8
AUDIT & RISK MANAGEMENT COMMITTEE
Meeting Date
19 JANUARY 2011
Title of Report
International Financial Reporting Standards (IFRS) Update
Report Reference
REP560
Portfolio
Performance
Portfolio Holder
Cllr Ryland – 01502 578053
Report Author and Tel No
David Ellis
(01502) 523664
Is the report Open or Exempt?
Open
Key Decision?
No
DECISION TO BE MADE
That the update on preparations for the introduction of International Financial Reporting Standards
(IFRS) and the draft Accounting Policies for 2010/11 be noted.
THE COMMUNITY NEEDS AND ASPIRATIONS IN RESPECT OF THIS DECISION
Local Authorities are required to report financial performance in accordance with proper accounting
practice. The introduction of IFRS accounting and reporting in 2010/11 will require significant resource
and preparation in order to ensure that this Council’s public financial reporting is consistent with the
new Code of Practice.
HOW THIS DECISION FITS WITH THE COUNCIL’S LOCAL PRIORITIES AND THE
WAVENEY SUSTAINABLE COMMUNITY STRATEGY
N/A – The report is an internal progress update for Member information. Compliance with the new
IFRS Code of Practice is mandatory for all Local Authorities.
STRATEGIC IMPLICATIONS
Sustainability - How this decision
builds a strong, healthy and just
society.
N/A – The report is an internal update for Members only and
does not link directly to sustainability issues.
53
Equality & Diversity – How this
decision tackles inequality,
disadvantage and discrimination, in
particular for people whose
circumstances make them
vulnerable.
N/A – The report is an internal update for Members in relation to
a Statutory reporting obligation. No Equality Impact Assessment
has been completed.
Managing Finances - How this
decision delivers value for money.
Preparations for IFRS may have a financial impact if key
systems require amendment or if significant additional valuation
work is required. Project planning of the IFRS preparations will
mitigate the risk of material unplanned expenditure, however
compliance with IFRS is mandatory and an investment in staff
time is required to achieve successful implementation.
Governance – How this decision
ensures effective management of
all risks, including Data Quality.
This report provides an update to Members and no formal
decisions are required. IFRS transition carries a number of risks,
as it potentially requires significant change and will impact
across a number of areas of the organisation. Keeping Members
informed of progress is a key element of the Governance
arrangements. Consideration of draft IFRS accounting policies in
advance of closing the 2010/11 Accounts is recognised as good
practice by the Audit Commission.
Legality - The legal powers and
implications of this decision.
Local Authorities are required under section 21/(2) of the Local
Government Act 2003 to comply with “proper accounting
practice” including IFRS and all relevant Accounting Standards,
when preparing their Statement of Accounts.
Managing resources – How this
decision ensures effective
management of the Council’s
people, natural resources and
physical assets to meet current and
future needs and deliver value for
money.
The introduction of IFRS accounting is a major project that will
involve many teams across the Council, including Finance,
Human Resources, Asset Management (NPS), and co-operation
from service managers. The IFRS preparations will ensure that
all relevant staff are consulted or involved directly as required to
deliver the expected outcomes. IFRS preparations are being
coordinated across both Waveney and Suffolk Coastal Councils
to minimise duplication of effort and align practices and policies
wherever possible.
Partnership – How this decision
will be delivered in partnership to
further improve outcomes.
IFRS preparations will involve close working with the Council’s
Asset Management partners, NPS. In addition, senior finance
officers are working together across the County to share
knowledge and best practice to improve outcomes for all.
Managing the preparations and harmonising practices across
Waveney and Suffolk Coastal Councils will provide wider
benefits and efficiencies.
MANAGING PERFORMANCE - HOW WILL THIS DECISION DELIVER THE OUTCOMES
AND IMPROVEMENTS THAT ARE NEEDED?
54
1
BACKGROUND AND INTRODUCTION
1.1
Local Authorities are required to keep their accounts in accordance with “proper
practices”. For financial years up to and including 2009/10, the Local Authority Statement
of Recommended Practice (SORP) defined the key principles and standards to be
adopted by Local Authorities when preparing their annual Statement of Accounts. The
SORP has been subject to annual updates to reflect changes in proper practice.
1.2
For 2010/11 onwards, proper practice is defined as compliance with the terms of the
Code of Practice on Local Authority Accounting (the Code). The 2010 Code, which will
apply to reporting periods commencing on 1 April 2010, is the first Code prepared directly
under International Financial Reporting Standards (IFRS).
1.3
This is the fourth IFRS briefing paper to the Audit and Risk Management Committee. The
three earlier reports were REP74 (October 2008), which outlined the impact and early
preparations for IFRS compliance, REP141 (January 2009), which provided an update
and outlined the major risk areas associated with the implementation of IFRS, and
REP451 (March 2010) providing further progress updates and details of the publication of
the Code.
1.4
This briefing report brings Members up to date on the Council’s preparations for the
impact of IFRS, summarises the main areas where IFRS will impact, and provides an
overview of the changes to the Core Financial Statements and the changes required to
the Council’s Accounting Policies to accommodate IFRS accounting and reporting.
2
CHANGES UNDER IFRS
2.1
As previously reported, although many of the new International Standards are broadly
similar to UK Accounting Standards, some of the new Standards represent material
changes in accounting treatment or recognition and will require significant effort to
address.
2.2
Officers have completed a high-level impact assessment of all IFRS changes, and have
identified the main areas of change as:

