Item: 2

Monitoring and Audit Committee: 27 August 2026

Draft Annual Accounts

Report by Director of Enterprise and Resources

1. Overview

1.1

This report presents the Annual Governance Statement, together with the draft Annual Accounts for 2025/26, for members’ approval.

1.2

A requirement exists for each local authority to prepare an annual set of accounts which are to be lodged with Audit Scotland by 30 June each year. The accounts are then subject to an external audit verification process which concludes with an independent opinion being expressed on the accuracy and/or quality of the financial statements themselves. The statement of accounts, together with an appropriate audit certificate, should then be available for publication by 30 September each year.

1.3

The purpose of the annual statement of accounts is to demonstrate proper stewardship of the Council’s financial affairs.

1.4

The external audit annual plan, which was considered by the Monitoring and Audit Committee on 4 June 2026, outlined the work the external auditors required to undertake as part of the annual audit of the Council for the period 1 April 2025 to 31 March 2026.

1.5

The Financial Statements for Orkney Islands Council for the year ended 31 March 2026, attached as Appendix 1 to this report, have been prepared in accordance with proper accounting practice as required by section 12 of the Local Government in Scotland Act 2003. Proper accounting practice comprises the Code of Practice on Local Authority Accounting in the United Kingdom (the Accounting Code) and the Service Reporting Code of Practice, supported by International Financial Reporting Standards and recommendations made by the Local Authority (Scotland) Accounts Advisory Committee.

2. Recommendations

It is recommended that members of the Committee:

1. Approve the Annual Governance Statement, comprising pages 22 to 29 of the draft Annual Accounts for financial year 2025/26, attached as Appendix 1 to this report.

2. Approve the draft Annual Accounts for financial year 2025/26, attached as Appendix 1 to this report.

3. Annual Governance Statement

3.1

CIPFA, in consultation with SOLACE, published the Delivering Good Governance in Local Government: Framework in 2007 to set the standard for local authority governance in the UK. The framework was reviewed in 2015, and a revised edition was issued in 2016.

3.2

Since 2007, when the first edition of the framework was issued, it has been a requirement for each Council to include an Annual Governance Statement in the Annual Accounts of the authority.

3.3

In May 2025, CIPFA published an addendum to the framework, covering the annual review of governance and the Annual Governance Statement. The addendum sets out the key roles and responsibilities in the annual review of governance and production of the Annual Governance Statement.

3.4

The addendum recommends that the Annual Governance Statement should include the following:

• Executive Summary – an executive summary to provide an overall opinion on whether governance is fit for purpose.
• Our assessment of effectiveness – a statement on how the review of effectiveness was conducted and the results.
• Where our governance needs to improve – identifying the areas of governance requiring improvement and how these will be addressed.
• How we have improved our governance arrangements in the current financial year.
• A forward look on governance – an opportunity to identify where governance needs to change or develop.

3.5

In January 2026, an officer group, led by the Service Manager (Governance), coordinated the process required in undertaking the annual review of governance and production of the annual governance statement. The draft Annual Governance Statement was considered and approved by the Corporate Leadership Team on 18 June 2026.

3.6

The Annual Governance Statement is contained within the draft Statement of Accounts for the financial year 2025/26, attached as Appendix 1 to this report, at pages 22 to 29.

4. Financial Statements

4.1

The management commentary to the annual accounts provides an overview of the objectives and strategy of the Council and a review of the business and financial performance for the financial year ended 31 March 2026. These issues can be summarised as follows:

• Overall, the activities of the Council returned a net surplus of £31.045M for the year.
• The source of this surplus can mainly be attributed to the following:
  • Surplus on Provisions of Services of £9.082M. The table on page 6 of the annual accounts shows the linkage between budget figures reported to committee and the figures in the annual accounts.
  • Surplus on revaluation of non-current assets of £20.256M.
  • An actuarial gain on pension assets of £15.058M.
  • Less a Pension Fund Asset Ceiling Adjustment of £13.351M.
• During the year, usable reserves increased by £22.128M or 9.2%, from £241.505M to £263.633M. Movements included the following:
  • An increase in General Fund reserves of £3.869M, from £13.792M to £17.661M, which, after taking into account earmarked balances of £9.506M, leaves £8.155M for General Fund purposes for 2026/27.
  • An increase in Harbour Fund balances of £7.175M, from £215.003M to £222.178M.
  • A decrease in the Housing Revenue Account balance of £0.083M, from £0.583M to £0.500M.
• In financial terms, the Council’s net worth stands at £721.778M, which is an increase of £31.043M or 4.49% on the previous year.
• The effect of recognising the Council’s interests in subsidiaries and associates on a group basis is an increase in net worth of £35.938M from £689.317M to £725.255M.
• During the year, the Council invested £22.190M through its capital programme across a range of projects, including a programme of house builds, roads and transport, education and recreation and social care.
• As at 31 March 2026, the Council carried a debt of £50.000M to support its capital financing requirement.

For Further Information please contact:

Pat Robinson, Service Manager (Accounting), extension 2621, Email: pat.robinson@orkney.gov.uk.

Implications of Report

1. Financial

Preparation of the annual accounts, including production of external reports from advisors, are met from within existing budgets.

2. Legal

Section 95 of the Local Government (Scotland) Act 1973 states that every local authority shall make arrangements for the proper administration of their financial affairs and shall secure that the proper officer has responsibility for the administration of those affairs.

The requirement for a local authority to keep accounts is established in Section 96 of the 1973 Act.

The Accounting Code constitutes proper accounting practices in terms of Section 12 of the Local Government in Scotland Act 2003, under the statutory framework provided by the Local Authority Accounts (Scotland) Regulations 2014.

3. Corporate Governance

In terms of the Scheme of Administration, consideration of the unaudited Annual Accounts, as submitted to the auditor, no later than 31 August immediately following the financial year to which the Annual Accounts relate is a referred function of the Monitoring and Audit Committee.

Approval of the Annual Governance Statement, for inclusion in the Council’s Annual Accounts, ensuring that it properly reflects the risk environment and supporting assurances, taking into account Internal Audit’s opinion on the overall adequacy and effectiveness of the Council’s framework of governance, risk management and control is a delegated function of the Monitoring and Audit Committee.

4. Human Resources

Existing staff resources are deployed as part of the annual financial year end closedown process to prepare the annual accounts for the Council.

5. Equalities

An Equality Impact Assessment is not required for financial reporting.

6. Island Communities Impact

An Island Communities Impact Assessment is not required for financial reporting.

7. Links to Council Plan

The proposals in this report support and contribute to improved outcomes for communities as outlined in the following Council Plan strategic priorities:

• ☒ Growing our economy.
• ☒ Strengthening our Communities.
• ☒ Developing our Infrastructure.
• ☒ Transforming our Council.

8. Links to Local Outcomes Improvement Plan

The proposals in this report support and contribute to improved outcomes for communities as outlined in the following Local Outcomes Improvement Plan priorities:

• ☒ Cost of Living.
• ☒ Sustainable Development.
• ☒ Local Equality.
• ☒ Improving Population Health.

9. Environmental and Climate Risk

N/A

10. Risk

N/A

11. Procurement

N/A

12. Health and Safety

N/A

13. Property and Assets

N/A

14. Information Technology

N/A

15. Cost of Living

N/A

List of Background Papers

None.

Appendix

Appendix 1: Draft Orkney Islands Council Annual Accounts 2025/26.

Draft Annual Accounts

2025/26

www.orkney.gov.uk

Appendix 1

IMAGE: Cover of the Draft Annual Accounts 2025/26. The cover shows the Orkney Islands Council crest and a view over buildings and greenery, with the text “Draft Annual Accounts 2025/26” and “www.orkney.gov.uk”.

Contents

• Management Commentary — 1
• Statement of Responsibilities for the Annual Accounts — 20
• Annual Governance Statement — 22
• Remuneration Report — 30
• Statements — 37
• Movement in Reserves Statement — 37
• Comprehensive Income and Expenditure Statement — 38
• Balance Sheet as at 31 March 2026 — 39
• Cash Flow Statement — 40
• Notes — 42
• Notes to the Core Financial Statements — 42
• Note 1 Summary of Significant Accounting Policies — 42
• Note 3 Critical Judgements in Applying Accounting Policies — 53
• Note 4 Assumptions made about the Future — 54
• Note 5 Material Items of Income and Expenditure — 55
• Note 6 Events after the Balance Sheet Date — 55
• Note 7 Expenditure and Funding Analysis — 55
• Note 8 Adjustment between Accounting Basis and Funding Basis — 60
• Note 9 Transfer to or from General Fund Earmarked Balances and Other Reserves — 62
• Note 10 Other Operating Expenditure — 64
• Note 11 Financing and Investment Income and Expenditure — 64
• Note 12 Taxation and Non-specific Grant Income — 64
• Note 13 Property, Plant and Equipment — 66
• Note 14 Investment Properties — 69
• Note 15 Financial Instruments — 69
• Note 16 Inventories — 73
• Note 17 Short-term Debtors — 74
• Note 18 Cash and Cash Equivalents — 74
• Note 19 Assets Held for Sale — 74
• Note 20 Short-term Creditors — 74
• Note 21 Provisions — 75
• Note 22 Reserves — 75
• Note 23 Trading Operations — 79
• Note 25 External Audit Costs — 80
• Note 26 Capital Grant Receipts in Advance — 80
• Note 27 Related Parties — 80
• Note 28 Capital Expenditure and Capital Financing — 82
• Note 29 Leases — 83
• Note 30 Impairment Losses — 86
• Note 31 Capitalisation of Borrowing Costs — 86
• Note 32 Pension Schemes Accounted as Defined Contribution Schemes — 86
• Note 33 Defined Benefit Pension Schemes — 86
• Note 34 Contingent Liabilities — 90
• Note 35 Nature and Extent of Risks Arising from Financial Instruments — 91
• Note 36 Charitable and Non-Charitable Trust Funds — 94
• Note 37 Common Good Fund — 96
• Housing Revenue Account — 97
• Council Tax Income Account — 99
• Non-Domestic Rates Account — 101
• Harbour Authority Account — 102
• UHI Orkney Account — 105
• Group Accounts — 107
• Glossary of Terms — 120

