Meeting documents

Appendix 5

Council Minimum Revenue Provision (MRP) & Depreciation Policy (Provisional)

1. Draft regulations are expected soon that will be effective from 31^st March 2008. In this The Secretary of State is expected to recommend that before the start of each financial year a local authority prepares a statement of its policy on making MRP in respect of that financial year and submits it to the fullI council.

2. The Minimum Revenue Provision on debt charges is in effect the repayment of principal or a "depreciation" charge.

3. There is a further complication in that all public sector accounts will need to be in line with international accounting standards. Detail on this relating to Local Government Accounting codes of practice is not yet available, but it is assumed that the CLG guidance on our available options is fully compliant with this future requirement.

4. The new regulation requires an authority to calculate MRP which is "prudent".

5. There is no definition of prudent but it is suggested that we adopt the following which is in line with audit guidance.

`Bath & North East Somerset will ensure debt is repaid over a period commensurate with that over which capital expenditure provides benefit'

6. Under the new regulations there will be options for calculating MRP.

Option A - as current calculation i.e. 4% of Capital FinancingRequirement (CFR) less adjustment A. This will continue to apply to all government supported borrowing and all borrowing prior to 2008/09. This assumes that we repay debt over 25 years and is the regime that applied in all local government capital accounts prior to these changes. It continues because government grant to finance capital will be paid to councils on this basis.

Option B - Asset Life Method i.e. calculate for each asset:

A - B A = Capital expenditure on an asset

C B = Total MRP already made against an asset

C = Remaining useful life of the asset

Useful life is not based on the length of the loan but on the asset life and cannot be subsequently changed. If an asset is disposed of before the end of its' useful life the MRP calculation still has to be done.

Option C - Depreciation method i.e. MRP is equal to depreciation as calculated in line with the SORP. Can delay MRP calculation until asset is operational.

Any expenditure financed by Unsupported Borrowing after 1^st April 2008 must use option B or C. From 1^st April 2008 all unsupported borrowing must be also be attached to a specific project/asset.

Provisional Council MRP Policy (subject to final published regulations and International accounting standards)

Bath and North East Somerset will make a prudent minimum revenue provision for all new unsupported borrowing from 1^st April 2008.

For all Government Supported Borrowing

a) The Council will determine that its MRP is equal as the amount determined in accordance with the former regulations 28 and 29 of the 2003 Regulations, as if they had not been revoked by the 2008 regulations.

For all new schemes of Council supported borrowing after 1^st April 2008 it will use the Asset Life Method

b) This will be calculated where capital expenditure on an asset is financed wholly or partly by borrowing or credit arrangements, MRP is to be made in equal annual instalments over the life of the asset, in accordance with the following formula:

A - B

C

Where-

B is the total provision made before the current financial year in respect of that expenditure

c) Subject to paragraph f below, MRP will normally commence in the financial year following the one in which the expenditure was incurred.

d) Asset life. The estimated life of the asset will be determined in the year that MRP commences and not subsequently be revised.

e) Freehold land. If no life can reasonably be attributed to an asset, such as freehold land, the life will be taken to be a maximum of 50 years. However, in the case of freehold land on which a building or other structure is constructed, the life of the land will be treated as equal to that of the structure, where this would exceed 50 years.

f) Construction period. When borrowing to construct an asset, the authority will treat the asset life as commencing in the year in which the asset first becomes operational. It may accordingly postpone beginning to make MRP until that year. "Operational" here has its standard accounting definition. Investment properties will be regarded as becoming operational when they begin to generate revenues.