Bank bailouts intensify IFRS headache

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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

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
Accounts Committee

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

Ken Wild,
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

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

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.

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