Information Management Policy has been reviewed, updated and approved. The CCTV policy (covering the Park and office) is currently in review with Park Ops Security The information management requirements of the organisation over the coming years are being reviewed with particular attention on Olympicopolis requirements (e.g. volume, information sharing). EMT agreed next steps including a review of current systems, further staff training on good practice and a subsequent assessment of systems. A document control group has been set up to include all areas of the business The recommendations of the recent Information Management & Security Audit have been implemented and the Information Governance Report has been approved by EMT, to be incorporated into the ongoing staff training and awareness programme. Twenty seven separate information security training sessions have been held so far this financial year, plus presentations to directorate, team and all staff meetings IT. The programme of continuous improvement has delivered improved communication and education as to the management of information and the use of, and opportunities offered, by IT. This has included a Celebrate IT day where the team showcased current and future projects and services during a drop in day. Improving the outsourced service is ongoing to deliver an increasingly better service. Various technology and process changes and improvements have been implemented such as file access audit logging,

6 revised authorisation for IT requests, Microsoft Office upgrade including security patches. A recommendation to extend the outsourced service provider (Civica) contract to July 2017 has been agreed during 2016 we will assess how to procure the service from July A mobile phone review has concluded, with agreement by EMT, to replace the current handset and mobile contract. This leverages the TfL / GLA mobile contract. The migration to the new provider (Telefonica / O2) and replacement of handsets will take place in January / February ICT implications of Olympicopolis are under review including which party is responsible for what aspects of ICT. IT are in discussion with Buro Happold, advising Olympicopolis to ensure that all aspects are covered including connectivity requirements utilising the current Park comms assets (fibre optic duct and cabling). The Digital User Experience workstream is in progress, focused on the overall Olympicopolis / and Park experience for visitors and Park residents and how technology could enhance that experience. Foundation for FutureLondon are involved The IT team is working with the Sustainability Team on the Smart Park initiative that will use technology to deliver a number of improvements including the visitor experience, Park operations, energy efficient buildings and a review of energy production and management. This is mainly funded through an EU climate change agency (Climate-KIC) and we are working with a range of partners including Engie (GDF Suez Cofely), Intel, UCL, Imperial College, Reading University, Tech University Munich and various not for profits and SME / startups in this space IT is working with the Park Operations asset management team in management of the communications assets on the Park (fibre optic cabling and ducts). As Here East opening nears with the Infinity data centre we have been approached by comms companies interested in leasing ducts and cables. Olympicopolis will also increase demand for access to the comms routes. We have developed a rate card and standard contract for simple requests to use cable / ducts. More complex requests will be negotiated according to the proposal. LIST OF APPENDICES Appendix 1 Tax update (contains exempt information) Appendix 2 Commercial update (contains exempt information) List of Background Papers No background papers Report originator(s): Oliver Shepherd Telephone: olivershepherd@londonlegacy.co.uk