|
|
|
|
| Financial Issues Advisory Group Report |
| ANNEX E |
| BUDGET DOCUMENTATION |
| 1. This Annex is a mock-up designed to show how a budget for a Department of the Scottish Administration might look. The budget documents would replace "Estimates" as they are currently prepared. |
| 2. The Department shown here is a mythical one based on the existing Development Department and the divisions responsible for water in Scotland. There are no proposals for such a merger; the amalgamation has merely been carried out so as to show as wide a range of expenditure as possible! |
| SCOTTISH PARLIAMENT: BUDGETING AND REPORTING THE DEPARTMENT FOR DEVELOPMENT AND WATER |
| BUDGET DOCUMENTS |
1. At the departmental level
it is considered that the budget documents for each department should incorporate:
|
| together with any further tables/analysis considered necessary. |
| 2. These statements Will provide a direct read across to the primary statements to be produced in the department's annual (resource) accounts. |
| General |
| 3. The attached financial statements represent a "fictitious" Department, the Department for Development and Water (comprising the current Development Department, less its Agency, Historic Scotland, plus the elements of Agriculture Environment and Fisheries Department dealing with Water Services activities. |
| 4. The financial statements have been prepared from the outturn 1997-98 data used in the preparation of the 1997-98 illustrative resource accounts. These accounts were prepared in June 1998, and it is therefore acknowledged that the figures used do not take account of adjustments to data made during the course of the audit (in particular any surplus which arose). Equally, the Balance Sheet figures are subject to farther examination. They should however provide an idea of the nature of the items which would fall to be dealt with by this "Department", and of the scale of the numbers involved. |
| 5. Where comparative 1996-97 figures have been provided these are a combination of known and estimated balances. |
| 6. This outturn information is presented as if it represented the budget for that period. Each statement is considered in turn, with specific comments on the examples provided. |
| Terminology |
| 7. It has been agreed that the present Westminster terminology of Estimates and Votes, etc should not be used. Resource Accounting and Budgeting introduces new terminology, but it is considered that it is not particularly "user-friendly" in all cases. The intention is to adopt terminology which can be readily understood, will provide a direct read-across to the end-reporting tool, i.e. the accounts, and with respect to the various "totals" to be controlled under resource budgeting. |
| 8. Appendix E-l provides examples and suggestions. (The examples drafted may use an unfortunate combination!) |
| Provision of Comparative Information |
| 9. The necessary planning cycle will mean that the budgets for the next year must be set at a relatively early stage in the current year. |
| 10. The only comparative outturn information which will be available will be that of2 year's prior. The budget for the "current" year should be shown. |
| 11. In practice, there will be projections for several future years, and it may be that this forward information should be shown alongside. |
| 12. It is for consideration what narrative information should accompany each statement. |
| SCOPE |
| 13. The Scope of a Budget is the authority to spend, and must therefore form the first section of the budget documents (Schedule 1/A). (The wording given is that of the relevant sections of the current Votes 1 and 2.) |
| 14. Rather than simply being able to state "the amount required" as the present Estimates do, a summary of the funding requirements is shown. |
| 15. The Scope of a Budget is input based. The focus of RAB is output based. A farther schedule (Schedule 1/B), showing the summary funding requirements alongside the departmental aims and objectives is also provided. If it is considered desirable to give the aims and objectives greater prominence, perhaps some combination of these two will be required. |
| STATEMENT OF REQUIRED FUNDING |
| 16. Schedule 2 is the more detailed statement supporting the summary on the opening sheet. This statement will pull together the Operating (Cost) budget with the projected balance sheet movements to show the funding required to meet the projections. |
17. The Total Funding Requirement
derived will be met by:
|
| and this is shown at the foot of the statement. (This is not something which is presently a requirement of resource accounting, but if grant is allocated and controlled at the Departmental level, this may provide better information.) |
| 18. Points to note: |
| 18.1 The annual change in value of the road network has been treated as an "Investing" activity. While the change will be composed of several variances, the price variance will be reflected in the revaluation reserve. |
| 18.2 It is not entirely clear under RAB how the non-voted elements should be treated in resource budgets. For these purposes, Capital Allocations and External Financing Limits have been treated as "cash equivalents". |
