Transport for LondonStatement of Accounting Policies
Skip to navigationa) Code of practice
The accounts have been prepared in accordance with the Code of Practice on Local Authority Accounting in Great Britain 2005 ('the SORP'), developed by the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC) Joint Committee and approved by the Accounting Standards Board.
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b) Basis of accounting
The accounts are made up to 31 March. The Corporation is a single service authority and all expenditure is attributable to the provision of highways, roads and transport services. Accordingly, no costs have been attributed to the corporate and democratic core.
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c) Basis of preparation of group accounts
The SORP requires local authorities with, in aggregate, material interests in subsidiary and associated companies and joint ventures, to prepare group accounts consistent with UK GAAP.
The group accounts presented with the Corporation's financial statements consolidate the individual financial statements of Transport for London and its subsidiary undertakings.
In line with the requirements of the SORP certain adjustments are made on consolidation to the Corporation results to bring them more in line with UK GAAP.
- Profits/losses on the disposals of fixed assets are included in net operating expenditure
- Notional interest charges on fixed assets are written back and replaced with the depreciation charge from net cost of services
- Amortisation of deferred grants is credited to net cost of services
A joint venture is an entity in which the Group has a long-term interest and shares control with one or more co-venturers. The joint venture is included in the Group's balance sheet using the gross equity method, which records the Group's share of gross assets and gross liabilities.
Merger accounting principles are applied where transfers into the Group of subsidiary undertakings, including statutory transfers, have the characteristics of group reconstructions in accordance with Financial Reporting Standard 6 - Acquisitions and Mergers. With merger accounting, the carrying values of the assets and liabilities of the parties to the combination are not required to be adjusted to fair value on consolidation, although appropriate adjustments are made to achieve uniformity of accounting policies where necessary.
In other cases the acquisition method of accounting is adopted. Under this method, the identifiable assets and liabilities of an acquired entity are recorded at their fair values at the date of acquisition. The results of subsidiary undertakings acquired or disposed of are included in the Group revenue account from the date of acquisition until the date of disposal.
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d) Revenue and expenditure
The accounts reflect the accruals concept whereby debtors and creditors are included in the balance sheet for goods and services supplied but not paid for at 31 March.
Sales revenue on trading activities comprises the value of sales of services or goods in the normal course of business, exclusive of Value Added Tax. Revenue earned by franchisees, or contractors, providing transport services on behalf of the Group is not taken into account, except in the limited circumstances where the Group shares the risk of revenue volatility with the franchisee.
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e) Grants and other funding
The main source of grant is in the form of Transport Grant, which is non-specific in that it is applied to both maintaining services and to fund capital expenditure.
In the accounts of the Corporation, Transport Grant is divided into three elements:
- The element used to finance revenue expenditure in the Corporation, including grants to subsidiaries and the joint venture to finance their own revenue expenditure
- The element used to finance capital expenditure in the Corporation, which is accounted for as described below
- The element used to finance capital expenditure in the subsidiaries, which is not accounted for in the Corporation's revenue account, but is shown in the Corporation's cash flow statement under Capital activities
In the accounts of the Corporation and the Group, grants applied for revenue purposes are accounted for in the year in which they arise, in common with other income, and are credited to the revenue account.
Grants and other contributions for capital expenditure are accounted for on an accruals basis and recognised in the accounts when the conditions for their receipt have been complied with and there is reasonable assurance that the grant or contribution will be received.
Where expenditure on fixed assets is financed either wholly or partly by grants or other contributions, the amount of the grant is credited initially to the deferred capital grants account. Amounts are released to the asset management revenue account over the useful life of the asset to match the depreciation on the asset to which it relates. For group reporting purposes this amount is reclassified and deducted from depreciation on the face of the group revenue account.
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f) Borrowings
Long term borrowings are carried in the Corporation and Group balance sheets net of discounts and issue costs. These discounts and issue costs are amortised to revenue over the duration of the debt. In the Corporation revenue account this charge is made through the asset management revenue account, and through interest payable in the Group revenue account.
The Corporation is required to make a minimum revenue provision (MRP) for the repayment of outstanding debt determinable under the Local Government Act 2003. For this period the MRP requirement is £3.2m (2004/05 nil).
