As the deadline for completing the first IFRS accounts looms nearer, how are local authorities doing?
It’s a safe bet that finance departments’ annual leave calendars will be pretty full after July 1 next year.
The day before is the deadline for councils, fire & rescue and police authorities to complete their first set of financial statements compliant with International Financial Reporting Standards, under the 2010/11 Code of Practice on Local Authority Accounting. Between now and then, there’s a lot of work to do. And some will have more than others.
The Audit Commission’s latest Countdown to IFRS update on local authorities’ progress shows there have been advances since last November, but some organisations still have significant catching up to do. Those that haven’t restated their 2009/10 accounts should aim to do this by the end of December at the latest. Authorities also have to produce 2010/11 skeleton accounts, including disclosures.
To do that, they will need to continue making progress in the main technical areas, such as accounting for lease arrangements, and segmental reporting.
Progress varies, but overall is encouraging. In November, just one in seven authorities was on track to produce IFRS-compliant accounts and one in five faced serious difficulties. This July, 41% were on track but more than 50% still had some issues to overcome.
Planning is vital and there is good news here – 95% of authorities now have a project plan. However, a third are lagging behind their plans. It seems that larger and more complex organisations are finding the transition to IFRS more difficult because of the scale of their activities. London and metropolitan boroughs and unitary councils are most likely to have technical issues to resolve. Fire authorities, which are smaller, single-service bodies, are the furthest ahead.
A major point is that the move to IFRS is not just an issue for finance professionals; changes need to be embedded across the whole organisation. By July this year, a quarter of authorities had not involved officers outside finance on the implications of the standards, especially regarding data collection and recording of transactions.
To help manage risk, audit committees must also be kept up to date so they can help ensure IFRS transition plans are on course. External auditors are another source of support. Almost all authorities have by now involved their external auditors and they should continue to do so, to discuss emerging issues and share the results of preparatory work.
There is also practical advice in Countdown to IFRS, including recommendations based on the NHS’s IFRS experience.
Of the technical areas, authorities had most work to do on accounting for non-current assets (formerly fixed assets). Over half had minor problems in this area, and 8% had more serious ones.
This leads us to ‘componentisation’. This is a word that will loom large as accountants prepare to meet the requirements to account separately for significant components of non-current assets. Although component accounting applies prospectively from April 1, 2010, all authorities need to work on developing accounting policies, processes and systems for this as soon as possible.
It will also affect any assets that have been revalued, enhanced or acquired since April 1 this year. So the impact of componentisation on accounts over the next few years will vary depending on the timing of revaluations, enhancements or acquisitions of assets.
As the IFRS deadline looms ever nearer, local authorities will need to maintain or increase their momentum in identifying and resolving any remaining problems. Seemingly minor issues can cause difficulties during the preparation of accounts – and lead to more audit enquiries, affecting costs and resources. Work on restatement and skeleton accounts is therefore essential and urgent.
After all, local government’s reputation is at stake.
Martin Evans is managing director of audit policy at the Audit Commission. The commission will publish its final IFRS auditor survey in March 2011. Later that year, it will report on the audit of the IFRS accounts in Auditing the accounts
