1

cipfa.org.uk

1

IFRS – Update for Local Government Practitioners

Roman Haluszczak – Manager – CIPFA Finance Networks

E-mail: Roman.Haluszczak@cipfa.org.uk

2

cipfa.org.uk

Why IFRS?

International Financial Reporting Standards (IFRS) aim to harmonise financial reporting in a world of cross-border trade and investment, and increased globalisation.

To date, over 100 countries, from Canada to China, have adopted the rules, or say that they intend to adopt them.

The International Accounting Standards Board (IASB) expects that to increase to 150 countries by 2011.

IFRSs have been adopted by both the Australian & New Zealand public sectors so a transition to these standards is perfectly possible though it will involve a great deal of preparation & implementation work.

Not all IFRSs will be relevant to the public sector & it will be necessary to determine which ones will require a greater focus.

3

cipfa.org.uk

Messages from HM Treasury Budget Report March 2007 – Paragraphs 6.59 to 6.60

The annual financial statements of government departments and other entities in the public sector are currently prepared using accounting policies based on UK Generally Accepted Accounting Practice.

In order to bring benefits in consistency and comparability between financial reports in the global economy and to follow private sector best practice, this Budget announces that from the first year of the CSR period these accounts will be prepared using International Financial Reporting Standards adapted as necessary for the public sector.

This Budget announced the Government’s intention that Whole of Government Accounts would be published for the first time for the 2008-09 financial year on an IFRS basis

WGA will now be published for the first time on an IFRS basis in 2009/10

4

cipfa.org.uk

01/04/0901/04/09 31/03/1031/03/10 31/03/1131/03/11

Need comparatives at this date

Need comparatives at this date

IFRS transition

date

IFRS transition

date

Full disclosure at this date

Full disclosure at this date

Implementation

Comparatives First IFRS accounts

TODAY

Prepare Code Preparation

Summary Implementation Timetable for Local Government

30 June 2011 –First IFRS accounts approved by members

5

cipfa.org.uk

Summary IFRS Implementation Timetable for the Public Sector

2008/09 2009/10 2010/11

NHS Comparatives IFRS IFRS

Local Government

Comparatives (PFI)

Comparatives(PFI)

IFRS

Central Government

Comparatives IFRS IFRS

Whole of Government Accounts

Comparatives IFRS IFRS

6

cipfa.org.uk

IFRS 1 – The Implementation Gateway for IFRS – Presentation and Disclosure

To comply with IAS 1, an entity’s first IFRS financial statements (closedown 2010/11) shall include;

Three statements of financial position (balance sheet), two statements of comprehensive income (I&E), two statements of cash flows, two statements of changes in equity (STRGL), related notes, including comparative information. MOST IFRS ACCOUNTING IS RETROSPECTIVE – YOU ACCOUNT

FOR THINGS AS IF THEY HAD ALWAYS BEEN UNDER IFRS RULES You will need to go back into the past especially with valuations

etc 

7

cipfa.org.uk

7

Selected - Transition arrangements (Chapter 10 of the Draft CIPFA IFRS Code)

The depreciated historical cost of an asset as at 1 April 2009 shall be deemed to be the depreciated historical cost of that asset as at 31 March 2009 under the 2009 SORP

IFRS 1 requires disclosures explaining how the transition from UK GAAP to IFRS affects the reported financial position, financial performance an cash flow – the Code instead requires an authority to disclose any material differences between amounts presented under the SORP 2009 and the IFRS based Code.