Management Commentary

The Management Commentary is intended to assist users in understanding the objectives and strategy of Orkney Islands Council, whilst demonstrating the stewardship of the public funds that support its mission and strategic priorities. It also provides a review of its business and financial performance throughout the year, summarising the position of the Council at the end of March 2026. It outlines the principal risks and uncertainties facing the Council and assesses the potential impact of those risks on future developments and performance. The financial position of the wider Council group is also presented, with the format and content of the Accounts prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom.

Orkney Islands Council

Orkney Islands Council is the smallest local authority in Scotland. Established in 1975, the Council was one of the 3 original all-purpose island local authorities in Scotland. Around half of the population live in the main towns of Kirkwall and Stromness, with the remainder in largely rural and islands situations, giving rise to further cost implications associated with the provision of public services.

Council Structure

On 22 April 2025, Policy and Resources Committee approved a new Corporate Management Structure, reducing the directorates across the Council down from 5 to 4, and restructuring the Heads of Service that sit under those 4 directorates, as follows:

• Orkney Health and Care / Integration Joint Board
• Education Communities and Housing
• Infrastructure and Organisational Development
• Enterprise and Resources

The full remit of each directorate can be found on the Council’s website: Orkney Islands Council Structure with SM Remits and Names.

IMAGE: A Council structure diagram showing the Chief Executive at the top, with four directorates beneath: Orkney Health and Care / Integration Joint Board; Education Communities and Housing; Infrastructure and Organisational Development; and Enterprise and Resources.

Council Mission and Strategic Priorities

What are we aiming to achieve for Orkney?

The Orkney Partnership

The Council works alongside four other lead agencies in Orkney to maintain and deliver Orkney’s Community Plan. The Council, NHS Orkney, Highlands and Islands Enterprise (HIE), Police Scotland and Scottish Fire and Rescue Service all have a statutory duty to facilitate community planning. This group works in partnership with a network of other public, private and third sector agencies across Orkney with the shared mission of “Working together for a better Orkney”.

The aim of Community Planning is to achieve better outcomes than would otherwise be achieved if they each worked separately. The Council supports the long-term ambitions of the Partnership by sharing both its mission and values, and by aligning the Council’s five priorities in the Council Plan with those of the Partnership’s three priorities.

The Community Plan, incorporating the Local Outcomes Improvement Plan, can be found at the following link: Orkney Community Plan 2025-2030 incorporating the LOIP (orkneycommunities.co.uk).

The Council Plan

Our strategic plan for 2023 to 2028 focuses on growing Orkney's economy, strengthening its communities and developing local infrastructure over the next five years.

The ‘Council Plan 2023 – 2028’ sets out the key priorities for the Council over the next five years as well as the actions and projects that will need to be completed to meet those.

The priorities were developed following feedback from the public, as well as reflecting national priorities set by both the Scottish and UK Governments, the core services which the Council provides day to day and new duties arising from recent legislation.

Progress on the approved plan is reported to Councillors every six months, with the actions attached to each priority subject to review depending on the changing political and financial landscapes affecting the work and resources of the Council.

The Strategic Priorities of the current Council Plan are shown below:

Growing our economy

• Reduce poverty and disadvantage and minimise the effects of the cost-of-living crisis.
• Create favourable conditions for sustainable economic growth.
• Work towards becoming net zero.

Strengthening our communities

• Support communities to develop local solutions and deliver what is important to them.
• Establish the highest standards of public support and protection.
• Widen access to opportunities for better learning, achievement and wellbeing.

Developing our infrastructure

• Invest in homes, supporting choice, inclusion and economic growth.
• Remove barriers to digital connectivity and vital transport.
• Invest in projects that further our economic ambitions.

Transforming our council

• Develop ways of working that put people at the heart of what we do.
• Establish a culture that motivates staff to do the right things at the right time.
• Develop business approaches that are fit for purpose and give people direct access to services wherever possible.

The full Council Plan which details the Council’s top priorities and projects to achieve them can be found at the following link: Council Plan 2023-2028 (orkney.gov.uk).

Underpinning all of our plans is the Council’s commitment to combat climate change, having joined other councils in declaring a climate emergency in 2019. The opportunity to grow our green and blue economies with land and sea-based renewable energy projects will give Orkney a head-start in the race to net zero, reducing energy use whilst simultaneously boosting employment. We will update the Council’s own estate to reduce our carbon footprint, improve the energy efficiency of our social housing and facilitate affordable measures to upgrade cold homes and combat fuel poverty.

Reflecting this priority focus, Climate Change was included as a core underlying principle in The Council’s 5-year plan, released for public consultation in 2023. The Council is also continuing to manage and report on its own carbon emissions. Along with other Councils, our annual returns in line with the Scottish Government’s guidelines, will be made publicly available on the appropriate web page: https://sustainablescotlandnetwork.org/reports/orkney-islands-council

How do we achieve the objectives?

The Council has an integrated Strategic Planning and Performance Framework which specifies the roles, responsibilities, systems and processes that enable the Council to meet its strategic priorities as described above. The Framework helps to ensure that the planned outcomes in the Council Plan are directly aligned to the performance measures that monitor its progress.

Looking back over 2025/26

Financial year 2025/26 has continued to be challenging for Orkney with the budget settlement failing to deliver real terms growth. Council Tax levels for 2025/26 were increased by 15% which was an unprecedented increase for Orkney but reflected the financial pressures faced by the Council. Work to identify, progress and develop future budget savings and efficiencies continued during the year, however, in February 2025 following the budget setting process for 2025/26, it was agreed to fund the gap between the cost of delivering services and available resources with a £20.0M draw from the Strategic Reserve Fund for the second year in a row. This was subsequently reduced to £18.4M but remains a considerable and unsustainable draw on the reserves to fund statutory services.

The Council received a further award of £214,000 from the Islands Cost Crisis Emergency Fund and this was distributed by the Orkney Community Planning Partnership’s Cost of Living Taskforce to meet the needs of those who need it most. The funding award was fully spent during 2025/26 and reported to the Scottish Government in March 2026.

Recruitment continues to be an issue across Orkney with firms, sectors and services competing for the same staff. As a result, the Council continues to be reliant on agency staff in Social Services. The agency staff are critical to the continued delivery of safe services, but costs associated with agency staff outstrip the budgets, with agency costs for social care now costing in the region of £6.0M per annum, covering the costs of employing the agency staff, including travel and accommodation costs.

After more than a decade of service, Hayley Green, Director for Infrastructure and Organisational Development retired in December 2025. Hayley was a key member of the leadership team at the Council, and her leadership and services were particularly important in ensuring that Orkney looked and operated well during the Orkney 2025 Island Games. Lorna Richardson who was the Head of Infrastructure Services, was appointed to the post of Director in February 2026.

Highlights

In early January 2026 the Council received notification from the Scottish Government, that the Scottish Budget for 2026/27, would provide the budget required to allow the Council to complete Phase 1 of the Ferry Replacement Programme, with Phase 1 seeking to replace the ferries which serve the routes between Kirkwall and the islands of Eday, Sanday, Stronsay and Westray.

The provision of this budget followed substantial engagement between the Council and the Scottish Government through the Ferries Taskforce, which was set up by John Swinney in December 2022 to address the need for renewal of the Orkney internal ferry fleet.

To allow the Council flexibility in how this additional funding is spent, it is being received by the Council as part of the annual settlement from the Scottish Government as inter-island connectivity funding totalling £10.0M per year, £2.0M capital and £8.0M revenue, with an indication that this funding will continue for the duration of the current Spending Review period.

During financial year 2025/26 the £2.0M capital connectivity funding was used to purchase the Toplander, a landing craft style vessel, to increase the resilience in island connectivity, a runway roller to allow staff at the airfields to carryout essential maintenance and the purchase of a third aircraft to deliver an enhanced timetable of flights to the north isles.

During financial year 2025/26 Orkney Islands Council’s Housing Service took ownership of 14 newly completed houses from the open market at Walliwall in Kirkwall and Cairston Road in Stromness. The Council also awarded contracts for the building of 25 new houses at Coplands Drive in Stromness and an independent living house at Moar Drive in Kirkwall. In addition to this, the Council purchased two properties in Kirkwall with external funding, to be used as student accommodation for students attending UHI Orkney.

