Following months of discussions over how the loan should be treated in the accounts, the final decision was to be presented at a meeting of the council’s audit, risk and governance committee on Monday last week.
But continuing indecision between the auditors and council on how the loan should be treated in the accounts for 2017-2018 meant that deadline has been extended by two weeks.
In a report to the committee, auditors Grant Thornton’s said reaching an agreement on how to treat the £50m LOBO loan - entered into by Lancashire in 2010 – in the accounts had become a “protracted process”.
Treasury management advisers at the council, treasury management consultancy Arlinglcose and Grant Thornton have been discussing for months “differing views as to the interpretation of the relevant accounting treatment” of the loan.
The “differing views” could involve material changes to the council’s accounts and reserves position, the Grant Thornton’s report stated.
The auditors explained Lancashire’s loan was a “specific complex variant being [an] inverse floating rate” LOBO, which they noted were “currently held by only a small number of local authorities”.
Mike Thomas, who led the audit for Grant Thornton, said in the committee meeting last Monday there were 12 other local authorities with ‘inverse floater’ LOBOs like Lancashire.
Don Peebles, head of policy and technical at CIPFA, told PF he believed auditors would now be raising more questions over LOBO loans as local authority finances come under increasing strain.
“What has happened is there’s been a closer look at LOBOs and the spotlight has been shifted onto the accounting treatment, and that change is having significant consequences for a small number of authorities.”
He added: “Local authorities have bought in to what are complex financial instruments and are more complex than was identified at the point of purchase, and there’s probably an underlying theme here that they failed to recognise what the accounting treatment will be.”
Grant Thornton noted in its report that LOBO loans “have been subject to significant public scrutiny in recent years” and that “during this year’s audit this has led to increased scrutiny of such financial instruments”.
Thomas told the meeting last week the auditors would now seek advice on appropriate accounting methods from a third party.
Angie Ridgwell, the council’s interim chief executive and director of resources, predicted at the audit committee meeting that if councils with ‘inverse floating rate’ LOBOs have to change the accounting arrangements for the loans this “would knock £0.5bn off of local government reserves” across those councils.
Although, she was “confident” the council had been using the correct method in accounting for the LOBO loan.
“This is a very complex issue and is being considered by the National Audit Office working with all the firms in the sector who audit bodies,” Grant Thornton’s report to the council’s committee added.
Once the issue of how to account for the LOBO loan is resolved, the auditor told the council it expects to issue an unqualified audit opinion.
Grant Thornton’s report also warned that Lancashire council’s finances were at “tipping point” due to an over-reliance on its reserves.
Lancashire’s 2017-18 budget required £57m funding from reserves to set a balanced budget.
The authority has planned to use £47m of reserves to set a balanced budget for 2018-19 according to the audit report, but only has sufficient reserves to balance its budget up to 2020.
The audit report said that the council’s reliance on its reserves is “unsustainable”.
LOBO loans became popular because they offer interest rates below that of central government’s Public Works Loan Board. But lenders can change rates at set times in the future.
Refusing, or being unable to pay updated interest rates would mean councils are forced to pay back the loan in full.
In July, 14 councils announced they were beginning legal action against banks that had issued them LOBO loans.