This includes the balance sheet so any material difference in the IFRS balance sheet as at 1 April 2009 from UK GAAP balance sheet at 1 April 2009 will need to be disclosed

If there are no material differences then you should include in the notes to the accounts a statement to that effect

8

cipfa.org.uk

The IFRS Local Government Planning Pyramid Apr

2010

BudgetsJan 2010

CLG Mitigation RegulationsSep 2009 – Dec 2009

IFRS Code: Consult Spring2009; Issue Autumn 2009

Prepare IFRS Accounting Code for 2010\11

9

cipfa.org.uk

CIPFA\LASAAC Board has considered what the IFRS Local Government code of practice for 2010/11 will look like, and all sections of the new code have already been drafted please see: http://www.cipfa.org.uk/pt/cipfalasaac/ifrs_structure.cfm

CIPFA/LASAAC formally consulted on the Code during early summer 2009. Consultation closed on the 11th of September 2009 – But in reality probably comments on the draft sections are still welcome, and can be sent to ifrscode@cipfa.org.

The PFI arrangements in the 2009 SORP apply now in 2009/10 – A year earlier than full IFRS.

Decisions concerning the development of the accounting code will be published on the new CIPFA/LASAAC website (www.cipfa.org.uk/pt/cipfalasaac)

CIPFA’s IFRS Work Programme (1)

10

cipfa.org.uk

Standards applicable to local authorities will be constantly reviewed by CIPFA in Code update reports.

These will refer to each IAS, IFRS, IFRIC interpretation, SIC interpretation and IPSAS that will be applicable on 1 April 2010

CIPFA produced an Update Report that includes a column headed "Current Local Authority Action Required". In some cases there will be no entry in this column, however local authorities will still need to plan how they will eventually implement those standards and ensure they can satisfy the information requirements.

Latest Code update report is 26th January 09 – Could be used as an impact assessment - relevant web address is : http://www.cipfa.org.uk/pt/cipfalasaac/ifrs_reports.cfm

The full draft code can be viewed at: http://www.cipfa.org.uk/pt/cipfalasaac/ifrs.cfm

CIPFA’s IFRS Work Programme (2)

11

cipfa.org.uk

Consultation process concluded on 11 September 2009 – I’m I’m sure you all replied !!!sure you all replied !!!

Report to CIPFA/ LASAAC on 29th September with any changes to the draft Code Likely to be clarification issues rather than significant changes

in principle Summary will be available via the website along with CIPFA/

LASAAC papers Final IFRS Code taken to FRAB on 8th October for approval Publication early Dec 09 SORP 2009 is the last SORP to be overseen by the ASB – we will

now come under the FRAB

CIPFA IFRS Code of Practice 2010/11

- Progress

12

cipfa.org.uk

CLG / Devolved Administrations Regulations being finalised by 31 Dec 2009

RICS RICS papers 9 & 10 available Component accounting guidance available Oct 09

Role of valuation professionals in understanding the fixed asset valuation agenda is crucial – Work with them

Guidance notes for IFRS Code of practice are being developed and will be approved by LAAP and published in Dec 09

Rough guide to IFRS capital reserves will be available shortly to FAN subscribers

IFRS – Additional Documentation

13

cipfa.org.uk

The Main differences between current UK GAAP and IFRS

A CIPFA commissioned study, considered the potential impact of IFRS on the CIPFA SORP on a standard by standard basis.

Following areas would have a significant impact for financial reporting in local authorities if the SORP moved to IFRS: Leases Segmental reporting PFI Disclosure requirements (Recognised in the first principles

review)• A major area of difference between the current FReM & the SORP

is the valuation basis for infrastructure assets, where the FReM requires a current valuation basis and the SORP an historical cost basis (both are consistent with UK GAAP).

• June 2008 CIPFA Paper to HM Treasury agreeing to move to current valuation basis for infrastructure assets – timing probably post 2010/11.

14

cipfa.org.uk

Leases – Chapter 4.2 of the Code

Likely that a large of proportion of operating leases will become finance leases. Because IAS 17 requirements are much stricter to allow operational definition. For example the 90% rule does not apply.

Implications of being on balance sheet. Account for property and land differently – therefore have to

separate. Need to analyse all leases to ensure correct classification and

perform correct accounting treatment retrospectively (depreciation etc).

