Auditor general disagrees with MoD accounting

THE MINISTRY OF DEFENCE has had its accounts qualified for a fourth successive year after the auditor general of the National Audit Office said it had failed to properly comply with IFRS.

Amyas Morse, the comptroller and auditor general, has qualified his audit opinion on the MoD’s 2012/13 accounts because he disagreed with its accounting decisions on leases and impairments. 

“I have qualified my opinion for a fourth year because the department has not complied with the required accounting treatment for leases in International Financial Reporting Standards and is therefore likely to have omitted a material value of lease assets and liabilities from its Statement of Financial Position,” he said.

Under IFRS the department must determine whether leases on buildings and equipment should be counted as agreements for operational purposes or whether the deal includes any financial risk.

If it is recorded as a finance lease then the value of the assets is recorded in the financial position rather than as a contract spend which is placed in in revenue expenditure.

However, the MoD failed to account for all its leases in this manner according to Morse, with 27 contracts remaining to be assessed to determine how they should be recorded. Although, Morse said the MOD had made significant progress on this long standing issue.

“I cannot quantify the impact of this on the accounts with certainty because, as a result of its accounting policies, the Department has not maintained the records, or obtained the information required to do so,” he added.

Morse also disagreed with was the accounting treatment of impairment charges to the MoD’s German estate, or the downward revision of the valuation of these assets. The army is moving back to the UK from Germany with training facilities there being handed back on a phased basis.

The impairment charge is due to the assets being used for a shorter period of time than had previously been estimated. Morse believes the full value of the impairment should have been charged under net operating costs. However, the MoD charged £597m to net operating costs and £907m to the revaluation reserve.

Morse believes that had the MoD accounted for the full value of the impairment, as he deemed appropriate, the department would have exceeded resources voted to it by parliament for 2012/13 by £395m.

“I am of the opinion that the full value of the impairment should be charged to net operating costs, with a transfer of £907m from the revaluation to the general reserve,” he said.

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