Stephen Sheen takes a look at the changes that the new year will bring – aided by a curious money spider.
It’s the time of year for getting the crystal ball out and making predictions for 2019. But the crystal ball is getting a bit monotonous, so I have been researching alternative methods of divination.
Options include cromniomancy, divination by onion. Or oomancy, divination by eggs. Then there is plastromancy, which involves studying the cracks that form when you heat a turtle’s shell, but Wikipedia doesn’t confirm whether the turtle is still supposed to be inside or not when the match is lit.
Past readers of this blog might consider omphalomancy to be most appropriate – divination by navel gazing. But I fancy a bit of apantomancy – divination by the chance meeting of animals. And right on cue a money spider scuttles across my keyboard.
Rustle of pages of the Apantomancer’s Almanack. “Salamander … scorpion … scuttling spider … scuttling spider – signifying much turmoil in the world of local authority accounts and audit.”
Mercy me, it works!
Accounting Outlook
2018/19 sees the implantation of two substantial accounting standards: IFRS 9 Financial Instruments, and IFRS 15 Revenue from Contracts with Customers.
IFRS 9 has been talked about at great length, and statutory provisions are in place to protect the accounting practices whose change might have had a substantial impact on the General Fund Balance – ie, having to recognise fair value movements in money market fund investments as income or expenditure as they arise.
Changes in arrangements for impairment loss allowances on amounts owed to an authority also have a potential to impact the General Fund Balance, as authorities will no longer be able to hope that amounts will be repaid. Previously, provision would have to be made for losses only when it was confirmed that repayments would not be forthcoming. Losses will now have to be based on future expectations as to credit risks. Fortunately, many authorities got away with not implementing the previous optimistic rules, much reducing the practical risk of a substantial increase in allowances under IFRS 9.
IFRS 15 has been less talked about, and hopefully for good reason. It is very significant for the private sector, where there are pressures to book income as early as possible and inflate profits. IFRS 15 provides a framework for ensuring that income is not credited until it has been earned. Not something that local government customarily has a problem with, certainly not at a corporate level.
The announcement that implementation of IFRS 16 Leases has been delayed until 2020/21 does not mean that it is no longer a 2019 thing. Authorities will be expected to use the time granted by the deferral to make sure that their preparatory work is completed nice and early.
The good news is that IFRS 16 is the last of the big accounting beasts lumbering over the horizon. The International Accounting Standards Board’s agenda is currently clear of proposals for substantial change beyond this. Once you have rejigged the authority’s arrangements for lease accounting, a few years of relative stability should then follow.
There is much chatter about disclosure initiatives and streamlining, which will encourage the more ambitious authorities to work to make the Statement of Accounts more approachable and increase readership. But all authorities should find more interest in their accounts as the growing demands for evidence of resilience turn eyes towards the Balance Sheet and the Movement in Reserves Statement.
Audit Outlook
2018 was the year of the Great Leap Forward, with draft accounts deadlines being brought forward by one month and audit sign-off accelerated by two months. 13% of authorities failed to publish their Statement of Accounts by 31 July, compared with 5% against the 30 September target that applied in 2016/17. On the face of it, a decent effort, but more fun to be had in 2019.
2019 will though mark the beginning of a new Age of Austerity for all. Marking the first year of the PSAA appointing regime, the 2018/19 audit round will see a 23% cut in fees. With no change in the scope of work and minimum auditing standards to be satisfied, authorities should be guaranteed to experience no change in the service they receive. But it will be intriguing to see how auditors will deploy their depleted resources to ensure this is so and in a way that will be sustainable over the five years of the new appointments.
Particularly so if they continue to be constrained by the curious ideas of what their overseers at the Financial Reporting Council consider should be the focus of a local authority audit.
One certain outcome of the contracting approach is that KPMG join PwC on the sidelines with no local government audit work. Deloitte make a return after several years’ absence.
Finally, I predict a continuing increase in people’s auditing. When the excitement about armchair auditors first arose, the impression was that the new army that would spring up would be composed of retired businessmen looking to hold their authority to account for failing to empty their garden waste bin on any given Tuesday.
Instead, the impressive growth in the exercise of public rights under audit has been powered by the activist community, working to a wider social justice objective. They are discovering that the statutory audit process offers some additional opportunities not available under freedom of information. The only thing that could halt the growth will be demoralisation with the slowness with which the wheels turn once an objection is made to the auditors and the small probability that auditor action will result.
Stephen Sheen is managing director at Ichabod’s Industries, a consultancy providing technical accounting support to local government.
