Councils must make progress on IFRS: Local Government Chronicle

Posted on December 29, 2009 · Posted in Local Government Chronicle

 

Local authorities should by now be well advanced in their progress towards the adoption from April next year of IFRS – International Financial Reporting Standards.

 

The adoption of IFRS has serious implications for local government accounting. It has been widely reported that the assets and liabilities of some PFI contracts that were previously off-balance sheet could move on-balance sheet under IFRS.

 

What has been less widely observed are the many other effects. Some leases may now need to reported as finance leases instead of operating leases. Investment properties must be reported at ‘fair value’ (ie market value) instead of at current replacement cost or net realisable value. Holiday pay and other employee benefits must be reported as they accrue.

 

There will also be changes to accounting for depreciation: different elements of a building will depreciate at different rates under IFRS. Roofing and internal fabric will be reported as depreciating faster than the bricks and mortar.

 

CIPFA has produced an ‘indicative timetable’, suggesting the progress that local authorities should be making with IFRS. High level impact assessments should have been completed last spring, along with the identification of necessary changes to accounting policies and the identification of which key staff will be involved in the process. Those key staff should then have been trained.

 

Over the spring and summer, councils should have identified the required changes to systems and and procedures. By now, authorities should also have identified the information on matters such as PFI contracts, leases and holiday pay to enable the April 2009 balance sheets to be restated. This will lead into the production of this year’s accounts under both GAAP and, as a trial run, IFRS.

 

The use of indicative timetabling rather than the system of ‘trigger points’ used when central government and health bodies moved to IFRS a year earlier is controversial. Julian Rickett, a partner in PricewaterhouseCoopers’ government and public sector practice, explains: “There were sticks for health and central government, but not for local government. I would have preferred similar formal trigger points for local authorities.”

 

What concerns Rickett is that while many councils are making excellent progress towards the adoption of IFRS, other – mostly smaller – authorities are moving more slowly. “It’s a mixed picture,” he says. “Some authorities have seen the lessons learnt by the health sector and central government that went a year before. Those that did, cracked on with it, to see what it meant for them.

 

But there are a number of authorities who think ‘if I don’t think about this it will go away’, and there are some that don’t have the capacity to deal with it – particularly district councils. Some think, ‘we don’t have PFI, we don’t have leases and our assets are fairly small,” so they think there is not that much work involved.”

 

The message from Rickett is that these councils should think again – and quickly. In fact, although local government spend is much smaller than central government spend, the complexities involving the move to IFRS can be much greater. For one thing, councils will typically be involved in a wider array of leases – both as landlord and tenant. Just finding all the leases that a council is a party to can be problematic.

 

The Audit Commission is in the best position to know how effectively authorities are moving towards adopting IFRS, but because it is conducting a comprehensive survey at present, it is coy about providing any answers.

 

In a statement, the Commission told LGC: “The Audit Commission is currently researching a report on local government’s preparations for IFRS, which is expected to be published in the spring of next year.  As work on this project has only just begun, we would rather not pre-empt its findings ahead of publication.”

 

No one at CIPFA was able to discuss authorities’ preparedness either. But Gillian Fawcett, head of public sector at the Association of Chartered Certified Accountants, believes it may still be too early to assess.

 

However, the guidance, information and training provided to local authorities is quite comprehensive with project plans/checklists on how to move forward,” she says. “PwC and CIPFA have both produced project planning and implementation guidance.

 

My understanding is that the IFRS Code of Practice is now being finalised and local authorities should be in the process of planning their route. CIPFA set out some milestones in its ‘outline plan’ for local authorities. This includes, for example, a milestone for restating balance sheets by December 2009. I would suggest that it is at this point we will know whether local authorities are on track.

 

Guidance will still be pouring out over the next few months on issues such as leases and holiday pay. Given that health and central government will be ahead, it will be important that lessons are learnt for their experience.”

 

But the ability of a local authority to move efficiently to IFRS is also a test of its corporate strength. Some authorities have devolved responsibility to departments to such an extent that the centre has little understanding of what departments are doing.

 

Those organisations that are better organised have a spider at the middle of the web,” suggests PwC’s Rickett. “Those that are less organised have more of a tangled web. Then it takes longer to find where all the assets and leases are.”

 

ACCA’s Top tips

 

  • Strong project management skills are necessary, with clear oversight of the changes required to become IFRS compliant.

  • Ensure the people have the right skills – invest in training and development.

  • Keep all stakeholders in the loop – audit committee, internal and external audit.

  • Identify systems, data systems enhancements required to make the change.

  • Learn the lessons from NHS/central government.

 

PwC’s Top Tips

 

  • Recognise IFRS is a serious challenge.

  • Plan early.

  • Don’t underestimate the difficulties – they will almost certainly be greater than you expect.

  • Accept that this involves more than just the finance department.

  • Engage early with your auditors to understand what they expect from you.

 

Background papers on the move to IFRS are available at:

 

www.cipfa.org.uk/pt/download/laap80.pdf

 

www.cipfa.org.uk/pt/download/IFRS_Code_ITC_Exec_Summary.pdf

 

www.communities.gov.uk/publications/localgovernment/changefinanceconsultation