The Council’s Local Housing Strategy sets an ambitious target for new homes over the next 10 years, with a 60/40 split between affordable and private housing. These goals will be delivered through a combination of the Council, Housing Associations, Development Trusts alongside private sector developers.

Orkney made history in 2025 by being the smallest island ever to host the International Island Games, welcoming a record number of visitors for a single event. The Games took place from 12th to 18th July 2025 and brought together 2,141 athletes and officials from 24 islands across the globe with 1,630 athletes competing across 12 sports and was a massive success.

Finance and Performance

Financial information is a key part of the Council’s Strategic Planning and Performance Framework with Council Services’ financial performance regularly reported to members and the respective Committees. In reviewing the financial performance of the Council, the trading activities including the Housing Revenue Account, Harbour Authority including Strategic Reserve Fund, and UHI Orkney all need to be recognised in addition to that of General Fund Services.

Revenue Expenditure

General Fund

Day-to-day income and expenditure on service provision is accounted for in the Comprehensive Income and Expenditure Statement (CIES) which includes all activities associated with the General Fund Services, the Housing Revenue Account and Harbour Authority.

The revenue outturn position will be reported to the Policy & Resources Committee on 22 September 2026.

The following table shows the linkage between the budget figures reported to committee and the figures in the Annual Accounts.

Principal sources of finance

As government funding continues to reduce in real terms, the Council recognises the financial challenges that come with the ongoing reduction in resources. The graph below shows how the services are funded and illustrating the continued and increasing reliance on drawing on reserves.

In 2025/26 budget setting there was £0.7224 of efficiency savings identified by the services. This is well below the savings target set as part of the 2024/25 budget setting process.

The 2026/27 budget includes a contribution from reserves of £20.000M to ensure a balanced budget. The medium-term financial strategy for the period 2025/26 to 2029/30 highlights that a growing contribution from reserves to meet in-year service costs is no longer sustainable, and baseline budgets need to return closer to funding levels.

IMAGE: A budget financing chart for 2016/17 to 2025/26 showing Non-Domestic Rates, Revenue Support Grant, Council Tax and Use of Reserves. The chart shows increasing reliance on reserves over the period.

Reserves

Use of the Council’s Reserves is an important component in assessing the Council’s ability to deliver effective services, as they support financial stability and provide flexibility to assist in the delivery of change and transformation. Within the Council’s useable reserves, there are both uncommitted and earmarked reserves, with uncommitted reserves held to ensure the Council can manage any unexpected financial demands without disrupting delivery of Council services.

The Movement in Reserves statement shows an overall net increase of £22.128M in usable reserves.

The Council’s Reserves Strategy review set a target for the unearmarked General Fund balances at 2% of budgeted expenditure for 2025/26.

Full details of the Council’s Movement in Reserves are shown in Note 22 Reserves.

Harbour Authority Account

The Harbour Authority Account is made up of three separate ring-fenced operations under Miscellaneous Pier and Harbours, Scapa Flow Oil Port and the Strategic Reserve Fund. Overall, the Harbour Authority generated a gain of £1.684M, from various harbour activities due to an increase in ship-to-ship transfers and increased fees. Investment activities through the Strategic Reserve Fund returned a gain of £26.616M for the year and after netting off grants and other investment expenditure there was an overall gain on the Harbour Authority Account of £26.729M.

Investment activities include externally managed fund investments plus a range of local investments in the form of property, direct investment and loans to businesses.

The Council aims to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. The risk appetite of this Council is low in order to give priority to security of its investments.

IMAGE: A chart of Strategic Reserve Fund investments showing Global Equity Fund £119.2M, Multi-Asset £41.2M, Alternatives £29.6M, Private Loan £4.9M, Property £25.1M and Bonds £44.3M.

The performance of the Strategic Reserve Fund externally managed fund investments is measured against a range of indices reflecting the weighting or concentration of individual asset classes within the approved investment strategy with a target to outperform the aggregate benchmark over a rolling 3-year period.

IMAGE: A bar chart titled “Managed Funds Investment - Performance summary”. It shows fund, benchmark and variance for the last 3 months: fund -1.6%, benchmark 0.3%, variance -1.9%; the last 12 months: fund 10.1%, benchmark 11.7%, variance -1.5%; and the last 3 years: fund 7.4%, benchmark 9.9%, variance -2.3%.

Strategic Reserve Fund managed fund investments increased to a total of £264.318M, which after allowing for transfer or cash outflows, represented a gain of 10.1% on the year, with further analysis provided at Note 15.

Housing Revenue Account (HRA)

The HRA returned a loss on its operations of £4.157M which can largely be attributed to revaluation losses on the housing stock during the current year of £5.442M (£1.232M for 2024/25). After allowing for accounting for fixed assets and employee pension benefits, accelerated debt repayment and transfers to/from Reserves, the HRA achieved a deficit position of £0.083M for the year resulting in a reserve balance of £0.500M as at 31 March 2026 (£0.583M as at 31 March 2025).

UHI Orkney

The range of higher and further educational activities provided by UHI Orkney returned a deficit of £1.154M for the year (deficit of £1.472M for 2024/25). A large proportion of this accounting deficit can be attributed directly to being unable to achieve external funding to supplement core Scottish Funding Council support. On a funding basis, the net effect of UHI Orkney’s activities resulted in a deficit of £0.623M for the year resulting in a fund liability of £2.038M as at 31 March 2026 (£1.415M as at 31 March 2025).

Orkney Integration Joint Board

The Orkney Integration Joint Board (OIJB) was established as a body corporate by order of Scottish Ministers with effect from 6 February 2016. The main purpose of the OIJB is to plan, resource and oversee the delivery of high-quality health and social care services for and with the people of Orkney. The Council and the NHS are jointly accountable for the delivery of services by the OIJB.

The OIJB is included as a joint venture within the Group Accounts on the basis that the parties have joint equal rights to the net assets.

Capital Expenditure

Capital expenditure represents money spent by the Council for buying, upgrading or improving assets such as buildings and roads. The Council receives the benefit from capital expenditure over a period exceeding one year, and the expenditure is financed and accounted for over the useful life of the assets. Further details, including the comparative figures are provided in Note 28.

During financial year 2025/26, the Council invested £22.190M through its capital programme.

Funding of the Capital Programme

Performance against Prudential Framework Indicators

The Prudential Code for Capital Finance in Local Authorities allows greater local flexibility for investment decisions that are informed and supported by a suite of performance indicators. The indicators for 2025/26 were approved by Council on 4 March 2025.

Treasury Management

The borrowing strategy is prepared in accordance with the Code of Practice on Treasury Management in Local Authorities and with the Council utilising a borrowing facility from the Public Works Loan Board (PWLB).

Following on from the PWLB Consultation in July 2020, HM Treasury has published revised lending terms which restricts the use of PWLB funds, by disallowing councils use of the funds as a means to purchase investment assets primarily for yield.

The Council’s Treasury Management Strategy is recommended by the Policy and Resources Committee and ensures that decisions are scrutinised sufficiently to mitigate potential risk. This can be found at the following link: Treasury Management Strategy.

Balance Sheet

The Balance Sheet represents a snapshot of Orkney Islands Council’s overall financial position as at 31 March 2026. It brings together the year-end balances of all the Council's accounts and presents money owed to and by the Council, assets owned and the reserves at the Council's disposal.

In financial terms, the Council’s net worth stands at £721.778M, which is an increase of £31.043M or 4.49% on the previous year.

Explanation of the main changes to the Council’s Balance Sheet

• Long term assets – The increase reflects the revaluation of fixed assets.
• Current assets – The increase is mainly due to a gain in the value of the externally managed investments of the Strategic Reserve Fund and increased cash balances.
• Long term liabilities – The reduction in long term liabilities reflects the changing profile on debt repayment.
• Current liabilities – The increase in current liabilities reflects debt due to be repaid in the next twelve months.
• Usable Reserves – The increases on usable reserves can be attributed to the gains on the Strategic Reserve Fund, and an increase on earmarked reserves.
• Unusable Reserves – The decrease on unusable reserves can be attributed to the recognition of an increase within the revaluations and pension reserve.

IMAGE: A comparison of the Council’s 2025 and 2026 balance sheets, showing long-term assets, current assets, current liabilities, long-term liabilities, usable reserves and unusable reserves.

Key Financial Ratios

The Chartered Institute of Public Finance and Accountancy (CIPFA) Directors of Finance Section recommends that certain “financial ratios” are included in the Management Commentary to assist the reader to assess the performance of the Council over the financial year and the affordability of its ongoing commitments.

Group Accounts

In accordance with the Code of Practice on Local Authority Accounting in the United Kingdom the Council has prepared Group Accounts to reflect its interests in subsidiaries, associates and joint ventures. The Council has identified 2 “subsidiary” entities where the Council has a “controlling interest”, as follows: Orkney Ferries Limited and the Pickaquoy Centre Trust.

The Council has also included the results of Hammars Hill Energy Limited as an “associate”, as the Council holds 28% of voting rights which is considered a “significant influence”.

The Orkney Integration Joint Board is included as a “joint venture”. The effect of recognising the Council’s interests in subsidiaries and associates on a group basis is an increase in net worth of £3.477M to £725.255M.

