EXAMPLE ACCOUNTING ENTRIES

FINANCIAL INSTRUMENTS 2007/08

(SCOTLAND)

IMPORTANT :
This note is intended as helpful guidance. It IS NOT a substitute or
alternative to reading the SORP 2007, the statutory guidance or the
Guidance Notes for Practitioners. The entries do not cover all aspects of
Financial Instruments implementation, only aspects which are likely to be
common to most authorities. For example financial instruments held for
trading, available for sale assets, derivatives, forward purchase contracts
etc are not considered. Local authorities may adopt different practices to
comply with the SORP. Complex situations will require more detailed
entries.

Suggestions for improvement or clarification are welcome. If potential

errors are spotted please contact CIPFA :
E-mail : gareth.davies@cipfa.org Phone: 0131-559-3604

REFERENCE MATERIAL

1) SORP 2007 : Chapter 4

2) Scottish Statutory Guidance : refer to Finance Circular 4/2007
Statutory Guidance issued by the Scottish Government 30 March 2007
3) See also ACOP SORP Guidance Notes for Practitioners 2007/08 Module
6

1. TRANSITION ENTRIES

See SORP 2007 para 4.79 - 4.85 & transitional steps. See ACOP
Guidance Notes 2007/08 Module 6 Section D (pages 702-721)

Materiality assessments may mean that some adjustments are

unnecessary. Practitioners will have to use judgement & discuss this with
their auditors.

All transition entries dated as if at 1/4/07

STATEMENT OF MOVEMENT ON THE GENERAL FUND BALANCE

(SMGFB)
It is considered that the transition adjustments should not affect the I&E
Account for 2007/08 nor the main SMGFB sections for 2007/08. In order
to give users of the accounts a clear overview of the transition
adjustments however the following presentation is suggested for the
“General Fund Balance brought forward section” to show the impact on
the opening balance.

£m £m
Closing General Fund Balance at 31 March 2007 (10.000)

Transition adjustments to comply with the SORP 2007 2.500

Transfers from the FIAA per Statutory Guidance (2.000)

Restated General Fund Balance as at 1 April 2007 (9.000)

Where considered appropriate an analysis of the adjustments and
transfers can be disclosed in the notes to the accounts.

In the transition entries that follow entries will be shown flowing through
the SMGFB on this basis with a differentiation drawn between ‘SMGFB-
Transition Adjustment’ and ‘SMGFB-Transfer to FIAA’. Dependent on
ledger set up some authorities may wish to make direct entries (ignoring
the SMGFB) and use manual adjustments to show the correct presentation
in the SMGFB.

1A) SOFT LOANS

To recognise a soft loan valued at £500K on 31/03/07 but which on
01/04/07 has a fair value of £400K :

DR SMGFB – Transition 100

Adjustment
CR Balance Sheet – ST/LT (100)
Debtors

DR FIAA 100
CR SMGFB – Transfer to FIAA (100)

NB1 There is no net effect on the fund balance because the Scottish
Statutory Guidance (para 43) allows the change to be reversed out of the
General Fund balance.

NB2 This will result in a change in Net Assets/Net Worth which will have to
be shown in the STRGL.

1B) PREMIUMS & DISCOUNTS (ON REPAYMENT OF DEBT)

To recognise immediate write out from Net Assets based on Scottish
Statutory Guidance (paras 15-22) which allows Scottish Local
Authorities to treat all existing premiums & discounts as unattached to
existing loans (para 15). This allows them to be held in the FIAA and
charged to the general fund as per originally scheduled.

The entries would be :

DR SMGFB – Transition 250

Adjustment
DR Balance Sheet- Discounts 50
CR Balance Sheet- Premiums (300)

DR FIAA (net figure for premiums 250

& discounts)
CR SMGFB – Transfer to FIAA (250)
NB1 There is no net effect on the fund balance since the Scottish
Statutory Guidance (para 17) allows the premiums and discounts to be
charged to the General Fund Balance as originally scheduled.

NB2 This will result in a change in Net Assets/Net Worth which will have to
be shown in the STRGL.

1C) FINANCIAL GUARANTEES

Financial Guarantees made up to and including 31/03/06 that are not

shown on the balance sheet as at 31/03/07 do not need to be recognised
on the balance sheet as at 01/04/07. (see SORP 2007 Step 1 p55, see
also ACOP Practitioners Guidance Notes p717-721).

Financial Guarantees made on or after 01/04/06 need to be recognised in

line with the SORP 2007 requirements. Eg a financial guarantee of £100K
made on 03/04/06 which on 01/04/07 has a 25% probability of being
called could require recognition of a £25,000 liability (see SORP 2007 4.75
– 4.78)

The Scottish Statutory Guidance does not contain any provision to offset
the impact of accounting for financial guarantees.