Additional disclosures on financial instruments required by FRS 13 and FRS 4 as a consequence of the Corporation's listed debt are made in note 20 to these accounts.
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g) Capital financing charges
The SORP requires net cost of services for the Corporation to include a capital charge equal to annual gross depreciation plus a notional interest charge. This notional interest charge recognises the cost of acquiring and holding assets (an opportunity cost) and is charged at a rate set annually by CIPFA (currently 3.5 per cent on assets held at current cost and 4.95 per cent on assets held at historical cost). Capital financing charges are not levied on assets under construction.
These notional capital financing charges are reversed through the asset management revenue account in the Corporation revenue account. Notional capital financing charges are eliminated in deriving the Group revenue account as described in d) above. Subsidiaries do not levy capital financing charges.
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h) Tangible fixed assets
All expenditure (excluding routine repairs and maintenance) on the acquisition of capital assets, or expenditure which significantly adds to the value, capacity in use, or useful economic life of existing assets, is capitalised as a fixed asset on an accruals basis. Fixed assets are classified as operational assets (those presently used for the delivery of public services or for support tasks) and non-operational assets (surplus property awaiting sale and assets under construction).
Operational assets
Infrastructure consists of roads, tunnels, viaducts, bridges, stations, track, signalling and bus stations and stands. Infrastructure, rolling stock and equipment are carried at their fair value when transferred to the Group, together with the cost of subsequent additions. The fair values have been calculated on the basis of depreciated replacement cost. LU assets are carried at the estimated cost of modern equivalent assets as at 31 March 1998, together with the cost of subsequent additions, written down to reflect their remaining estimated useful lives. Bored tunnels, excavations for stations, and embankments entering service in LU prior to 1 April 1992 are carried at nil value as there are no records of their historical cost and it is impractical to provide a reliable valuation.
Other property consists of business properties, used by the Group for its own purposes, which are not limited in their future use by operational constraints or requirements and which are not integral to the infrastructure (eg, offices). These properties were valued at open market value at 31 March 2006 (on an existing use basis) by the Director of TfL Group Property and Facilities and by suitably qualified TfL staff. The revaluation is taken to the fixed asset restatement account for the assets owned by the Corporation and the fixed asset revaluation reserve for assets owned by the Subsidiaries.
Plant and equipment
The SORP recommends the use of current replacement cost for plant and equipment. For practical reasons, including difficulties in estimating current replacement cost for these assets, the Corporation has maintained these assets at historical cost.
Non-operational assets
These include property awaiting disposal and assets under construction. The properties awaiting disposal are valued like other property but with additional consideration of alternative uses. Assets under construction are carried at historical cost and are not depreciated until they come into use.
Depreciation
Assets are depreciated on a straight-line basis over their estimated useful lives, which are reviewed regularly, and which for the major categories fall in the following ranges:
|
Tunnels and embankments |
100 years |
| Bridges and viaducts | 100 years |
| Track | 50 years |
| Road pavement | 15 years |
| Road foundations | 50 years |
| Signalling | 15-40 years |
| Stations | 50 years |
| Other property | 20-50 years |
| Rolling stock | 30-50 years |
| Lifts and escalators | 25-40 years |
| Plant and equipment | 3-40 years |
Leasehold properties are amortised over the shorter of the lease term and 40 years. Property awaiting disposal is not depreciated.
The accounting policy for assets held under the London Underground PPP is described in paragraph q) below.
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i) Stocks
Stocks consist primarily of fuel, uniforms, and materials required for the operation and maintenance of infrastructure. Stocks are included in the balance sheet at cost less provision for obsolescence. Equipment and materials held for use in a capital programme are accounted for as stock until they are issued to the project, at which stage they become part of assets under construction.
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j) Debts outstanding
Provision is made for bad and doubtful debts, and uncollectable debts are written off to the net cost of services.
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k) Provisions
Provisions represent liabilities, where the amount or date of payment is uncertain. They are charged to net cost of services in the year that they are recognised.
