MoD accounts fail to comply with IFRS

16 Jul 13
The Ministry of Defence’s accounts have been qualified for the fourth successive year due to what auditor general Amyas Morse said was a failure to comply with International Financial Reporting Standards accounting rules.

By Richard Johnstone | 16 July 2013

The Ministry of Defence’s accounts have been qualified for the fourth successive year due to what auditor general Amyas Morse said was a failure to comply with International Financial Reporting Standards accounting rules.

In his statement qualifying the accounts for 2012/13, Morse said the department has not met regulations on how to account for lease arrangements.

Under IFRS, the department must determine whether leases on buildings or equipment should be counted as simply agreements for operational purposes or whether the deal includes any financial risk.

Such decisions are ‘particularly relevant’ to the MoD, as it often enters into strategic arrangements with certain contractors to procure items such as ships, submarines and aircraft.

These arrangements can mean the department has the exclusive, or near exclusive, use of industrial assets that only has limited use to other customers. As a result, the contract terms may give rise to the department controlling the significant majority of the outputs of the supplier’s assets – for example, where shipyards are used exclusively on defence contracts.

Such deals should be considered as a ‘finance lease’ under IFRS, which has a significant impact on the financial statements, Morse added. If a contract is classified as a finance lease, then the value of the assets can be placed in the department’s Statement of Financial Position, rather than simply recording the contract spend as capital or revenue expenditure as it is incurred.

However, the MoD had failed to account for all its leases in this manner, Morse said, with 27 contracts remaining to be assessed to determine the type of arrangement.

The department also failed to provide adequate evidence to support a £10.5bn valuation of military equipment and spares, he added.However, the report acknowledged that the department had made ‘significant progress’ to resolve this long-standing issue. 

Another reason for the qualification was that the department exceeded the limit set by Parliament on the number of Royal Navy special reservists. The department had 1,950 reservists at one point in 2012/13, above a limit of 1,940.

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