Leasing – This is a significant issue for most Local Authorities. Amendments to the
definition of Finance leases (treated as capital) and the requirement to split and
categorise any leases containing both land and buildings into their composite parts
may result in a number of leases previously being accounted for as Operating Leases
(treated as revenue) being deemed Finance Leases under IFRS.
Officers are currently working alongside colleagues from NPS, building on the wealth
of work previously undertaken in this area, to complete the review of all leases and to
strengthen the supporting working papers.
It is not yet known how many leases are likely to change category, although evidence
from progress so far has not indicated a significant number of changes. Where a
lease does change category, the accounts must be restated from the start date of that
lease, which may require the unpicking of several years’ worth of accounting entries,
so this remains a high risk area for the Council.

Property, Plant and Equipment (PPE) – Fixed Assets, in addition to being renamed
PPE, are subject to a number of significant changes under IFRS accounting. There
are changes to the definition of some classes of asset, differences in the way
reductions in asset valuations (impairments) are accounted for, and an explicit
requirement to recognise material component assets separately in the Accounts.
These changes will impact on the Fixed Asset Register (FAR) and underlying
accounting records, may lead to changes to the valuation basis and frequency for
some assets, and for capital enhancements to existing assets, the old part of the
asset being enhanced will need to be removed from the asset records in the Balance
Sheet.
Most of the work to identify changes in asset categories has been completed and new
55
valuations are being obtained to support restatement of the 2009/10 accounts. The
FAR is scheduled to be updated within 2010/11 to enable the Council to account for
its assets under the new rules.
The practical implementation of component assets remains an area of ongoing
technical debate, and despite the Practitioner Guidance Notes having been published,
it is likely that further detailed guidance will be issued before the 2010/11 Accounts
are prepared.

Assets Held for Sale – Formerly part of “Surplus Assets” under SORP, a new
category of asset is introduced under IFRS for assets that are expected to be
disposed of within 12 months. Assets falling under this new category are not
depreciated and falls in value are taken to Surplus / Deficit on Provision of Services
(not Revaluation Reserve, as with most other assets).
The review of surplus assets is nearing completion and data is being compiled to
enable the restatement of the 2009/10 accounts and the preparation of this aspect of
the 2010/11 Accounts.

Investment Properties – Changes to the definition of Investment Properties under
IFRS are likely to lead to a number of assets previously categorised as such being
reclassified as PPE. This is primarily due to the new definition excluding any assets
not solely held for income generation or capital appreciation. Assets held for service
objectives are to be classified as PPE and not Investment Properties.
The review of Investment Properties is nearing completion and data is being compiled
to enable the restatement of the 2009/10 accounts and the preparation for the
2010/11 Accounts.

