CIPFA Bulletin 12 Accounting for Infrastructure Assets Temporary Solution

The CIPFA Bulletin 12 – Accounting for Infrastructure Assets – Temporary Solution covers the issues to be considered regarding the temporary solution for the accounting and reporting issues relating to infrastructure assets 

Objective of the Bulletin:

• To provide guidance on the temporary solution for accounting for infrastructure assets, focussing on the reporting of the derecognition provisions where there is replacement expenditure and particularly for highways infrastructure assets
• The temporary solution includes the Update to the Code and Specifications for Future Codes for Infrastructure Assets (Update to the Code) from 1 April 2021 to 31 March 2025 which features a temporary relief not to report gross cost and accumulated depreciation for infrastructure assets and the statutory prescriptions from England and Wales and Scotland
• The Bulletin also includes guidance on accounting for the pattern of consumption of economic benefits and service potential ie depreciation.

Areas covered in the Bulletin: The Bulletin includes guidance on materiality, an overview of different elements of the temporary solution, the accounting requirements for derecognition including the statutory prescription, the impact on accounting policies and the reporting requirements for disclosure of gross cost and accumulated depreciation 

Statutory Provisions

The Bulletin considers the statutory provisions in England, Wales, and Scotland 

Statutory Provisions in England and Wales 

• The Local Authorities (Capital Finance and Accounting) (England) (Amendment) Regulations 2022 SI 1232/2022 – These amendment regulations provide that where a local authority replaces a component of an infrastructure asset, the authority has a choice of how to identify the carrying amount to be derecognised in respect of that component (ie either a nil amount or to follow the Code).
• The English Regulations apply to statements of accounts for financial years beginning on or before 1st April 2024, and to those statements of accounts which have not already been certified by a local auditor.
• The Local Authorities (Capital Finance and Accounting (Wales) (Amendment) Regulations 2022 SI 1254/2022 (W.255) – Similarly these amendment regulations provide that where a local authority replaces a component of an infrastructure asset, it must either determine that the replaced component has a value of nil and therefore that there is no requirement to remove any amount from its balance sheet in respect of the disposal of that component, or it must account for the carrying amount in accordance with the accounting practice in the Code.
• The Welsh Regulations apply to all local authority statements of accounts from the year beginning 1 April 2021 up to and including statements of accounts produced for the financial year ending 31 March 2025.
• Both English and Welsh Regulations specify that an authority is not required to make any prior period adjustment to the balances of that statement of accounts in respect of infrastructure assets.
• Local authorities need to consider this carefully. 

Statutory Provisions in Scotland 

• Local government finance circular 09/2022: statutory override - accounting for infrastructure assets
  -Statutory override 1 permits local authorities in Scotland not to disclose gross cost and accumulated depreciation.
  -Statutory override 2 allows the carrying amount of the replaced part to be derecognised as nil for local authorities in Scotland. 
  -Statutory override 1 applies for accounting periods commencing from 1 April 2021 until 31 March 2024 and statutory override 2 applies for accounting periods commencing from 1 April 2010 until 31 March 2024.
  -Note that local authorities can instead apply the provisions of the Code (but not the Update to the Code).

Depreciation – pattern of consumption

• Bulletin 12 applies the definition of depreciation ie local authorities would need to use a method that reflects the pattern in which the asset’s future economic benefits or service potential are expected to be consumed
• Use of a weighted average likely to be necessary
• The methodologies set out in Bulletin 12 present illustrations of how weighted averages might be calculated. Authorities may be able to devise alternative approaches that will satisfy Code requirements for local conditions and their own circumstances and must use an approach which best reflects the consumption of economic benefits or service potential for its local circumstances. This guidance therefore cannot be prescriptive.
• Examples in the Annex using estimations of both Gross Book Value and/or Net Book Value – note the examples are purely illustrative 
• Examples include the use of a multiplier
• The Bulletin is clear that depreciation is an estimate – it cannot be a precise measurement – alternatives to the various suggestions in the Bulletin may be used provided it results in a reasonable estimate of benefits/potential consumed by use of the assets and may better represent the consumption of economic benefits and service potential

Depreciation – useful lives

• The pattern of consumption will be affected by the useful lives of the various parts of the infrastructure assets 
• Normally useful lives would be set by an authority based on their expert’s views on the length of useful life either remaining if net book values are used or if using gross cost an estimate of the total useful life of an asset for an authority
• CIPFA has taken the unusual step of including reasonable ranges of useful lives of the components of highways infrastructure assets based on information provided by the UK Roads Leadership Group Asset Management Board to assist local authorities though these might instead support the reasoning behind a local authority’s current decisions
• Factors included to explain why a useful life used may be outside of these ranges