Chartered Institute of Public Finance and Accountancy

Paper No PCSG 4 01/02

Committee PRUDENTIAL CODE STEERING GROUP
Venue Royal Over-Seas League
Date 26 July 2001
Author Maureen Wellen
Tel 01628 623 652
Policy and Technical Manager
Capital and Treasury
Subject The role of depreciation

PURPOSE

To receive a report on the work that has been commissioned by CIPFA on the potential role of depreciation within a prudential system. To establish a reference group to review and comment on this work.

REPORT

1 It was agreed at the first meeting of the Steering Group held on 31 May that the potential role for depreciation in a new prudential system should be further explored and that the PCSG would receive a report on this at its next meeting.

2 In order that the potential role of depreciation in a new prudential framework can be further considered, CIPFA has commissioned research work from Stephen Sheen in accordance with the specification attached as the appendix to this report.

3 The Steering Group is asked to establish a reference group to review and comment on this work through correspondence by e-mail, and for this work to be scheduled so that the PCSG receives a substantive report for consideration at its meeting in September.

RECOMMENDATION

The Steering Group is asked to receive this report on the work that has been commissioned by CIPFA on the potential role of depreciation within a prudential system; and to establish a reference group to review and comment on this work.

SPECIFICATION

1 To draft a report and send it to the CIPFA Secretariat (Maureen Wellen).

Format for the report:

(a) introduction to depreciation

— explanation of the contribution that an accounting solution might make to a system for capital investment by local authorities, matching finance to the rate of consumption of resources equitably over the life of assets

(b) UK GAAP

— summary of the impact of a pure current value depreciation accounting system, with no restrictions on the application of resources to either capital or revenue purposes

(c) reserves option

— summary of a system for local authorities that will allow any resources generated by depreciation to be reserved on the balance sheet and applied to new capital investment and/or to finance unfinanced capital expenditure

— outline of the arrangements that authorities would have to introduce to operate such a system

— exemplification as to how the system would impact on local authority resources.

(d) cash option

— summary of a system for local authorities that will allow any cash surpluses generated by depreciation to be identified and applied to new capital investment and/or to finance unfinanced capital expenditure

— outline of the arrangements that authorities would have to introduce to operate such a system

— exemplification as to how the system would impact on local authority resources.

2 To discuss the draft report with the CIPFA Secretariat and to amend the report in view of those discussions.

3 To circulate through correspondence the report with a reference group of the TMP Prudential Code Steering Group (to be established); to respond to comments of that group; to revise the report in view of comments received and send revised report to CIPFA Secretariat.