Implementing International Financial Reporting Standards

Report: 12
Date: 10 March 2011
By:  Treasurer and Director of Resources on behalf of the Commissioner

Summary

To provide the Committee with a quarterly update on the implementation of International Financial Reporting Standards (IFRS) within the MPA/MPS and to provide an opportunity for Members to consider changes made to MPA accounting policies.

A. Recommendation

That members of the Committee NOTE the progress made by the IFRS Implementation Team and consider the changes to accounting policies.

B. Supporting information

Background

1. With effect from 1 April 2010, local authorities have been required to prepare their accounts following the International Financial Reporting Standards (IFRS) and the International Public Sector Accounting Standards (IPSAS) (where these provide additional guidance to local authorities) as interpreted by the CIPFA Code of Practice on Local Authority Accounting in the United Kingdom 2010/11. Over the last 24 months the MPA have received regular quarterly updates on the transition to IFRS across the MPA/MPS. This report updates the Committee on progress made by the IFRS Implementation Team, over the last quarter and the current status of the implementation in the MPA/MPS.

2. In line with best practice the report provides an opportunity for Members to consider the key changes made to MPA accounting policies to comply with IFRS, which will apply to the 2010/11 accounts. The policies and treatments will be formally reviewed by the Audit Commission.

Current status

3. Significant progress continues to be made on developing the IFRS compliant statutory accounts and finalising the implementation of accounting changes as a result of IFRS. The key milestones achieved this quarter are outlined in Table 1 below.

Table 1 IFRS implementation: Progress in the third quarter 2010/11

Completed

Milestone	Current status
Draft accounting policies and treatments.	Policies drafted and with Audit Commission for review
Produce an opening balance sheet for 1 April 2009 on an IFRS basis.
Calculate the revised figures for 2009/10 to be included in the 2010/11 accounts.
Review the IFRS requirements as specified by the new CIPFA guidance notes (see below) before finalising the draft format of the statement of accounts.
Finalise the new draft format for the 2010/11 accounts, including financial statements consisting of the new Comprehensive Income and Expenditure Statement, the revised Balance Sheet, new Movement in Reserves Statement and revised Cash Flow Statement.	Completed and with Audit Commission for review
Finalise new draft disclosure notes for the regulatory changes identified to date.
Restated accounting policies to be reported to Audit and Corporate Governance Committee with final approval from Treasurer.	As reported to this meeting 10 March 2011
Closedown 2010/11 accounts on an IFRS basis	By 30 June 2011

4. Focus of work in the last quarter has been interpretation of the new standards for the purpose of preparing the new format Statement of Accounts for both 2009/10 and 2010/11. In addition a more detailed set of disclosure notes to the accounts as required by IFRS has been produced. The process was assisted by the publication of the CIPFA guidance notes for practitioners in December 2010, which were reviewed prior to completion of the new format Statement of Accounts.

5. The Audit Commission are performing a complete review of the restated 2009/10 figures and draft format of the Statement of Accounts for 2010/11 (and disclosures) to ensure the MPA has followed and interpreted the IFRS standards correctly. The review is expected to be completed in time for the close of accounts.

6. An extract from the draft format of the Statement of Accounts for 2010/11 is provided in Appendix 1 and includes the new naming conventions under IFRS as shown in Table 2 below:

Table 2 Financial statements - new naming conventions

Old title under GAAP UK	New title under IFRS
Income and Expenditure Account	Comprehensive Income and Expenditure Account (Surplus or Deficit on Provision of Services)
Statement of Recognisable Gains and Losses	Comprehensive Income and Expenditure Account (Other Comprehensive Income and Expenditure)
Balance sheet	Balance sheet
Statement of Movement on General Fund Balance	Movement in Reserves Statement
Cash-flow statement	Cash-flow Statement

7. In line with IFRS the Balance Sheet is now split into 3 columns while the Comprehensive Income and Expenditure Account is split into 6 columns. There are further breakdowns throughout the notes to the Accounts which reflect the requirement to restate comparative information for the prior period as a result of the IFRS adjustments.

Changes to accounting policies and treatments

8. At the last meeting in December 2010, the Committee received an update in respect of the accounting policies that were expected to change to comply with IFRS. The new and modified MPA accounting policies have now been finalised and are presented below for Member’s consideration. These policies will set the standards by which the MPA accounts are produced for 2010/11.

Finance Leases

9. The accounting requirement for finance leases is no longer based on UK GAAP but on IAS 17 and IPSAS 13. This requires a change in the current MPA accounting policy on leases and will require 2009/10 comparative figures to be restated. Under UK GAAP it was presumed that a lease is a finance lease if at the inception of the lease the present value of future lease payments amounts to 90% or more of the fair value of the asset. Under the new IFRS policy a finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. The policy will no longer apply a percentage minimum limit in considering whether a lease is a finance lease; rather ‘all relevant facts’ shall be taken into account when making the decision to treat a lease as a finance lease.

