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Anonymous
#1 Posted : 04/10/2017
Joined: 3/2/2018(UTC)
Posts: 868

Hello,

I''m reviewing CIPFA''s invitation to comment on (amongst other things) IFRS 9, and the requirement to categorise financial instruments as fair value - profit and loss (FVPL), or fair value - other comprehensive income & expenditure (FVOCI), as well as amortised cost of course.

I would be very grateful if someone could set me straight on this question:

- impairments / losses through FVPL will hit the net surplus/deficit on povision of services. This would mean waving goodbye to a big chunk of general fund balances should something go wrong.

- impairments / losses through FVOCI - I''m less sure about. It''s clearly being treated differently, so would I be right in assumming these charges could be offset with a statutory mitigation via MIRS, and to a reserve (e.g. financial instrument adjustment account?)

The guidance I''m reading doesn''t say this directly, but I can only assume it''s placement in "other comprehensive income & expenditure" has some significance to the general fund''s safety compared to "surplus / deficit on cost of services", and this must be through some ability to divert the charge to reserves.

But there''s no mention in any guidance or briefings whether FVOCI constitutes an allowable adjustment between accounting basis and fund basis..?


Many thanks!
Anonymous
#2 Posted : 05/10/2017
Joined: 3/2/2018(UTC)
Posts: 868

I think all impairments have to go through Surplus / Deficit, but per the proposed new chapter 7 (from the separate document on the forthcoming provisions re IFRS9 / IFRS15) any impairment losses relating to an investment which meets the definition of capital expenditure are not proper charges to the General Fund.
(7.2.10.1 in the proposed 18/19 Code - refers to Appendix B i.e. the capital finance regulations)


Anonymous
#3 Posted : 05/10/2017
Joined: 3/2/2018(UTC)
Posts: 868

My understanding is the same as yours in that the impairments / losses through FVOCI to reserve. The way I understand this to be is that other comprehensive income and expenditure does not go through the general fund part of the MIRS (only the Surplus/Deficit on Provision of Services does)and is shown as a direct transfer to reserve on the MIRS.


Anonymous
#4 Posted : 10/10/2017
Joined: 3/2/2018(UTC)
Posts: 868

Thank you for the replies. What I didn''t have at the time was chapter 7.2.10.1 from the proposed code of practice.

For information, I''ve had confirmation from our auditors that:

- FVOIC - would not be a charge to the general fund, and
- Councils can make an irrevocable election to treat things as FVOCI (though this route I guess rules out any future gains to the general fund, were you to fancy the gamble)
- the differences between fair value / cost value would still be subject to the materiality test before changes were needed


so this helped ease my mind quite a lot.

IG
Anonymous
#5 Posted : 30/11/2017
Joined: 3/2/2018(UTC)
Posts: 868

Afternoon,

I have a follow up question to my earlier one, that I hope people might be able to help me with.


Where financial instruments result in cashflows that are not payments of principle and interest, they should be held at Fair Value through Profit and Loss (FVPL). For subsequent recognition of gains and losses, para 7.2.6.2 of thee IFRS9 exposure draft sets out that gains and losses must go through the surplus or deficit on the provision of services (see text at foot of this message).


If local authorities are holding say, part ownership of a property fund, would the authority not then be in line to take the gain to it''s general fund if that fund can demonstrate a real increase in value?


Tactically - authorities might not want to do this, and push a gain into reserves to guard against future losses. But accounting-wise, there is a clear route to achieve revenue gains from IFRS9, albeit risky.


Before IFRS 9, I was anticipating that the ultimate sale of ownership of, say a sucessful property fund, would yield capital receipts, rather than revenue gains. But IFRS9 does seem to open the door on providing a revenue gain (if the option to hold at FVOCI is not chosen).


Could anyone advise if the my understanding above is correct?


Many thanks,






7.2.6.2 A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in Surplus or Deficit on the Provision of Services unless:

a) it is part of a hedging relationship

b) it is an investment in an equity instrument and the authority has elected to
present gains and losses on that investment in other comprehensive income in
accordance with 7.1.5.9, or

c) it is a financial asset measured at fair value through other comprehensive
income in accordance with paragraph 7.1.5.2 and the authority is required to
recognise some changes in fair value in other comprehensive income in
accordance with paragraph 7.2.6.5.


