CIPFA’s consultation on Simplifying Local Authority Accounts is drawing to a close and CIPFA/LASAAC will consider the responses in November. I believe the proposals represent a big improvement in the way local authorities report but am also aware that some may feel they don’t go far enough.
In preparation for our recent local authority accounting conferences I came across an article in Public Finance written by a former LAAP chair on busting local authority accounting myths. I was struck by how relevant those myths still are and so updated them for the current framework.
Myth One: It’s CIPFA/LASAAC's fault as the standard setter.
Local authority accounts are complex but the reason for this is the statutory control framework that seeks to mitigate the effects of proper accounting practice (i.e. International Financial Reporting Standards) on council tax levels. The resulting adjustments create much of the apparent complexity of local authority accounts, not the underlying accounting standards.
Myth Two: As accounting standards have been developed to meet the needs of the private sector they are not appropriate for public sector bodies.
An organisation’s accounts are meant to represent the economic reality of the underlying financial transactions. The effects of, say, entering into a lease or receiving a government grant are the same whether the entity concerned is in the private or public sector. Moreover the global framework of accounting standards developed specifically for the public sector by the International Public Sector Accounting Standards Board (IPSASB) is also based on IFRS. The only specific ‘public sector standards’ are those relating to transactions that are unique to the public sector, such as payment of welfare benefits.
Myth Three: The accounts include meaningless numbers.
The adjustments needed to reconcile the accounts produced in accordance with IFRS with the statutory control framework do result in some “funny numbers”. Adjustments to ‘reverse out’ various charges or credits to the income and expenditure statement lead to unusual balances on the balance sheet. But such unusable reserves as the pension reserve, the capital adjustment account and the financial instruments adjustment account are not meaningless. They represent expenditure that the authority has incurred (in accounting terms) but not yet financed through local taxes. These amounts will have to be funded in future.
Myth Four: The accounting framework could be simplified if it were aligned with other parts of the public sector.
The accounting framework for local authorities is essentially the same as that for central government. Central government accounts comprise a series of IFRS-based primary statements with a Statement of Changes in Taxpayers’ Equity (equivalent to a local authority’s Movement In Reserves Statement) that reconciles the IFRS numbers to the government’s budgeting framework.
While we may be tempted by the apparent utopia of half a dozen pages of text and figures to present a true and fair view of local authority finances, the reality is that local authorities are complex organisations with wide ranging transactions and varied assets and liabilities. We should make the accounts as accessible as possible but while we can cut clutter, some details are necessary to give a true and fair view.
