The financial instruments of capital accounting in local authorities
| Date | 01 March 1999 |
| DOI | https://doi.org/10.1108/14635789910252927 |
| Published date | 01 March 1999 |
| Pages | 89-107 |
| Author | Mark Deakin |
| Subject Matter | Property management & built environment |
Practice briefing:
Financial
instruments
89
PRACTICE BRIEFING
The financial instruments of
capital accounting in local
authorities
Mark Deakin
Department of Building and Surveying, Napier University, Edinburgh,
Scotland, UK
Keywords Capital accounting, Economy, Efficiency, Information systems, Logic, Valuation
Abstract The paper examines the development of the financial instruments (land audits,
property reviews, information systems, registers and approaches to valuation) required to replace
the expenditure-driven logic of public sector finance with the system of capital accounting in local
authorities advocated by the Chartered Institute of Public Finance and Accountancy. The
examination draws on the findings of a research project undertaken to survey the steps local
authorities have taken to develop the property registers and valuation procedures for such
purposes. It highlights the critical role property valuation plays in introducing a system of capital
accounting that ensures that the financing of the public sector is not expenditure-driven, but
subject to value-for-money tests, and meets the economy and efficiency criteria which this requires.
Introduction
If local authorities are to become fully accountable for their capital expenditure and if
[property] managers are to operate [economically and] efficiently, being fully aware of the
current costs of the assets they are using, then a new system is required.
The quote appears on the first page of the Chartered Institute of Public Finance
and Accountancy (CIPFA’s) (1989) Capital Accounting in Local Authorities: The
Way Forward. Prepared by a joint steering group, made up of representatives of
the Department of Environment, Audit Commission (AC), CIPFA and
Association of District Councils (ADCs), the document proposes that local
authorities should adopt a new system of financial reporting and expenditure
accounting, one that does away with the preoccupation property managers have
with statements about the methods of financing expenditure, rather than
system of capital accounting.
This paper examines the development of the financial instruments required
to introduce the new system of capital accounting in local authorities. The
examination begins by reviewing the arguments for the switch from the
Journal of Property Investment &
Finance, Vol. 17 No. 1, 1999,
pp. 89-107. © MCBUniversity
Press, 1463-578X
This paper is drawn from the findings of a research project funded by the RICS Educational
Trust. The project in question examines the development of local authority property management
in terms of the corporate strate gies, financial instruments and computer-based information
systems local authorities have put in place to improve the standards of property management.
The full report appears in Deakin (1998a).
Received 20 February
1998
The research register for this journal is available at
http://www2.mcb.co.uk/mcbrr/jpif.asp The current issue and full text archive of this journal is available at
http://www.emerald-library.com
JPIF
17,1
90
so-called “methods of financing expenditure” to “systems of capital accounting”.
It then goes on to examine the issues currently surrounding the development in
terms of the property registers required for such purposes and questions about
the valuation of assets needed under the new system of capital accounting. The
paper draws particular attention to the significance of capital markets in
developing the income and cost structure, bases, methods and techniques of
valuation for such purposes. It also draws on the findings of a recent survey to
highlight the critical role such a structure of valuation plays in the development.
Methods of financing expenditure
At first sight, the proposal to draw a division between finance and accounting
in local authorities may appear a little odd for an Institute of Public Finance and
Accountancy. However, on reflection, the reason for this becomes clear: it is
because CIPFA are of the opinion that questions about public sector finance in
general, and with government as the authority for the provision of services in
particular, have been driven by expenditure methods rather than accounting
systems. In CIPFA’s view the focus of attention on methods of financing, rather
than system of accounting for expenditure, exposes the weakness of the present
situation and need to replace the existing expenditure-driven logic of public
sector finance with a new system of capital accounting in local authorities.
In making the case for the new system of capital accounting in local
authorities, CIPFA propose it should be judged on the advantages it has over the
expenditure-driven logic of public sector finance. In going on to argue the case
for capital accounting in local authorities, CIPFA draw attention to the
weaknesses of the expenditure-driven logic currently in place. The weaknesses
in question are presented as follows:
•the method of financing capital expenditure: for example; by debt, sale
and leaseback and receipts, fix the charges to the service department
rather than the local authority;
•the result is an arbitrary set of charges, with normal charges for debt,
reduced payments for sale and leaseback and no charge for capital
expenditure funded from receipts;
•under this formula all charges are paid from the service department
revenue accounts and may appear an unusually high burden, or of little
consequence depending on whether capital expenditure is funded by
debt or receipt;
• such a formula operates on a “method driven logic” of expenditure, with
different payments, time horizons, economic lives, profiles of
obsolescence and depreciation and can penalise one service department
budget relative to another;
•this imbalance is compounded due to the fact that charges are based on
historic rather than the current cost of replacing the capital in question
via further expenditure, appropriate tests, or assessments.
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