GUIDANCE ON CASH FLOW STATEMENT (Sheet 13)

Transcription

1 GUIDANCE ON CASH FLOW STATEMENT (Sheet 13) Introduction The Cash Flow statement is a new section that has been added to the L Pack for the first time, for This statement will not be subject to detailed audit test or given a formal opinion by auditors in the WGA dry run, but it will be review by auditors to identify any issues, which are crucial to the proposed publication of WGA accounts, for Like other primary statements in a set of accounts, the cash flow statement forms an essential part of the overall WGA accounts. The consolidated cash flow statement in the WGA accounts will be prepared on the indirect method, which is the method adopted by all significant WGA bodies in their statutory accounts. In previous dry-run years, the WGA team have attempted to reproduce a consolidated cash flow statement using additional information collected from WGA packs. However, the attempt at recreating a consolidated cash flow statement based on this method were unsuccessful and have left a large gap of unreconciled cash balance in the region of 6bn. It was identified that there were a number of issues surrounding the reproduction of a consolidated cash flow statement, based on the method above. The most apparent problem encountered was that every WGA body has a unique approach of mapping expenditure in the I&E statement. This caused a number of difficulties when it came to making adjustments for non cash items to the I&E accounts in the cash flow statement. These non-cash adjustments, in most cases, are not obvious on the face of the I&E accounts. Hence, non cash adjustments are usually left out from the consolidated cash flow reconciliation, causing a large unreconciled balance in the cash movement. Given the issues highlighted above and the need to improve the accuracy of the information in the consolidated cash flow statement prior to publication, it is now considered necessary for every WGA body to complete a cash flow statement. This will minimise unreconciled balances and makes it possible for the WGA team to carry out any central adjustments on the consolidated cash flow statement, which results from the elimination of intra group transactions and balances. Guidance for completing the cash flow statement The cash flow statement in the L pack is based on the indirect method. This method calculates the movement in cash from the final accounts, adjusted for any appropriate amendments (i.e. non cash items, movements in working capital and accruals). On the other hand, the direct method derives cash movement from the net of both, gross cash receipts and gross cash payments for all transactions with third parties. The main difference between the two methods lies in the calculation of net cash flow from revenue activities. The cash flow statement comprises three main categories; namely, revenue, capital and investing, and financing activities. Most authorities should find that the first section of the cash flow can be sourced from the notes to the cash flow

2 statement in their annual statement of accounts, where it shows the reconciliation of surplus/(deficit) for the year to net cash flow from revenue activities. However, the authority must remember when completing this cash flow section, the reconciliation of I&E account to net revenue cash flow also includes interest / dividend received from the returns on investment and the interest paid for the cost of servicing finance. These items are usually shown under a separate section on its own or under investing and financing activities. Reconciliation of income and Expenditure Account to Net Revenue Cash Flow (A) Surplus / deficit on Income and Expenditure Account This is the net surplus or deficit for the year and is automatically populated from the I&E account (sheet 4). No input is required. This represents the starting point before any adjustments are made, to work backwards to the net cash flow from revenue activities in the final accounts. Surplus / deficit attributable to associates Only applies to authorities that have shares in associates, as disclosed in their group accounts. It represents the proportion of the authority s share of surplus or deficits of operating results in associates for the year. The net surplus or deficits of associates are adjusted out of the group cash flow because associates are consolidated to the parent accounts on equity basis, in group accounts. Surplus / deficit attributable to joint venture Only applies to authorities that have shares in joint ventures, as disclosed in their group accounts. It represents the proportion of the authority s share of surplus or deficits of operating results in joint ventures, for the year. The net surplus or deficits of joint ventures are adjusted out of the group cash flow because joint ventures are consolidated to the parent accounts on equity basis, in group accounts. (B) Adjustment for non cash items in the Income and Expenditure Account Depreciation and amortisation This represents the total depreciation cost on fixed assets and any amortisation cost on intangible assets charged to the I&E account. These items are regarded as non cash because they have no real implication on the authority s cash flow even though they represent a charge to the I&E accounts. This cell is prepopulated from the I&E accounts (sheet 3). Amortisation of government grant and other contributions This represents government grants, other grants and contributions, deferred in previous years and released to the I&E account in the current year. Although these items are credited to the I&E accounts, they do not represent cash inflow in year, as these are grants received from previous years. Hence, these amounts must be excluded from the calculation of the cash movement for the year. This cell is pre-populated from the I&E accounts (sheet 3).

