Implementing International Financial Reporting Standards

Report: 13
Date: 15 June 2009
By: Treasurer and Director of Resources on behalf of the Commissioner

Summary

In March 2007 the Government announced in the Budget Report the intention that all government and other public bodies should in future publish their annual financial statements in line with International Financial Reporting Standards. The new reporting standards are to be implemented by central government bodies for 2009/10 and other public bodies, including Police Authorities for 2010/11.

Early planning is seen as key in successfully making the transition to the new arrangements, and this report provides members on progress made since the last update in December 2008.

A. Recommendation

That

1. members note the report and the appended project plan; and
2. decide if and when they would like to receive training on IFRS

B. Supporting information

Background

1. The annual financial statements of government bodies and other public bodies, including police authorities are currently produced in line with UK Generally Accepted Accounting Practices (UKGAAP). However in March 2007 the Chancellor’s Budget Report announced the Government’s intention that the annual financial statements of government departments and other public bodies were in future to be published in line with international financial reporting standards (IFRS). The intention was to bring consistency and comparability with global economies and follow best practice in the private sector which had already converted to IFRS in 2005.

2. Central Government bodies will need to report on an IFRS basis from 2009/10, with other public bodies, including Police Authorities, reporting on an IFRS basis from 2010/11. Financial statements for the previous year will also need to be restated to produce prior year comparatives.

Progress to date

3. Early planning is key in ensuring the successful implementation of IFRS and a recent discussion at the Police Authority Treasurer’s Society has highlighted that we are well advanced in comparison to other Police Authorities. To ensure momentum is maintained during the busy closing of accounts period a consultant has been appointed for a 6 month period to ensure we continue to make good progress in implementing IFRS.

4. In March 2009 CIPFA issued an IFRS implementation project plan which included key milestones. The MPA and MPS have amended their project plan (attached at appendix 1) to reflect these. The revised dates are either in advance or in alignment with CIPFA dates.

5. The Audit Commission has recently issued a briefing paper that identifies 5 international accounting standards that will have a significant impact on Authorities’ accounts. Progress in implementing each of these standards is outlined below:-

PFI

6. Currently our two PFI schemes are accounted for “off balance sheet” however under IFRS if we are deemed to “control the assets” (assessed through carrying out a number of control tests) we will in future have to include the PFI schemes on our balance sheet. An initial review of the PFI schemes has indicated that the schemes will need to be included on the balance sheet and the financial implications of this is currently being assessed.

Leases

7. IFRS will create two issues with regard to leases (a) accounting treatment for existing leases (b) the number of arrangements that will in future needed to be accounted for as a finance lease.

8. Currently leases for land and buildings are usually treated as operating leases, and therefore not included on the balance sheet. However under IFRS leases for land and buildings will need to be split between the land element and building element. The land element will continue to be accounted for as an operating lease however the likelihood is that the building element of some leases may be assessed as a finance lease and will need to be included on the balance sheet. The Authority currently has about 400 leases, however of these only 42 are deemed to be major. A review of all the major leases is underway to assess their accounting treatment under IFRS, in addition smaller leases will be dip sampled to assess their accounting treatment.

9. A review will also need to be undertaken of all arrangements that may involve the use of an asset such as a licence, a partnership agreement or long term agreement to consider whether they are a finance contract.

Property Plant and Equipment

10. No major changes are envisaged with regard to accounting for property, plant and equipment as the IFRS is broadly similar to the existing accounting treatment, except for the need to identify and account for separate components of a large asset such as a building. Where a component part of an asset such asproperty, plant and equipment has a cost that is significant in relation to the total cost of the item e.g. a boiler, it would need to be recorded separately and depreciated separately to the building it was situated in. Therefore asset registers will need to be able to record such components of an asset separately. However the understanding is that that this will only apply to assets replaced or revalued from April 2010 and therefore has no immediate impact.

Employee benefits

11. Whilst most aspects of the IFRS for employee benefits will have little impact, the Authority will in future be expected to accrue for staff benefits including the financial value for any paid leave not taken before the end of the financial year. This, as reported previously, could have a significant impact on the accounts, although the impact should affect the income and expenditure account in the first year only. After that the impact is likely to be immaterial as leave patterns are unlikely to vary significantly from one year to another. Calculating the accrual for police officers is not an issue as CARMS can provide the necessary information. However the MPS does not presently have the necessary systems in place for calculating the accrual (the financial value of unpaid leave) for police staff. The current intention therefore is to adopt a sample approach to calculating this although this still needs to be formally agreed with the auditors

Effect on the income and expenditure account

12. All the above mentioned changes have a potential impact on the MPA’s Income and Expenditure account in the first year of implementation as well as the preceding year where transactions will also have to be restated. CIPFA are looking at ways of minimising the effect of this in the accounts of local authorities and at present are advising that the net effect of these changes be taken to a general reserve.

Disclosures

13. It is clear that IFRS will require a significant number of additional disclosure requirements over and above those currently included in the statement of accounts. However until the CIPFA code is finalised it is difficult to assess the impact. Unfortunately the long awaited CIPFA code has still not been published, although drafts of sections of the code are now being made available on the CIPFA website. The probable impact of the code will be assessed as and when sections of the code are issued.

14. The Audit Commission paper also highlights the importance of members of the Corporate Governance committee being sufficiently aware of the requirements. Members are being kept informed through quarterly updates but are also asked to consider whether training may also be of benefit, either now or nearer to the date of transition.

C. Race and equality impact

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

D. Financial implications

Whilst the introduction of IFRS will impose greater burden on those preparing the accounts than on those auditing them, there will nevertheless be extra work for external audit. The additional cost in 2010/11 is as yet unquantified.

E. Background papers

• None

F. Contact details

Report author: Annabel Adams and Joy Lincoln

For information contact:

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

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