About Local Government accounting

The Local Governments keep financially oriented accounts in accordance with the Local Government Act and the budget and accounting regulations. The Local Government accounts are oriented towards working capital in that the accounts shall show all inflow and application of funding. Working capital is equal to the difference between current assets and short term debt. This means that the Local Government accounts say something about the Local Governments’ ability to cover its payment obligations.

The accruals principle in Local Government accounting is that the accounts shall be entered in accordance with the ordinance principle. This principle means that all known expenses/payments and income/receipts for the year are included in the current year, whether or not they have been paid when the accounts are closed. That a transaction is “known” means that goods or services must be delivered/performed or received during the accounting period. It is thus not the date of payment that is key to accounts entries but as a general rule the date of acquisition or utilisation.

Local Government accounts shall be divided into an operating section and an investment section. The operating section includes the Local Governments’ income and the application of these (the operating expenses). The investment section includes other income that is not ongoing and the application of this (investment expenses). Income that is included in the investment section cannot be used for operational purposes, but it is possible to use income for investment purposes. Borrowed funds can only finance expenses in the investment accounts and cannot be used to finance operations purposes. Loan instalments shall normally be entered as operating expenses.

Local Government accounting has a balance sheet showing assets (fixed assets and current assets), debt (long and short term) and equity. Under equity, funding for specific purposes and funding that is reserved for investment purposes shall be entered as separate items.

Tangible fixed assets are capitalised as fixed assets and shall be depreciated on the balance sheet. The depreciations shall also be entered in the operations section of the accounts, but these are not included in the Local Governments’ financial results and are not included in the balance requirement for operations. The purpose of these depreciations is primarily to identify the depreciation in value of the tangible fixed assets.

The balance requirements mean that the Local Governments must have a financial result that is sufficient to cover the operating expenses (including interest and instalments). The results must also be sufficient to cover:

• provisions of unused income in the operating section that is earmarked for specific operational purposes
• deficits from previous years
• and any other provisions that are deemed necessary for good Local Government financial administration

The Local Government accounts shall, in addition to what follows from laws and associated regulations, be kept in accordance with good Local Government accounting practice. The preparation and publication of standards for good Local Government accounting practice, as well as interpretation of questions of principle in connection with the given standards, may be found on the website of the Association for Good Local Government Accounting Practice.