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Local authority accountants are facing numerous changes in financial reporting requirements with an ever changing policy landscape and a need to balance this, ensuring that the information they provide is easily understood by their key stakeholders – and all against a backdrop of resource constraint. How can they manage and be prepared for some of the key financial reporting challenges they are facing?
A regular refrain across sectors is that IFRS financial statements are too long and too complicated. This situation is exacerbated in local authorities as financial performance is measured on a fiscal basis as well as the accounting basis. Changes to the 2016/17 Accounting Code have addressed this issue. The new Expenditure and Funding Analysis has brought these two reporting frameworks together in a way which promotes accountability and effective decision making.
Importantly, the financial reporting requirements in the 2016/17 Code have also been changed so that the top of the comprehensive income and expenditure statement is now reported in line with the organisational structure of the authority, making this information more recognisable to stakeholders as this format should follow the financial performance framework of the authority. At the same time the opportunity has been taken to minimise the reporting requirements of one of the more complicated statements, the Movement in Reserves Statement.
Local authorities can make substantial changes of their own. Perhaps the most important is to remove immaterial disclosures, but you can also ensure that financial statements are written in plain language, that ‘boilerplate’ disclosures and accounting policies are avoided and that the information disclosed is tailored to the authority.
All these changes should mean that the key messages in the statements are more accessible to your stakeholders. CIPFA and CIPFA/LASAAC want to allow time for the substantial changes to the 2016/17 Code to bed in for local authorities. However, there are a couple of further changes proposed in the 2017/18 Code which will maintain the momentum for increased accessibility and the opportunity to use the financial statements to tell an individual authority’s own story.
The 2017/18 Code consultation includes changes to the narrative reporting requirements, moving to a principles-based approach adopting the reporting elements in the International Integrated Reporting Council’s Framework. The narrative report can provide not just effective context for the financial performance and position of a local authority but under these principles an authority should, for example, be able to demonstrate how it has used its scarce resources to deliver planned outcomes in accordance with its corporate and strategic plans.
The financial crisis of 2008 saw the development or accelerated development of three substantial financial reporting standards. These standards have now been issued by the International Accounting Standards Board (IASB): IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases.
The financial crisis highlighted the need for better and timelier information on issues such as expected credit losses, and for changes in the way information is reported, such as the new right of use asset under the leasing standard and improved disclosure requirements. Local authority accountants, like those in the rest of the public and the private sector, will need to ensure that they understand the changes, the potential impacts on their financial information and the systems they use to provide them and perhaps most importantly the impact on their financial results and how they will need to prepare for such changes.
In addition it will be important to understand the practical effects of the changes ie the need for training, to inform their stakeholders about the changes and to appreciate the potential benefits that better information will provide such as more informed decision making. For local authorities it will also be important to ensure that they understand the impact on the statutory environment.
As most public sector accountants know, being an effective accountant is not just about the debits and credits. Accountants have to be strategic and professional advisors to their organisations. We have rarely been in a period of such change, from Brexit to devolution, from the move to 100% business rates retention to faster closing and from business transformation to delivery of services in partnership with other bodies.
Finance practitioners need to be prepared and understand the vast array of changes to their operating environment, for the roles they will have to play and the information and scrutiny they need to provide expert and effective support to their organisations. The better prepared we are, the easier it will be rise to meet these challenges.
So whether it's new financial reporting standards or new policy initiatives, local authority accountants will need to ensure that they keep up to date with the new changes. The good news is that with all things, forewarned is forearmed.