Councils engaged in commercial activities face reductions of more than 10% in their general fund from changes to accounting rules being introduced next year, according to experts.
The Chartered Institute of Public Finance and Accountancy has launched a consultation on the impact of changes resulting from amendments to international accounting standards which will be introduced in April next year.
One of the new rules, IFRS 9, will see the removal of the “available-for-sale” classification in the Code of Practice on Local Authority Accounting, which currently allows gains and losses to be held in reserves until realised.
Assets held in this category will now move into the “fair value through profit or loss” category.
This means gains and losses from changes in fair value of assets will be reflected in surpluses and deficits in the Provision of Services line in local authority accounts.
Grant B Patterson, director of audit at accountancy firm Grant Thornton, said: “These additional charges to revenue would need to be recognised in the general fund and impact upon useable reserves and/or sums to be raised by council tax.
“For instance, whilst in a different sector, the European Banking Authority is estimating that banks will be increasing current provisions by around 13% as a result of the introduction of IFRS 9 into the commercial sector.”
“Whilst these might be seen as technical changes there is the potential for a real impact on local authority finances.”
Peter Worth, director at consultancy Worth Technical Accounting Solutions, said; “If a council has an investment in a local authority waste disposal company or a leisure company, they will now have to account for it at fair value.
“Currently, losses and gains are only realised if these assets are disposed of. From next year, if there is a loss then that now becomes a cost to the council, and is likely to impact on the council tax payer.”
Worth said that the Department for Communities and Local Government (DCLG) could take action to remove the impact of the new rules on service budgets.
He said: “In previous years, in other areas, DCLG has created statutory overrides to reverse the impact of changes which could impact on council tax payers. I would be surprised if they are not looking at this in relation to IFRS 9.”
David Green said that the rules could also make councils think twice about making risky investments, and that the impairments could reduce the gap in returns between riskier and safer investments.
He said: “It will force people to think more about what they are doing and get them to consider the risks more.”
Patterson said the changes could require councils to introduce new accounting policies and disclosures, management judgements, internal controls and data systems.
Worth said that the impact of the IFRS 9 changes were likely to impact councils differently, depending how much outsourcing they have undertaken and the type of financial instruments in which they are invested.
He said: “Things like VNAV and enhanced money market funds are also included in the ‘available for sale’ category and will also be affected.”
