Local government finance circular 8/2025: accounting for financial instruments - equal pay costs flexibility
Statutory guidance to provide a temporary amendment to Local Government Finance Circular 7/2018: Accounting for Financial Instruments to permit a local authority to use a discount (gain) arising on the refinancing of loans to fund equal pay claims.
To: Directors of Finance of Scottish local authorities, Audit Scotland
Dear Director of Finance,
Accounting for financial instruments - equal pay costs flexibility
The Scottish Government has agreed to permit a temporary variation in relation to Finance Circular 7/2018: Accounting for Financial Instruments. The variation permits a local authority to set aside the requirements of Finance Circular 7/2018 and to use a discount (gain) arising on the refinancing of loans to fund equal pay costs.
Finance Circular 7/2018 sets out the following statutory requirements in relation to premiums and discounts arising on the refinancing of loans:
In the case of a premium (fee) arising on the refinancing of a loan, a local authority may choose either to recognise the premium immediately as a charge against revenue or to defer the premium in the Financial Instruments Adjustment Account (FIAA) and to make an annual charge against revenue over the term of the replacement loan.
In the case of a discount (gain) arising on the refinancing of a loan, a local authority is required to defer the discount in the FIAA (to the extent of any loan premiums held in the FIAA) and to make an annual transfer from the FIAA to the General Fund over the term of the replacement loan.
The variation set out in this circular permits a local authority to instead recognise a discount (gain) arising on the refinancing of loans as income to the General Fund (rather than requiring the discount to be transferred to the FIAA), with the following conditions:
a) The replacement loan repayment period must not exceed the remaining repayment period of the original loan at the time of refinancing. In other words, the repayment period may not be extended.
b) The discount must be used solely to fund equal pay costs.
This finance circular should be read in conjunction with Local Government Finance Circular 7/2018.
This guidance is also available from the Scottish Government website.
If you have any questions, please do not hesitate to contact me.
Yours faithfully,
Elanor Davies
Head of Local Authority Accounting
Local Government and Analytical Services Division
Accounting for financial instruments
Scottish Government
Contents
- part 1 – background
- part 2 – guidance on proper accounting practices – financial instruments
Part 1 of this document gives informal advice only and is not part of the guidance itself, which is contained in Part 2.
Part 1 - background and commentary
Background
1. The Code of Practice on Local Authority Accounting in the UK (the Accounting Code) requires local authorities to account for financial instruments in accordance with a number of standards except where interpretations or adaptations to fit the public sector are detailed in the Accounting Code.
Premiums or discounts associated with the refinancing of loans
2. Where a local authority negotiates with their lender to cancel existing debt and replace it with new debt on different terms, a fee (a premium) or a gain (discount) may arise.
3. The accounting treatment of the premium or discount will depend on whether or not the replacement debt has substantially different terms to the old debt:
- if the replacement debt has substantially different terms, the refinancing will be accounted for as the extinguishment of the old debt and its replacement as new debt
- if the replacement debt does not have substantially different terms, the refinancing will be accounted for as a loan modification
4. Where, in accordance with the Accounting Code, a loan is to be treated as a loan modification, the gain (discount) or loss (premium) is required to be recognised immediately in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account, in accordance with the Accounting Code. There is no statutory adjustment to be made in relation to a loan modification.
5. Where, in accordance with the Accounting Code, a loan is to be treated as a loan extinguishment, the gain (discount) or loss (premium) will initially be recognised in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account. A statutory adjustment is then permitted (in the case of a premium) or required (in the case of a discount) to defer the premium or discount to a statutory reserve, the Financial Instruments Adjustment Account (FIAA) and to make an annual charge to the General Fund from the FIAA for the premium or discount over a period greater than one year, as set out in Local Government Finance Circular 7/2018.
6. In the case of a discount, a local authority is only required to transfer an amount sufficient to settle any outstanding premiums held in the FIAA. If a balance remains after settling the premiums held in the FIAA, this may be recognised immediately in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account.
Variation to Finance Circular 7/2018 – discount arising on loan extinguishment
7. Where, in accordance with the Accounting Code, the repayment of the original loan is to be treated as a loan extinguishment, the variation to Finance Circular 7/2018, set out in part 2 of this circular, permits a local authority to immediately recognise the discount (gain) arising on the repayment of the loan in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account.
8. This variation is only permitted where:
a) The replacement loan repayment period does not exceed the remaining repayment period of the original loan at the time of refinancing.
b) The discount is to be used solely to fund equal pay costs.
9. This variation is permitted from the financial year commencing 1 April 2025 until 31 March 2028. It applies to all local authorities.
Housing revenue account
10. Where a local authority intends to refinance historic debt of which a proportion relates to the HRA, an equivalent proportion of the discount (income) earned on refinancing must be attributed to the HRA.