Statement of Responsibilities for the Annual Accounts

The Authority’s Responsibilities

The authority is required to:

• Make arrangements for the proper administration of its financial affairs and to secure that the proper officer of the authority has responsibility for the administration of those affairs (section 95 of the Local Government (Scotland) Act 1973). In this authority, that officer is the Director for Enterprise and Sustainable Regeneration.
• Manage its affairs to secure economic, efficient, and effective use of resources and safeguard its assets.
• Ensure the Annual Accounts are prepared in accordance with legislation (The Local Authority Accounts (Scotland) Regulations 2014), and so far, as is compatible with that legislation, in accordance with proper accounting practices (section 12 of the Local Government in Scotland Act 2003).
• Approve the Annual Accounts for signature.

Signed on behalf of Orkney Islands Council.

Councillor Heather Woodbridge
Leader

The Chief Finance Officer’s Responsibilities

The Director for Enterprise and Sustainable Regeneration is responsible for the preparation of the authority’s Annual Accounts in accordance with proper practices as required by legislation and as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2025/26 (the Accounting Code).

In preparing the Annual Accounts, the Chief Finance Officer, has:

• Selected suitable accounting policies and then applied them consistently.
• Made judgements and estimates that were reasonable and prudent.
• Complied with legislation.
• Complied with the local authority Accounting Code, in so far as it is compatible with legislation.

The Chief Finance Officer has also:

• Kept adequate accounting records which were up to date.
• Taken reasonable steps for the prevention and detection of fraud and other irregularities.

I certify that the financial statements give a true and fair view of the financial position of the local authority and its group at the reporting date and the transactions of the local authority and its group for the year ended 31 March 2026.

Gareth Waterson, BAcc., CA
Director of Enterprise and Resources

Annual Governance Statement

Scope of Responsibility

Orkney Islands Council is responsible for ensuring that its business is conducted in accordance with the law and appropriate standards, and that public money is safeguarded, properly accounted for, and used ethically, economically, efficiently and effectively. We have a statutory duty to plan to secure Best Value under the Local Government in Scotland Act 2003.

In discharging these responsibilities, the Council is committed to ensuring effective arrangements for the governance of the Council’s affairs and the stewardship of the resources at its disposal, including arrangements for the management of risk.

The Council’s corporate governance is underpinned by the CIPFA/Solace Framework ‘Delivering Good Governance in Local Government’. A revised edition of the Framework was published in early 2016 and the Local Code of Corporate Governance was updated to reflect the 2016 edition of the Framework in 2022. CIPFA issued an Addendum to the ‘Delivering Good Governance in Local Government’ framework in May 2025, detailing changes required to the annual review of governance and the Annual Governance Statement, to be implemented for financial year 2025/26 onwards. The Council adopted a revised Local Code of Corporate Governance in April 2026.

In addition, the Council is responsible for confirming effective corporate governance arrangements exist within the group entities over which it has control.

Purpose of the Governance Framework

The governance framework is based on the seven principles of good governance defined in the Framework and comprises the systems and processes, and culture and values by which the authority is directed and controlled. It enables the authority to monitor the achievement of its strategic objectives and to consider whether those objectives have led to the delivery of appropriate, cost-effective services and the achievement of key outcomes.

The system of internal control is a significant part of that framework and is designed to manage risk to a reasonable level. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of the Council’s objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them effectively.

Seven Principles of Good Governance

• A - Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law.
• B - Ensuring openness and comprehensive stakeholder engagement.
• C - Defining outcomes in terms of sustainable economic, social, and environmental benefits.
• D - Determining the interventions necessary to optimise the achievement of the intended outcomes.
• E - Developing the Council’s capacity, including the capability of its leadership and the individuals within it.
• F - Managing risks and performance through robust internal control and strong public financial management.
• G - Implementing good practices in transparency, reporting, and audit to deliver effective accountability.

Review of Effectiveness of Governance Arrangements

In line with best practice the Council is responsible for conducting, at least annually, a review of the effectiveness of its governance framework, including the system of internal financial control. This annual review is supported by a process of self-assessment against the Local Code of Corporate Governance, and is informed by various means:

• The Council and its committees – monitor governance arrangements throughout the year.
• The Corporate Leadership Team – overall responsibility for the development and maintenance of the governance environment.
• The Extended Corporate Leadership Team Finance and Performance – assist the Corporate Leadership Team in keeping the governance under review whilst acting with the wider objectives of the Council in mind to ensure resources are effectively deployed to achieve local and national outcomes.
• The Director of Enterprise and Resources – the Council’s most senior adviser on all financial matters.
• The Monitoring Officer – required to report to the Council where it appears to them the Council has done, or is about to do, anything which would contravene the law or which would constitute maladministration.
• The Chief Social Work Officer – required to, in the discharge of the Council’s statutory social work duties, produce an annual report on all statutory, governance and leadership functions of the role.
• Internal Audit – a professional and objective internal audit service in accordance with the Local Authority Accounts (Scotland) Regulations 2014.
• External Auditors, review bodies, agencies and inspectorates – who come together as a Local Area Network to determine any scrutiny activity required which feeds into the National Scrutiny Plan.

The 2025/26 self-assessment of the Council’s Local Code of Corporate Governance was reviewed by the Corporate Leadership Team on 21 May 2026 and reported to the Monitoring and Audit Committee on 4 June 2026. The Council’s degree of compliance with each principle in the Local Code was graded in accordance with the CIPFA Framework as “3 – fully compliant with the requirement”.

Internal Audit and Monitoring and Audit Committee

The Chief Internal Auditor provides an annual internal audit opinion based on an objective assessment of the framework of governance, risk management and control. It is the opinion of the Chief Internal Auditor, based on the audit work performed in 2025/26, that the Council has a framework of controls in place that provides adequate assurance regarding the organisation’s governance framework, related internal controls, and the management of key risks.

While the overall governance framework is in place and operating, improvements are required in key areas – particularly Non-Domestic Rates which was the only audit this year to receive a Limited opinion.

The Chief Internal Auditor confirmed that there was one fraud issue reported to the Council’s external auditors in financial year 2025/26, and this had been referred to the National Fraud Intelligence Bureau and Police investigations are ongoing.

The Monitoring and Audit Committee provides independent assurance on the adequacy of the Council’s corporate governance, performance, risk management and internal control frameworks. The Committee also oversees financial reporting, the annual governance processes, and the Council’s internal and external audit arrangements.

Integration Joint Board

The Chief Internal Auditor for Orkney Islands Council (OIC) was appointed as the Chief Internal Auditor for the Orkney Integration Joint Board (IJB) for a period of five years starting from April 2021. This was extended for a further two-year period on 22 April 2026 as Azets, NHS Orkney’s current internal auditors, would have required a separate contract and procurement process to take on the role of Chief Internal Auditor.

It has been agreed that Azets will continue to provide support to the IJB Chief Internal Auditor to deliver the Orkney IJB’s internal audit plan.

Where our Governance needs to improve

Securing good governance has been and remains of prime importance to Elected Members and senior officers of the Council; a considerable task at a time when budgets are reducing, services are being redesigned, and a range of national and local priorities require to be addressed.

Each Head of Service has reviewed the arrangements in their Service area and certified their effectiveness by providing individual Certificates of Assurance to their Director. The Directors have reviewed these submissions, considered the overall arrangements across their Directorate, reflected on their effectiveness or otherwise, before submitting their own Certificates of Assurance to the Service Manager (Governance). These Certificates of Assurance provide the basis for the Annual Governance Statement which was circulated for final endorsement by the Corporate Leadership Team before being authorised by the Chief Executive and the Council Leader.

These reviews have identified potential governance matters and concerns where actions will be taken forward to progress improvement, and in many cases are ongoing issues raised in previous years.

How we have improved our governance arrangements in 2025/26

In the prior year, the governance statement identified a number of challenges. Those that have been completed are not being reported on. However, the undernoted table provides some further updates on ongoing work.

As a result of the review of the management restructure, reported to the Policy and Resources Committee in April 2025, the Scheme of Administration and the Scheme of Delegation to Officers were subsequently updated to reflect the outcome of that review.

A review of the Standing Orders has also been undertaken and will be reported to the Policy and Resources Committee in June 2026.

Forward Look on Governance

Public Service Reform

Public Service Reform (PSR) is a national priority aimed at ensuring every pound of public sector funding is used effectively and that services are sustainable well into the future.

What is clear is that PSR needs to be shaped to meet our local needs, with a bespoke approach particularly important in island communities.

In Orkney, we have been working across the Council, NHS Orkney and the Integration Joint Board to develop our local approach, which we published last December, titled a ‘Routemap to (Public Service) Reform’.

On 8 June 2026, senior management, Board Members and Elected Members from the Council, NHS Orkney and the Integration Joint Board met to focus on working more closely together where it makes sense to do so for the benefit of local people. These discussions are at an early stage.

As we move forward, other partner organisations will also be involved, as well as our local community.

Local Government Elections

The Local Government Elections are scheduled for May 2027. Looking to the results of the Scottish Parliamentary Election held in May 2026, this could result in a loss of experienced councillors, who are well versed in local government governance.

Officers are actively engaged in a national network, run by the Improvement Service, preparing for an Elected Member induction programme for 2027.