| 18.3 Capital grants have been treated as programme expenditure in the Operating Budget. A final decision on "Capital Beyond the Boundary" has yet to be taken. The accounting treatment is settled (capital grants will be charged to the Operating Cost statement) but the resource budgeting treatment is still uncertain. |
| OPERATING BUDGET |
| 19. Schedule 3 attempts to build on the format of the RAB Operating Cost statement; to provide more meaningful information on the nature of the expenditure and income. (The programme categories are those of the current Votes, with the EU Social Fund net subhead presented separately, in line with the resource accounting requirement to analyse income and show that derived from the EU.) |
| 20. Present Estimates deal only with the "programme" categories, although admittedly in more detail than does this statement. (Further detail on the programmes is however provided in the statements dealing with objectives.) |
| 21. Present Estimates analyse Votes across Direct Expenditure: Running costs, Other current, and Capital; and Grants and Transfers: Current and Capital. Under RAB, there will be no "direct capital" in the Operating budget, and the revised definition of capital is already impacting on what should be included in the first two categories. For the others, the read across between the SCOAP data and the Budget is not immediate, but such an analysis could presumably be provided if relevant. |
| 22. In a note to the resource accounts, the Operating Cost statement is analysed "by spending body", i.e. whether directly by the "core Department", by Agency, NDPB, etc. This could be incorporated. |
| 23. Under RAB, all income has to be accounted for in the Operating Cost statement. Income which is subsequently CFER'd must nevertheless be budgeted for and accounted for. This has therefore been categorised separately from the programme items, and a "functional" analysis provided. To recognise that this income is not available to the Department it is added back to arrive at the Operating Budget. Income which is CFER'd does not therefore form part of the "Funding Requirements", and is not "controlled" in any way under this format. (Appropriations-in-Aid are shown as "Retained Income".) |
| 24. The "Operating Budget" describes the resource implications of the programmes to be administered by the Department. The Department's running costs may however be controlled as part of administration costs more generally, in a separate budget. A memorandum item has however been included to give an indication of the running costs directly involved in delivering the departmental programmes. |
| 25. Points to Note: |
| 25.1 Support given to Local Authorities has been shown as a separate category. This could however be allocated across the various programmes. |
| 25.2 Capital charges have been calculated in more simplistic terms than RAB will require. A straight 6% on the 1997-98 Balance Sheet has been applied. |
| 25.3 RAB requires programme expenditure in the form of grants to be accounted for by matching the grant with the "underlying activities". This aspect has not yet been examined in great detail for The Scottish Office. At 31 March there was an exercise to determine where grants may have to be accrued, and several cases from this Budget were identified. |
| 25.4 As noted in paragraph 14.3 above, capital grants have been treated as programme expenditure , but this may not be the case. HIAL, and Scottish Homes are in receipt of capital grants. |
| ASSETS AND LIABILITIES |
| 26. It is considered desirable that the departmental budget documents contain "Balance Sheet elements" (Schedule 4). |
| 27. In the present case it is intended that the "operational" assets and liabilities (i.e. principally the accommodation and staff costs) of the Scottish Executive will be managed centrally. The fixed assets used by an internal Department to carry out its functions on a day to day basis will not therefore feature as part of the resources managed by that Department. Cash management will similarly be conducted centrally, and Accounts Receivable and Accounts Payable may be managed centrally so all relevant cash and working capital flows will not necessary be identifiable to each internal Department (they certainly are not at the moment). |
| 28. The Balance Sheet items which should feature within their budgets will be "programme" assets and liabilities, directly under the control of that Department. |
| 29. There are a number of practical considerations to "extracting" elements of a global balance sheet in a meaningful way, in particular, what information should be presented? |
| 29.1 A balance sheet should, by definition, balance. In view of the central functions however, and dependent on what controls exist at the departmental level, the separation of the "bottom half' of the Balance Sheet may be more difficult, and not particularly meaningful. The statement provided shows a revaluation reserve in respect of the road network, and the Department's share of the General Fund. |