Anonymous
#6 Posted : 01/12/2017
Joined: 3/2/2018(UTC)
Posts: 868

It would depend on how the purchase of the investment in the property fund was initially accounted for. If it was expenditure required to be accounted for as capital per the Capital Finance Regs, then regardless of whether the investment is subsequently regarded as FVPL or FVOCI, any gain on the investment would not hit the General Fund (proposed 7.1.9.3). You would still have to calculate the gain and show in Surplus/Deficit or Other Comprehensive Income, but then reverse in MIRS.
However if the investment didn''t come within scope of the capital finance regs (eg as I understand it, investment in CCLA etc) then any gain would go through Surplus /Deficit and hit the General Fund.
I don''t think you could designate such an investment as FVOCI as this requires the investment to be an equity instrument.
Mark Catlow
#7 Posted : 01/12/2017
Joined: 2/24/2018(UTC)
Posts: 9
Organisation: Chichester District Council

I would urge everyone to read the statement issued by CIPFA in relation to IFRS 9 - in summary IFRS9 is to be implemented in full

http://www.cipfa.org/pol...cal-authority-code-board

from this statement...

"One of the key impacts of IFRS 9 will be that, whilst many local authority loans and investments will continue to be held at amortised cost, gains and losses arising from changes in the fair value of some categories of investments will have to be recognised in authorities’ revenue accounts. This means that from 2018/19 changes in
the value of certain investments will have a consequent impact on the general fund. Previously any changes in the fair value of these investments were only recognised in the general fund when the asset was sold. The recognition of unrealised gains and losses may provide a particular challenge to local authority CFOs who will have to consider whether unrealised gains should be held back in order to provide for potential future losses. This may have an impact on the level of local authority reserves being held to manage risk."

I understand that the DCLG is seeking evidence from Local Government as to the effect of this on GF balances. I would urge everyone to consider this carefully - the potential impact of this decision by CIPFA/ LASACC is significant.
Anonymous
#8 Posted : 03/12/2017
Joined: 3/2/2018(UTC)
Posts: 868

Once again, thank you for taking the time to reply.

To summarise then, it seems gains (and losses?) from investments would not be headed towards the general fund post IFRS9 implementation, but we will still have to be aware of their value so that unrealised gains / losses can be accounted for correctly.

The property fund I have in mind would be described as an equity fund though rather than an investment, as by investing into it we: became partners in an LLP, the return of the investment is not guaranteed, and receive dividends based on it''s performance, rather than regular payments of interest.

As per 7.1.9.3, my assumption is that this will be share capital and therefore an equity instrument.
IFRS9 states:



Equity instruments

All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in ''other comprehensive income''. There is no ''cost exception'' for unquoted equities.


So, assumming these conditions are met, it does seem like the general fund could well benefit from gains (but lose from losses) were a declaration not made.


thanks



Anonymous
#9 Posted : 05/12/2017
Joined: 3/2/2018(UTC)
Posts: 868

I''m not sure about your definition regarding CCLA. Surely it is an equity instrument as it meets the definition in IAS 32? It is not capital expenditure in England or Scotland, but is in Wales and Northern Ireland, does that mean local authorities in each country will need to treat the same investment differently?
PXGRIFFIN
#10 Posted : 06/12/2018
Joined: 2/24/2018(UTC)
Posts: 7
Organisation: Somerset County Council

Good afternoon,

Has anyone considered the IFRS9 impact on their debts to accrue debtor balances?

A debt to accrue is when a local authority accrues a debt for an elderly residents care costs, when they exceed the means-tested threshold. As part of the arrangement, the authority is awarded a legal charge over the residents property, and the debt is repaid when the resident passes away.

As the debt is a statutory requirement (the resident has to meet the charge if they exceed a threshold) does the debt actually meet the definition of a financial instrument? If it doesn't the impairment rules will obviously not apply, so it would be helpful to understand how this kind of debt is treated (if at all) by IFRS9?

Any thoughts??

Many thanks,
Paul.
MW
#11 Posted : 07/12/2018
Joined: 2/24/2018(UTC)
Posts: 77

Was thanked: 4 time(s) in 3 post(s)
Interesting, hadn't considered that for social care deferred payment agreements. However aren't there contracts / agreements in place? - making it a financial instrument? Even if not a financial instrument though, impairment would still have to be calculated, just on the incurred loss basis.
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