10. Finance leases are currently ‘off Balance Sheet’ and following this change in the MPA accounting policy they will be required to be recognised on the Balance Sheet together with a liability for the financing provided by the lessor.

11. In addition to the change in policy, IAS 17 also requires more extensive disclosures than SSAP 21.

Asset valuation

12. Under UK GAAP impairments of revalued assets caused by the consumption of economic benefits (rather than falls in prices) were recognised in the Income and Expenditure Account. The MPA has revised its accounting policy on impairment in-line with IAS 36 which states that all revaluation losses should be taken initially to a revaluation reserve to the extent there is a balance relating to the specific asset.

Components

13. IFRS also places a greater emphasis on component accounting. Where components of an asset are significant in value in relation to the total value of the asset as a whole, and they have substantially different economic lives, they should be recognised separately. At the date of print the MPA accounting treatment for component accounting is still being reviewed by the Audit Commission. The standard (which requires organisations to value and depreciate significant components separately from their main assets in the asset register) is causing some discussions 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 currently building a model that would satisfy IFRS whilst keeping costs to a minimum.

Investment properties

14. Under IFRS the definition of Investment property and the accounting treatment of valuations will change. The MPA policy has been revised accordingly. The new IAS 40 defines an investment property as property held (by the owner or by the lessee under a finance lease) solely to earn rentals or for capital appreciation or both. Valuation movements now have to be treated as a charge to revenue and a subsequent transfer to the capital adjustment account. Given the change in the MPA policy in respect of the definition of an investment property and treatment of valuations, a review has been completed to ensure that all properties are correctly classified and valuations treated in accordance with IFRS.

Assets held for sale (new requirement)

15.A new accounting MPA policy has been developed to reflect the new IFRS classification of non-current assets called “assets held for sale”. Assets meeting this classification are those where the value of the asset will be recovered mainly by selling the asset rather than through usage. Assets held for sale are to be valued at the lower of their existing balance sheet value or their estimated sale price less costs to sell. An asset or a group of assets is classified as ‘held for sale’ if:

• its carrying amount will be recovered principally through sale rather than through continuing use;
• it is available for immediate sale;
• the sale is highly probable within one year, and
• the asset is being actively marketed.

16. A review will be completed to identify any assets that fall into this category. Any assets held for sale that are identified will be appropriately classified in the balance sheet.

Employee benefits (new requirement)

17. A new policy has also been developed to account for employee benefits. Under IFRS employee benefits such as unused annual leave are recognised as an accrual (expense) in the accounts in the year of entitlement. This cost will not affect the outturn position as the accrual will be offset by the creation of an additional accounting reserve. The accrual for unused annual leave will be recorded in the balance sheet each year as a provision.

Government grants and contributions

18. Under UK GAAP the MPA’s grants and contributions (which had satisfied any conditions) were deferred on the balance sheet and treated as a liability until the grant was spent. Under IFRS, government grants and contributions are now recognised immediately as revenue income (once any conditions have been met) and transferred to reserves.

Donated Assets

19. Similarly under the new IFRS MPA policy, donated assets will be treated as revenue income as soon as any conditions of the donation have been met.

Joint ventures (new requirement)

20. Finally the MPA has adopted a new policy of disclosing joint ventures in the notes to the Statutory Accounts in line with IAS31. Under this standard a joint venture is a contractual arrangement whereby two or more parties undertake activities that are under their joint control (there must be unanimous agreement for all strategic decisions). There are two types of joint venture which could potentially affect the MPA/MPS. These include jointly controlled assets and jointly controlled operations which require further disclosure in the accounts under IFRS. The IFRS Implementation Team is currently reviewing MPS partnerships and other collaborative arrangements to identify if the arrangements fall within these categories.

Possible policy changes in future years.

21. The IFRS implementation represents a substantial change in accounting treatment in the public sector. Over the last 24 months professional advisory bodies such as the Financial Reporting Advisory Board and CIPFA have worked hard in consultation with the public sector, to apply these standards in a local authority context. However there are still elements of IFRS where further clarification is required, or which need to be adapted for public sector/local authority circumstances. Hence it is likely to 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 mainly 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. As a consequence Members should expect to hear about further changes in respect of IFRS accounting treatment in future years. However taken as a whole it is expected that these will be relatively minor in comparison to the implementation of IFRS this year.

C. Other organisational and community implications

Equality and Diversity Impact

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

Consideration of MET Forward

2. IFRS supports the Met Forward Met Support Strand.

Financial Implications

3. The cost of implementing IFRS from existing resources

4. Similarly although there will be 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

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

Environmental Implications

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

Risk Implications

7. 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 audit review of restated balances and pro-forma accounts.

D. Background papers

None

E. Contact details

Report author: Anne McMeel, MPS and Annabel Adams, Deputy Treasurer ,MPA

For information contact:

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

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