The Capital Financing Requirement (CFR) Chris Taylor

The CFR measures a vital component of an authority’s capital strategy, the amount of capital spending that has not yet been financed by capital receipts, capital grants or contributions from revenue income. It measures the underlying need to borrow for a capital purpose, although this borrowing may not necessarily take place externally.

The Prudential Code defines the CFR as:

The Capital Financing Requirement

“Actual figures for capital financing requirement for previous years should be taken from the local authority’s balance sheets for those years, by consolidating:

„ tangible fixed assets (ie property, plant and equipment, investment properties and noncurrent assets held for sale)

„ intangible assets

„ long-term debtors relating to capital transactions (where applicable)

„ any amounts carried as investments that were treated as capital expenditure under

proper practice or applicable regulations

„ Revaluation Reserve

„ Capital Adjustment Account

„ Donated Assets Account”

The CFR is effectively the authority’s underlying need to borrow but whilst this represents the maximum amount of debt that should be outstanding (external and internal borrowing) it is recommended that a liability benchmark is used to measure the authority’s projected net loans requirement plus a short term liquidity allowance for future periods. The purpose of a liability benchmark is to establish the level of risk which the authority regards as its balanced or normal position so that it can take measured decisions in relation to that risk

As part of our preparation of client liability benchmarks we compare the CFR Disclosure Note with the CFR items on the Balance Sheet. The comparison often identifies that differences exist between the two.

Sometimes the differences can be explained by the fact that some or all the Long-Term Investments and or Long-Term Debtors have been capitalised and therefore form part of the CFR.

If a loan within Long Term Debtors has been accounted for as a soft loan, then this can be an added factor to take into consideration in the reconciliation process.

Expected Credit Loss amounts relating to such loans can be another influencing factor.

It is also the case that differences between the CFR Disclosure Note and the Balance Sheet cannot be identified from examining the Statement of Accounts. This leaves the question as to which figure is “correct”?

From a Revenue budget perspective, the charge for Minimum Revenue Provision (MRP) is directly related to the CFR. It is therefore important to have confidence in the validity of the CFR.

A reconciliation between the Balance Sheet and CFR Disclosure Note helps provide such confidence and now that accounts have been prepared it is as good a time as any to ensure that the CFR can be agreed to the core financial statements and at Arlingclose our Technical Team can assist you in this process.