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l) Reserves
The capital accounting regime requires that maintenance of two special reserve accounts in the balance sheet:
- The fixed asset restatement account, which represents, principally, the balance of the surpluses or deficits arising on the periodic revaluation of fixed assets
- The capital financing account, which represents amounts set aside from revenue resources or capital receipts to finance expenditure on fixed assets or for the repayment of external loans and certain other capital financing transactions
The depreciation charge in the Corporation on assets acquired from predecessor bodies is met by an appropriation from the fixed asset restatement account. The remaining depreciation charge is met by an appropriation from the capital financing account. The revaluation of property in the Corporation is credited to the fixed asset restatement account. These two account balances do not form part of the resources available to the Group and Corporation.
TfL sets aside specific amounts as earmarked reserves for future policy purposes or to cover contingencies. Reserves are created by appropriating amounts from the Revenue Account after the Net Operating Expenditure line. When expenditure to be financed from earmarked reserves is incurred, it is charged to the Revenue Account in that year and included in Net Cost of Services. A corresponding amount is then appropriated back into the Revenue Account from earmarked reserves after Net Operating Expenditure so that there is no net impact on amounts to be met from Government grant and local taxation.
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m) Insurance
The Group maintains certain insurance policies for damage to and loss of owned/third-party property and for its potential liabilities to employees and third parties. In addition, the Group selectively self-insures its exposures under the above policies and to other risks. Provision is made for the estimated value of the Group's liability in respect of self-insured losses.
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n) Pensions
The Group's employees are members of a number of defined benefit schemes. In accordance with FRS 17, the regular service cost of pension provision relating to the period, together with the cost of any benefits relating to past service, is charged to the Group revenue account. A charge equal to the increase in the present value of the schemes liabilities (because the benefits are closer to settlement) and a credit equivalent to the Group's long-term expected return on assets (based on the market value of the scheme assets at the start of the period), is included in the revenue account.
The difference between the market value of the assets of the scheme and the present value of accrued pension liabilities is shown as an asset or liability, net of deferred tax. Any difference between the expected return on assets and that actually achieved is recognised in the statement of movements in reserves along with differences which arise from experience or assumption changes.
For certain defined benefit schemes, the Corporation and/or the Group is unable to identify its share of the underlying assets and liabilities of the scheme on a consistent and reasonable basis. Under FRS 17 these schemes are accounted for as defined contribution schemes.
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o) Deferred taxation
Provision is made within the Group accounts for deferred taxation arising from timing differences between profits or losses as computed for taxation purposes and profits or losses as stated in the accounts, to the extent it is payable or recoverable in the foreseeable future.
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p) Leases
Assets held under finance leases are included in tangible fixed assets and are depreciated on a straight-line basis over their estimated useful lives. Rentals payable are apportioned between the finance charge and a reduction of the outstanding obligation for future amounts payable; the finance charge being allocated to accounting periods over the lease term so as to produce a constant rate of charge on the remaining balance of the obligation.
The Group has entered into a number of Private Finance Initiative (PFI) agreements. Each PFI agreement has been analysed to determine where the balance of the risks and rewards lies. Where substantial risks are retained by the private sector, these transactions are accounted for as operating leases and the assets provided are, therefore, not included in the balance sheet. Where the risks and rewards under the agreements lie with the Group, the transactions are accounted for as finance leases. Any assets created are capitalised in the balance sheet and depreciated over their estimated useful lives. Finance charges are allocated over the period of the contract in proportion to the capital element outstanding.
The Group has also entered into operating leases in respect of properties and motor vehicles. Rentals payable under operating leases (including certain PFI agreements) have been accounted for in the period to which they relate.
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q) London Underground Public Private Partnership (PPP)
LU has three PPP contracts. Under these contracts, existing LU assets are allocated to the PPP contractors for a 30-year period from when the contract was established, during which the PPP contractors maintain, enhance and replace these assets. LU pays service charges to the PPP contractors.
LU retains substantial risks and rewards of ownership of the assets allocated to the PPP contractors during the contract term. These assets continue to be recorded as fixed assets in the Group accounts. Similarly, new assets acquired or constructed by the PPP contractors for LU are recorded as fixed asset additions in the Group accounts and a corresponding liability is recorded as a finance lease creditor within creditors in the Group accounts. An imputed finance charge on this liability is included in interest payable in the Group revenue account.
Service charges paid by LU to the PPP contractors are allocated to the revenue account to reflect management's estimate of the value of operating services received, with the balance applied to amortise the finance lease creditor over the term of the contract. Performance adjustments to the service charges are also recorded within expenditure.
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