Artificial Intelligence

Artificial Intelligence (AI) is now becoming an integral part of various industries. It can offer significant benefits such as improved efficiency, enhanced decision-making, and innovative solutions, and gives us an unparalleled opportunity to do things differently and deliver more with less. We need to be aware that it is not infallible and needs good data and effective governance to work well.

An Officer working group has been set up and is continuing to work on strategy, policy and guidance, to establish guiding principles for the Council that must be considered when using artificial intelligence technologies.

Upcoming Statutory Duties

More statutory duties and responsibilities are being placed on services which only adds pressure to an already stretched workforce and budget. Examples including the requirement to produce a Good Food Nation Plan, free school swimming lessons and the potential roll out of the Outdoor Education Residential Bill. It is of paramount importance that, if there is a requirement to deliver statutory duties and/or services, they must be adequately funded and resourced.

Executive Summary

In our respective roles as Leader of the Council and Chief Executive, we are committed to good governance and recognise the contribution it makes to securing delivery of service outcomes in an effective manner. We have been advised on the results of the annual review of the Local Code of Corporate Governance and that the Council’s arrangements continue to be regarded as fit for purpose in accordance with the CIPFA governance framework. It is our opinion that reasonable assurance can be placed upon the adequacy and effectiveness of the systems of governance operated by the Council.

This annual governance statement summarises the Council’s current governance arrangements and affirms our commitment to ensuring they are regularly reviewed and remain fit for purpose.

While pressure on financial settlements is likely to continue during the coming period, we will continue to engage with our partners and the wider community to agree plans and outcome targets that are both sustainable and achievable. Good governance will remain essential in delivering services in a way that both meets the needs of communities and discharges statutory best value responsibilities.

Councillor Heather Woodbridge
Leader
30 September 2026

Oliver D Reid
Chief Executive
30 September 2026

Remuneration Report

The Local Authority Accounts (Scotland) Regulations 2014 require local authorities in Scotland to prepare a Remuneration Report as part of the annual statutory accounts.

All information disclosed in sections three to eight in this Remuneration Report will be audited by the Council’s appointed auditor, KPMG. The other sections of the Remuneration Report will be reviewed by the appointed auditor to ensure that they are consistent with the financial statements.

1. Remuneration policy for the Leader of the Council, the Civic Head and Senior Councillors

The remuneration of councillors is regulated by the Local Governance (Scotland) Act 2004 (Remuneration) Regulations 2007 (SSI No. 2007/183). The Regulations provide for the grading of Councillors for the purposes of remuneration arrangements, as either the Leader of the Council, the Civic Head, Senior Councillors or Councillors.

The salary that is to be paid to the Leader of the Council is set out in the Regulations. The Regulations permit the Council to remunerate one Civic Head. The Regulations set out the maximum salary that may be paid to that Civic Head. Council policy is to pay at the national maximum.

The Regulations also set out the remuneration that may be paid to Senior Councillors, and the total number of Senior Councillors the Council may have.

The Members’ Remuneration Package which encompasses the salaries of all Elected Members including the Leader, Civic Head and Senior Councillors took effect from 3 May 2007. The policy for setting the detail of the remuneration package to Councillors is delegated to the Chief Executive.

In addition to the Senior Councillors of the Council the Regulations also set out the remuneration payable to Councillors with the responsibility of a Leader or a Civic Head of a Joint Board such as a Valuation Joint Board.

In 2025/26 Orkney Islands Council had 8 Senior Councillors excluding the Leader, Depute Leader and Civic Head. The remuneration paid to these 8 Senior Councillors totalled £274,103.

2. Remuneration Policy for Senior Employees

The salary of senior employees is set by reference to national arrangements. The Scottish Joint Negotiating Committee (SJNC) for Local Authority Services sets the salaries for the Chief Executives of Scottish local authorities. Circular CO-154 sets the amount of salary for the Chief Executive of Orkney Islands Council for the period 2025/26. Salaries of the Corporate Directors and Heads of Service are also based on Circular CO-154.

Other benefits received by senior employees include car mileage allowance.

3. Remuneration of Senior Employees

The regulations define a senior employee as any employee who meets one or more of the following criteria:

• Has responsibility for the management of the local authority to the extent that the person has power to direct or control the major activities of the authority whether solely or collectively with other persons.
• Holds a post that is politically restricted by reason of section 2(1)(a), (b) or (c) of the Local Government and Housing Act 1989.
• Whose annual remuneration, including any annual remuneration from a local authority subsidiary body is £150,000 or more.

The Council has interpreted the above criteria as including the Chief Executive, Directors and any senior person reporting directly to the Chief Executive.

The term “remuneration” means gross salary, fees and bonuses, allowances and expenses and compensation for loss of employment. The table below outlines the remuneration details for senior employees, including prior year figures.

4. Remuneration of Senior Councillors

Under the regulations, remuneration disclosures are to be made for the Leader, the Civic Head and any Councillor designated a Senior Councillor by the Council.

5. Pension Entitlement

Pension benefits for both Councillors and local government employees are provided through the Local Government Pension Scheme (Scotland).

The Local Government Pension Scheme is a defined benefit pension scheme with pension benefits being based on Career Average Revalued Earnings (CARE). Members pensions accrue at a rate of 1/49th of the amount of pensionable pay received in a scheme year for those members contributing to the main section of the scheme or half of this rate for any period a member has elected to contribute to the 50/50 section of the scheme.

The scheme’s normal pension age for both Councillors and employees is State Pension Age, which is currently 66. If the State Pension Age changes in the future, then this change will also apply to a member’s normal pension age in the Local Government Pension Scheme.

There is no automatic entitlement to a lump sum however members may opt to convert pension into lump sum subject to limits set by the Finance Act 2004.

The value of the accrued benefits has been calculated on the basis of the age at which the person will first become entitled to receive a pension on retirement without reduction on account of its payment at that age.

The pension figures shown relate to the benefits that the person has accrued as a consequence of their total local government service, together with any transfer from other pension schemes and not just their current appointment.

6. Councillors’ remuneration

The Council paid the following amounts to its Elected Members (Councillors) during the year:

The annual return of Councillors' salaries and expenses for 2025/26 is available for any member of the public to view at all Council libraries and public offices during normal working hours and is also available on the Council's website at www.orkney.gov.uk. Please follow the links on the Council's website as follows: Councillors Record of Claims.

7. Remuneration of Employees

The following table gives a statement of the number of employees whose remuneration, excluding pension contributions, was in excess of £50,000 during 2025/26, in bands of £5,000.

8. Exit Packages

The regulations require the Remuneration Report to provide information on the number of exit packages awarded, in bandings of £20,000 up to £100,000 and thereafter in bandings of £50,000, along with the total cost of the exit packages within each band.

Councillor Heather Woodbridge
Leader

Oliver D Reid
Chief Executive

Statements

Movement in Reserves Statement

This statement shows the movement in the year on the different reserves held by the Council, analysed into usable reserves (those reserves that can be applied to fund expenditure or to reduce local taxation) and unusable reserves.

Comprehensive Income and Expenditure Statement

Balance Sheet as at 31 March 2026

The unaudited accounts were issued on 30 June 2026.

Gareth Waterson, BAcc., CA
Director of Enterprise and Resources

Cash Flow Statement

Notes to the Core Financial Statements

Note 1 Summary of Significant Accounting Policies

The Financial Statements for the year ended 31 March 2026 have been prepared in accordance with proper accounting practice as per section 12 of the Local Government in Scotland Act 2003. Proper accounting practice comprises the Code of Practice on Local Authority Accounting in the United Kingdom (the Accounting Code), supported by International Financial Reporting Standards and recommendations made by the Local Authority (Scotland) Accounts Advisory Committee (LASAAC).

The Annual Accounts have been prepared on a “going concern” basis. They are designed to give a true and fair view of the financial performance and position of the Council and comparative figures for the previous financial year are provided.

The following accounting concepts have been considered in the application of accounting policies:

• Going concern - the going concern concept assumes that the Council will continue in existence for the foreseeable future.
• Relevance – the information in the financial statements is useful for assessing the Council’s stewardship of public funds and for making economic decisions.
• Materiality - information is included in the financial statements where the information is of such significance that it could influence the decisions or assessments of users of the information.
• Understandability – users of the financial statements are assumed to have a reasonable knowledge of accounting and local government.
• Accruals basis - the accruals concept requires the non-cash effects of transactions to be included in the financial statement for the year in which they occur, not in the period in which payment is made or income received.
• Reliability – information included in the financial statements faithfully represents the substance of transactions, is free from bias and material error, is complete within the bounds of materiality and cost, and has been prudently prepared.
• Primacy of legislative requirements - legislative requirements have priority over accounting principles in the event of conflict between legislation and the Accounting Code.

The accounts have been prepared under the historic cost convention, other than changes resulting from the revaluation of certain categories of non-current assets and financial instruments.

Accruals of Expenditure and Income

Activity is accounted for in the year that it takes place, not simply when cash payments are made or received. In particular:

• Revenue from the sale of goods is recognised when the Council transfers the significant risks and rewards of ownership to the purchaser, and it is probable that the economic benefits or service potential associated with the transaction will flow to the Council.
• Revenue from the provision of services is recognised when the Council can measure reliably the percentage of completion of the transaction and it is probable that the economic benefits or service potential associated with the transaction will flow to the Council.
• Supplies are recorded as expenditure when they are consumed.
• Expenses in relation to services received are recorded as expenditure when the services are received, rather than when payments are made.
• Interest payable on borrowings and receivable on investments is accounted for on the basis of the effective interest rate for the relevant financial instrument.
• Where income and expenditure have been recognised but cash has not been received or paid, a debtor or creditor for the relevant amount is recorded in the Balance Sheet.