First Time Recognition / Presentation of Financial Statements – For the first year of
IFRS (2010/11) there is a requirement to include complete comparator data on an
IFRS basis for the previous year (2009/10), which will include three Balance Sheets
(at 1 April 2009, 31 March 2010 and 31 March 2011). There is also a requirement to
provide details of all material changes between the 2009/10 SORP Accounts and
those restated under IFRS.
Preparing for the new financial statements is a major task, requiring a number of new
disclosures, new Core Financial Statements; in essence a total re-write of the existing
Statement of Accounts document.
A pro-forma set of Accounts has been now developed, based on early drafts of the
Practitioner Guidance Notes. This pro-forma has been populated with the 2009/10
SORP Accounts data, and an extract showing the Core Financial Statements under
IFRS is included in Appendix A2. The main differences between the SORP
Statements and those under IFRS are set out in section 5 below.
The reporting requirements under IFRS involve a wider columnar analysis than under
SORP, so a landscape format is now preferred. The next stage will involve restating
the SORP figures for 2009/10 under IFRS, and be subject to review by External Audit,
alongside the supporting evidence and working papers.

Operating Segments – The IFRS requirement for “Segmental reporting” is one that is
based in company financial reporting and does not naturally translate to Local
Government accounts. The core principle is that entities should provide information to
enable users of its financial statements to understand the nature and financial effects
of its business activities and the economic environments it works in.
CIPFA’s aim, in adopting the standard, is to make Local Authority financial statements
more understandable to users, by clearly reconciling authorities’ internal financial
reporting to the figures reported in the statutorily defined Comprehensive Income and
Expenditure Statement. This reconciliation is also required on a “subjective” basis (by
type of income or expenditure, such as employees costs, premises costs, supplies,
etc).
No detailed work has yet been undertaken in this area.

