By Sarah Sheen, Technical Manager Financial Reporting, CIPFA
IFRS 9 Financial Instruments has been adopted by the Code of Practice on Local Authority Accounting in the United Kingdom 2018/19 (the Code). Its objective is to establish principles for the financial reporting of financial instruments that will present useful information for the users of the financial statements to assess the amounts timing and the uncertainty of future cash flows.
Key things to be considered
- The new classification of financial assets for the investments held by local authorities. IFRS 9 has introduced a new classification model based on the business model for holding the financial assets and on the nature of the cash flows that might flow from them. Local authorities will therefore need to identify their financial assets, consider them against the new tests in IFRS 9, remeasure any that have changed classification and prepare the relevant adjustments to opening balances and consider the possible impact of statutory reversals.
- IFRS 9 has also introduced a new expected credit loss model for impairment in contrast to the incurred loss model in IAS 39 (IAS 39 Financial Instruments: Recognition and Measurement - adopted by the 2017/18 Code). This model will require local authorities to assess the risk of default on the relevant financial instruments rather than an assessment based on evidence that the default has already taken place. Local authorities will need to calculate their loss allowances based on this new model and adjust the General Fund Balance for these re-measurements. Work with CIPFA/LASAAC and the Treasury and Capital Management Panel has indicated that these loss allowances should not be very significant for the majority of financial assets held by local authorities as normally local authorities invest in financial assets with high credit ratings. An area of further consideration, however, might be loans made to other parties to support services where there might be a substantial risk of default.
- There are substantial new disclosures to support the objective of the standard to assist users in assessing the amounts timing and uncertainty of cash flows. More detail is included in relation to the disclosure of the carrying amounts and the gains and losses on financial instruments held. The expected credit loss model requires information on the credit losses of local authorities including a new disclosure providing a reconciliation of the loss allowances and details of the decisions authorities are likely to make in relation to the estimation and measurement of loss.
If they haven’t started already local authorities are advised to start their preparations to adopt the standard. Following introduction of the standard some financial instruments may mean that gains and losses are recognised against the General Fund before disposal. Where relevant CIPFA is working with government and the devolved administrations in support of a statutory override. However, local authorities will need to be prepared for the changes outlined above to ensure that they understand the impact on the financial statements and the General Fund.