Cash and Cash Equivalents

Cash is represented by cash in hand and deposits with financial institutions repayable without penalty on notice of not more than 24 hours. Cash equivalents are investments that mature in three months or less from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value.

Employee Benefits

Short-term employee benefits, such as wages and salaries, paid annual leave and paid sick leave, bonuses and non-monetary benefits for current employees, are recognised as an expense in the year in which employees render service to the Authority.

The Council participates in two formal pension schemes: the Local Government Pension Scheme which is administered by Orkney Islands Council; and the Scottish Teachers' Superannuation Scheme. Both schemes provide defined benefits to members. However, the liabilities for the teachers’ scheme cannot be identified specifically to the Council, therefore the scheme is accounted for as if it were a defined contributions scheme.

The Local Government Scheme is accounted for as a defined benefits scheme.

Provisions, Contingent Liabilities & Contingent Assets

Provisions are made where an event has taken place that gives the Council a legal or constructive obligation that probably requires settlement by a transfer of economic benefits or service potential, and a reliable estimate can be made of the amount of the obligation.

Contingent liabilities are not recognised in the Balance Sheet but disclosed in a note to the accounts.

Contingent assets are not recognised in the Balance Sheet but disclosed in a note to the accounts where it is probable that there will be an inflow of economic benefits or service potential.

Reserves

Reserves are created by appropriating amounts out of the General Fund Balance in the Movement in Reserves Statement. When expenditure to be financed from a reserve is incurred, it is charged to the appropriate service in that year to score against the Surplus/Deficit on the Provision of Services in the Comprehensive Income and Expenditure Statement.

Note 2 Accounting Standards Issued but not yet adopted

The Code required implementation from 1 April 2026, therefore there is no impact on the 2025/26 financial statements.

This applies to the adoption of the following new or amended standards within the 2025/26 Code:

• Amendments to Classification and Measurement of Financial Instruments issued in May 2024 following the post-implementation review of IFRS 9 and IFRS 7.
• Amendments to IFRS 9 – Contracts Referencing Nature-dependent Electricity.
• Amendments to FRS102 – The Financial Reporting Standard (amendments to Heritage Assets) issued in May 2024.
• Annual Improvements to IFRS accounting standards – Volume 11, issued in July 2024.

The changes will be effective from 1 April 2026 and are not expected to have a material impact on the Council’s financial statements.

Note 3 Critical Judgements in Applying Accounting Policies

In applying accounting policies, the Council has had to make certain judgements about complex transactions or those involving uncertainty about future events.

Public Sector Funding: There is a high degree of uncertainty about future funding levels for local government. However, the Council has determined that this uncertainty is not yet sufficient to provide an indication that the assets of the Council might be impaired as a result of a need to close facilities and reduce levels of service provision.

Asset Valuations: The Council’s appointed valuer of property assets carries out regular reviews of the value of assets reported in the Balance Sheet and any significant changes in value are processed as asset revaluations or impairments.

Note 4 Assumptions made about the Future

The Annual Accounts contain estimated figures that are based on assumptions made by the Council about the future or that are otherwise uncertain. Estimates are made taking into account historical experience, current trends and other relevant factors. However, because balances cannot be determined with certainty, actual results could be materially different from the assumptions and estimates.

Note 5 Material Items of Income and Expenditure

All material items are disclosed on the face of the Comprehensive Income and Expenditure Statement.

Note 6 Events after the Balance Sheet Date

The Section 95 Officer, being the officer responsible for the Council’s financial affairs, signed the Draft Annual Accounts on 30 June 2026. Events taking place after this date are not reflected in the financial statements or notes.

Note 7 Expenditure and Funding Analysis

This note provides a reconciliation of the main adjustments to the Net Expenditure to Fund Balances to arrive at the amounts in the Comprehensive Income and Expenditure Statement.

Expenditure and Income Analysed by Nature

Note 8 Adjustment between Accounting Basis and Funding Basis

This note details the adjustments that are made to the total comprehensive income and expenditure recognised by the Council in the year in accordance with proper accounting practice to the resources that are specified by statutory provisions as being available to the Council to meet future capital and revenue expenditure.

Note 9 Transfer to or from General Fund Earmarked Balances and Other Reserves

This note sets out the amounts set aside from the General Fund Balance in statutory reserves established under Schedule 3 of the Local Government (Scotland) Act 1975 to provide financing for specific areas of expenditure, and the amounts transferred back from these funds to meet General Fund expenditure.

A Capital Fund is maintained for the replacement of property, plant and equipment in terms of Schedule 3 of the Local Government (Scotland) Act 1975 and includes unapplied capital receipts and grants.

Repairs and Renewals funds are maintained for the purpose of providing for the replacement of plant and vehicles held by the General Fund of Orkney Islands Council. In particular, funds in respect of general repairs and renewals and ferry replacement.

Note 10 Other Operating Expenditure

Note 11 Financing and Investment Income and Expenditure

Note 12 Taxation and Non-specific Grant Income

Grant Income 2025-2026

Note 13 Property, Plant and Equipment

Statutory Override – Infrastructure Assets

The CIPFA/LASAAC Code of Practice for Local Authority Accounting in the United Kingdom (the Code) requires infrastructure assets to be measured using the historical cost measurement basis and carried at depreciated historical cost.

The Council has applied both statutory overrides for infrastructure assets, as follows:

• Statutory Override 1: For accounting periods commencing from 1 April 2021 until 31 March 2027, a local authority is not required to report the gross cost and accumulated depreciation for infrastructure assets.
• Statutory Override 2: For accounting periods commencing from 1 April 2021 until 31 March 2027 the carrying amount to be derecognised in respect of a replaced part of an infrastructure asset is to be taken to be and accounted for as a nil amount.

Note 14 Investment Properties

There are no restrictions on the Council’s ability to realise the value inherent in its investment property or on the Council’s right to the remittance of income and the proceeds of disposal.

Note 15 Financial Instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial instruments include the following investments held as part of the Strategic Reserve Fund on the Harbour Authority Account:

Note 16 Inventories

Note 17 Short-term Debtors

Note 18 Cash and Cash Equivalents

Note 19 Assets Held for Sale

Note 20 Short-term Creditors

Note 21 Provisions

A provision of £42.831M has been set aside to provide for the future cost that will be incurred by the Council in respect of the decommissioning of the Flotta Oil Terminal. The provision is updated annually by RPI for the effects of inflation.

Note 22 Reserves

Usable reserves

Useable reserves are those reserves the Council is able to apply to fund expenditure or reduce taxation and comprise both capital and revenue reserves.

Unusable Reserves

Unusable reserves are those reserves that the Council is not able to utilise to provide services, and comprise:

• Reserves that hold unrealised gains and losses, in relation to the revaluation of property, plant and equipment where amounts will only become available to provide services once the gains or losses are realised as the assets are disposed of.
• Adjustment accounts that deal with situations where income and expenditure are recognised according to statutory regulations against the General Fund Balance and the Housing Revenue Account Balance on a different basis from that expected by generally accepted accounting practices.

Note 23 Trading Operations

Following a review of the Council’s trading operations it was reaffirmed that no significant trading operations existed which required the establishment of separate trading accounts.

Note 24 Agency Services

The Council is required by legislation to provide a collection service for Scottish Water whereby it collects water and waste charges in conjunction with collection of Council Tax. The legislation stipulates the minimum amount Scottish Water must pay by way of commission for this service. For 2025/26 the value of this service amounted to £0.083M (2024/25 £0.078M).

The Council collects Non-Domestic Rates on behalf of the Scottish Government. For 2025/26 £11.759M was collected (2024/25 £12.176M).

Note 25 External Audit Costs

Fees payable to Audit Scotland in respect of external audit services undertaken in accordance with Audit Scotland’s Code of Audit Practice were as follows:

Note 26 Capital Grant Receipts in Advance

The Council has received no capital grants in advance of need during 2025/26.

Note 27 Related Parties

The Council’s related parties are those bodies or individuals that have the potential to control or significantly influence the Council, or to be controlled or significantly influenced by the council.

• Scottish Government: The Scottish Government has effective control over the general operations of the Council, being responsible for providing the statutory framework within which the Council operates. The Scottish Government provides the majority of the Council’s funding in the form of grants and prescribes the terms of many of the transactions that the Council has with other parties.
• Companies and Joint Boards: The Council is deemed to have significant influence or control over a number of wholly owned companies or Joint Boards, including the Orkney Integration Joint Board.
• Councillors and Officers: The Council can on occasion transact with individuals or businesses that are owned by Elected Members or employees, but these are neither considered to be material by value or by nature.
• Pension Fund: The Council is the administering authority and scheduled body for the Orkney Islands Council Pension Fund.

Note 28 Capital Expenditure and Capital Financing

The total amount of capital expenditure incurred in the year is shown in the table below, together with the resources that have been used to finance it.

