Public sector focus: IFRS delay

You may have missed the announcement in the Budget that the government has
decided to postpone the public sector’s adoption of international financial
reporting standards, but it is one that has implications for around 2,000 public
sector bodies.

The reasons for the delay are a lack of general IFRS ‘preparedness’ and
specific difficulties around PPP/PFI accounting. Several central government
departments made it clear that they could not meet the 2008/09 timetable.

The extra year gives public bodies more time to prepare ­ but they can’t now
rest on their laurels. The introduction of IFRS will have a significant impact
on the financial statements of public sector entities just as it did in the
private sector.

IFRS requires thorough examination of an organisation’s business to identify
the ‘known unknowns’, such as a financial instrument embedded in a procurement
contract, and it is a lengthy and exacting process. Even with the postponement,
it is vital to maintain the momentum around IFRS transition ­ a 12 month delay
in the go-live date does not mean public bodies can park IFRS until next year.

The private sector experience is that the ‘devil is in the detail’. It is
only once IFRS transition is underway and the impact of each standard is fully
considered that the scale of the challenge becomes clear.

It is a challenge that includes capturing relevant disclosure data from
outside finance, or documenting based on testing, why the numbers in the primary
resource account statements have not changed.

Time-consuming task

Even if a public sector body has no change it will take time to go through
the requirements of each standard and prove that that is the case. Various
sources of information may be required to support such a conclusion. It is easy
to underestimate the time it will take to complete such a task.

Considerable progress has already been made by a number of public bodies,
often with the support of external advisors. Now all public bodies need to be
able to make the transition to IFRS on the same time-line.

The private sector had five years to make the transition, and while nobody
missed the deadline this was not always assured.

There are two major differences that highlight the scale of the challenge
facing the public sector: IFRS standards were being developed and implemented
simultaneously by the private sector; Secondly, the private sector only had to
apply IFRS at a group or parent company level.

The Treasury is requiring all public sector organisations, from the smallest
agency to the biggest central government departments, to adopt the standards.

Research shows significant changes in the financial outturn for a number of
corporate sectors when reporting under IFRS compared to UK GAAP. This is partly
due to more assets being recorded on the balance sheet under IFRS and the fair
valuing of these assets.

While the public sector has been focused on the fact that most assets in
transactions are likely to come on balance sheet under IFRS, it is also likely
that more leased assets, intangible assets, investment properties and financial
instruments will also be recorded on the balance sheet.

Given the public sector’s complex budgetary framework the implications need
to be carefully considered. The link between the impact of IFRS accounting
changes, the budgetary framework in the public sector, and IFRS’ requirement to
capture relevant disclosure from outside finance will mean government finance
professionals must get out and about and be more visible across departments.

Hopefully this will be both in relation to collecting retrospective
information for accounts, but also in the financial management of future
programmes and projects.

Bigger picture

IFRS is one of the areas of focus for Jon Thompson, the newly-appointed head
of the government finance profession, as he takes forward the
professionalisation agenda.

Much of the debate on implementation in the public sector has been around
PPP/PFI, however, the postponement is also in response to the level of IFRS
preparedness and there are other assets likely to be brought on balance sheet
under IFRS.

The incidental result of delaying implementation is that the government will
not need to bring up to, what some commentators say, could be £30bn of
underlying assets in PFI/PPP arrangements onto its balance sheet for another

Although it was never certain this would become government debt it will at
some point have significant implications for the government’s debt position and
its ability to comply with its own fiscal rules. The postponement of IFRS
implementation in the UK public sector makes sense in the context of the scale
of the challenge.

The momentum must be maintained, and the Treasury proposals that public
bodies will prepare shadow IFRS accounting and implement the UK GAAP standards
relating to financial instruments in 2008/09 are vital.

On the agenda

The government’s motivation for the move to international financial reporting
standards was clearly stated when the policy was announced in the 2007 Budget:
‘…The government needs to use high value performance data in combination with
appropriate financial data…in order to bring benefits in consistency and
comparability between financial reports in the global economy and to follow
private sector best practice.’

To put the issue into a wider context, the move to IFRS can be seen as an
important part of the government’s finance professionalisation agenda. It is an
agenda that includes professionally qualified finance directors sitting on the
board of Whitehall departments; faster closing of accounts; enhanced financial
management of future programmes and projects.

Reporting under IFRS will require government finance professionals to be
familiar with the accounting framework used by the largest corporates.

HM Treasury, in its accounting guidance has over recent years been moving
away from reproducing the underlying standards in a public sector context and
now most IFRS material directs government finance professionals to the actual
standards, with adaptation limited only to where the UK public sector business
is genuinely different.

Mark Williams is part of Deloitte’s government
accounting advisory team

Related reading

Fiona Westwood of Smith and Williamson.