When International Financial Reporting Standards come into full effect in 2010/11, local authorities will have to include a balance sheet of the position at April 1, 2009. An early start is essential
For local authorities, the clock is ticking on the move to International Financial Reporting Standards, with April 1 the transition date. This will have implications for the closedown of the 2008/09 accounts.
When the first IFRS-based accounts are produced for 2010/11, they will need to include an opening (transition) IFRS balance sheet as at April 1, 2009. So now is the time to think about what information will be needed to produce this. Collecting the IFRS information along with that needed for the 2008/09 accounts might be more efficient than collecting the information later, when there is less chance it will be available.
Under IFRS, accounting policy changes are retrospective — they are reflected in the opening balance sheet as if authorities had always accounted under IFRS.
This affects the accounting treatment of various areas, primarily employee benefits, the Private Finance Initiative, property leases and some assets.
International Accounting Standard 19 requires authorities to accrue for employee benefits as they are incurred. The main example of this will be holiday pay, although the requirement extends to other arrangements, such as flexitime, if the amounts are material. For employees with untaken leave on March 31, an accrual for the leave will need to be included in the balance sheet, and balances adjusted accordingly.
Identifying the information is likely to be tricky. Accruals for teachers might be large, but are relatively easy to estimate as holidays are fixed. For other employees, however, samples will be needed if your HR system doesn’t capture the information.
Accruals could affect local authority balances — and therefore council tax — unless mitigating regulations are introduced. CIPFA is discussing the options with the Department for Communities and Local Government and the devolved governments.
Private Finance Initiative accounting is also affected. The 2009 Statement of Recommended Accounting Practice Exposure Draft proposed moving to a Financial Reporting Manual basis for PFI accounting for the 2009/10 accounts. Assuming this is approved, adjustments made in the 2009/10 accounts will provide the information needed for the transition balance sheet.
IAS 17 requires property leases to be accounted for as separate leases of land and buildings. This could lead to elements of existing leases being reclassified from operating to finance or vice versa. This applies whether the authority is acting as a lessee or a lessor.
An important part of preparing the transition balance sheet will be reviewing leases and identifying any reclassifications — this will involve estates sections and legal staff as well as finance staff. An early start is essential.
While many of the property, plant and equipment requirements remain unchanged, it is possible some assets will need to be revalued. Estates sections can help here. Despite the rumours, authorities don’t need to separate all their assets into components for the transition balance sheet. Instead, components will be identified when they are replaced or when assets are revalued from April 1, 2010 onwards.
Components need to be accounted for separately only where their values are significant in relation to the asset. Components with the same economic life and depreciation method can be grouped together for accounting purposes.
In some other areas, IFRS will require a different accounting treatment to be implemented, but authorities will already have the information required. Take investment properties. Under the Sorp, gains and losses on revaluation of these properties go through the Revaluation Reserve; under IFRS, they go to the Income and Expenditure Account (and are then transferred to the Capital Adjustment Account).
Restating the opening balance sheet will involve transferring the balance on the Revaluation Reserve in respect of investment properties to the Capital Adjustment Account, but authorities will already have this information.
Group accounts will also need to be restated on an IFRS basis. However, other group entities may continue to account under UK Generally Accepted Accounting Practice.
In this situation, consolidation adjustments will be required where amounts would be materially different under IFRS than UK GAAP. Look out for the usual suspects — such as holiday pay and leases. Authorities should already be talking to other members of the group.
Of course, the impact of these will vary — and some authorities might find that they face different issues when preparing the transition balance sheet. As always, the best way to avoid surprises at the last minute is to prepare early and keep up to date with developments.
Paul Mason is technical manager, local government accounting, at CIPFA. For the latest information on IFRS and an outline project plan, see www.cipfa.org/pt