At 31 March 2026 the Council had commitments on capital contracts for projects of £31.243M.

Similar commitments at 31 March 2025 were £2.492M.

Note 29 Leases

In 2025/26, the Council has applied IFRS 16 Leases as adopted by the Code of Accounting Practice. IFRS 16 establishes a single model for lessee accounting, requiring the recognition of both assets and liabilities for most leases.

Orkney Islands Council as Lessee

Right of Use Assets

Transactions under leases

Orkney Islands Council as Lessor

The Council leases out property under operating leases for the following purposes:

• for the provision of community services, such as sports facilities, tourism services and community centres; or
• for economic development purposes to provide suitable affordable accommodation for local businesses.

Note 30 Impairment Losses

The Code requires disclosure by class of assets of the amounts for impairment losses and impairment reversals charged to the Surplus or Deficit on the Provision of Services and to Other Comprehensive Income and Expenditure. These disclosures are consolidated in Notes 13 and 19.

Note 31 Capitalisation of Borrowing Costs

The Council does not capitalise its borrowing costs.

Note 32 Pension Schemes Accounted as Defined Contribution Schemes

There are currently two occupational pension schemes for teachers in Scotland, the Scottish Teachers' Superannuation Scheme (STSS) and the Scottish Teachers’ Pension Scheme 2015 (STPS 2015). These schemes are administered by the Scottish Public Pensions Agency on behalf of Scottish Ministers.

The Council paid £4.683M (£4.607M in 2024/25) of employer contributions to the Scottish Public Pensions Agency during 2025-26.

Note 33 Defined Benefit Pension Schemes

Participation in pension schemes

The Council participates in two pension schemes:

• The Local Government Pension Scheme, administered locally by Orkney Islands Council - this is a funded defined benefit scheme.
• Arrangements for the award of discretionary post-retirement benefits upon early retirement - this is an unfunded defined benefit arrangement.

The principal risks to the Authority of the scheme are the longevity assumptions, statutory changes to the scheme, structural changes to the scheme, changes to inflation, bond yields and the performance of the equity investments held by the scheme.

Pension Assets and Liabilities recognised in the Balance Sheet

Analysis of Pension Fund’s Assets

Basis for Estimating Assets and Liabilities

Changes in assumptions as at 31 March 2026

The Authority anticipates paying £8.60M in contributions to the scheme in 2026/27.

Note 34 Contingent Liabilities

Contingent liabilities are possible obligations that arise from past events whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events.

Former Landfill and Quarry Sites Re-instatement

The Council is responsible under environmental and planning legislation for the ongoing monitoring, and if required maintenance and reinstatement of current and former landfill and quarry sites.

As at 31 March 2026, no financial provision has been made however the Council recognises that a contingent liability in respect of future reinstatement of current and former landfill and quarry sites operated by the Council may arise.

Grant Funding Conditions

The Council receives grant income from a number of external agencies and public bodies in support of the delivery of a range of projects being undertaken. The standard conditions for grants received apply for a number of years after the end of the financial year in which the final instalment of the grant is paid.

Merchant Navy Officers Pension Fund (MNOPF)

The MNOPF is closed to new members and to future accrual from 31 March 2016, when contributing members were transferred to the Ensign Retirement Plan (for the MNOPF). The MNOPF is a multi-employer defined-benefit scheme and the Council cannot identify its share of the underlying assets and liabilities.

The next full valuation is due as at 31 March 2027.

Note 35 Nature and Extent of Risks Arising from Financial Instruments

The Authority’s activities expose it to a variety of financial risks:

• Credit Risk - The possibility that other parties might fail to pay amounts due to the Authority.
• Liquidity Risk - The possibility that the Authority might not have funds available to meet its commitments to make payments.
• Market Risk - The possibility that financial loss might arise for the Authority as a result of changes in such measures as interest rates and stock market movements.

The Council’s management of treasury risks actively works to minimise the Council’s exposure to the unpredictability of financial markets and to protect the financial resources available to fund services.

Credit Risk

Credit risk arises from the short-term lending of surplus funds to financial institutions and local authorities, as well as credit exposures to the council’s customers.

The risk is minimised through the Annual Investment Strategy, which can be found at the following link: Annual Investment Strategy 2025-2026.

Credit Risk Management Practices

The Council’s credit risk management practices are set out on pages 58 to 63 of the Annual Investment Strategy. It is the policy of the council to place deposits only with a limited number of high-quality banks, building societies and money market funds whose credit rating is independently assessed as sufficiently secure by the Council’s treasury advisers and to restrict lending to a prudent maximum amount for each entity.

Liquidity risk

The authority has a cash flow management system that seeks to ensure that cash is available as needed. If unexpected movements happen, the authority has ready access to borrowings from the money markets and the Public Works Loans Board.

Market risk: interest rate risk

The Authority is exposed to risk in terms of its exposure to interest rate movements on its borrowings and investments.

To illustrate the notional impact of changes in interest rates upon the Council, the following table shows the financial effect if rates had been 1% higher, with all other variables held constant.

The impact of a 1% fall in interest rates would be as above but with the changes being reversed.

Market risk: price risk

The authority held £271.543M of investments as at 31 March 2026 in the form of equities, multi-asset and bonds. The authority is consequently exposed to losses arising from movement in the price of the shares.

A general shift of 5% in the general price of shares, positive or negative, would have resulted in a £13.577M gain or loss being recognised in the income and expenditure statement.

Market risk: foreign exchange risk

As part of the portfolio of £271.543M of investments, the authority held £71.473M of investments in the form of global equities and multi-assets pooled funds.

A general shift of 5% in the general price of shares, positive or negative, would have resulted in a £3.574M gain or loss being recognised in the income and expenditure statement.

Note 36 Charitable and Non-Charitable Trust Funds

This section of the Annual Accounts shows the summary of transactions relating to the Charitable and Non-Charitable Trust Funds administered by Orkney Islands Council as sole trustee.

Summary Income and Expenditure Statement

Registered as Charities

• Orkney Educational Trust (OET) — SC044607
• William Orkney Reid’s Bursary Fund — SC044607

Trust Fund Balances

Copies of the annual accounts of the Charitable Funds are available on the Council website.

Note 37 Common Good Fund

Common Good Funds were inherited from the former Burgh Councils at reorganisation of local government in 1975. Common Good Funds are held for the benefit of residents of the former Burghs of Stromness and Kirkwall.

The assets of the Fund are the properties of these former Burghs and monies are invested with the Council's Loans Fund. The Fund’s main expenditure is incurred in respect of the maintenance of properties and the provision of grants to local organisations, while the Fund’s income is derived from property rentals and interest generated on investments.

Housing Revenue Account

Housing Revenue Account income and expenditure statement

The Housing Revenue Account (HRA) reflects a statutory obligation to maintain a revenue account for local authority housing provision in accordance with the Housing (Scotland) Act 1987.

Notes to the Housing Revenue Account income and expenditure statement

1. The number and types of dwelling in the Council’s housing stock

The Council was responsible for managing 1,042 dwellings during 2025/26 (1,024 in 2024/25).

2. The amount of rent arrears

At 31 March 2026 total rent arrears amounted to £0.652M (£0.575M at 31 March 2025). This is 12.92% of the total value of rental income at 31 March 2026.

3. The provision considered to be necessary in respect of uncollectable rent arrears

In the financial year 2025/26 the rental bad debt provision has increased by £0.028M (£0.020M increase during 2024/25). The provision to cover the potential loss of income stands at £0.235M at 31 March 2026.

4. The total value of uncollectable void rents

The total value of uncollectable void rents for Council dwellings that were not let during the year was £0.080M (£0.067M during 2024/25).

Council Tax Income Account

Councils raise taxes from residents by way of a property tax – the council tax – which is based on property values. Each dwelling house in a local authority area is placed into one of eight valuation bands, “A” to “H”.

Annual council tax charges

Non-Domestic Rates Account

This account is an agent’s statement that reflects the statutory obligation for those councils who issue bills to non-domestic rate payers to maintain a separate non-domestic rate account.

For 2025/26 the charge was 49.8 pence in the pound.

Harbour Authority Account

Harbour Authority Revenue Account income and expenditure statement

The Orkney County Council Act 1974 permits the Council to establish and operate a Harbour Authority Account. The trading position from harbour operations is reflected within the Council's Cost of Services, with surpluses carried to a Strategic Reserve Fund within the Harbour Authority Account.

Harbour fund balances

UHI Orkney Account

UHI Orkney Revenue Account income and expenditure statement

Orkney Islands Council provides further and higher education provision through UHI Orkney which is funded by direct grants from the Scottish Funding Council (SFC). The trading position from these activities is reflected within the Council's Comprehensive Income and Expenditure Statement as part of financing and investment expenditure.

Group Accounts

Statement of Group Accounting Policies

Authorities are required to prepare a full set of group accounts in addition to their own Council's accounts where they have a material interest in such entities.

The Group Accounts consolidate the results of the Council with five other entities.

The Council has included the results of Hammars Hill Energy Ltd as an “associate” within the Group Accounts, as the Council holds 28% of voting rights which is considered “significant influence”.

The Council has included the Orkney Integration Joint Board (OIJB) as a “joint venture” within the Group Accounts on the basis that the Council and the National Health Service (NHS), as the parties participating in the arrangement, have joint equal rights to the net assets of the OIJB.

