Statement of accounts 2006-07

20Accounting PoliciesProvisionsProvisions for liabilities and charges have beenestablished in accordance with FRS 12 Provisions,Contingent Liabilities and Assets and are based onreliable estimates of the expenditure required to settlefuture legal or constructive obligations that exist at thebalance sheet date.Provisions are charged to the income and expenditureaccount and are released when the transfer ofeconomic benefit to settle the obligation has beenmade.Policy in relation to the principal provisions is asfollows:Third Party Liabilities - to make provision for realisticestimates of the future settlement of third partyclaims, the liability for which already exists at the dateof the balance sheet, insofar as they will not be met byexternal insurance. The figure shown on the balancesheet does not include any adjustment to discountthe total liability to present day terms in line with FRS12 because the claims involved are deemed to beestimates based on present day values.Tax Liability - to make provision for the reimbursementto officers of tax deducted in respect of CompensatoryGrant. The grant to which this tax relates is paid to allofficers who are in receipt of rent allowance and joinedbefore 1994.Bad Debts - to make provision for general and specificdebts where there is significant doubt that payment willbe received. The provision for bad debts is deductedfrom current debtors in the balance sheet.ReservesThe SORP requires the maintenance of a FixedAsset Restatement Account and a Capital FinancingAccount within the balance sheet. These accounts donot form part of the cash resources available to theAuthority.The Authority maintains reserves that are eitherearmarked for specific purposes or held to meetunforeseen or emergency expenditure. Earmarkedreserves will be established from time to time tomeet specific expected revenue or capital costs asdetermined by the Authority.The Authority also maintains a general reserve tomeet unforeseen or emergency expenditure whichcannot be contained within the approved budgetand has agreed that this reserve be established at aminimum of 1.5% to 2% of net budgeted expenditure,as and when conditions permit, provided that thereare adequate accounting provisions and earmarkedreserves, reasonable insurance arrangements, a wellfunded budget and effective budgetary control.Contingent LiabilitiesThe MPA recognises material contingent liabilities,which arise from past events whose existence canonly be confirmed by the occurrence of one or moreuncertain future events which are not wholly withinthe MPA’s control in the notes to the balance sheet.Details of the extent of the potential liabilities aredescribed in the note.Private Finance Initiative Contracts (PFI)The Authority has entered into two long termcontractual agreements under PFI whereby theContractor is responsible for design, construction,finance and maintenance of four new police stationsin south-east London and a new public order andfirearms training centre. Such PFI schemes meet theconditions set out in FRS 5 Substance of Transactionsand professional advice has been provided whichindicates there is no impact on the balance sheet ofthe Authority (other than mentioned above). Detailsof the ongoing revenue commitments are describedon page 30.Redemption of DebtThe Authority is able to finance a proportion of itscapital investment projects through borrowing. Theopportunity to finance capital expenditure in this wayhas increased through the flexibilities provided bythe Prudential Code. The income and expenditureaccount is charged with an amount sufficient to ensurethat the minimum statutory principal repayment inrespect of outstanding debt is repaid. The incomeand expenditure account also meets all accruedinterest costs.Details of current earmarked reserves are set out onpages 41 to 43.