ITEM AU8
AUDIT COMMITTEE – 22 APRIL 2009
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Report by the Assistant Chief Executive & Chief Finance Officer
Introduction
1. From 2010/11, local authorities’ accounts are required to be prepared using International Financial Reporting Standards (IFRS). This is part of a wider public sector move to comply with international standards. Experience from the private sector suggests that IFRS is not just a financial reporting issue. It may have an impact on budgets as well as other areas such as systems and processes and it affects all parts of the organisation, not just finance.
2. The purpose of this report is to advise the Committee of the impact of these changes on the Council’s accounts and to give details of the project that is underway to ensure compliance with the requirements within the timescale.
Significant Differences between IFRS and the current Code of Practice on Local Authority Accounting (the Code)
3. Property: IFRS requires a different basis of valuation for property. The County Council has £1.3bn operational land and buildings on its balance sheet which will need to be reviewed. In addition there is a requirement to account separately for components of properties that have different useful lives e.g. a lift within a building.
4. Investment & Surplus Properties: Definitions of investment and surplus properties have changed under IFRS. The County Council has £3.7m of investment properties and £11m of surplus properties on its balance sheet which will need to be reviewed.
5. Leases: IFRS gives a different definition of operating and finance leases. It also requires that leases of property are separated into land and buildings. The County Council currently has land and buildings leases with a total annual charge of £2m and some 500 vehicle and equipment leases which will need to be reviewed. There is also a requirement to ensure that there are no ‘embedded’ leases contained within contracts and therefore all contracts will need to be reviewed.
6. Service Concession Arrangements: These are contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of assets for public sector services e.g. under Private Finance Initiative (PFI) contracts. For the County Council there are implications for the Homes for Older People contract (£24m was removed from our balance sheet in 2001). There are also potential implications for the up-coming waste treatment contract and Building Schools for the Future. CIPFA has consulted on the early adoption (in 2009/10) of the IFRS treatment in local government and the outcome of this consultation is awaited.
7. Intangible Assets: IFRS recognises a wider range of intangible assets and costs of internally generated intangible assets such as computer software should be capitalised if particular criteria are met.
8. Employee Benefits: IFRS places a requirement for the Council to accrue for any untaken annual leave, flexi leave or time off in lieu at the end of the financial year. It is likely that new systems will need to be introduced to collect this data. In addition, accruing for holiday pay may impact on the budget in the year of transition to IFRS. CIPFA has agreed to approach the Department for Communities and Local Government to consider the need for regulations to mitigate this impact.
9. Segment Reporting: Under IFRS, reporting segments must be aligned to the Council’s internal reporting structure rather than the standardised service format specified under the current Code. This may make comparisons with other local authorities more difficult.
10. Interests in Joint Ventures: IFRS has a wider definition of joint ventures than the Code and includes joint arrangements that are not entities (JANEs). Examples of JANEs in which the County Council participates are pooled budgets with the health sector and the Oxfordshire Waste Partnership. There is an increased likelihood of having to produce group accounts.
11. Presentation and Disclosure Requirements: Under IFRS there is a need for more disclosures in almost all areas. Experience from the private sector indicated that financial statements increased by 60% in size after the introduction of IFRS. There may be additional data that needs to be captured to make these disclosures or implications for existing systems e.g. new reports required.
Plans towards Achieving Compliance
12. A desk top review was undertaken during the autumn 2008 to identify the broad implications of IFRS implementation for the Council. Key differences in the IFRS based accounts were identified and a series of meetings were held with key stakeholders across the Council.
13. The review identified the need for a formal project to be established to ensure full compliance with the requirements within the timescale. A project brief for the IFRS implementation was completed in December 2008, setting out project deliverables and timescales. Sue Scane is the project sponsor. Funding for the project was agreed as part of the 2009/10 budget approved by Council on 10 February 2009.
14. A project manager was appointed in February 2009. Detailed project planning and development of the Project Initiation Document (PID) is underway using the Council’s Project Management guidelines. Project deliverables already being addressed relate to the capture of data for calculating annual leave and flexi time/time off in lieu accruals and the commissioning of our external valuers to undertake a valuation of the whole property portfolio as at the date of transition (1 April 2009).
15. Work during the next few months will concentrate on identifying and collating other information required, particularly around the areas of leases and service concession arrangements. The impact of data requirements on systems and processes across services will be reviewed. Skeleton IFRS statement of accounts will be developed during the late summer/early autumn.
16. Although IFRS is not being implemented in full until 2010/11, the need to include comparative information for 2009/10 in the first IFRS accounts means that the balance sheet as at 1 April 2009 will need to be prepared in the new format. This draft balance sheet will be produced during the autumn 2009 and will need to be reviewed by the External Auditor by April 2010.
17. Briefings and/or training to key stakeholder groups will be undertaken throughout the project. Regular updates will be provided to finance staff through established group meetings.
18. Discussions have already been held with the external auditor over approaches being taken. These discussions will be ongoing throughout to ensure that any issues are raised at the earliest possible opportunity. The Council’s approach to IFRS conversion will also be reviewed by Internal Audit.
Summary
19. The conversion to IFRS based statement of accounts involves a significant amount of work for the Council. However work is underway to ensure we meet the requirements and at this stage staff are confident that the Council will meet the requirements of IFRS conversion within the timescale. A further update will be provided to the Committee in the late autumn.
RECOMMENDATION
20. The Committee is RECOMMENDED to:
(a) receive the report;
(b) note the requirement for local authorities to prepare accounts using International Financial Reporting Standards from 2010/11; and
(c) note the progress to date and project in place to ensure compliance with the requirements.
SUE SCANE Assistant Chief Executive & Chief Finance Officer
Background Papers; Nil
Contact Officers: Hilary Cameron, IFRS Project Manager (01865) 797231 Stephanie Skivington, Strategic Finance Manager (Financial Accounting & Reporting) (01865) 797443
March 2009
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