| 29.2 A projected Balance Sheet of itself will not provide much information to the reader; more interesting will presumably be the "movements", and in particular, the planned capital spend. Not all Balance Sheet movements will of course be planned capital spend (e.g. NRD directly related debtors and creditors). The disclosure may depend on what it is that the Parliament will be controlling in terms of the Balance Sheet elements. |
| 29.3 There will of course be capital charging consequences of Balance Sheet movements. Under RAM capital charging is calculated on the whole balance sheet, but departmental budgets will have to deal with the capital charging consequences of their programmes (the capital charges will have to be reflected in the departmental Operating Cost statement). |
| 29.4 The necessary planning cycle means that the budgets for the next financial year must be set at a relatively early stage in the current year; the opening Balance Sheet for the year in question is a bit of a moving target, and can only realistically be expressed in relation to the projected closing Balance Sheet for the previous year. |
| 30. Appendix E-2 details items from the 1997-98 Balance which have been identified as relating specifically to this "Department". |
| Capital Expenditure Plan |
| 31. Schedule 4/2 deals only with the planned expenditure in relation to the programme tangible fixed assets, i.e. the road network, and is for illustration only. There would need to be consideration of what it would be possible, and indeed desirable, for Roads Directorate to provide. |
| 32. It is for consideration what schedules/farther information should supplement the Balance Sheet. An example would be information on PFI commitments. |
| 33. One factor to consider is to what degree any such information should then be "reported against" in the annual accounts. |
| AIMS & OBJECTIVES |
| 34. RAB requires the production of a "Schedule 5", showing the allocation of resources to objectives. This requires total costs to be attributed to objectives (i.e. the programme costs plus the costs of delivering those programmes (staff, overheads, etc.) |
| 35. A statement has therefore been included (Schedule 5) showing the Operating Budget allocated across the departmental objectives, together with an indicative split of the directly allocated administration costs. It would be possible to incorporate also non-voted items (but there would be no direct read-across to the funding requirements, unless all working capital and non-cash movements were also dealt with.) |
| 36. Further statements for each programme could then provided, giving the Operating Budget for each, and showing the sub-programmes being followed in pursuit of the objectives. Performance indicators should be shown, with the targets set for the year. Two examples are provided. Work on objectives and performance indicators is ongoing within the office, and these are purely illustrative. |
| APPENDIX E-l |
| TERMINOLOGY |
| RAB/Cash accounting | Ltd Company | Options/Suggestions |
| resource accounts | financial accounts (= annual accounts) | annual accounts |
| resource budget | management accounts (= internal monitoring) corporate plan budgets projections forecasts |
monitoring reports |
| plan | ||
| budgets | ||
| expenditure plans | ||
| projections | ||
| Operating Cost statement | Profit & Loss Account | Operating Cost statement
Operating statement |
| Income | Income | Income |
| Expenditure | Expenditure | Expenditure |
| Receipts & payments | On an accruals basis, P&L account items will be"receivable" and "payable" | Do not use cash
terminology Do not mix terminology, i e. do not use:
|
| Income including CFERs | N/A | Retained income (retainable?)
Income surrendered (surrenderable?) |
| Balance Sheet | Balance Sheet |
|
| APPENDIX E-2 |
| BALANCE SHEET CONTENT |
| 1. The following items from the 1997-98 Balance Sheet have been identified as relating specifically to this "Department". (The detail provided is as extracted from the "Illustrative resource accounts".) |
| 2. Tangible Fixed Assets |
| 2.1 Road Network |
| The trunk road network managed by the Department is valued on the basis of current replacement cost, adjusted to reflect the overall condition of the network. No annual depreciation is charged because it is recognised that the network is to be managed in perpetuity. The cost of maintaining the network is charged each year to the Operating Cost statement. |
|
£ |
|
| Valuation of network in use as at 31 March 1998 |
7,158,787,124 |
| Costs to date of roads under construction |
45,020,325 |
|
7,203,807,449 |
| 2.2 Skye Bridge |
| The Skye Bridge is owned by the Secretary of State for Scotland. A concession has been granted to the Skye Bridge Company Ltd, at the end of which the SofS will enjoy full ownership. Only the value of the reversionary interest in the Bridge is therefore included in the accounts. |
|
£ |
|
| Estimated value as at 31 March 1998 |
8,842,956 |
| 3. Fixed Asset Investments |
| 3.1 Nationalised Industries |
| The Secretary of State for Scotland is the sole shareholder in Caledonian MacBrayne Limited (CalMac) and Highlands and Islands Airports Limited (HIAL). The Secretary of State holds the following investment: |
|
£ |
||
| CalMac | 1.5 million ordinary shares of £10 each |
15,000,000 |
| HIAL | 50,000 ordinary shares of £1 each |
50,000 |
| Shareholdings @ historical cost |
15,050,000 |