Therefore the entries would be

DR SMGFB – Transition 25
Adjustment (to impact on the
General Fund Balance)
CR Balance Sheet- Liabilities (25)

NB1 : Without being routed through the I&E Account there will need to be
an item in the STRGL to explain the change in net assets/net worth.

1D) LOAN DEBT

(EG EIR CALCULATION RESULTS IN CHANGE IN CARRYING VALUE)

This will apply especially to stepped interest rate loans. See the SORP
2007 para 4.23 – 4.26 and also page 57 step 3. Scottish Statutory
Guidance para 46 – 50 specifies that interest on stepped rate loans as at
31/03/07 should be continue to be charged to the general fund as
originally envisaged. Any new stepped rate loans taken out on or after 1
April 07 are to be charged to the General Fund as per the SORP EIR
requirements.

Stepped interest rate loans should be recalculated on an EIR basis from

inception to the end of the loan to determine the loan value as at
31/03/07.

As an example : a stepped rate loan of £1,000,000 may be shown on the

balance sheet at 31/03/07 as :
Creditor – Accrued Interest (£5,000)
Long Term Liability – Loan (£1,000,000)

If the EIR recalculation shows that the value as at 31/03/07 should be

£1,100,000 the relevant entries would be :

DR SMGFB – Transition (95)

Adjustment
CR Balance Sheet -Long Term (95)
Liability - Loan

DR FIAA – Adjust to Loan Debt (95)

CR SMGFB – Transfer to FIAA (95)

NB1 The £5,000 accrued interest has already been charged to the
General Fund. As such the adjustment should take this into account.

NB2 There is no net effect on the fund balance because the Scottish
Statutory Guidance (para 47) specifies that the interest is to be charged
to the General Fund Balance as originally scheduled.

NB3 This will result in a change in Net Assets/Net Worth which will have
to be shown in the STRGL.

NB4 For 31/03/08 and later years accrued interest already charged to the
General Fund should be shown on the balance sheet as part of ‘Borrowing
repayable’ (long term or short term dependent on loan) since it is part of
the value of the loan outstanding, not as part of normal (trade) creditors

1E) REVIEW BAD DEBT PROVISION (IMPAIRMENT) AT 31/03/07

The SORP 2007 (page 58 Step 4) requires impairment (bad debt

provision) of financial instruments, eg debtors, to be reviewed as at
01/04/07 to assess if these should be restated to comply with the SORP
2007 requirements (see SORP 2007 para 4.62-4.72 page 50).

As stated above materiality will no doubt be a consideration in assessing

whether any adjustment is necessary.

Example : As at 31/03/07 no impairment (bad debt provision) was

allowed for a debtor of £1,000,000. On review it is decided that the SORP
2007 would have required a bad debt provision of £200,000.

The Scottish Statutory Guidance does not contain any allowance to offset
the impact of revised bad debt provisions. The SORP 2007 Step 4 page 58
states “The change in the impairment write-downs should be recognised
as an adjustment to the restated opening 2007/08 General Fund Balance.”
 DR SMGFB – Transition 200
Adjustment (to impact on the
General Fund)
CR Balance Sheet – Bad Debt (200)
Provision (or Debtors)

NB1 This will result in a change in Net Assets/Net Worth which will have to
be shown in the STRGL.
2. ONGOING ENTRIES

Following the transition entries as at 01/04/07 the FIAA becomes

‘operative’ and entries will need to be made annually. In essence the FIAA
is a temporary holding account which is used to affect the timing of
certain charges to the General Fund balance. Due to this the eventual
balance for each financial instrument in the FIAA should become ‘zero’.

For this reason it will be necessary to maintain a detailed analysis of the

FIAA balance ( eg to show the individual entries for each specific financial
instrument). This will assist during the audit process and allow the
identification of the balance for each financial instrument at each year
end.

Movements via SMGFB to/from the FIAA should be shown in the SMGFB
section ‘Amounts included in the I&E Account to be excluded when
determining the Movement on the General Fund Balance’ (see SORP 2007
page 77)

LOANS FUND
It is considered that Loans Fund accounting should reflect the statutory
charges to be made to the general fund NOT the FRS25/26 adjustments.
This is because the Loans Fund may make charges to other borrowers and
failure to include these real costs may understate the charge that should
be made. In addition the calculation of interest charges for statutory
purposes should be on a statutory basis.

In the following examples charges to the Loans Fund are separately

identified. Where charges are made the normal expectation would be that
at least a proportion of these costs will impact on the General Fund /HRA
balances via the year end Loans Fund interest charges (or credits) to the
General Fund and HRA I&E Accounts.