3 Amortisation of financial instrument revaluation This relates to financial instruments, which are valued at amortised cost. The carrying value of these instruments are written up or down against the I&E account, over the term of the instrument. The amortisation of financial instrument is a non cash item in the I&E account and hence must be excluded from the cash flow calculation. Impairment of fixed assets This represents the value of any impairment to tangible and intangible fixed assets. As a non cash transaction, it should be removed when calculating the movement in cash flow. This cell is pre-populated from the I&E accounts (sheet 3). Charged to service changes in valuation of soft loans The fair value of soft loans issued by authorities is usually below the amount of the actual cash lent. This is due to loans being made at nil interest rate or at a rate below the prevailing market rate. Hence the difference between the fair value and the actual loan value, which is charged to the I&E does not represent actual cash transaction but it is merely a change in valuation and this amount should be entered into this cell. Investments written off When investments are written off, a charge is made against the I&E accounts and the corresponding credit is against the asset account. This represents a non cash transaction in the I&E accounts and needs to be removed when calculating the movement in cash flow from revenue activities. Non cash items relating to the disposal of fixed assets and investments When a fixed asset or investment is disposed off, this gives rise to a gain or loss on disposal and the net gain or loss on disposal is debited / credited to the I&E account. The net difference between the proceeds from sale, the carrying amount of the asset / investment, the cost of the disposal and the outstanding balance of any government grants or other capital contributions related to the asset, is regarded as the gain or loss on disposal. Not every item, which makes up the gain or loss on disposal falls within the category of revenue activities in the cash flow statement, except for the cost of the disposal. All other elements resulting from the disposal of fixed assets or investments should be accounted for in the capital and investing activities. Hence, when calculating the gain or loss on disposal amount, to be inserted in this cell, authorities must ensure that they do not include the cost of the disposal element. Increased in provision charged to service This cell is pre-populated and is linked to the Liabilities & Provs (sheet 9). This adjustment only applies to general provisions for liabilities arising from past events, which result in a future obligation. The increase in provision, which is a debit to service in the I&E account is a non cash expense. Provisions applied / written back

4 This cell is pre-populated and is linked to the Liabilities & Provs (sheet 9). Similar to the above adjustment, it should only apply to provisions for liabilities arising from past events, which result in a future obligation. Deferred debt redemption premium Premiums incurred on premature redemption of loan debt are usually amortised to the I&E account over a period defined by the authority or in accordance with the Capital Financing and Accounting regulations or statutory guidance. This is a common practise among authorities to spread the cost of premiums on council tax over future financial years. In other cases, premiums arise as a result of a modification to the original loan and are replaced by new terms. In cases like these, the premium is adjusted against the carrying amount of the new loan and amortised over the life of the new term. Premiums amortised in the I&E account do not form part of the in year cash movement and hence must be excluded. Other capital grant release Similar to amortisation of government grants, include in this cell any other capital grants released from reserve to the I&E account. Capital grant released to the I&E account should be excluded from the cash flow statement as they represent non cash movement. Charges for retirement benefits in accordance with FRS17 This is a pre-populated cell showing the in year pension cost charged to the I&E NCS Subjective Analysis (sheet 3) and the I&E accounts (sheet 4), in accordance with FRS 17. This amount is excluded from the cash flow calculation as it only represents a notional liability cost to the authority. The actual cash transaction on pension is later added back to the cash flow statement, under the line actual amount paid to pension fund. Other non-cash movements Enter in this cell, any other non-cash adjustments, which do not fall under any of the above headings. Note: if the total in this cell is greater than 500k or less than - 500k, the authority is required to provide an analysis / breakdown of the balances. (C) Other Adjustments Capital receipts in I&E account- remove & reclassify under capital activities Capital receipts from sale of housing stock or from the disposal of assets, recorded in the I&E accounts should be excluded from revenue activities and reclassified to the appropriate headings under capital activities, in the cash flow statement. Note: This cell should also include the proportion of capital receipts from sale of council stock which is payable to the Government (England only). Actual amount paid to pension fund charged against Council Tax for pension in year Record in this cell the actual pension cost paid out in the year to the pension fund. Note: The amount charged against the I&E account for retirement benefit is only an estimated value of the in year liability, which the council is required to contribute towards the future pension cost. Other adjustments

5 Enter any other adjustments, which do not fall under non cash or movement in working capital, but is required to be adjusted in the cash flow statement as a result of the way the account is prepared under SORP. Note: if the total in this cell is greater than 500k or less than - 500k, the authority is required to provide an analysis / breakdown of the balances. (D) Movement in working capital The general idea behind the movement in working capital is to convert transactions recorded on accrual basis to cash basis, in order to work out the actual cash in and outflow associated to these transactions. Increase / decrease in long & short term debtors This cell is pre-populated and it calculates the difference between the opening and closing balance of debtors recorded in the balance sheet (total debtors falling due within one year and after one year, note: including long term debtors transferred debt, in the Current Assets (sheet 8)). This cell also includes a formula, which automatically adjusts / excludes any capital debtors or accruals recorded in capital and investing activities. Increase / decrease in long & short term creditors This cell is pre-populated and it calculates the difference between the opening and closing balance of creditors in the balance sheet (this includes current and non-current trade creditors, amount owed to joint ventures, other tax and social security payable, government grants (revenue) received in advance c/f, receipts in advance, other current and non-current creditors, and deferred liability in the Liabilities and Provs (sheet 9)). Like debtors, there is a formula built into this cell which automatically adjusts / excludes any capital creditors or accruals recorded in capital and investing activities. Increase / decrease in stock / WIP This cell is pre-populated and it calculates the difference between the opening and closing balance of stock & WIP. Other movements in working capital Authorities should insert in this cell the increase or decrease in other working capital such as interest (exclude the principal) liability / accrued on PWLB and other borrowings, and investment interest receivable (if interest accrued is recorded under the Investment section in the L pack). Note: if the total in this cell is greater than 500k or less than - 500k, the authority is required to provide an analysis / breakdown of the balances. Cash Flow from capital and investing activities Intangible fixed assets addition / purchase This is a pre-populated cell and it is linked to Intangible Assets note (sheet 6). This cell records the purchase price of any additions or purchases, which is usually a representation of the cost value of a new intangible asset. Tangible fixed assets addition / purchase This is a pre-populated cell and it is linked to Fixed Assets note (sheet 5). Again,

