Stephen Sheen looks at how a suite of new accounting standards will impact preparations for next year’s statements of accounts.
As the ink dries on the 2017/18 statement of accounts, there is no better time to start thinking about how the pen might need to be wielded in 2018/19.
At least this year there is no pressure for further acceleration of the timetable for accounts closure.
The majority of authorities were able to meet the 31 July target for the publication of audited statement of accounts for 2017/18.
Those that found benefit in doing so might even be thinking of ways to enhance those benefits by voluntarily rolling forward their 2018/19 deadlines.
But I doubt the statutory date for audited accounts could or should be moved any further forward than 31 July, on the basis that effective audit will be jeopardised.
The tighter the time into which audit work is crammed, the smaller the opportunity to give junior auditors the necessary depth of experience of working with local authorities.
There is also less time to deal collectedly with significant issues when they arise.
The absence of pressure to accelerate closedown is fortunate because we have entered a period where there is a run of new accounting standards.
These won’t just require a little tinkering with the statement of accounts but have a real potential to impact on the resources of an authority.
Authorities will need to take the time to approach them with confidence.
IFRS 9 – Financial Instruments
Plenty has already been said about IFRS 9 Financial Instruments, which came into effect on 1 April, much of it on this website.
But there will never be a time in the next few months when it won’t be worth reiterating the steps to be taken in the two key risk areas for a revenue impact:
- Ensuring that the authority understands the effects of the switch in accounting treatment for investments that are more than basic lending arrangements. This means no more storing up of fair value gains and losses on the balance sheet until maturity or disposal, but immediate recognition as income or expenditure. Where your authority has such investments, make sure you have properly appreciated the opportunities for statutory reversals or for designation of instruments into the accounting category that allows continued accumulation of gains and losses;
- Confirming whether there have been any significant increases in impairment loss allowances for cash deposits and loans, with the switch of model from incurred losses to expected losses. Up to 1 April 2018, allowances against loans and other debtors were only required where a debt had gone bad. From that date, however, allowances must reflect all the possibilities that a debt might not be repaid, taking a weighted average position rather than the likeliest outcome. The risk here of bottom-line impact is probably greatest for loans given for non-capital purposes.
IFRS 15 – Revenue from contracts with customers
Less well publicised, but also coming into effect on 1 April, was IFRS 15 Revenue from Contracts with Customers.
This is a very significant standard for the private sector, where there is great interest in being able to recognise income as early as possible, but it has yet to be the focus of much debate in local government.
IFRS 15 introduces a five-step model for assessing the performance obligations in a contract for the provision of goods or services and how much of the transaction price is to be taken as each obligation is satisfied.
The model will largely confirm the pattern of revenue recognition for a contract as it would have been determined currently in the absence of any specific rules.
However, IFRS 15 might require some reconsideration of contracts where there is a significant timing difference between the authority providing goods and/or services and receiving payment.
Payments in advance will bring a particular risk that the recognition point for income might have to be pushed back.
IFRS 16 – Leases
One year on (but potentially requiring substantial preparation in 2018/19) will be the adoption of IFRS 16 Leases from 1 April next year.
The standard removes the distinction between operating and finance leases for lessee accounting.
Aside from those with a term of less than 12 months, and those for items of low value, all leases will be accounted for by recognising an asset for the right to use the relevant property, plant or equipment and a liability to pay for that right.
Early signs are that the changes do not have a great potential to have an impact on the general fund balance, as the default financing treatment for both operating and finance leases is currently to charge rentals to revenue in the year that they become due.
This is the recommended approach in the government’s statutory guidance applicable for IFRS 16.
However, there should be a greater focus on value for money as more leases will need to have their rentals disaggregated to show the cost of the property rights acquired and the interest rate implicit in the arrangement.
Even though there are transitionary concessions, some work will be needed to update the leases register and to calculate newly recognised lease assets and liabilities.
Expenditure and funding analysis
On top of all of this, there will also be some tinkering with the Expenditure and Funding Analysis (EFA).
Following objections from accounting purists, segmental reporting requirements will no longer be met in the comprehensive income and expenditure statement.
All the work will now have to be done by the EFA, taking it further away from its initially intended role as a straightforward bridge between the budget outturn and net expenditure as per the financial statements.
Stephen Sheen is managing director of Ichabod’s Industries, a consultancy providing technical accounting support to local government.
