Local Authority owned companies are often in the spotlight, with high profile failures impacting the financial stability of the council itself. In extreme cases the failure of a council owned company can lead to a Section 114 Notice by the parent authority.
No wonder then that auditors are increasingly focusing on the correct accounting for these companies, so that the accounts give users the most accurate information possible.
Councils do not automatically need to account for subsidiaries at fair value.
The treatment will depend on the classification of the investment under the CIPFA Code of Practice.
When the council’s ownership meets the three “control” tests, then the company is consolidated in Group Accounts. This means the assets, liabilities, income and expenditures of the company are all included in one set of accounts. Any inter-group transactions, including the ownership of the shares in the subsidiary company, are excluded from the group accounts as underlying assets and liabilities of the subsidiary are included.
In the past some authorities have argued that if the company is small enough, then it isn’t material enough to produce groups accounts. However, this justification is losing its force as more auditors argue that the company’s assets are material on public interest grounds.
Regardless of if the authority produces group accounts or not, in the single entity accounts an authority’s investment in a subsidiary is normally treated as a financial instrument.
In this case it will be held at fair value, which by definition means a fair value will need to be calculated. This will mean deciding a valuation technique and disclosing the approach taken and the information used in the accounts, as a level 3 fair value.
There are a number of techniques that can be used, from the very basic balance sheet technique to the more sophisticated, but more exposed to subjective judgement discounted cash flow calculations.
Whatever approach a council uses, it must be comfortable that it can justify the inputs used, the decisions made and provide a clear audit trail for all.
As with group accounts, previously some councils have argued that fair values are immaterial or that the production of group accounts means they are not needed. Again, auditors are increasingly finding these arguments less persuasive.
Arlingclose has provided clients with assistance on both the production of Group Accounts and the calculation of fair values.
If you would like to discuss either of these subjects contact Stephen Kitching skitching@arlingclose.com 06/03/2026
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