Carry forward of unused discount
11. Where the full value of the discount is not utilised within the financial year, the balance of the discount must be held within a separate reserve within the General Fund and may only be applied in future years to meet equal pay costs.
12. Any balance remaining once all equal pay costs have been settled must then be transferred to the FIAA but only to an amount equal to any outstanding premiums.
13. Any remaining discount, once all equal pay costs and outstanding premiums held in the FIAA have been settled, may be recognised in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account.
Annual accounts - statutory reporting requirements
14. The Accounting Code requires the disclosure of the statutory adjustments to be made in the Movement in Reserves Statement as part of the section “adjustments between accounting basis and funding basis under statutory provisions”. The Accounting Code requires an analysis of the transactions in this section, either within the Statement itself or in a note.
15. In addition to the disclosures required by the Accounting Code and the statutory reporting requirements in relation to premiums and discounts described in Finance Circular 7/2018, a local authority must also separately disclose, as an adjustment between the accounting basis and funding basis under statutory provisions in the Movement in Reserves Statement, the value of the discount recognised in the Surplus or Deficit on the Provision of Services and the amount of the discount applied to equal pay costs.
Scottish Government
Local Government and Analytical Services Division
14 November 2025
Part 2 - Accounting for financial instruments
Issued by Scottish Ministers under section 12(2)(b) of the Local Government in Scotland Act 2003
Definitions
Local Authority means a council constituted under section 2 of the Local Government etc. (Scotland) Act 1994 (c.39). It includes other bodies as set out in section 106 of the Local Government (Scotland) Act 1973.
General Fund means the fund detailed in section 93(1) of the Local Government (Scotland) Act 1973. It includes the Housing Revenue Account (HRA).
Financial year is a year which commences 1 April and ends 31 March.
Proper accounting practices are as defined in section 12 of the Local Government in Scotland Act 2003.
Accounting Code – the CIPFA-LASAAC Code of Practice on Local Authority Accounting in the United Kingdom.
The Financial Instruments Adjustment Account is an unusable reserve which holds the statutory adjustments made by a local authority applying this guidance.
Replacement loan – means any loan of money to the local authority which the local authority has taken out in order to finance the repayment of any loan repaid early.
Statutory premium or statutory discount – means those premiums or discounts which arise on the early repayment of debt and which are required by the Accounting Code to be immediately recognised in Surplus or Deficit on the Provision of Services.
Local Government Finance Circular 7/2018 – sets out the statutory accounting requirements in relation to premiums or discounts which arise on the early repayment of debt.
This guidance should be read in conjunction with Local Government Finance Circular 7/2018.
Application
1. This statutory guidance applies from the financial year commencing 1 April 2025 until 31 March 2028. It applies to all local authorities.
Employee Statutory Adjustment Account
2. Each local authority that chooses to apply, or is required to apply, the adjustments set out in this guidance and in Finance Circular 7/2018 is required to establish and maintain a Financial Instruments Adjustment Account (FIAA).
Variation to Finance Circular 7/2018 – discount arising on loan extinguishment
3. Where a gain is recognised on the refinancing of a loan a local authority may immediately recognise the discount (gain) arising on the repayment of the loan in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account.
4. This variation is only permitted where:
a) The replacement loan repayment period does not exceed the remaining repayment period of the original loan at the time of refinancing.
b) The discount is to be used solely to fund equal pay costs.
Housing revenue account
5. Where a local authority intends to refinance historic debt of which a proportion relates to the HRA, an equivalent proportion of the discount (income) earned on refinancing must be attributed to the HRA.
Carry forward of unused discount
6. Where the full value of the discount is not utilised within the financial year, the balance of the discount must be held within a separate reserve within the General Fund and may only be applied in future years to meet equal pay costs.
7. Any discount balance remaining once all equal pay costs have been settled must then be transferred to the FIAA but only to an amount equal to any outstanding premiums.
8. Any remaining discount, once all equal pay costs and outstanding premiums held in the FIAA have been settled, may be recognised in the Surplus or Deficit on the Provision of Services in the Comprehensive Income and Expenditure Account.
Annual accounts - statutory reporting requirements
9. The Accounting Code requires the disclosure of the statutory adjustments to be made in the Movement in Reserves Statement as part of the section “adjustments between accounting basis and funding basis under statutory provisions”. The Accounting Code requires an analysis of the transactions in this section, either within the Statement itself or in a note.
10. In addition to the disclosures required by the Accounting Code and Finance Circular 7/2018, a local authority must also separately disclose, as an adjustment between the accounting basis and funding basis under statutory provisions in the Movement in Reserves Statement, the value of the discount recognised in the Surplus or Deficit on the Provision of Services and the amount of the discount applied to equal pay costs.
Contact
Email: ceu@gov.scot