TREASURY AND RESOURCES MINISTER
Agreement of Order – Accounting standards to be adopted for the States of Jersey’s Annual Financial Statement
1. Purpose of Report
1.1 The purpose of this report is to gain approval of an Order, required under Article 32 of the Public Finances (Jersey) Law 2005 specifying the basis on which the States of Jersey’s 2006 Annual Financial Statement and accounts will be prepared.
2. Background
2.1 The Public Finances (Jersey) Law 2005 (Article 32 refers) states that -
“Treasurer to prepare annual financial statements in respect of accounts of the States”
(1)The Treasurer must –
(a) prepare an annual financial statement in respect of the accounts of the States for a financial year within 3 months of the end of the year; and
(b) send the statement to the Comptroller and Auditor General for auditing.
(2)The statement must be prepared in accordance with –
(a) generally accepted accounting practice (GAAP); and
(b) accounting standards prescribed by an Order made by the Minister.
2.2 During the drafting stages of the Finance Law it had been the intent that the 2006 Accounts would be compliant with UK GAAP but this has proved to be a bigger issue for the States to address than initially believed and the 2006 Accounts will not meet this requirement.
2.3 Work is currently underway to highlight all the issues which need to be considered, timetabled and actioned prior to UK GAAP compliance. Progress has been made in ensuring that the treatment of creditors and debtors meet UK GAAP requirements but the main area of departure from UK GAAP lies in the accounting treatment of capital. This requires a major change in the way in which the States records and accounts for all of its capital assets.
2.4 When the Law was originally drafted the intent had been that Article 32 would enable the States accounts to be prepared in line with GAAP or with other accounting standards (such as International Accounting Standards) as prescribed by an Order made by the Minister. The advice at the time from the Law Draftsman was that the “and” which joins 32(2) (a) and (b) could be interpreted as “or” thus allowing the States accounts to be prepared in line with accounting standards prescribed in an Order. This is the interpretation followed in the drafting of an Order indicating the accounting policies to be followed by the States.
2.5 The exact definition of the term GAAP is open to discussion but the main issue is that the accounting practice and policies followed should be applied on a consistent basis which allows comparison, aids transparency and supports accountability. This requirement will be followed in the production of the States 2006 Accounts and attached as Appendix A are details of the Accounting Policies which it is recommended are incorporated into an Order as required under Article 32 (2) (b).
3. Recommendation
3.1 That the Law Draftsman be requested to draft the necessary Order for signing by the Minister for onward transmission to the next available States sitting.
4. Reason for Decision
4.1 To set by Order the Accounting policies and standards to be followed by the States in the production of the 2006 Accounts.
States Treasury Corporate Finance
6th February 2007 for Decision Meeting February 2007
STATES OF JERSEY MINISTERIAL ORDER – 2006 ACCOUNTING POLICIES
1. Basis of Accounts
The Annual Financial Statement will be drawn up to meet the requirements of the Public Finances (Jersey) Law, 2005. The States accounts have traditionally been prepared in accordance with the Public Finances (Administration) (Jersey) Law, 1967. It is planned over this and coming years that the accounts will increasingly reflect recognised accounting standards and principles, including United Kingdom Generally Accepted Accounting Principles (UK GAAP). The following paragraphs outline the basis on which the 2006 accounts are to be prepared.
2. Aggregation and Consolidation
The accounts are to reflect the aggregated income and expenditure accounts and the balance sheet of the States of Jersey including the results of separately constituted funds but not JT Group Limited, the Jersey Post Limited, the Jersey Electricity Company Limited and the Jersey New Waterworks Company Ltd.
As the Waterfront Enterprise Board Limited, a wholly-owned subsidiary is a developer and agent of the States of Jersey, its results and financial position will be consolidated within the States of Jersey accounts.
The accounts will not include Special Funds, such as legacies and bequests, which are administered by the States of Jersey. The Social Security Fund, Social Security (Reserve) Fund, and Health Insurance Fund will be published separately to the States accounts. The Criminal Offences Confiscation Fund and Drug Trafficking Confiscation Fund will not be consolidated into the States accounts but financial information on the funds will be disclosed within a note to the accounts.
3. Inter-Department Transactions
Transactions and balances between Departments, including interest on capital servicing incurred by States Trading Operations, will not be eliminated in the preparation of the accounts.
4. Related Party Transactions
The accounts will not contain any disclosures with respect to related party transactions.
5. Foreign Currencies
Assets and liabilities denominated in foreign currencies will be translated to sterling at rates current at the balance sheet date. All foreign exchange differences will be included in income and expenditure for the year.
6. Income and Expenditure
Income and expenditure will generally be accounted for using the accruals concept, i.e. income and expenditure will be accounted for when goods and services are provided and received.
7. Income Tax and Impôts
Income Tax will be recognised when an assessment is raised; with provisions made for doubtful debts. Impôts duties are recognised when the goods are landed in Jersey.
8. Provisions for Liabilities and Charges
A provision will be made in the accounts in respect of obligations arising from past events where the predicted outcome of the event is considered probable and there is a reliable estimate of the amount of the liability.
9. Fixed Assets
Fixed Assets are to be categorised according to their source of funding as opposed to being classified according to their nature, function or use in business.
A capital repayment charge is to be made as an approximation to any depreciation charge that would be applicable under UK GAAP including an element in respect of land, which would not be depreciated in accordance with UK GAAP. The capital servicing charge is calculated as cost at the end of the year divided by the estimated remaining life of the asset. Assets in the course of construction will be held at cost. Completed fixed assets will be held at cost less capital servicing.
