Public sector IFRS: worth the effort?

by Peter Bateman

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28 Feb 2012

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THE AUDIT COMMISSION has given a qualified pat on the back to local authorities in their report on the audit of the 2010/2011 financial statements which was published on the 15 December.

This was the first year of IFRS-based accounts in the local government sector and significant problems had been predicted. The worst fears were, however, not realised.

By 30 October, 444 opinions had been issued with all but one being standard and the one qualified opinion being unrelated to IFRS. The commission did express concern at the increase in the number of councils needing to amend the accounts for material errors (up from less than half in 2009/2010 to nearly two thirds) as well as the number of councils not adjusting non-material, but still important, errors particularly with regard to the problems this may pose in future years as the errors accumulate.

There has also been an increase in the number of councils unable to publish audited accounts by the statutory deadline of 30th September.

Problem areas were, as expected, Property, Plant and Equipment, the reclassification of leases and the revised treatment of government grants.
Although the conversion process generally went better than expected there was criticism from some practitioners of both CIPFA and the Royal Institution of Chartered Surveyors (RICS) for not producing guidance on major issues, particularly the key property issues, earlier.

Several practitioners were also critical of auditors. One said: "We were encouraged to engage with our auditors and discuss proposed solutions to technical accounting issues as well as updating them on progress. We found them unprepared for this and the engagement we had hoped for never took place."

A number of authorities experienced problems during the audit, particularly with junior audit staff who seemed unfamiliar with a number of the technical issues.

Overall, however, things went well at most authorities. The experience of Liverpool City Council was typical of many. Accountant Phil Hamill said: "Everything went much better than expected and we were able to complete our accounts on time and receive an unqualified opinion.

"We achieved this within the existing budget for Financial Management as we made no use of consultants. We realised significant benefits in terms of the technical skills and knowledge of our central accounting team and particularly saw major improvements in the working relationship between finance and property teams. Senior managers now have a better understanding of the closedown process and of its importance."

The benefits, however, came from the process rather than from IFRS-compliant accounts as such. Practitioners remain sceptical about the value of the accounts they produce. They are considered to be technically over-complex and not addressing the real needs of users, which are fundamentally different from the needs of users of the financial statements of commercial entities.

The general experience is that stakeholders show little interest in the accounts and few authorities expect this to change any time soon. One practitioner said: "They didn't mean much before and they mean even less now. The fundamental issue has been lost sight of, which is to provide stakeholders and local taxpayers with a clear picture of what has been spent on the provision of what services and how this compares to the budget on which their tax demand was based. Whatever happened to ‘Back to Basics' (a CIPFA document looking at promoting transparency in financial reporting)?"

Local authorities are well placed to develop IFRS accounting after a generally successful first year. CIPFA has taken note of the concerns about both the guidance given to local authorities and the complexity of the accounts. The institute responded: "The transition to IFRS was a significant challenge for the local government sector. Bodies should therefore be congratulated on managing the change so well. Though, the successful transition should not be a surprise given local government's track record in implementing such changes.

"CIPFA recognises that there are lessons to be learnt from the introduction of IFRS and is undertaking a review that will promote examples of best practice. CIPFA will consider how to streamline the presentation of financial information and has recently published guidance on summary accounts."

Peter Bateman is a freelance journalist

 

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