MRP implications Look for embedded leases as well in some asset hire agreements Adopt a matrix approach to lease classification Effects on GF of lease re-classifications – Mitigation issues

15

cipfa.org.uk

Intangible Assets (IAS 38) Recognition of a wider range of intangibles – mainly internally

generated. Authorities continue to recognise all intangible assets that were

previously recognised on their balance sheet.

Impairments All impairments taken to the revaluation reserve in the first

instance for each respective asset then thereafter the income and expenditure account (or its replacement).

Intangibles (Chapter 4.5 of the Code) and Impairments (Chapter 4.7 of the Code)

16

cipfa.org.uk

The accounting treatment set out in this Appendix shall apply where:(a) The local authority controls or regulates what services the operator must provide with the property, to whom it must provide them, and at what price; and where(b) The local authority controls - through ownership, beneficial entitlement or otherwise - the significant residual interest in the property at the end of the term of the arrangement.

Where the property is used for its entire life, and there is little or no residual interest, the arrangement would fall within the scope of IFRIC 12.

This applies to 2009\10 – right now

SORP 2009 – Appendix E – PFI – Accounting IFRIC 12 Control Tests (Chapter 4.3 of the Code)

17

cipfa.org.uk

Review PFI scheme contracts / documentation. Apply IFRIC 12 tests – To determine what comes back to BS &

what does not. Identify opening asset values and corresponding liabilities and

interest rates. Take out the old transactions and put in new transactions. Separate between MRP, interest, service charges and principal

repayments. Account as if the PFI scheme was always on our Balance sheet,

depreciation etc. Council Tax impacts? – Finance charges coming back into I + E.

SORP 2009 – PFI Practical Implications

18

cipfa.org.uk

Chapter 4.1 of the Code – Property, Plant and Equipment (PPE) (1) Purpose

- Principles of initial recognition and subsequent accounting

Key considerations- Recognised at cost including costs of preparation for use.- Revaluations requirements continue (as at present)- Components to be identified and treated separately w.e.f

1.4.2010- Depreciation reflects the pattern/use of consumption

IAS 23 Borrowing Costs- Capitalisation of borrowing costs directly attributable to

the acquisition, construction or production of a qualifying asset is still being considered by CIPFA/LASAAC.

19

cipfa.org.uk

Chapter 4.1 of the Code – Property, Plant and Equipment (PPE) (2)

An asset is recognised as PPE when- Future economic benefits or service potential (>1 year)

are probable,- Cost can be measured reliably, - They are tangible i.e. physical in substance

Criteria applies to all costs when incurred, including - Initial acquisition or construction costs - Subsequent enhancement costs

20

cipfa.org.uk

Chapter 4.4 of the Code – Investment Property, (1)

– Purpose

• Principles of initial recognition and subsequent accounting considerations

– Key considerations• Applies to assets held for future income streams and /or capital

appreciation- Definition

• Investment property is land and/or buildings held solely for the purpose of earning rentals and/or capital appreciation.

• Assets which earn rentals AND provide services are not investment properties and should be dealt with a PPE

21

cipfa.org.uk

Chapter 4.4 of the Code – Investment Property, (2)

Suggested examples – Land held for long term capital appreciation rather than short term

sale– Land held for a currently undetermined future use– Buildings owned by authority that is subsequently leased out.– A building held under a finance lease that is subsequently sub

leased to another entity.– Note: All the building must be available for lease not just part of

it.

22

cipfa.org.uk

Chapter 4.4 of the Code – Investment Property, (3) Initial recognition

– Investment property shall be measured at cost.– Where no payment is made or asset exchanged the asset should be

measured at fair value or at the carrying value of the asset given up

– Leased assets lower of NPV of lease payment and fair value . Definition of FAIR VALUE (3) is ‘the amount that would be paid for

the asset in its highest and best use, i.e market value. The fair value of

investment property held under a lease is the lease interest

23

cipfa.org.uk

Chapter 4.4 of the Code – Investment Property, (4)

Subsequent recognition– Measured at fair value– Gain or loss recognised in Expenditure and Income Account– Further steps – for a gain -- DR GF and Cr CAA – (within movement

in Reserves Statement)

– Investment properties are not depreciated.

