Formal approval of Lancashire County Council’s accounts has been delayed after auditors disputed how a complex loan arrangement should be registered.
The final decision could have “a significant impact” on the authority’s reserves, interim Chief Executive Angie Ridgwell told the council’s Audit, Risk and Governance Committee.
Members of the committee had been expected to accept the council’s financial statement for 2017/18, but were instead briefed about an obscure loan deal known as a Lender Option Borrower Option (LOBO).
Auditors Grant Thornton have queried how the council accounts for a £50m LOBO loan which it took out in 2010.
“As with many accounting standards, there are grey areas and judgment calls,” Mike Thomas, Director at Grant Thornton, explained to the committee.
“When these loans were entered into, [it was] never envisaged that there would be anything other than ‘vanilla’ LOBOs, [but it] has come to light that there are a number of variants and, therefore, the accounting treatment can be slightly different, “ Mr. Thomas added.
Lancashire County Council’s deal is a rarer arrangement, known as an ‘inverse floating-rate LOBO’. That means the interest rate charged to the authority moves in the opposite direction to the market rate.
Khadija Saeed, Head of Corporate Finance at county hall, told the committee: “The council [feels] that its current accounting treatment - as has been the case for the last eight years - has been correct.”
Interim Chief Executive Angie Ridgwell explained that if the auditor’s final decision went against the authority, the resulting change to accounting methods had the potential to wipe half a billion pounds off the reserves of councils across the country.
“Grant Thornton haven’t given me any compelling reason why we should change [our accounting]”, Ms Ridgwell said. “I would rather we did agree with our auditors and we hope to get to a position where we can do that.”
Two of Grant Thornton’s competitors, which audit councils elsewhere in the country, have accepted the method used by Lancashire County Council and other authorities.
The company is currently seeking advice from a third party about the appropriate accounting method and will ”test that view in the market”, Mike Thomas said.
The accounts for the last financial year cannot be approved until external auditors have offered a final opinion on them.
Committee member Tony Martin asked for - and received - an assurance from Angie Ridgwell that the query over LOBOs was the only reason the accounts could not yet be confirmed.
In a statement after the meeting, Angie Ridgwell said:
"It is disappointing that one technical item has held up the process, however our external auditors must form an independent view and they need more time while they seek further technical advice around the accounting treatment.
"There are a number of other councils who hold similar loans and have had their accounts approved so I hope that this situation will be resolved for Lancashire shortly."
What are LOBOs?
Lender Option Borrower Option (LOBO) loans come in various forms.
The most basic deals involve fixing the interest rate paid by a borrower until various points in the life of the loan.
The borrower then has the option to buy out the loan if they do not want to pay the changed rate. But the arrangements have come in for criticism in recent years for the hefty exit fees which are sometimes charged to end the deal.
Inverse floating-rate LOBOs track the market interest rate - but then move the rate charged to borrowers by a corresponding amount in the opposite direction.
This variation on the LOBO came under the spotlight in 2015, when it emerged that low market rates had left several councils locked into high-rate deals.