Local government special: the fuse is lit

The transition to international financial reporting standards is probably not
at the top of the list of priorities of most finance teams in local authorities
around the UK ­ but it should be, argue experts.

To be fair, local government’s transition to IFRS could not have come along
at a worse time. With conflicting financial pressures and a downward-spiralling
economy it will not be an easy two years for council finance teams. Heads of
finance are faced with less now and the prospect of what little they have
dwindling still further in the future. But the deadline is set.

Among local authorities the picture is mixed in terms of preparedness, with
some finance teams having started work evaluating the IFRS changes, while others
have not yet undertaken an impact assessment ­ usually the first stage in
preparation for the transition.

Those that have set up dedicated teams to look at substantial changes that
IFRS will bring to the financial statements are in the minority and even they
are at the very early stages of data gathering and impact assessment.

Information gathering

Chris Smith, audit partner at
Grant Thornton,
says: ‘Those in the minority have set up teams to look at this but they are few.
They are in the information-gathering stage and looking at what the issues might
be, and if they can access that information.’

Local authorities have an extra year compared to central government and the
NHS to complete the switch to IFRS and although councils have the extra
breathing space and the benefit of others’ knowledge both in the public and
private sectors their experience of the process will be different.

It is unlikely that any of the local authorities will miss the deadline set
by government to begin filing their accounts under the new set of rules by 2011,
but the extent of the work involved is being underestimated ­ as is the impact,
despite the extra year handed to them.

The 2011 deadline may seem far off but local authorities will have to produce
2009/10 comparatives and contribute IFRS figures towards the whole of government
accounts – so finance directors are under pressure, says Julian Rickett, partner
leading public sector IFRS conversion,
PricewaterhouseCoopers.

The first, and arguably biggest, feat is gathering the information, which is
different and more varied than traditional UK rules have required. Disclosure
will increase significantly.

‘The challenge is around collecting information and documenting it. Much of
it may be unchanged but you have to do the work to prove that. Auditors have to
be closely involved in that process,’ says Mark Williams, part of the public
sector IFRS team at
Deloitte.

The areas where most of the work will come are not dissimilar to those that
central government is grappling with ­ PFI accounting, holiday accruals, leases
and valuations ­ so if heads of finance are sharp they will be closely following
progress at central government teams in an effort to avoid their mistakes.

Given the current economic pressures the sooner councils begin work the
better, say consultants, because the longer you leave it the more expensive it
will become, increasing the difficulty meeting the deadline within budget.

‘The later you leave it the more likely you are to come up with resources
issues and costs will increase,’ says Rickett.

An added pressure on local authorities is that for budgetary purposes they
could end up with a politically unacceptable result that neither taxpayers nor
ministers would welcome in the current economic climate.

Councils have a minimum reserve and that could be forced up by the difference
in treatment of PFIs alone, which would in turn affect council taxes.

A rise in council tax cannot be the outcome of these accounting changes so
finance chiefs have to understand what IFRS does to their statement of accounts,
capital controls positions and reserves ratios in order to neutralise the effect
and thus avoid an increase.

‘It would be problematic if council tax levels moved because of accounting
changes, but there are a range of ways you can deal with the changes caused by
bringing transactions on the balance sheet. You have to have a good handle on
how to deal with that,’ says Williams.

Education process

Another hurdle for council finance teams is in ensuring the involvement and
understanding of the changes of other sections within the council. Finance teams
will have to work closely with other departments in order to obtain the data
required. Disclosure will increase significantly, which is a concern in terms of
providing meaningful accounts to the public.

‘There will be an education process for finance teams to educate internal
committees and councillors so that they can approve the accounts having fully
understood them,’ says Rickett.

Historically, local government has always been much better at putting finance
at the centre of decisions, not least because of the strict rules governing
financial management long established within local authorities.

IFRS offers council finance teams the opportunity to once again prove their
expertise to central government.

Case study: ‘get started as soon as you can’

Early last year Stuart Taylor, head of financial services at Pembrokeshire
County Council, began to look at what would be involved in the transition to
IFRS having ‘realised quite quickly it will be a significant challenge and that
we aren’t blessed with in-house expertise’.

Taylor set up a dedicated team of two accountants – himself and a project
manager from CIPFA – in
order to complete an impact assessment. As a back-up he also drafts in three
other staff from various services, such as social care, as and when he requires
extra resource. Given that there is no in-house IFRS expertise he has also made
training in the new standards a priority to his strategy to ensure he meets the
2011 deadline.

‘My game plan is to have two accountants that will be up to speed on IFRS as
they will be responsible for closing the accounts,’ he says.

With the impact assessment now complete his team is starting to get to grips
with how it will affect the council and disseminating that reality to
non-finance staff.

‘Getting an awareness in other departments and explaining that it is not just
an issue for finance is a big challenge, but we’ve got that done now,’ Taylor
says.

‘Get started as soon as you can. Get a project plan and get the relevant
resources. You can’t skimp in that regard,’ he adds.