24

cipfa.org.uk

Chapter 4.9 of the Code – Non Current assets Held for Sale (1)

– Purpose Identifying assets that no longer contribute to the delivery of

services.– Key considerations

Need to be presented separately on the balance sheet Sale must be highly probable (usually within 1 year) to qualify

and can include the exchange of assets Assets can be grouped ‘Disposal Groups’ Assets to be scrapped or abandoned are not held for sale, as no

sale will take place. No depreciation to be applied once identified. Normal churn

25

cipfa.org.uk

Chapter 4.9 of the Code – Non Current assets Held for Sale (2)

Measurement– Immediately before reclassification the asset(s) shall be measured

at lower of carrying value or fair value 4(= market value) less costs to sell.

– Any loss or gain should be treated in the same way as any revalued asset

– Assets held for sale are not depreciated (differs from current SORP/FRS15)

Disposal– Any gain or loss on disposal is treated in the same manner as any

asset disposal.

26

cipfa.org.uk

Principal valuation methods

Fixed Assets valuation

Existing use value – social housing

Council Housing

Infrastructure, Community Assets,

Assets under constructionHistoric Cost

Property Assets(excl held for sale,

investment properties)

Plant and equipment assets

Fair Value 1, Value in Use,

Or DRC

Historic Cost (mostly)

27

cipfa.org.uk

Benefits Payable During Employment (1) Short-term Employee Benefits – Chapter 6.2 of the Code (IAS 19)Employee Benefits Wages, Salaries and Social Security Contributions. Recognise as

an accrual. Short-term compensated absences – includes annual leave and

flexitime that are accumulating. Recognised at balance sheet date.

Bonuses & Similar Payments – depends on specific conditions but need to recognise.

Non-monetary Benefits – ‘benefits in kind’. Amount recognised as liability shall be the cost to the employer of providing the benefit.

28

cipfa.org.uk

Benefits Payable During Employment (2) Practical Issues – Holiday Pay Obtaining the data is an issue for most authorities. Pattern of untaken holidays may vary between years depending

on timing of Easter. Many authorities do not have comprehensive holiday pay record.

Thus:- Need to establish estimation basis for different types of

employees. Consider whether future systems changes required.

Need to start working on this now because of transitionbalance sheet. Need to accrue for untaken holiday leave at 31st of March

2009 – GF effects of this? – YES Teachers are included!

29

cipfa.org.uk

Areas likely to be mitigated:-- Employee benefits.

- Changing classification of leases. - PFI. CLG and the devolved authorities are working on mitigation

this autumn – CIPFA input into this from the recent consultation Implementation costs:-

- Investigating leases, employee benefits, PFI etc - External advice. - Preparing opening Balance Sheet and 2010/1 accounts

(comparisons etc) – private sector experience. - Costs of valuations - components. - System changes. HR and Property - Implications across the organisation not just Finance.

IFRS Resource Implications

30

cipfa.org.uk

Finance (corporate and service accountants) Human Resources Procurement Estates - Valuation Legal Services External Auditors External advisors – how would they be used? What will you do yourselves? – Don’t contract it all out – retain

institutional memory?

IFRS Implementation – Required Input

31

cipfa.org.uk

Need to be briefed now making them aware of timescales and implications.

Need to share impact assessment with them and outline reports.

Highlight additional resource requirements. Audit implications – opening balance sheet and 2010/1

accounts. Communication with Audit Committee. The accounts will look different – There can be no surprises for

members.

Key Issues - Members

32

cipfa.org.uk

What are key focus areas? – traffic lights?

