Council accounting: a shift from rules to principles

1 Sep 16

Look out for the consultation on changes to the code of practice on local authority accounting, including new standards and requirements

The high number of responses to its two consultations on the Code of Practice on Local Authority Accounting in the United Kingdom last year delighted CIPFA/LASAAC – a partnership between CIPFA and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC). We want to maintain this level of communication.

As a part of this, CIPFA has issued regular briefings on one of last year’s main changes – measuring the highways network asset at depreciated replacement cost. It has also updated How to Tell the Story – now called Understanding Local Authority Financial Statements – to help senior finance staff present financial statements to members and others. It explains how formats introduced in the 2016-17 code and the new expenditure funding analysis can be used to convey information.

The changes to the code in 2017-18 will be less technical than in 2016-17. The main one is the introduction of principles-based guidance on the narrative report for local authorities in England, Northern Ireland and Wales. These principles will be based on the elements of the International Integrated Reporting Council (IIRC) framework. Under these principles, a local authority should ensure that its narrative report continues to tell the individual story of its financial performance, financial position and cash flows. CIPFA is keen to understand what type of guidance would best assist councils to do this.

The code has been improved to encourage authorities to avoid “boilerplate” disclosures for accounting policies. This year’s consultation also focuses on going concern reporting, reporting transaction costs for pension fund investments and some technical changes to IAS 7 Statement of Cash Flows and IAS 12 Income Taxes.

The 2018-19 financial year will see two extensive standards introduced: IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. It is likely that both of them will require careful preparation, with managers having to make new judgments and the potential for new information requirements, with systems changes required to record and manage that information. CIPFA/LASAAC will be consulting on these two standards and proposes to include them as appendices in the 2017-18 code. This will give councils more time to prepare for the 2018-19 year; early adoption is neither required nor permitted.

The financial instruments standard will introduce new classification and measurement requirements so that the measurement categories for financial assets reflect the nature of their cash flows and the way they are managed as a group. Classification will require judgment from those preparing accounts because of the move from a rules-based to a principles-based approach. IFRS 9 also includes a forward-looking expected loss impairment model, with more information about an authority’s expected credit losses. The new classification and impairment requirements could have a budgetary impact in terms of timing and amount for a local authority’s holdings of financial instruments.

IFRS 15 requires local authorities to recognise revenue from the transfer of promised goods or services in an amount that reflects what it expects to receive. Hopefully, for most transactions, the revised recognition and measurement requirements will not result in substantial change when income is credited. IFRS 15 comes with increased disclosure requirements. In its implementation requirements for IFRS 15 disclosures, CIPFA/LASAAC wants to reflect the fact that local authority income transactions are not normally complex nor involve substantial recognition or measurement issues.

While we hope that 2017-18 will be quiet in terms of financial reporting developments, we ask authorities to look closely at this year’s consultations to ensure that the approach to adopting these two standards represents their circumstances and that there are no practical application issues that could adversely affect them.

  • Lynn Pamment & Sarah Sheen

    Lynn Pamment is a partner at PwC and chair of the CIPFA/LASAAC Local Authority Accounting Code Board. Sarah Sheen is technical manager for local government financial reporting at CIPFA

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