Accounting Policies, Estimates and Errors – New Accounting Policies are required for
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IFRS accounting (see comments in section 6 below). In respect of prior period errors,
under SORP Local Authorities were only required to restate the old year accounts
where errors were “fundamental”. Under the IFRS Code, corrections are required
where errors are “material”, which is likely to lead to more prior period adjustments in
Local Authority accounts. The IFRS Code also requires disclosure of future changes
to accounting policies where new Standards have been issued but not yet adopted.
This is a new requirement.
The “first time adoption” of IFRS and the resulting changes in Accounting Policies will
therefore require the complete restatement of the previously approved 2009/10
Accounts as part of the 2010/11 Statement of Accounts.
3
IFRS GUIDANCE NOTES AND TRAINING
3.1
To date a wealth of information has been published on the expected impact of IFRS on
Local Authority accounting and reporting. The CIPFA IFRS Code of Practice was
published in December 2009 and provided practitioners with confirmation on a number of
areas of uncertainty. CIPFA had expected the detailed Guidance Notes for Practitioners
to be published in July 2010, but as an interim measure had provided draft transitional
guidance on its website.
3.2
The Audit Commission released a number of technical briefing papers for practitioners,
and officers have used these documents, as well as attending seminars and workshops
to keep up to date with how the IFRS agenda was developing. Information has been
shared across the County, via the Suffolk Chief Accountant Network, to share knowledge
and best practice where possible.
3.3
The CIPFA Guidance Notes for Practitioners were finally published on 21 December 2010
and the CD-ROM is now available to relevant officers across the Council so that it can be
used for reference. The delay in publication, not untypical of CIPFA, was due to the need
to completely re-write the former SORP guidance, and officers will now need to review
almost 800 pages of new guidance in preparation for the 2010/11 Accounts.
3.4
Despite the late publication of the Guidance Notes, there remain some technical areas
that are still developing (such as the interpretation of Asset Componentisation
requirements, how to treat Surplus Assets not meeting the new “Held for Sale” definition,
and the IFRS Group Accounting requirements). Further guidance is likely to follow.
4
WORK-PLANNING
4.1
Some initial work in preparation for IFRS and old-year restatements was undertaken in
early 2010, but necessarily had to be put on hold to enable the completion of the SORPbased 2009/10 Accounts by the 30 June deadline. Subsequent work to support the
completion of the Statutory Audit of the accounts by 30 September, the initial work on the
2011/12 Budget, Medium Term Financial Strategy update and savings options, combined
with the ongoing work in respect of the implementation of the Council’s new ledger
system resulted in IFRS work being deferred until October 2010.
4.2
Led by the Chief Accountant, the more recent IFRS work has focussed on completion of
the impact assessments, drafting of new IFRS-based Accounting Policies, and reviews of
changes to Fixed Assets and Leases. Meetings have been held with our partners at NPS
in relation to categorisation and valuation of assets where IFRS has resulted in changes
to the way some assets are accounted for.
4.3
As reported above, a new Statement of Accounts pro-forma document has been
developed, and the 2009/10 SORP accounts have been modelled on that template before
being restated under IFRS accounting rules.
4.4
As part of the continuing move to shared services, wherever possible the IFRS work is
being undertaken on behalf of both Waveney and Suffolk Coastal Councils together, in
order to avoid duplication of effort, and to align practices, policies and documentation
across both Councils. As well as using common templates, the Auditor liaison will be
coordinated by Waveney’s Chief Accountant on behalf of both Councils.
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5
NEW CORE FINANCIAL STATEMENTS
5.1
As reported above, the Core Financial Statements have changed under IFRS. The
changes can be summarised as follows:
SORP Accounts
IFRS Accounts
Income & Expenditure Account
Comprehensive Income & Expend Statement
Statement of Movement on G/Fund
Movement in Reserves Statement (part)
Statement of Recognised Gain / Losses
Comprehensive Income & Expend Statement
Balance Sheet
Balance Sheet (amended analysis)
Cash Flow Statement
Cash Flow Statement (amended analysis)
Rather than simply presenting the new Statements to Members in June, a comparison of
the Statements under both SORP and IFRS is provided in Appendix A as an early
introduction for Members.
5.2
Appendix A1 is an annotated extract of the Audited 2009/10 SORP Accounts that were
approved by Council in September 2010. Key figures in the SORP Accounts (such as Net
Cost of Services, Surplus / Deficit on Income & Expenditure, General Fund Balances, and
the Movement in the Balance Sheet “Net Worth”) are all cross-referenced to the new
IFRS Statements.
5.3
Appendix A2 is the draft layout for the Core IFRS Financial Statements, populated with
the SORP 2009/10 results. It should be noted that whilst the figures shown here relate to
the SORP accounts to aid comparison of the two different formats, these will be restated,
where required, in the draft 2010/11 accounts that go to Members in June. Work on
calculating those restatements is still ongoing.
5.4
The old Income and Expenditure (I&E) Statement moves straight across to its new
counterpart, the Comprehensive Income and Expenditure Statement (CIES). The surplus
of £2,609k (cross-reference E) appears two-thirds of the way down the CIES. The
remaining CIES items are taken from the old Statement of Total Recognised Gains &
Losses (STRGL), and the new CIES bottom line agrees to the change in the Balance
Sheet for the Year (£19,655k decrease).
5.5
The former Statement of Movement on General Fund Balance (which reconciled the I&E
bottom line back to the movement in the General Fund balance) is now part of the new
Movement in Reserves Statement (MIRS). This new Statement shows on one page all
the Council’s Reserves, with the opening and closing balances and the change in the
year, which replaces the analysis in Note 15 to the SORP Accounts.
5.6
The Balance Sheet is still called Balance Sheet under IFRS, although some of the
terminology has changed. Areas of change are annotated in Appendix A2. Note that
reserves are now split between “Usable” reserves (those that the Council may use to
provide services) and “Unusable” reserves (“technical reserves” that hold unrealised
gains and losses on assets and the Pension Fund, or are held to allow for differences
where income and expenditure is recognised statutorily on a different basis to the
Standards within the Code), a split which arguably represents a clearer presentation of
reserves than the former SORP Accounts.
5.7
The Cashflow Statement is still named as such but the analysis is slightly different. An
important change here is the concept of “Cash Equivalents”, which are defined under
draft Accounting Policies as investments that mature in three months or less from the
date of acquisition and that are readily convertible to known amounts of cash. Whilst the
numbers shown here have not been restated for Cash Equivalents, the 2009/10 accounts
will be restated to split out Cash Equivalents from the Short Term Investment figures.
5.8
Inevitably it is challenging to draw out all the differences and subtleties of IFRS
Accounting and Reporting without detailed training, however the annotation in the two
appendices will help Members identify and follow both the similarities between the SORP
and IFRS Core Statements and the main differences. An explanation of the restatements
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made to the SORP figures will accompany the draft accounts in June.
6
DRAFT ACCOUNTING POLICIES
6.1
The October 2009 Internal Audit report on the self-assessment of Waveney’s Audit and
Risk Management Committee recommended that the Committee should receive, as part
of the annual accounting reporting process, reports on the status of, or any changes to,
Accounting Policies.
6.2
Appendix B contains the latest draft version of the Accounting Policies to be adopted for
the 2010/11 Statement of Accounts under IFRS. Whilst some areas are unchanged under
IFRS, other policies have been subject to a major re-write to accommodate new
accounting practices and reporting requirements, especially in relation to Fixed Assets,
Leases and the accounting treatment for Capital Grants and Contributions.
6.3
The draft Policies are presented to Members for information at this stage. The Practitioner
Guidance Notes for IFRS Accounting was only published in late December 2010, and
officers will need to review these draft policies against this guidance in preparation for the
2010/11 accounts closedown process.
6.4
Once reviewed, the final draft version of these Policies will be presented to Members for
approval in advance of presenting the 2010/11 accounts in June, however this report
provides the perfect opportunity to share with Members the work that has been
undertaken so far.
7
NEXT STEPS AND RESOURCES
7.1
The timing of the remaining IFRS work is expected to be as follows:

Completion of review of Fixed Assets and Leases – by 31 January 2011

Restatement of 2009/10 Accounts – by early February 2011

Audit review of 2009/10 restatements – February / March 2011

Preparation for 2010/11 IFRS closedown – From Late February onwards

Presentation of 2010/11 Draft Accounts to Members – mid-June 2011.

Audit of 2010/11 IFRS Accounts – July to September 2011
7.2
Officer training will continue, with the Audit Commission facilitating a joint finance
workshop for both Councils in mid January, an Audit Commission closedown workshop
(mid February) and a detailed CIPFA practitioner workshop in March.
7.3
Resourcing the ongoing IFRS work in 2010/11 is a challenge for all Local Authorities,
especially given the other pressures that are being addressed over the same timeframe.
Locally the work for the finance team to deliver a balanced Budget and MTFS for 2011/12
and beyond is challenging enough, especially when combined with the work to complete
the move to a new ledger system as part of the Shared Service agenda.
7.4
The Chief Accountant will continue to coordinate the IFRS workload, from both a project
managing role as well as technical lead, but resources to support the ongoing 2009/10
restatement work and the preparation for the 2010/11 Accounts remain a challenge for
the Finance Team.
8
SUMMARY
8.1
This report provides an update and overview to Members of the work the Council is
undertaking to prepare for the implementation of IFRS, drawing on the main findings of
the impact assessments, and identifying the changes required to the Accounting Policies
and the Core Financial Statements. Draft Policies and annotated comparisons of the Core
Statements are provided in the appendices for information.
8.2
The report sets out the expected timetable of the remaining workload and the next steps
towards implementation. The 2009/10 accounts, once restated for the changes in
accounting requirements under IFRS, will be presented to Members as prior year
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comparators to the 2010/11 draft Accounts in June 2011. The restatements will be
subject to external audit review, and recommendations arising from that work will be
incorporated into the 2010/11 closedown timetable.
OTHER OPTIONS CONSIDERED, REJECTED AND WHY
N/A – IFRS is a mandatory requirement for Local Government from 1 April 2010 onwards.
REASONS FOR RECOMMENDATION
To update Members on the Council’s preparations for successful implementation of IFRS accounting
and reporting, and provide an early insight into the new Core Accounting Statements and changes to
Accounting Policies required for the 2010/11 financial year.
RECOMMENDATION
That the update on preparations for the introduction of International Financial Reporting Standards
(IFRS) and the draft Accounting Policies for 2010/11 be noted.
APPENDICES
Appendix A1
Core Accounting Statements 2009/10 (SORP layout)
Appendix A2
Core Accounting Statements 2009/10 (IFRS Code layout)
Appendix B
Draft Accounting Policies Statement 2010/11
BACKGROUND PAPERS
Date
Type
Available From
December 2009
“Code of Practice on Local Authority
Accounting in the United Kingdom 2010/11
Based on International Financial Reporting
Standards”
CIPFA / LASAAC website
December 2010
“Code of Practice on Local Authority
Accounting in the United Kingdom 2010/11Guidance Notes for Practitioners”
CIPFA / LASAAC website
Various
IFRS Guidance and Briefing Papers
Audit Commission website
Various
Seminar / Conference notes and handouts
Chief Accountant
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