GENERAL FUND/HRA
Where noted some entries will require an apportionment or split between
the General Fund and the HRA in order to allow the HRA I&E and SMHRAB
to be presented correctly.

Where an apportionment is required (see 2B and 2D below) the suggested

approach is to base this on the year end actual interest charges/credits
from the Loans Fund to the General Fund and HRA i.e the split should be
in the same proportions as actual loans fund charges since finance costs
are not normally identified to specific assets / services.

Ongoing entries include the following :

2A) SOFT LOANS

Example : Where a soft loan made on or before 31/03/07 has been
written down at 01/04/07 and for 2007/08 the calculated (market
equivalent) interest would be £10K but the actual charge to the borrower
is only £4K (with £1K opening and closing accruals) the entries would be :
 DR Balance Sheet ST/LT Debtor 1
– Closing Accrual
DR Cash – Interest Rec’d 4
CR Loans Fund – Interest Rec’d (4)
(may be service revenue
income if loan not made by
the Loans Fund)
CR Balance Sheet ST/LT Debtor (1)
- Opening Accrual

To show ‘actual’ interest received by Loans Fund

DR Balance Sheet – ST/LT Debtor 6

CR I&E Account – Interest (6)
Received

To ‘top up’ in the I&E Account the interest to the ‘market based’ £10K
while also building up the amount on the balance sheet that is due from
the borrower so that it eventually equates to the final payment due from
the borrower.

DR SMGFB - Amounts in the I&E 6

Acct to be excluded from the
GF Balance
CR FIAA – Soft Loan balance (6)

To ensure that the credit to the General Fund is the actual cash received
(i.e (10) + 6 = (4) income to GF) and to reduce the balance in the FIAA
related to the soft loan.

NB1 In Scotland new soft loans 01/04/07 or later must be accounted for
per the SORP with no entries going through the FIAA. (See SORP 2007
page 39 paras 4.9-4.12, also ACOP-SORP Guidance Notes 2007/08 pages
644-646 paras A14-A18, especially A16)

NB2 If the soft loan related to the HRA this would have to be identified as
such and shown in the HRA I&E Account.
2B) PREMIUMS & DISCOUNTS
For premiums and discounts transferred to the FIAA under the transition
arrangements the Scottish Statutory Guidance requires the premium to be
charged to the general fund in line with the original schedule (para 17).

For premiums & discounts arising on or after 01/04/07 the Scottish

Statutory Guidance specifies :

Situation Length of Write Off Caln of Write Off

Replacement loan is Life of replacement Pro rata to expected
fixed rate (para 24) loan (para 24) or interest expenditure
shorter period profile (para 39)
Replacement loan is Lesser of (a) life of Pro rata to expected
variable rate or has replacement loan or interest expenditure
option to vary (para (b) 20 years OR profile (para 39) OR if
25) shorter period (para max 20 years then in
25) equal instalments (para
39/40)
No replacement loan 5 years or shorter Equal instalments
(para 26) (para 26) (para 41)
Premiums /discounts In line with original As per schedule (para
that exist at 31/03/07 schedule (para 17/32) 17/32)
and subsequently
become overhanging
(para 32)
New Overhanging Lesser of (a) Years = Equal instalments
premiums /discounts premium or disc / (para 42)
that arise from annual saving or (b) 20
refinancing of debt on years OR shorter
or after 01/04/07 (NB period (para 33)
presumably new
borrowing replacing old
borrowing) (para 33)
Overhanging premiums 5 years or shorter Equal instalments
/ discounts arising on (para 35) (para 41)
or after 01/04/07 with
no new borrowing
(para 35)

The above is a brief summary. For full details see paras 13-42 of the
Scottish Statutory Guidance

New Premium – Entry to FIAA

For example if a premium of £500K is incurred on or after 01/04/07 which
does not meet the SORP requirement to be an adjustment to the carrying
value of a loan then the entries would be :

DR I & E Account – Interest Paid 500

& Similar Charges
CR Cash
(OR if already charged (500)
against the Loans Fund in the
year CR Loans Fund)
 DR FIAA 500
CR SMGFB - Amounts in the I&E
Acct to be excluded from the (500)
GF Balance

NB 1 That amortised premiums/discounts in the HRA I&E Account are

shown separately, not included in the ‘Interest Charges’ Line (see SORP
2007 page 100 HRA I&E)

NB 2 That premiums/discounts being treated as above will need to be

split between the General Fund and the HRA (see ACOP SORP Guidance
Notes 2007-08 para Q29 page 245)

Charging Premiums Held in the FIAA

The following entries are suggested where £100K of premiums held in the
FIAA are to be charged to the General Fund as per statutory requirements
:

DR Loans Fund – expenditure 100

(Premiums & Discounts)
CR I&E Account -Interest
Charges from Loans Fund (100)

This entry to ensure that the premiums/discounts are included in the

Loans Fund calculation of interest. The credit to the I&E Account Interest
Charges line is to offset the impact of the premiums & discounts flowing
through to the I&E Account via charges from the Loans Fund.

