Bank bailouts intensify IFRS headache

The government’s multi-billion pound package of bank guarantees is set to cause the Treasury an IFRS nightmare, while it also copes with other central departments struggling to get to grips with the standards.

Ian Carruthers, CIPFA’s technical chief and the former head of government reporting at the Treasury, said the aid given to banks and businesses would be difficult to account for under new standards. ‘The government’s guarantees to the banks will be complex under IFRS,’ said Carruthers.

Under IFRS some of the guarantees come under the umbrella of IAS39, the standard which recognises and measures financial instruments. The fair value aspect of IAS39 has caused banks, analysts and investors major headaches because complex models have to be used to calculate the current worth of loans.

Accountancy Age understands that the bailouts currently treated as contingent liabilities, will be accounted for as financial guarantees under IFRS. This will create difficult valuations of future cashflows from the fees.

Carruthers warned that other departments had struggled to bring existing financial instruments and PFI projects onto the balance sheet.

IFRS will apply to central government departments for 2009/10, and they are working on producing ‘dry run’, or comparative, accounts. They must restate their resource accounts on an IFRS basis by 10 September 2009 or risk having their numbers qualified and facing the wrath of the National Audit Office and Public Accounts Committee.

‘The difficulty some departments are having with their existing guarantees brings these issues into sharp relief,’ Carruthers added.

Ken Wild, Del o itte’s IFRS expert, said the government’s guarantees represented a ‘very thorny topic’.

‘There are a number of issues. Where do the banks sit in the government accounts? Under IFRS, there’s an interplay about what guarantees fall into IAS39 and what falls under insurance standards. It also raises the question: what does this mean in terms of the government’s exposure to the underlying assets of the banks?’ he said.

IFRS adoption has already been postponed before for central government and the scale of the task has been highlighted by the NAO, which recently reported that 24 out of 47 departments had their IFRS-compliant balance sheets qualified.

Last year, the Treasury imposed four ‘trigger point’ deadlines in the run-up to adoption, but snags have seen departments fall behind. The NAO said some key departments ‘appeared to underestimate the complexities and challenges of applying IFRS’.

The bailouts will be valued ‘in accordance with the relevant standard and included within [IFRS] statements’, said a Treasury spokesman.

IFRS sticking points

The National Audit Office has warned central government departments are facing major headaches moving to IFRS.

Key sticking points are:

-Valuing and accounting for derivative financial instruments at fair value.

-Recognising and categorising other financial instruments in accordance with the IFRS based Financial Instrument Standards.

-Reconsidering the accounting treatment for Private Finance Initiative and other Public Private Partnership arrangements, to bring them on to the balance sheet.

-Reconsidering the accounting treatment for leases to identify which party bears the bulk of the risks and rewards incidental to ownership of the leased assets.

These issues have caused the departments major headaches, the NAO said. The MoD and Department of Health have found preparing for the transition so difficult that they have asked to be excused from the trigger point deadlines and are following their own schedule.