Local authorities should now be well advanced in their preparations for adopting the International Financial Reporting Standards (IFRS) next April.
The IFRS - a unified accounting system that will enable comparison of public and private sector accounts worldwide - will have major implications for local government.
It has been widely reported that assets and liabilities of some private finance initiative contracts that have been off-balance sheet could move on-balance sheet under the system.
Other effects have been less widely discussed. Some leases, for example, may now need to be reported as financial rather than operating leases. Investment properties will have to be reported at ‘fair value’ - market value instead of at current replacement cost or net realisable value. Holiday pay and other employee benefits will be reported as they accrue.
There will also be changes as a result of component accounting for fixed assets. For example, elements of a building may depreciate at different rates - roofing and internal fabric may depreciate more quickly than the bricks and mortar.
The Chartered Institute of Public Finance & Accountancy has produced an ‘indicative timetable’, suggesting the progress that local authorities should be making with IFRS. High-level impact assessments should have been completed last spring, along with the identification of necessary changes to accounting policies and the training of key staff.
Over the spring and summer, councils should have identified and implemented changes to systems and procedures.
Those that are less organised and have more of a tangled web will find it takes longer
Julian Rickett, PricewaterhouseCoopers
By now, authorities should also have identified the information on matters such as PFI contracts, leases and holiday pay to enable the April 2009 balance sheets to be restated. This will lead into the production of this year’s accounts under both existing general accounting practice and, as a trial run, IFRS.
The use of indicative timetabling is different from the system of ‘trigger points’ used when central government and health bodies moved to IFRS a year earlier.
Julian Rickett, a partner in the government and public sector practice at PricewaterhouseCoopers (PwC), says: “There were sticks for health and central government, but not for local government.
“The use of similar formal trigger points for local authorities would have provided more of an indicative snapshot of progress.”
What concerns Mr Rickett is that while many councils are making excellent progress on IFRS, other, mostly smaller, authorities are moving more slowly. “It’s a mixed picture. Some authorities have seen the lessons learnt by the health sector and central government that went a year before. Those that did, cracked on with it to see what it meant for them,” he says.
“But there are a number of authorities who may be of the view that: ‘If I don’t think about this it will go away’, and there are some that may not have the capacity to deal with it - typically district councils. Some think: ‘We don’t have PFI, we don’t have leases and our assets are fairly small’, so they think there is not that much work involved,” he adds.
The message from Mr Rickett is that these councils should think again - and quickly. In fact, although local government spend is much smaller than that of central government, the complexities involved in the move to IFRS can be much greater. For one thing, councils will typically be involved in a wider array of leases - both as landlord and tenant. Just finding all the leases that a council is party to can be problematic.
The Audit Commission is currently conducting a comprehensive survey on how effectively authorities are moving towards adopting IFRS. But it is hesitant about providing any conclusive answers as yet.
The commission told LGC that the survey was due to be completed in next spring.
“As work on this project has only just begun, we would rather not pre-empt its findings ahead of publication,” it said.
Assessing the situation
Gillian Fawcett, head of public sector at the Association of Chartered Certified Accountants (ACCA), believes it may still be too early to assess the situation.
“The guidance, information and training provided to local authorities is quite comprehensive with project plans/checklists on how to move forward.
“PwC and CIPFA have both produced project planning and implementation guidance. My understanding is that the IFRS code of practice is now being finalised and local authorities should be in the process of planning their route,” she says.
“CIPFA set out some milestones in its ‘outline plan’ for local authorities. This includes, for example, a milestone for restating balance sheets by December 2009. I would suggest that it is at this point we will know whether local authorities are on track.
“Guidance will still be pouring out over the next few months on issues such as leases and holiday pay. Given that health and central government will be ahead, it will be important that lessons are learnt from their experience,” she adds.
But the ability of local authorities to move efficiently to IFRS is also a test of their corporate strength. Some have devolved responsibility to departments to such an extent that the centre has little understanding of what departments are doing.
According to Mr Rickett, the best-organised bodies have “a spider project-managing at the middle of the web”.
“Those that are less organised and have more of a tangled web will find it takes longer, for example, to locate where all the assets and leases are.”
Paul Gosling, ‘financial agony uncle’ for the Independent