Basis of Consolidation and Going Concern

In line with the principles contained within the Code, the Group Financial Statement for the year ended 31 March 2026 has been prepared on the basis of a full consolidation of the financial transactions and balances of the Council and its subsidiaries.

“Subsidiaries” have been accounted for under the accounting convention of the “acquisition basis”. The “associate” and the “joint ventures” have been included using the equity method.

The effect of inclusion of the above bodies on the Group Balance Sheet is to increase both Reserves and Net Assets by £3.477M representing the Council’s share of the net liabilities in these entities.

Group Movement in Reserves

Group Comprehensive Income and Expenditure Statement

Group Balance Sheet as at 31 March 2026

The unaudited accounts were issued on 30 June 2026.

Gareth Waterson, BAcc., CA
Director of Enterprise and Resources

Glossary of Terms

AAA Fitch Rating

Highest credit quality - ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments.

AA Fitch Rating

Very high credit quality - ‘AA’ ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments.

A Fitch Rating

High credit quality - ‘A’ ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong.

Accounting Period

The period of time covered by the accounts, normally a period of twelve months commencing on 1 April. The end of the accounting period is the Balance Sheet date.

Accruals

Sums included in the final accounts to recognise revenue and capital income and expenditure earned or incurred in the financial year, but for which actual payment had not been received or made as at 31 March.

Actuarial Gains and Losses

For a defined benefit pension scheme, the changes in actuarial surpluses or deficits that arise because:

• Events have not coincided with the actuarial assumptions made for the last valuation (experience gains and losses); or
• The actuarial assumptions have changed.

Asset

An item having value to the authority in monetary terms. Assets are categorised as either current or non-current.

• A current asset will be consumed or cease to have material value within the next financial year, for example, cash and stock.
• A non-current asset provides benefits to the Authority and to the services it provides for a period of more than one year and may be tangible, for example, a community centre, or intangible, for example, computer software licences.

Audit of Accounts

An independent examination of the Authority’s financial affairs.

Balance Sheet

A statement of the recorded assets, liabilities and other balances at the end of the accounting period.

Borrowing

Using cash provided by another party to pay for expenditure, on the basis of an agreement to repay the cash at a future point, usually incurring additional interest charges over and above the original amount.

Budget

The forecast of net revenue and capital expenditure over the accounting period.

Capital Expenditure

Expenditure on the acquisition of a fixed asset, which will be used in providing services beyond the current accounting period, or expenditure which adds to and not merely maintains the value of an existing fixed asset.

Capital Financing

Funds raised to pay for capital expenditure. There are various methods of financing capital expenditure including borrowing, leasing, direct revenue financing, usable capital receipts, capital grants, capital contributions, revenue reserves and earmarked balances.

Capital Programme

The capital schemes the Authority intends to carry out over a specific period of time.

Capital Receipt

The proceeds from the disposal of land or other fixed assets. Proportions of capital receipts can be used to finance new capital expenditure, within rules set down by the government but they cannot be used to finance revenue expenditure.

Claw-Back

Where average council house rents are set higher than the government’s prescribed average limit rent, used in the calculation of rent rebates, the percentage difference reduces the amount of rent rebate subsidy due to the authority.

CIPFA

The Chartered Institute of Public Finance and Accountancy.

Collection Fund

A separate fund that records the income and expenditure relating to Council Tax and non-domestic rates.

Community Assets

Assets that the Authority intends to hold in perpetuity, that have no determinable useful life and that may have restrictions on their disposal. Examples of community assets are parks and historical buildings.

Comprehensive Income and Expenditure Statement

The account of the Authority that reports the net cost for the year of the functions for which it is responsible and demonstrates how that cost has been financed from precepts, grants and other income.

Consistency

The concept that the accounting treatment of like items within an accounting period and from one period to the next are the same.

Contingent Asset

A contingent asset is a possible asset arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the Authority’s accounts.

Contingent Liability

A contingent liability is either:

• A possible obligation arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the Authority’s control; or
• A present obligation arising from past events where it is not probable that a transfer of economic benefits will be required, or the amount of the obligation cannot be measured with sufficient reliability.

Corporate and Democratic Core

The corporate and democratic core comprises all activities that local authorities engage in specifically because they are elected, multi-purpose authorities.

Creditor

Amount owed by the Authority for work done, goods received, or services rendered within the accounting period, but for which payment has not been made by the end of that accounting period.

Current Service Cost (Pensions)

The increase in the present value of a defined benefits pension scheme’s liabilities, expected to arise from employee service in the current period.

Debtor

Amount owed to the Authority for works done, goods received, or services rendered within the accounting period, but for which payment has not been received by the end of that accounting period.

Defined Benefit Pension Scheme

Pension schemes in which the benefits received by the participants are independent of the contributions paid and are not directly related to the investments of the scheme.

Depreciation

The measure of the cost of wearing out, consumption or other reduction in the useful economic life of the Authority’s fixed assets during the accounting period.

Equity

The Authority’s value of total assets less total liabilities.

Events after the Balance Sheet Date

Events after the Balance Sheet date are those events, favourable or unfavourable, that occur between the Balance Sheet date and the date when the Statement of Accounts is authorised for issue.

Fair Value

The fair value of an asset is the price at which it could be exchanged in an arm’s length transaction.

Finance Lease

A lease that transfers substantially all of the risks and rewards of ownership of a fixed asset to the lessee.

Going Concern

The concept that the Annual Accounts is prepared on the assumption that the Authority will continue in operational existence for the foreseeable future.

Government Grants

Grants made by the government towards either revenue or capital expenditure in return for past or future compliance with certain conditions relating to the activities of the Authority.

Housing Revenue Account (HRA)

A separate account to the General Fund, which includes the income and expenditure arising from the provision of housing accommodation by the Authority.

Impairment

A reduction in the value of a fixed asset to below its recoverable amount, the higher of the asset's fair value less costs to sell and its value in use.

Infrastructure Assets

Fixed assets belonging to the Authority that cannot be transferred or sold, on which expenditure is only recoverable by the continued use of the asset created. Examples are highways, footpaths and bridges.

Intangible Assets

An intangible (non-physical) item may be defined as an asset when access to the future economic benefits it represents is controlled by the reporting entity. This Authority’s intangible assets comprise computer software licences.

Liability

A liability is where the Authority owes payment to an individual or another organisation.

• A current liability is an amount which will become payable or could be called in within the next accounting period, for example, creditors or cash overdrawn.
• A deferred liability is an amount which by arrangement is payable beyond the next year at some point in the future or to be paid off by an annual sum over a period of time.

Materiality

The concept that the Annual Accounts should include all amounts which, if omitted, or mis-stated, could be expected to lead to a distortion of the financial statements and ultimately mislead a user of the accounts.

Minimum Revenue Provision (MRP)

The minimum amount which must be charged to the revenue account each year in order to provide for the repayment of loans and other amounts borrowed by the Authority.

Net Book Value

The amount at which fixed assets are included in the Balance Sheet, i.e., their historical costs or current value less the cumulative amounts provided for depreciation.

Net Debt

The Authority’s borrowings less cash and liquid resources.

Non-Domestic Rates (NDR)

The Non-Domestic Rate is a levy on businesses, based on a national rate in the pound set by central government and multiplied by the assessed rateable value of the premises they occupy.

Operating Lease

A lease where the ownership of the fixed asset remains with the lessor.

Operational Assets

Fixed assets held and occupied, used or consumed by the Authority in the pursuit of its strategy and in the direct delivery of those services for which it has either a statutory or discretionary responsibility.

Provision

An amount put aside in the accounts for future liabilities or losses which are certain or very likely to occur but the amounts or dates of when they will arise are uncertain.

Public Works Loan Board (PWLB)

A Central Government Agency, which provides loans for one year and above to authorities at interest rates only slightly higher than those at which the government can borrow itself.

Rateable Value

The annual assumed rental of a hereditament, which is used for National Non-Domestic Rate purposes.

Related Parties

There is a detailed definition of related parties in FRS 8. For the Council’s purposes related parties are deemed to include the Authority’s members, the Chief Executive, its Directors and their close family and household members.

Remuneration

All sums paid to or receivable by an employee and sums due by way of expenses allowances and the money value of any other benefits received, other than in cash. Pension contributions payable by the employer are excluded.

Reserves

The accumulation of surpluses, deficits and appropriations over past years.

Revenue Expenditure

The day-to-day expenses of providing services.

Stocks

Items of raw materials and stores an authority has procured and holds in expectation of future use.

Temporary Borrowing

Money borrowed for a period of less than one year.

Trust Funds

Funds administered by the Authority for such purposes as prizes, charities, specific projects and on behalf of minors.

Useful Economic Life (UEL)

The period over which the Authority will derive benefits from the use of a fixed asset.

Finance Services, School Place, Kirkwall, Orkney, KW15 1NY

Telephone: 01856 873535 Fax: 01856 876158

www.orkney.gov.uk

IMAGE: The final page displays the Orkney Islands Council crest above the contact details for Finance Services, School Place, Kirkwall, Orkney, KW15 1NY, telephone 01856 873535, fax 01856 876158, and www.orkney.gov.uk.