6 this cell records the purchase price, which is also the initial recognition of cost value, for new assets. Adjustment: movement on fixed assets creditors & accruals Insert in this cell, the difference between the opening and closing capital creditors & accruals, resulting from addition or purchase of intangible and tangible fixed assets. Proceeds from sale of intangible fixed assets Authorities should record the full sale price receivable from the sale of intangible fixed assets, in this cell. Proceeds from sale of tangible fixed assets Authorities should record the full sale price receivable from the sale of tangible fixed assets, in this cell. Adjustment: movement on fixed assets debtors & accruals Insert in this cell, the difference between the opening and closing capital debtors & accruals, resulting from sale of intangible and tangible fixed assets. Other capital payments: deferred debtors advances / premium on early redemption of debt Include in this cell, any other capital payments made which do not relate to the addition or purchase of assets. This includes items such as premium charges on early repayment of loans, which is incurred by the authority in year and the proportion of capital receipts from sale of housing stock that is payable to the Government. Adjustment: movement in creditors / accruals relating to other capital payments Insert in this cell, the difference between the opening and closing creditors / accruals balance, associated with other capital payments. Capital receipts Insert in this cell those capital receipts not identified with the disposal of fixed assets, i.e. receipts from sale of housing stocks (include income received and receivable). Adjustment: movement on capital receipts debtors / accruals Insert in this cell, the difference between the opening and closing debtors and accruals balance, associated with capital receipts. Capital grant income due for the year This cell represents all capital grant income due to the authority for the year, including income received and receivable. Note: If there is an overpayment of grant income due to the authority from a Department, this will be adjusted in the capital grant creditors / accruals line. On the other hand, when there is an underpayment of grant income due, income will be adjusted under the capital grant debtors / accruals line. This adjustment is to convert capital grant income from accrual basis to cash basis.

7 Adjustment: movement on capital grant debtors / accruals Insert in this cell, the difference between the opening and closing debtors / accruals balance, associated with capital grant. Adjustment: movement on capital grant creditors / accruals Insert in this cell, the difference between the opening and closing creditors / accruals balance, associated with capital grant. Purchase / addition of long term investments Record in this cell the increase in long-term investments, such as purchase of equity shares or interest in associates, joint ventures and subsidiaries. It should also include other fixed asset investments (available for sale financial assets). It should not take into account the accrued interest income on investments, instead, accrued interest should be included under other movements in working capital or the increase or decrease in long term debtors. Authorities must also ensure that the purchase or addition of long term investment is adjusted for any creditors associated to the transaction. Proceeds from sale of long term investments Include in this cell any repayment or sale of long term investments, in year. Adjust for any debtors linked to these transactions. Purchase / addition of short term investments Insert in this cell the gross increase (due to purchase or addition) in short-term investments in year. This refers to all items categorised under current asset investments in the L Pack (usually investments which are redeemable within 12months or investments which can be easily convertible to cash). Do not include interest income accrued on short term investments in this cell. Accrued income on investment should be accounted for under other movements in working capital, if it is not include in short term debtors. Ensure creditors arising from the purchase or addition of short term investments are adjusted for, when calculating this cell. Proceeds from the redemption of short term investments Include in this cell any repayment or sale of short term investments, in year. When calculating this cell, authorities must remember to adjust for any debtors linked to these transactions. Other adjustments to capital and investing activities Insert in this cell, any other cash transactions in relation to capital and investing activities, which cannot be summarised under any of the headings above. Note: Authorities must provide an analysis / breakdown of the balance, if cell total exceeds 500k or is less than - 500k. Cash Flow from financing activities New long term loans raised This relates to the take up of new loans or borrowings in the year (only account for the principal). It refers to loans or borrowings, which are repayable within a period in excess of 12 months, for example PWLB loans. Do not include deferred liability finance leases and the accrued interest on long term loans, in this cell.

8 Both, deferred liability and accrued interest on loans should be accounted for under revenue activities, in other movements in working capital. Repayment of long term loans Insert in this cell, the principal amount of long term loans repaid in the year. Ensure the interest paid on long term loans during the year is excluded from this cell, as this amount should be accounted for under revenue activities, in other movements in working capital. Net movement in short term loans (net of loan raised & repaid in year) Insert in this cell, the net amount of short term loans raised and repaid in the year, excluding the interest (paid or payable) on the loans. Interest on loans should be accounted for under revenue activities, in other movements in working capital.