Implementing international financial reporting standards

Report: 16
Date: 10 December 2009
By: MPA Treasurer and Director of Resources on behalf of the Commissioner

Summary

Early in 2007 the Government announced the intention that all government and other public bodies should in future publish their annual statutory accounts in line with International Financial Reporting Standards (IFRS). Thorough preparation is essential in successfully making the transition to the new arrangements, and this report provides members on progress made since the last update in September 2009.

A. Recommendation

That members note the report.

B. Supporting information

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, the private sector has been producing IFRS based accounts since 2005. In March 2007 the Government stated its intention that the annual financial statements of government departments and other public bodies were to be published in line with international financial reporting standards (IFRS). This was to bring consistency and comparability with global economies and follow best practice in the private sector.

2. The timetable for conversion for Central Government bodies to report on an IFRS basis was from 2009/10. For other public bodies, including Police Authorities, reporting on an IFRS basis is required from 2010/11. Financial statements for the comparative year will also need to be restated on an IFRS basis for 2009/10.

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 most significant standards that affect the Authority’s accounts is as follows:

Private Finance Initiative (PFI)

4. As previously reported our two PFI schemes are accounted for ‘off balance sheet’ however, they have now been determined under IFRS as being under our ‘control of the assets’ (assessed through carrying out a number of control tests). Accordingly we will in future have to include the PFI schemes on our balance sheet. Considerable work has been done in determining the impact of the revised accounting procedures for PFIs on both the way transactions are accounted for and how these ‘new’ assets are presented on the balance sheet. In a new development, the latest CIPFA regulatory publication called Statement of Recommended Practice (2009) requires the accounting treatment for PFIs under IFRS to be implemented a year earlier in 2009/10. The Authority is well place to comply with this requirement and include the necessary entries in this financial year for publication as part of the statutory accounts.

Leases

5. IFRS requires the MPA to assess existing leases to ascertain whether they should be added to the balance sheet. The MPA already has a number of finance leases and this regulation will extend the number shown. This applies not only to property related leases but also to other assets.

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 which the Authority has the benefit of, for a substantial part of the asset’s life will need to be included on the balance sheet as though the lease belongs to the Authority. An offsetting liability is also created to reflect the requirement to continue paying for the ‘asset’. The Authority is reviewing a large sample of its 500 plus leases, as well as liasing with external valuation surveyors to ascertain their likelihood of becoming finance leases. A report will be produced by the end of the calendar year identifying leases that fall in this category.

7. Additionally a review is also being undertaken of all contracts that may involve the use of equipment, which could result in the Authority having to include it on the balance sheet as an asset.

Property plant and equipment as components

8. IFRS requires components to be accounted for separately in the Authority’s fixed asset register. Accordingly the detailed requirements of IFRS have been researched and a policy developed and applied in 2009/10, which complies with IFRS and allows the Authority to follow the new regulation a year in advance.

Employee benefits

9. Whilst most aspects of the IFRS Employee Benefits requirement 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 budget and accounts, the outcome will depend on the accounting treatment options, under discussion as part of the CIPFA consultation process. The accrual for police officers has been derived from the police duty management system (CARMS) and at present is being validated. 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. A sample approach has been chosen to calculate this figure in 2009/10. In the future the intention is to enhance the HR personnel system to record unused holiday leave for police staff as a basis for calculating this figure.

10. The review of these standards and other standards was completed by end of September. However as CIPFA has not yet published its definitive guidance on accounting for local authorities under IFRS, the final basis on which the Authority can maintain its accounting records and produce its annual accounts cannot be determined. Once CIPFA has produced this document the intention is then to produce a draft restated balance sheet as at 1/4/2009 for review by the external auditors in line with the Project Initiation document. The MPS thinks it is likely that the definitive guidance from CIPFA will be released in December and the opening balance sheet produced in early February. The revised timetable will allow sufficient time for the auditors to review the balance sheet.

Consultation

11. Following the issue of the long awaited CIPFA consultation on the code of practice for IFRS at the end of June, the Authority submitted its response in September. The basis of the response was to welcome the intended changes as an aid to produce comparability however it was also to point out that the additional information to be included in the accounts not only made it more difficult for readers to be able to interpret the accounts, but also increased the size of the document considerably. The Authority’s IFRS implementation team keeps the Audit Commission appraised of its developments in interpreting and applying IFRS regulations by holding regular meetings and uses these meetings as opportunities to obtain the Audit Commission’s views on their approach. The IFRS team is also in regular contact with other local authorities and police constabularies in order to share information and develop a consistent approach to developing IFRS accounting.

Budget implications

12. Other than the issue mentioned above regarding the accrual for employee benefits, there are no significant changes expected to the overall revenue or capital budget for the Authority. 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 a 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 un-quantified.

E. Legal implications

None given.

F. Background papers

• None

G. 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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