The road to International Financial Reporting Standards is a long one but we are getting much nearer to the destination
Local authorities are on a journey towards International Financial Reporting Standards that will be completed in 2010/11. Over the summer, CIPFA consulted on the new IFRS-based Code of Practice on Local Authority Accounting and there were more than 120 responses. The joint CIPFA/Local Authority (Scotland) Accounts Advisory Committee code board and the Financial Reporting Advisory Board have considered these responses, and the final signposts have now been added to the route.
So where are we heading?
For capital grants and contributions, it’s a sharp change in direction. Up to now, we have treated these items as deferred income in the balance sheet and amortised them to revenue to match depreciation. However, this doesn’t fit with the idea that the balance sheet shows only true assets and liabilities. So, in future, capital grants and contributions will be shown as income when they are received.
For borrowing costs, it’s straight ahead – at least for now. The current Statement of Recommended Practice allows authorities to choose whether to capitalise or charge to revenue borrowing costs that relate to a qualifying asset (one that takes more than 12 months to construct). This will continue in the short term but will be reviewed at a later date.
Despite rumours to the contrary, the remaining substance of the draft code (such as accruing for all holiday pay, including for teachers) won’t change when the final version is published. However, some issues have been clarified. For example, the code now makes it clear that land leases can be finance leases without the legal title being transferred.
Now that the map has been finalised, how should authorities be planning their route? CIPFA’s outline project plan is a good starting point, and highlights the main milestones for authorities en route. The first of these is the restatement of the opening IFRS balance sheet. The recommended date of December 31, 2009 isn’t compulsory, unlike the ‘trigger points’ elsewhere in the public sector. However, this date is an important target as meeting it will ensure local authorities are aware of how the changes will affect their budgets before they set council tax early in 2010.
Setting budgets for 2010/11 is another key stage for local authorities. This part of the journey is complicated by the fact that, to continue the analogy, part of the road is still under construction.
Legislation currently takes UK Generally Accepted Accounting Practice as its starting point, and then adjusts this for taxation purposes. With the move to IFRS, changes will be required if taxation is to remain unchanged.
CIPFA has identified holiday pay accruals and leases as areas where changes might be required, and the UK and devolved governments have indicated that they expect new regulations or guidance to be in place by March 31, 2010.
Following in the tracks of others can help. Central government and the health service will complete their journeys ahead of local authorities, and there will be lessons to be learned from their experience. And we can travel in convoy. Working with other authorities is a good way to reduce the risks associated with the transition to IFRS.
Examples include Cumbria, where CIPFA is undertaking an extensive IFRS training programme jointly for the county and district councils, and Scotland, where 27 of the 32 local authorities and the majority of the joint boards are working with CIPFA and PricewaterhouseCoopers to identity and implement the changes arising.
So are we there yet? No, but the signs are that local authorities are making good progress with the move to IFRS, and will arrive on time.
Paul Mason is technical manager, local government accounting, at CIPFA