Capital expenditure financed by means of finance leases will be depreciated over the remaining term of the lease or the remaining useful life of the asset, whichever is the lesser, commencing in the year following completion or acquisition.
Useful economic lives by category over which assets are depreciated or over which capital servicing is allocated are as follows:
· Buildings 50 years
· Infrastructure 10-30 years
· Plant and Equipment 5-10 years
· Fixtures and Fittings 5-10 years
· Vehicles 5 years
· Computer hardware and software 3-5 years
10. Leasing Arrangements
Assets financed by finance leases and lease-back arrangements, and their related liabilities will be included in the accounts. These finance leases will be capitalised at the estimated present value of the underlying lease payments. The corresponding lease obligations, net of finance charges, will be included in creditors. The interest element of the finance charge is to be charged as revenue expenditure over the lease period in proportion to the outstanding debt.
Payments made under operating leases will be charged to revenue expenditure in equal instalments over the period of the lease.
11. Capital Grants
Capital grants received in respect of the construction of tangible fixed assets are to be carried forward in the balance sheet until such time as the related asset is constructed and are then deducted from the construction costs.
12. Strategic Investments
Although the States of Jersey holds a majority of the ordinary voting shares in the JT Group Limited, the Jersey Post Limited, the Jersey Electricity Company Limited and the Jersey New Waterworks Company Ltd, the accounts of these will not be consolidated as these are strategic investments and information on these companies is better provided by reference to the separate accounts. These investments will be stated at cost less provision for any permanent diminution in value.
Profits or losses on disposal or redemption of investments will be included in the income and expenditure account when realised. Income on interest-bearing investments will be recognised on an accruals basis. Income on other investments will be recognised when receivable.
13. Other Investments
Investments held other than for strategic purposes, principally for investment returns, are to be carried at market value.
Profits or losses on disposal or redemption of investments are to be included in the income and expenditure account when realised.
Unrealised gains and losses on investments are to be included in the Statement of Total Recognised Gains and Losses.
Income on interest-bearing investments will be recognised on an accruals basis. Income on other investments is to be recognised when receivable.
14. Stock and Work in Progress
Stock and work in progress includes homes under construction held within the Housing Development Fund, site developments held for resale with the Waterfront Enterprise Board Limited, and other general stocks.
All stocks are held at the lower of cost and net realisable value.
15. Debtors and Prepayments
Debtors will be recognised on an accruals basis reflecting goods and services provided for which income is due as at 31st December 2006.
Prepayments will be recognised on an accruals basis reflecting goods and services that have been paid for but no benefit received as at 31st December 2006.
16. Creditors
Revenue creditors will be recognised on an accruals basis reflecting goods and services received in the year ending 31st December 2006.
Capital creditors are to include the cost of all work certified as complete up to the 31st December 2006, less retention monies plus all fees due.
17. Contingent Liabilities
A contingent liability will be disclosed where:
a possible obligation that arises from a past event and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the States of Jersey’s control; or
a present obligation arises from past events but has not been recognised because:
it is not probable that a transfer economic benefits will be required to settle the obligation; or
the amount of the obligation cannot be measured with sufficient reliability
18. Pension Schemes
The States of Jersey operates two principal pension schemes for certain of its employees (Public Employees’ Contributory Retirement Scheme and Teachers’ Superannuation Fund). The assets are held in separate funds.
Public Employees’ Contributory Retirement Scheme (PECRS)
PECRS, whilst a final salary scheme, is not a conventional defined benefit scheme as the employer is not responsible for meeting any ongoing deficiency in the scheme. Accordingly Financial Reporting Standard 17 (FRS17) will not be applied in accounting for the scheme. In addition one further pension scheme exists (Jersey Post Office Pension Fund), closed to new members, which relates to Jersey Post Limited (a wholly owned strategic investment).
The regular pension cost will be charged to revenue expenditure over the employees’ future working lives.
Jersey Teachers’ Superannuation Fund (JTSF) and Jersey Post Office Pension Fund (JPOPF)
These schemes will be accounted for as defined benefit schemes in accordance with FRS17.
The Income and Expenditure Account will be charged with the current and past service costs of these schemes and the interest on pension scheme liabilities less the expected return on pension scheme assets.
Actuarial gains and losses arising in the year from the difference between the actual and expected returns on pension scheme assets, experience gains and losses on pension scheme liabilities and the effects of changes in demographics and financial assumptions will be included in the Statement of Total Recognised Gains and Losses.
Pension scheme assets will be measured using market values and scheme liabilities will be measured using the projected unit credit method, discounted at the current rate of return on a high quality bond of equivalent term and currency to the liability. Recoverable pension scheme surpluses and pension scheme deficits will be recognised in the balance sheet.
19. Financial Statement Presentation
The presentation of the financial report and accounts will largely follow the format adopted by the States of Jersey in previous years with comparatives restated where it is necessary to aid understanding.
Ministerial Government reforms
2005 comparative figures will be materially amended to reflect organisational changes upon the following basis:
· If responsibility for a service has been transferred between departments the accounts will show the relevant 2005 figures alongside the 2006 figures within the new department.
· Where a department has ceased to exist and all activities have been transferred into new departments, then 2005 comparatives will be shown within the new departments.
· If responsibility for a discreet area within a service has moved from one department to another, then 2005 comparative figures will be displayed against the 2006 reported figures for that area.
Change in policy to creditor based accounting
2005 comparators will be amended to reflect the change from commitment to creditor based accounting on the following basis:
· Departmental analyses will show a total adjusting amount for each department on the statements in order to reflect the impact of the policy change upon the 2005 reported figures.
· The 2005 comparative figures shown on the primary statements will be restated to reflect the change in accounting policy.
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