Conrad Hall takes issue with a recent Room151 opinion article and argues that local government needs to embrace International Financial Reporting Standards rather than seeking exemptions and statutory overrides.
I like David Green and I respect his opinions. However, discerning readers, and hence all of Room151’s readers, will immediately realise that one doesn’t write a statement like that without a “but” coming. And it’s a big “but”, because I disagree with pretty much everything David wrote in his Local government: an exception that proves the rule article and felt strongly enough about it to want to say so.
I believe that the International Financial Reporting Standards (IFRS) are the gold-plated framework to show the true economic impact of financial decisions. In fact, I don’t believe anyone has ever made any serious argument to the contrary, although the debate on the detail of the standards remains as challenging as it ought to be. Possibly International Public Sector Accounting Standards (IPSAS) will provide a viable alternative in time, but we’ll see.
I also believe that local government has damaged its credibility with senior policy makers by seeking too many exceptions to the standards. Indeed, I question whether any exceptions at all were ever justified.
There is an existing framework to allow adaptations and interpretations on the implementations of the standards, but local authorities have gone further and argued for wholesale exceptions, often via statutory overrides. We are the only part of the UK public and private sector that has needed those, and I question whether the nature of a local authority is really so different as to justify those choices.
Local government has damaged its credibility with senior policy makers by seeking too many exceptions to the standards. Indeed, I question whether any exceptions at all were ever justified.
IFRS 9 override
David Green starts his argument on IFRS 9 and the continuation of the statutory override for another two years, but not to make it permanent. The simplest way to think about IFRS 9 is to imagine an investment of say £100 expected to return 5% annually for 10 years. If in the first year it returns less than that, then what is wrong with charging the shortfall to the accounts?
I know at present you, being prudent treasurers, will have reserves to cope with this volatility, but it is just possible that some authorities that may not be too far from a s114 might run that risk. Implementing IFRS 9 would expose that as a matter of cold hard accounting fact and prudent authorities with appropriate reserves will not experience any downside.
David moves on to premia and discounts on early redemptions and to pensions and argues that we depend on these to avoid immediate charges to revenue. I can see where he’s coming from, but it stems from the rather odd way we invest the general fund reserve with a sort of mystique that it doesn’t warrant. Of course, the section 151 officer must be able to state that the financial position is sound, but consider the following example.
Suppose your authority has a general fund reserve of £7m and a pensions deficit of £807m, for which you have a sober, prudent and fully budgeted 10-year recovery strategy. Do you tell your members that over the last 20 years or whatever you have spent £800m more than you earned to deliver services (with a side discussion about the IFRS position on inter-generational equity perhaps)? Or do you say you have reserves of £7m and a weird accounting “thingy” that shows a deficit on pensions that they don’t need to worry about.
Seeking statutory overrides to standards worsens the clarity of the information and leads, in turn, to worse decision-making.
Recovery plans
Why don’t you say that you have a deficit of £800m and a plan to recover it over an appropriate period of time that has been signed off by a professionally qualified actuary and overseen by government? Why does the general fund balance have to be positive at all? It’s only a way of keeping score. If we simply adopted IFRS in full, we could allow the general fund to be negative and that would be fine provided you, as treasurer, could explain it. Is there really any difference between this presentation and the one I have at the moment, since it comes from Newham’s accounts?
And, as an aside, a long time ago now I recall trying to explain why we had to budget for increased pension costs. My basic thesis was that three years prior to that we had a 20-year recovery strategy for the pension fund deficit and that, having had a new triennial review, we should now have a 17-year strategy because … three years had passed. That meant costs had to go up, so colleagues wanted me to reduce them by increasing the deficit recovery period.
I wonder if I went back to that council now what its deficit recovery period is, but, technically, it should be two years because, under my thesis, there have been five triennial revaluations since. If it isn’t – and I’m prepared to entertain a bet that it isn’t – I would argue that this arises because we don’t follow IFRS and that if we did and simply showed a general fund deficit it would have brought this problem into much sharper relief. If you follow my argument to its logical conclusion, we might have been able to deal with the issue sooner, instead of just assuming that our children (and grandchildren?) would pay for our pensions.
That’s the sort of information the IFRS-based accounts provide us with. Seeking statutory overrides to standards worsens the clarity of the information and leads, in turn, to worse decision-making.
Embracing IFRS
And reversing out depreciation? David and I are in complete agreement here. Stop doing it and rely on Minimum Revenue Provision (MRP), which isn’t exactly IFRS-compliant but comes reasonably close at the principles level. Or else repeal the MRP legislation and rely on depreciation. Either would work, because the principle of each is the same. Our problem as a sector is that we do both, with predictably poor consequences.
So I think, unlike David, that we should embrace IFRS and focus on financial statements that would be fully compliant with it. We’d need to make some changes to the way we discussed our accounts, including the concept of a negative general fund balance being acceptable. But, let’s be clear that this is a presentational issue, because the accounts already have such a balance if you have any sort of deficit on your pension fund.
It would aid the clarity of our financial reporting and, let’s be honest, that could do with all the help it needs, because that’s the key foundation stone to making better financial decisions on how we spend their money. Who could argue against that?
Conrad Hall is chair of CIPFA/LASAAC and corporate director of resources at the London Borough of Newham.
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