DR SMGFB - Amounts in the I&E 100

Acct to be excluded from the
GF Balance
CR FIAA – Premiums/Discounts (100)

NB1 In order to properly present the HRA I&E Account/SMHRAB an

allocation or apportionment of the last entry of £100K (DR SMGFB/CR
FIAA) between the General Fund (Council Tax) and HRA account will be
required. The prior entries do not need to be apportioned since this will be
achieved through the year end Loans Fund charges.

2C) FINANCIAL GUARANTEES

The Scottish Statutory Guidance does not contain any provision to offset
the impact of accounting for financial guarantees. There should be no
entries in the FIAA relating to Financial Guarantees.

Existing financial guarantees made on or before 31/03/06 may require a

provision to be created (per FRS12) if it becomes probable that they will
be called (see ACOP SORP Guidance Notes 2007/08 example page 720,
also SORP 2007 para 4.77).
Financial Guarantees made on or after 01/04/07 need to be recognised in
line with the SORP 2007 requirements. Eg a financial guarantee of £100K
made on 02/04/07 which lasts for 3 years and has a 25% probability of
being called could require recognition of a £25,000 liability (see SORP
2007 4.75 – 4.78)

For full accounting entries see ACOP Guidance notes 2007/08 para C47
page 700

Therefore the entries could be

Initial recognition 02/04/07:

DR Service Revenue Account - 25

expenditure
CR Balance Sheet – Guarantee (25)
Liability

Annual entry (until balance written off) :

DR Balance Sheet – Guarantee 8.3

Liability
CR Service Revenue Account – (8.3)
expenditure

NB1 With reference to the on-going entries for financial guarantees

practitioners should refer to the SORP 2007 page 53 para 4.77 and the
ACOP SORP Guidance notes 2007/08 pages 698-701 (paras C39-C48). If
payment of the guarantee becomes probable then a provision should be
made as per the requirements of FRS12. The amortisation of the initially
recognised guarantee liability may normally be done on a ‘straight line’
basis however practitioners may wish to refer to the requirements of
International Accounting Standard 18 (IAS 18) to ensure that this
treatment is appropriate.

NB2 If the financial guarantee related to the HRA this would have to be
identified as such and shown in the HRA I&E Account.

2D) LOAN DEBT (EG EIR CALCULATED INTEREST CHARGES)

WHERE THE LOAN EXISTED AS AT 31/03/07

Example

Loan value as at 1/04/07 (after restatement)= £1,200,000

Made up of :
Principal (£1,100,000)
Accrued Int (chgd to GF 06/07) (£40,000)
EIR Adjustment (opposite entry to FIAA) (£60,000)

With cash interest payment in 07/08 of £200K and closing interest accrual
(on previous scheduled basis) of £50K. The EIR interest charge for 07/08
is calculated as £240K.
Entries in 07/08 –

DR Loans Fund Expenditure 210

DR Balance Sheet –Borrowing 40
i.e opening “accrual”
CR Cash – Interest payment (200)
CR Balance Sheet –Borrowing (50)
i.e closing “accrual”

To reflect actual ‘old basis’ interest charge. Interest charge will flow
through Loans Fund to be included (in part) in the I&E Account –Interest
Charge line.

DR I&E Account 30
–Interest Charge
CR Balance Sheet – LT Liability (30)

EIR adjustment to ‘top up’ the I&E interest cost and correctly state the
liability on the balance sheet ( £240k EIR interest less £210K charged to
gen fund in 07/08)

DR FIAA 30
CR SMGFB - Amounts in the I&E (30)
Acct to be excluded from the
GF Balance

To neutralise the ‘top up’ impact on the general fund.

The key accounts therefore show :

LT Liability : (1,200) op + 40 reversed to rev + (50) clos accrual + (30)

EIR adjust = (1,240) clos bal

FIAA : 60 op + 30 EIR adjust = 90 clos bal

NB1 In order to properly present the HRA I&E Account an allocation or

apportionment of the £30K between the General Fund (Council Tax) and
HRA account will be required.

NB2 Interest on new loans taken out 01/04/07 or later should be

accounted for in compliance with the SORP 2007. There should be no
entries to the FIAA for such new loans.
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