Local government accounting is facing its annual review, with changes due to be implemented in 2013/14. To ensure the plans are practical, chief finance officers and other senior staff need to respond to the consultation on the proposed code
Having just finalised their 2011/12 accounts, local authority accountants could be forgiven for wanting to forget about the complexities of International Financial Reporting Standards for a few weeks. However, that would be a big mistake.
After the ‘Big Bang’ of IFRS implementation in 2010/11, there have been few changes to the requirements for 2011/12 and 2012/13. But like all good things, this period of relative stability has to come to an end.
That end has just arrived in the form of the consultation on the 2013/14 Code of Practice on Local Authority Accounting. This includes five changes that will have a major impact on local authorities’ accounts, as well as a host of minor changes.
Authorities hopefully feel they can trust CIPFA/LASAAC to get the accounting right. We are certainly confident the proposals are technically correct. But what CIPFA/LASAAC can’t necessarily judge without feedback is the practicability of the proposals.
Chief finance officers and other senior finance staff will be able to assess the impact on their authorities. To minimise the work needed to implement the changes, we are keen to get responses to the consultation and to discover where the difficulties might be. At this stage, there may be ways to resolve them, but once the code has been issued it’s likely to be too late.
So what are the five key areas where we are looking for a response?
1) Revaluing Assets
Implementing IFRS 13 could in some eyes require all assets to be valued at market value – requiring a revaluation of every asset. Whilst CIPFA/LASAAC doesn’t believe this is appropriate for local authorities, and is proposing to take most property assets outside the measurement scope of IFRS 13, there may be a sting in the tale with increased disclosures. Some authorities’ accounting policies and existing notes may be sufficient to negate the need for these disclosures. We’d like to know where this is the case and, if not, how easy would it be to produce the additional information.
2) Pensions (in the employers’ accounts)
The relevant accounting standard (IAS 19) has been updated. The move to a net pension liability (or asset) will produce different surpluses or deficits in the Comprehensive Income and Expenditure Statement – but won’t change the impact on the General Fund. However, additional disclosures could be more onerous, and actuaries may struggle to produce some of the information, at least initially. Can authorities meet the proposed disclosure requirements? If not, we need to know why.
Last year’s consultation included proposals regarding schools’ assets, but these weren’t implemented – partly because of a lack of evidence coming out of the consultation. The extra year has given us the time to come up with much more detailed proposals. In addition, to ensure that these proposals are robust CIPFA/LASAAC established a working party with experts from the private and public sector experienced in applying IFRS and representatives from key bodies who have an understanding of the events that take place. These proposals include:
- All schools off balance sheet (ie out of the local authority reporting boundary), except community and community special schools
- Changes to the way schools’ income and expenditure is reported
- Possible group accounting issues in respect of schools
Are there any practical issues with the proposals? What will the new requirements mean for individual authorities? Feedback will enable us to ensure the proposals can be implemented smoothly.
4) PFI Schemes
The publication of IPSAS 32 has made us reconsider the arrangements for PFI schemes. Some code changes shouldn’t have much impact in practice – for example, even though the code was silent on the scenario where the private sector was allowed to charge users, the guidance notes covered this. Currently, liabilities are measured as if they were finance leases. CIPFA/LASAAC believes measuring them as financial instruments would be a better reflection of the transactions.
Would this have a budgetary impact? We don’t think so – but it might depend on the Minimum Revenue Provision policy, so we need to confirm this. It is likely to require PFI liabilities to be recalculated. How much time would this take? Can this information only be obtained at a significant cost to the authority?
5) Highways Infrastructure Assets
Ever since the publication of the CIPFA Code of Practice on Transport Infrastructure Assets, there has been debate over whether to value roads using depreciated replacement cost (DRC). The publication of Whole of Government Accounts is increasing this debate.
Central Government already values roads on this basis, and this difference in accounting policies led to one of five audit opinion qualifications on WGA. The Treasury is coming under pressure from the Public Accounts Committee to resolve these qualifications.
CIPFA/LASAAC believes it would be detrimental to the local government sector for this to be one of the last outstanding qualifications. It is therefore proposing to move to DRC for the 2014/15 accounts – which will include the 2013/14 comparators. This advance notice is intended to allow authorities sufficient time to address the undoubted practical issues. Does 2014/15 give sufficient time?
If there are any concerns over the proposals, now is the time to respond. CIPFA/LASAAC’s consultation can be found here.
We are keen to ensure the changes in the 2013/14 Code are both technically correct and manageable. We hope we have got the balance right in the proposals. And, unless authorities tell us otherwise, we will proceed on that basis. To change the proposals, we need evidence. Unlike last year, we won’t have the luxury of delaying the proposals to allow more research.
The consultation is open until 1 October and we look forward to hearing the views of all those affected.
Sarah Sheen is technical manager for local government financial reporting at CIPFA