| 3.2 Voted Loans |
| The Secretary of State provides loans to Caledonian MacBrayne to be used for construction in new shipping. Loans from voted provision have also been made to Independent Harbour Trusts and to the Tay Road Bridge Joint Board. |
|
CalMac |
Harbours |
Tay Bridge |
Total |
|
|
£ |
£ |
£ |
£ |
|
| 01- Apr-97 |
4,499,622 |
85,463 |
3,148,125 |
7,733,210 |
| Advanced |
0 |
0 |
0 |
0 |
| Repaid |
221,898 |
37,014 |
71,372 |
330,284 |
| 31-Mar-98 |
4,277,724 |
48,449 |
3,076,753 |
7,402,926 |
| Accounting for these balances Fixed Asset Investments means that the amounts which will be repayable during the next year are not visible disclosed in the balance sheet: |
| Due <one year |
239,617 |
2,257 |
77,066 |
318,940 |
| Due > one year |
4,038,107 |
46,192 |
2,999,687 |
7,083,986 |
| 3.3 National Loans Fund |
| The Secretary of State makes loans to Scottish Homes, and the three Scottish Water Authorities out of funds provided by the National Loans Fund. Loans granted for a period of greater than one year are accounted for as Fixed Asset Investments. |
|
Scottish |
Water |
TotaL |
|
|
£ |
£ |
£ |
|
| 01-Apr-97 |
392,447,563 |
485,000,000 |
877,447,563 |
| Advanced |
0 |
281,555,000 |
281,555,000 |
| Repaid |
132,622,065 |
61,000,000 |
193,622,065 |
| 31-Mar-98 |
259,825,498 |
705,555,000 |
965,380,498 |
| Repayments received are remitted back to the National Loans Fund, and these loan balances are therefore matched by a corresponding creditor. As for Vote Loans above, this presentation does not show the element repayable within one year. |
| Due <one year |
1,618,144 |
30,000,000 |
31,618,144 |
| Due > one year |
258,207,354 |
675,555,000 |
933,762,354 |
| A more visible matching with the corresponding NLF creditor may be preferable. |
| 4. Current Assets |
| 4.1 General |
| Accounts Receivable is managed centrally, and although there may be balances at the year end which relate to this programme, these are not separately identified. |
| 4.2 Short Term NLF Loans |
| The Secretary of State makes loans to three Scottish Water Authorities out of funds provided by the National Loans Fund. Loans granted for a period of less than one year are accounted for as Short Term Investments, within Debtors. |
| Repayments received are remitted back to the National Loans Fund, and these loan balances are therefore matched by a corresponding creditor. |
|
£ |
|
| 01-Apr-97 |
18,000,000 |
| Advanced |
186,477,000 |
| Repaid |
187,000,000 |
| 31-Mar-98 |
17,477,000 |
| 4.3 Accrued Loan Interest |
| Interest received in respect of loan balances is reported as income in the Operating Cost statement. At a year end the amount of interest accrued to the date of the balance sheet, but not yet paid, is calculated, and included within debtors. |
| Although treated as income of the Department, the Department must surrender such income to the Consolidated Fund. |
|
£ |
|
| Interest accrued on outstanding loan balances to 31 March |
28,812,260 |
| 4.4 Prepayments & Accrued Income |
| Expenditure may occur in relation to a proposed Roads PFI scheme prior to that scheme actually commencing. These are treated as prepayments in the year in which the payment is made. |
|
£ |
|
| Prepayments re Roads PFI schemes |
12,003,092 |
| 4.5 Surplus Land |
|
£ |
|
| Land acquired in relation to the road network now surplus |
1,756,276 |
| 5. Creditors |
| 5.1 General |
| Accounts Payable is managed centrally, and although there may be balances at the year end which relate to this programme, these are not separately identified. |
| 5.2 NLF Loans |
| The Fixed Asset Investment and Short Term Investment Loan balances due to the Department are matched by an obligation to repay the National Loans Fund. |
|
£ |
||
| Fixed Asset Investments |
965,380,498 |
|
| Short Term Loans |
17,477,000 |
|
|
982,857,498 |
||
|
Due < 1 year: Loan Investments |
31,618,144 |
|
|
Short Term Loans |
17,477,000 |
|
|
Due> 1 year: Loan Investments |
933,762,354 |
|
| 5.3 The Consolidated Fund |
| Although interest received on loan balances is treated as income of the Department, the Department must surrender such income to the Consolidated Fund. Other categories of income are also treated in this way. At the year end the amount not yet so surrendered is included within Creditors. |
|
£ |
|
| Cash balances still to be surrendered |
140,348,970 |
| Interest accrued on outstanding loan balances to 31 March |
28,812,260 |
|
169,161,230 |
| 5.4 Accruals: Grant |
| An exercise is conducted at the year end to identify any expenditure of the financial year which requires to be accrued, or any creditors of the Department not accounted for via the financial systems. Where entitlement to a grant crystallises in respect of that financial year, the amount as yet unpaid should be accrued. (A detailed examination of grant programmes to accord with the RAM is still to be conducted.) |
|
£ |
|
| Programme Grant Accruals |
1,327,612 |
| 5.5 Roads Retentions and Claims |
| Road schemes give rise to claims from contractors, and amounts retained in respect of payments to contractors which will be paid over in due course. |
|
£ |
||
| Roads Retentions & Claims |
13,000,000 |
|
|
Due < 1 year |
2,500,000 |
|
|
Due > 1 year |
10,500,000 |
|
|
|