Urgent Priority Medium Priority Lower Priority

Format of AccountsPFI

LeasesFixed Assets

Investment PropertiesIntangible Assets

Employee BenefitsGroup Accounts

Government GrantsIncome Recognition

Financial InstrumentsAccounts Disclosures

Impairments

Stocks (inventory)Post Balance Sheet

EventsRelated Party DisclosuresProvisions

33

cipfa.org.uk

Carryout a high level analysis of PFI, leases, tangible assets, employee benefits and other areas. Construct an impact assessment. Identify changes to accounting polices. Identify key staff needed in the process. Train key staff on the IFRS. Identify information required for the opening balance sheet. Implications for budgets.

Please Read LAAP bulletin 80 – CIPFA outline IFRS -- See overleaf for the highlights

IFRS – What Should Authorities Be Doing Now?

34

cipfa.org.uk

IFRS implementation timetable – summary

31 Dec 2009

31 March2010

30 June 2011

31 Dec 2010

31 March2011

cipfa.org.uk IFRS implementation timetable

cipfa.org.uk

37

cipfa.org.uk

Do you have a project plan in place for IFRS transition? Do you have a project manager and wider team in place to

deliver the project plan? Is the team multi disciplinary and include members of HR, Legal,

Estates, IT ? Is there understanding of the importance of the project at senior

level - Chief Exec, Director of Finance, Corporate Directors? Have audit committee and Cabinet been informed of the IFRS

project plan ?

Restated balance sheet 01.04.09 – how prepared are you ? (1)

38

cipfa.org.uk

Have you got a comprehensive list of your lease agreements? Have you determined which of those leases are now finance or

operating? Both lessee and lessor arrangements Have you reviewed your service arrangements for embedded

leases ? Do you have information on leave entitlements at 31.03.09? Have you reviewed your assets against IFRS definitions to ensure

they are recorded in the right category?

Restated balance sheet 01.04.09 – how prepared are you ? (2)

39

cipfa.org.uk

On a scale of 1 -10 how prepared are you ????

Restated balance sheet 01.04.09 – how

prepared are you ?

40

cipfa.org.uk

Donated assets – Possible Accounting -- Dr Asset Fair Value – Cr Donated Assets Reserve?

Borrowing costs – to be capitalised or not if they can be related to a capital scheme ? – Not in the IFREM but valuers do include capitalised borrowing costs in their valuations – jury still out

Government Grants (IAS 20) – Government grants recognised in revenue account straight away unless there are attached conditions to the grant (Negation of GGD account( jury still out on that one

Service financial information will be included in the Comprehensive Income and Expenditure statement in BVACOP format – Defined segments will be reported in the notes to the accounts and reconciled to BVACOP

Material segment is circa 10% of your overall expenditure – related to your internal reporting needs –minimum hassle intended by CIPFA

SOME OUTSTANDING IFRS ISSUES

41

cipfa.org.uk

Change in Accounting Policy will in future require three balance sheets opening and closing for the comparative period and the current year position ( As in the IFRS transition scenario)

Authorities will be expected to disclose the expected accounting impact of future editions of the CIPFA code – ( hopefully these future editions will prescribe retrospective disclosure requirements relating to changes in accounting policies – May lead to additional disclosures

SORP 2009 only requires authorities to correct prior period errors when they were fundamental BUT IFRS requires the restatement of previous years accounts when errors are material – May lead to more frequent restatements of accounts

Final Considerations

42

cipfa.org.uk

42

Reminder of IFRS financial statements

Order Old Name IFRS name IFRS Code of Practice

1 SMGFB Statement of changes in Equity

Movement in reserves statement

2 Income and Expenditure

Account +STRGL

Statement of Comprehensive Income

Comprehensive Income and Expenditure Statement

3 Balance Sheet Statement of Financial position

Balance Sheet

4 Cash Flow Statement

Cash Flow Statement Cash Flow Statement

5 Notes to the accounts

Notes to the accounts Notes to the accounts

43

cipfa.org.uk

Any Questions?

Are you ready for this ?

Do you feel like this?

OR

This ?