Implementing International Financial Reporting Standards

Report: 11
Date: 14 September 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 June 2009.

A. Recommendation

That members note the report.

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. In line with previous updates, good progress continues to be made in preparing for the implementation of IFRS. Progress on the 4 standards assessed as having the most impact on the Authorities accounts is as follows:

PFI

4. As previously reported 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 are currently being assessed.

Leases

5. IFRS will require the MPA to assess existing leases to ascertain whether they should be added to the balance sheet. This applies not only to property related lease but also to other assets. It is expected to result in more leases being shown in the balance sheet as a result of them being categorised as finance leases. The MPA already has a number of Finance leases and this regulation will extend the number shown.

6. 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 over 500 leases, and as reported previously a review of all the major leases is underway to assess their value and accounting treatment under IFRS, to date 43 are deemed to have a material impact to the accounts. In addition smaller leases will be dip sampled to assess their materiality in the context of rental commitments.

7. A review is also being 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

8. As reported previously 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 as property, plant and equipment has a cost that is significant in relation to the total cost of the item e.g. air-conditioning systems within a category called ‘services’, 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 but linked to the main asset. However the understanding is that that this will only apply to assets replaced from April 2010 and therefore has no immediate impact.

Employee benefits

9. Whilst most aspects of the IFRS Employee Benefits will have limited 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 and the outcome will depend on the accounting treatment options, under discussion as part of the consultation process. 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. One option under consideration is to adopt a sample approach to calculating this although this still needs to be formally agreed with the auditors. Also an additional accrual will have to be made for any early retirement packages for all years of the early retirement period.

10. The review of these standards and other standards is due to be completed by end of September. The intention is to then produce a draft restated balance sheet as at 1/4/2009 in accordance with IFRS based CIPFA Code of Practice for review by the auditors. This will enable early identification of any issues.

Consultation

11. The long awaited CIPFA consultation on the code of practice for IFRS was produced at the end of June with responses due back by the 11 September. The MPA/MPS are currently reviewing the documentation and the next IFRS update will include a summary of our response.

Budget implications

12. These will be considered once it is clearer what impact the new standards are likely to have on the accounts. However as previously reported and reconfirmed by the CIPFA consultation document the intention is to keep any impact on the income and expenditure account to a minimum.

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, MPA and Joy Lincoln, MPS

For information contact:

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

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