Implementing International Financial Reporting Standards

Report: 10
Date: 13 September 2010
By: Chief Executive

Summary

This report provides the Committee with a quarterly progress update on the International Financial Reporting Standards (IFRS) project. The report also updates members on the impact of the changes in accounting policies applicable for the year ending 31 March 2011.

A. Recommendation

That Members of the Committee note the contents of this report

B. Supporting information

Background

1. With effect from 1 April 2010, Local Authorities are required to prepare their accounts following International Financial Reporting Standards (IFRS) as interpreted by the CIPFA Code of Practice on Local Authority Accounting in the United Kingdom 2010/11. The MPA is also required to refer to the International Public Sector Accounting Standards (IPSAS) where these provide further guidance.

2. As reported to the Committee in June, the IFRS implementation project has been established to coordinate the transition across relevant MPS business groups including Finance Services. The purpose of this report is to update the Committee on the status of the IFRS implementation and provide information on key differences between the existing UK-GAAP accounting policies and the proposed IFRS accounting policies.

Current status

3. Since the last progress report resources have primarily been directed at producing the 2009/10 UK GAAP compliant accounts. However now the 2009/10 process is nearing completion, attention has turned to finalising the IFRS implementation.

The MPS implementation team have so far:

• Undertaken a detailed assessment of the IFRS impact on the key areas of change. This includes mapping the current format of the annual accounts to the proposed IFRS accounts format, for the key statements, and an impact rating of the restatement;
• Gained an understanding of the PFI contracts and agree PFI methodology with Auditors;
• Developed a methodology for assessing leases to determine whether they are finance leases or not (which is now used by other authorities);
• Received property valuations to apply to PFI assets;
• Revalued 2008/09 and 2009/10 Balance Sheet to reflect PFI assets;
• Identified Finance leases (from 550 leases), embedded leases and embedded derivatives and their accounting impact;
• Developed a methodology to calculate the cost of unused holiday and rest days (benefits);
• Undertaken comprehensive sampling of employee unused benefits across the MPS to calculate the liability.

4. Final tasks still in progress:

• Receive property valuations to apply to other assets and leases;
• Produce an opening balance sheet for 1 April 2009 on an IFRS basis;
• Produce a set of pro forma accounts for 2010/11;
• Complete final stages of working out the technical aspects of the transition in order to enable 2009/10 to be restated under IFRS conditions, and provide a template for 2010/11 and onwards.

5. Key milestones between now and the end of March 2011 are as follows:

 Revised Accounting policies and interpretation of the Standards

6. A strategic review and analysis of the present CIPFA Code and IFRS (and IPSAS) has now been completed to identify the more ‘significant’ differences between the standards. Appendix 1 outlines new draft accounting policies that comply with these standards. Whilst these draft policies are not expected to change practices and procedures significantly, MPA accounting policies will need to be finalised by March 2010, in order to set the standards by which the MPA’ accounts are produced for 2010/11.

7. Two particular issues which all Authorities are grappling with at present include disclosures notes in the accounts and component accounting.

a) Disclosure notes

8. The MPA has identified the accounting requirements of IFRS in terms of what information needs to be disclosed in the accounts. There are however still some detailed issues in the regulations that need greater clarification and as such need to be discussed in a wider audience to determine the correct way of applying them. It is generally accepted by the Audit Commission and practitioner groups that it may take several years before a high degree of consistency is reached across the public sector in respect of the technical interpretation of some of the regulatory requirements. This is because of the speed at which IFRS has been introduced, (compared to UK GAAP which evolved over time) and the sheer weight of IFRS and IPSAS standards that need to be interpreted. In the meantime the MPA is actively seeking to accelerate the resolution of issues through the sharing of views with other Authorities.

b) Component Accounting

9. Whilst CIPFA has recently issued guidance on component accounting, the standard (which requires organisations to value and depreciate significant components separately from their main assets in the asset register) is causing some difficulties in interpretation and application. If applied using the strict definition given, the Standard could create significant additional work and cost (of valuation). In the present economic climate this appears to be an unreasonable approach. The Authority is currently liaising with external auditors and other local authorities to agree an appropriate way of implementing this particularly with regard to its practical application for properties. Property Services and Finance staff are also attempting to develop a model that would satisfy IFRS whilst keeping costs to a minimum.

New format of the Accounts

10. Proposed formats for the IFRS financial statements are being drafted. Under the CIPFA Code, a complete set of financial statements comprises:

• Movement in Reserves Statement for the period;
• Comprehensive Income and Expenditure Statement for the period;
• Balance Sheet as at the end of the period;
• Cash Flow Statement for the period;
• Notes, comprising a summary of significant accounting policies and other explanatory information; and
• Balance Sheet as at the beginning of the earliest comparative period. This is required where an Authority applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

11. Under the Code, the MPS must present with equal prominence all of the financial statements and the order of the first four statements above is recommended but is not a requirement. The financial statements must be presented in the order that best enables users to understand them.

C. Other organisational and community implications

Equality and diversity impact

Equality and diversity issues will be properly considered throughout the transition period.

Consideration of MET Forward

Whilst this report has no ‘direct’ implication for the delivery of MET Forward it does however support the Met Forward Met Support Strand.

Financial implications

1. The cost of implementing the requirements of IFRS are marginal including the specialist team within the MPS working on IFRS and are expected to be contained within existing budgets.

2. Although there will additional work undertaken by the Audit Commission with regard the transition to IFRS, the Audit Commission have decided to subsidise these costs and accordingly our total audit fee for 2010/11 remains the same as 2009/10 at £516,000.

Legal implications

This report is generated as part of the governance process and no direct legal implications arise.

Environmental implications

There are no direct environmental implications arising from this report which is submitted as part of the Governance process.

Risk implications

Failure to properly implement IFRS could result in the Auditor issuing a qualification on the Authority's Statement of Accounts. Risks of non compliance with IFRS will be mitigated by activity in this report including external audit review of restated balances and pro-forma accounts.

D. Background papers

None

E. Contact details

Report author: Annabel Adams, MPA Deputy Treasurer and Joy Lincoln

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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