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A version of this article appeared in Public Finance in September 2017.
The annual consultation on the Code of Practice on Local Authority Accounting in the United Kingdom was issued by the CIPFA/LASAAC Local Authority Accounting Code Board in July 2017. CIPFA/LASAAC is currently analysing the responses received. This year will see the introduction of two substantial international financial reporting standards: IFRS 9 Financial Instruments; and IFRS 15 Revenue from Contracts with Customers. Both will result in technical accounting changes and will have practical and possibly budgetary consequences.
Last year, CIPFA/LASAAC took the unusual step of consulting a year early on changes to the Code to give accounts preparers more time to get ready for them. Following this, CIPFA/LASAAC issued a publication setting out its position on the approach to the 2018/19 Code’s adoption. It did not consult again in July on the two new standards in the Code to provide a ‘steady state’ for those preparing accounts.
IFRS 9 will introduce new classifications for financial assets based on the business models used for holding groups of financial assets and the cash flow characteristics of individual financial instruments. It will also bring in a forward-looking expected credit loss model, which establishes a three-stage approach for the impairment of financial assets, in contrast to the current methodology that relies on evidence that impairment has taken place. The standard also introduces a hedge accounting model that reflects more accurately how an organisation manages its risk in the financial statements.
It is possible that both the classification and impairment models will affect local authorities’ general funds. The CIPFA Treasury and Capital Management Panel issued a questionnaire on IFRS 9 to assess its impact, and is now analysing the questionnaires that were submitted.
IFRS 15 requires organisations to recognise revenue for the provision of goods and services as an amount that reflects the consideration it expects to be entitled to in exchange for goods and services. It also introduces a disclosure framework to help users better understand the amount, timing and nature of the cash flows relating to revenue.
Although CIPFA/LASAAC did not consult again on the adoption of these two standards, it is happy to consider any augmentations to the Code as a result of the consultation responses. The consultation also sought more information on a few issues relating to the two new standards, including the approach to disclosures under IFRS 15.
The 2018/19 Code consultation also covered technical amendments to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes, IAS 40 Investment Property Annual Improvements to IFRS Standards 2014-2016 Cycle and IFRIC 22 Foreign Currency Transactions and Advance Consideration, as well as other minor changes.
The pace of developments in IFRS means that CIPFA/LASAAC will need again to seek views early. The consultation therefore included an appendix on the adoption of IFRS 16 Leases; it is anticipated that this standard will be in the 2019/20 Code. IFRS 16 will require local authorities that are lessees to recognise most leases on their balance sheets as right-of-use assets with corresponding lease liabilities (there is recognition for low-value and short-term leases).
Councils will need to make effective preparations for all three standards. New information requirements are likely to need revised data collection procedures and systems, and management’s judgment will be required in numerous areas. There may also be budgetary implications. Risks need to be assessed as soon as possible.