Statement of Accounts 2011/2012 - Blackburn with Darwen Borough ...

NOTES TO THE FINANCIAL STATEMENTS
Private Finance
Initiative (PFI)
schemes
Inventories
Financial
Instruments
Provisions
PFI contracts are agreements to receive services,
where the responsibility for making available the
property, plant and equipment needed to provide
the services passes to the PFI contractor.
However, as the Council is deemed to control the
services that are provided under its PFI schemes,
and as ownership of the property, plant and
equipment will pass to the Council at the end of the
contracts for no additional charge, the Council
carries the assets used under the contracts in its
Balance Sheet as part of Property, Plant and
Equipment.
The original recognition of these assets at fair
value (based on the cost to purchase the property,
plant and equipment) will be balanced by the
recognition of a liability for amounts due to the
scheme operator to pay for the capital investment.
The Council pays the operator for the specified
services over the life of the arrangement. The
contract includes performance standards. It also
sets the initial prices to be levied by the operator
and regulates price revisions over the term of the
arrangement.
IAS 2 requires that inventories are measured at the
lower of cost and net realisable value. The
Council’s inventories are valued on a variety of
bases depending on the nature of the items
involved, including: cost, average cost, FIFO and
LIFO. The bases used do not always, therefore,
comply with the requirements of IAS 2 or the code
interpretation.
Fair value of trade debtors/creditors is assessed to
be the same as book value less provision for
impairment of debtors.
Fair value of PWLB debt and market debt is
estimated based on amount that would have had to
repay at balance sheet date including any premium
which would be due for early re-payment.
Fair value of investments is estimated by
discounting the cash flows on investments - i.e.
principal and interest due on maturity, at a market
rate for an investment of a similar period to the
outstanding period at the balance sheet date.
Provisions are made when an event has taken
place that gives the Council a legal or constructive
obligation that probably requires settlement, and a
reliable estimate can be made of the amount of the
obligation. There are three current provisions made
by the Council, which are in respect of Highways
Third Party Claims, a loan guarantee made by the
Council and potential insurance excess liabilities
for five outstanding accident claims.
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Although the payments made to the
contractor are described as unitary
payments, they have been calculated
to compensate the contractor for the
fair value of the services they provide,
the capital expenditure incurred and
interest payable whilst the capital
expenditure remains to be reimbursed.
A detailed financial model provides
cost projections over the life of the
contract and disaggregates the annual
payments to the contractor between:
- cost of services
- repayment of liability; and
- interest / financing costs,
in order to provide the required
accounting entries.
As the PFI model uses recognised
measurement techniques and the
Council has taken professional
guidance, the underlying data is
considered to be reliable and the
scope to use judgement and change
assumptions limited. The degree of
estimation uncertainty is, therefore,
considered to be acceptable.
The values are not material i.e.
£321,000 at 31 March 2012 (£336,000
at 31 March 2011), therefore the
degree of estimation uncertainty is
considered to be low.
The base data is historical cost
information in the most part. The same
bases are used for individual inventory
balances consistently year on year.
The exercise of judgement is only
around determining the most
appropriate method of valuation at the
inception and therefore the level of
judgement is not significant.
Underlying data is relatively reliable -
i.e. for PWLB redemption terms are
provided; for other loans and
investments interest rates etc are
available and recorded as part of
normal treasury management
processes.
The level of judgment used is limited
and there is no reason to try to bias the
estimates in any way since they are
disclosure items only.
The overall level of estimation
uncertainty considered to be low.
The Highways Third Party Claims
balance results from detailed
monitoring of outstanding/potential
claims and a year end assessment of
the element to be classified as an
earmarked reserve and that which
constitutes a provision.
The values are not material i.e.
£785,000 at 31 March 2012 (£808,000
at 31 March 2011), therefore the
degree of estimation uncertainty is