By Sarah Sheen | 1 April 2013
Councils have consolidated the gains made under the first two years of International Financial Reporting Standards. But further challenges lie ahead
Local authorities not only improved the quality and timeliness of their financial reporting in 2011/12, they did this while embedding International Financial Reporting Standards at a time of reducing resources, according to the Audit Commission’s annual review, Auditing the accounts.
CIPFA and the Local Authority (Scotland) Accounts Advisory Committee came to a similar conclusion in their review of the IFRS-based Code of Practice on Local Authority Accounting in the UK. Finance teams can be justifiably proud of this achievement. The CIPFA/Lasaac review noted that IFRS implementation had been successful, with no significant issues arising from the code’s provisions.
‘Cutting clutter’ was identified as an area for further development, and work has begun. As a result of the review, a number of disclosures (required neither by legislation nor by the IFRS) have been removed. There have also been clarifications on lease classification and on the recognition and measurement requirements for property, plant and equipment.
Although the formal review has been completed, CIPFA/Lasaac believes review is a continuous process. The next stage will be a more in-depth review of the structure and content of the main financial statements, likely to run in parallel with central government work.
But authorities can’t rest on their laurels as the 2012/13 code has now been updated and the 2013/14 code approved.The 2012/13 Code Update arose from the need to address issues that have arisen since the code was published by which authorities are legally bound. They cover:
> the new self-financing system for the Housing Revenue Account in England
> Carbon Reduction Commitment Scheme Allowances
> the new prudential system for capital finance in Northern Ireland.
Since the first IFRS-based code was issued in 2009, most changes have arisen as a result of legislation, reflecting CIPFA/Lasaac’s desire to minimise changes while authorities were ‘bedding in’ the standards. However, in recent years, developments have been gathering pace and future editions of the code are likely to include some potentially significant amendments as a result.
For 2013/14, reporting arrangements for pension liabilities (in employers’ accounts) have been revamped. While care has been taken to ensure that the new arrangements have no budgetary impact, more transparent information on pension fund commitments will be needed in the authority’s accounts.
CIPFA/Lasaac has also been considering IFRS 13 – Fair value measurement. This is a complex standard, requiring valuations of assets (and liabilities) to be based on market prices. The board was not convinced that this was more relevant than the current ‘existing use value’ for most local authority assets. This issue is still under debate and adoption of IFRS 13 has been deferred until 2014/15.
Accounting for Private Finance Initiative schemes has also been reviewed following the publication of International Public Sector Accounting Standard 32 – Service concession arrangements: Grantor. Amendments have been made in the 2013/14 code, in particular clarification that PFI assets might need to be recognised during construction.
However, the board has not implemented its proposals to measure PFI liabilities as financial instruments rather than as finance lease payables. This is because responses to the consultation showed that further work was required in this area.
The main legislative changes for 2013/14 relate to the new regime for business rates retention in England and policy initiatives on business rate retention in Scotland.
One substantial element of the consultation on the 2013/14 code is missing from the published version – prescriptive accounting requirements for schools. CIPFA/Lasaac had put forward the view that only community schools were within the local authority boundary. Consultation respondents had differing views on these conclusions. Equally significantly, practical application issues were raised that will need time to resolve.
It also became clear that the proposals would cause difficulties for Whole of Government Accounts, as Whitehall departments do not use IFRS as the basis of consolidation, unlike the rest of the public sector. CIPFA will work through these complex issues with the Treasury through a joint group that will include key stakeholder representation.
This all highlights the importance of the consultation process. Many issues can be identified only by practitioners, and such feedback is essential to maintaining the sector’s excellent IFRS performance.
Sarah Sheen is secretary to the CIPFA/Lasaac Local Authority Accounting Code Board. The 2012/13 Code Update is available on the CIPFA website at www.cipfa.org/codeupdate
