07 March 2008
The Treasury's expert accountancy advisers have backed delaying central government's implementation of International Financial Reporting Standards by a year, because two key departments cannot meet the 2008/09 deadline.
Financial Reporting Advisory Board members reached their conclusion after the Department of Health and the Ministry of Defence both indicated they would be unable to adopt IFRS for the next financial year.
The hold-up is a result of the Treasury's failure to issue new guidance on the treatment of Private Finance Initiative schemes under IFRS, which has to be implemented at the same time as the standards.
The delay is significant because the new accounting standards are likely to mean many PFI projects being included in the public sector net debt figures for the first time.
This in turn could cause the government to breach its self-imposed investment rule, which stipulates that PSND must remain below 40% of gross domestic product.
But the two ministries, which account for a substantial proportion of PFI liabilities, have said they are unable to adopt IFRS in time due to the sheer scale and complexity of the task.
Frab member Ken Wild, giving evidence to the Treasury select committee on March 4, said he had always been concerned by the ambitious timetable for implementation, based on the private sector's experience. In the circumstances, he told MPs, delaying the deadline was now the best option.
'It is better to move to it [IFRS] in shadow form and to do it properly,' he said.
Chancellor Alistair Darling has not yet responded to Frab's advice, but accepting it would lift the threat of his breaking the sustainable investment rule in 2008/09.
PSND is projected to be 38.6% of GDP by the end of next year, while PFI schemes totalling approximately £30bn, or 2.5% of GDP, are off-balance sheet. Bringing them on-balance sheet in 2008/09 would therefore bring public debt close to or above the 40% threshold, depending on the proportion of PFI liabilities reclassified.
Darling is already expected to make a statement on the future of the sustainable investment rule in the Budget on March 12, to explain how the estimated £100bn of public liabilities generated by the Northern Rock nationalisation will be treated. A decision on delaying implementation of IFRS is also possible.
Ian Carruthers, CIPFA's policy and technical director and a member of Frab, told Public Finance that even if the Treasury delayed implementation, the panel would still want momentum on the move to IFRS to be maintained.
'In order to keep up the pressure, we would still want the other departments, except perhaps the DoH and MoD, to produce dry-run accounts using IFRS next year,' he said.