Local government finance teams still have time to resolve any outstanding issues with International Financial Reporting Standards – if they act now
In the 2007 Budget, the government announced that all public bodies would have to prepare their accounts in accordance with International Financial Reporting Standards.
NHS, probation and central government bodies achieved this in 2009/10 but the decision was taken to delay local government’s move to IFRS by a year to ensure the accounting changes did not affect council tax.
Publishing audited statutory accounts is the principal way that local government bodies discharge their accountability for their stewardship of public money. Successful implementation of IFRS for 2010/11 is important to the reputation of individual councils and to the sector as a whole.
The Audit Commission has been following the progress of local authorities through auditor surveys since November 2009. We have also published briefings and technical papers to help authorities. Our third auditor survey was completed in January 2011 and our final briefing paper in the Countdown to IFRS series, The Final Countdown, was published on our website on March 17.
Overall, auditors assessed one in ten authorities as ‘not on track’ to prepare IFRS-compliant accounts or as facing major issues that needed resolving. Over 50% had minor issues to deal with. The situation is not irretrievable, but authorities need to recognise the scale of the work needed now, and the risks they run if they don’t focus immediately on it.
Of course, local authority finance capacity has been under pressure as a result of the October Comprehensive Spending Review and the Local Government Finance Settlement.
Authorities have had to focus on other priorities, such as revising their budgets and medium-term financial plans. Perhaps unsurprisingly, the timetable for implementing major IFRS tasks has slipped at many authorities.
One of these tasks, restating 2009/10 comparatives, is important because it gives an early understanding of where financial reporting issues might arise. Of the authorities that had started work on this early, 20% identified unexpected issues, such as the requirement to account for grant income when conditions have been met, rather than matching it to related expenditure.
Also in January 2011, half of authorities had significant or material financial reporting issues to resolve. Many involved accounting for non-current assets, such as valuation and component accounting. Leases also posed problems.
Preparing disclosures will also be more time-consuming under IFRS, especially if authorities have not yet looked at these in detail. So it’s likely that closedown this year will be much more time-pressured and difficult than in previous years, particularly if problems are discovered at a late stage. And where authorities do identify problems later on, this might lead to material errors in the draft accounts and, potentially, extra costs.
Chief finance officers have a legal responsibility to sign off draft accounts before providing them for audit, so they need to keep a close eye on whether major IFRS tasks are being completed on time. The risks can be avoided as long as authorities plan a realistic closedown schedule with enough contingency time.
Despite the significant or material IFRS issues identified in January, auditors felt that most of the authorities concerned were taking appropriate action to resolve them. The overall message is that even authorities with major issues to resolve can still implement IFRS successfully, but only if they take the right action now.
What next? In a few months time finance staff might be congratulating themselves on managing this challenging process successfully. But IFRS is not a one-off exercise. Authorities must make sure they have embedded the skills and knowledge to enable good financial reporting in future years.
The Audit Commission will report on the outcome of IFRS implementation in December 2011.
Martin Evans is managing director, audit policy, at the Audit Commission
