By means of context, UK law stipulates that extant IFRS standards apply to public service reporting. CIPFA applies standards to meet this requirement in relation to local government.
Applying to all corporate and public financial reporting, IFRS 9 has made important changes to the accounting for local authority investments which includes collective investment vehicles. Gains and losses on the sale of an investment can have real consequence and so it has been determined that they should impact on the trading, that is revenue, performance.
It is likely that many collective investment vehicles would be classified from 1 April 2018 so that the gains and losses will be chargeable to income and expenditure. Technically, the issue is whether collective investment vehicles qualify for the election under IFRS 9 for movements in fair value of ‘investments in an equity instrument’ to be chargeable to reserves; that is chargeable to fair value through other comprehensive income. To do so, the investment would need to meet the definition of an equity instrument in accounting standards.
This will be a decision for the authority and practitioners, who will need to consider all the relevant and contractual information and whether the instrument is ‘puttable’ (ie the holder has the right to demand repurchase or repayment of the principal).
If the instrument is puttable, CIPFA agrees with the view of the International Accounting Standards Board (and subsequently confirmed by the IFRS Interpretations Committee) that a financial instrument that has all the features of a puttable instrument is not eligible for the presentation election in IFRS 9 to charge these movements to reserves (in a local authority’s case the financial instruments revaluation reserve).
CIPFA/LASAAC has therefore acknowledged that in accordance with the aims of the standard fair value gains and losses should be reported transparently and fairly, that is consistently with all other accounting entities in the UK and overseas (applying IFRS).
However, CIPFA recognises two difficulties: first it is important that the impact of unrealised losses or gains should not affect the taxpayer through actual reduction or increases in the council’s reserves; and secondly, clearly, councils culturally treat the instruments under discussion as balance sheet investments.
We have received widespread feedback from Treasurer Societies on their concerns, which has of course weighed with us, so that on balance, therefore, CIPFA is working with the Ministry of Housing, Communities and Local Government (MHCLG) and each of the devolved administrations in support of a statutory override.
We have been cautious when weighing the public interest to ensure that there has been a balanced debate, helpfully informed by the investment providers to the sector. It is helpful to assist councils to understand the implication of these changes.
Finally, in asking government for an override we are mindful of a downstream risk: namely if new accounting standards that fully apply to the corporate sector should not apply to councils in the public and taxpayer interest, the question may be asked whether public bodies should in fact have access to such instruments.