Local authorities will be “disadvantaged” if the statutory override to the IFRS 9 accounting standard is allowed to expire as they will be put off investing in pooled funds.
And the IFRS 16 standard will “probably have some” impact on the local authority borrowing landscape this year.
Those were the conclusions of David Green, director at advisor Arlingclose, when asked about the International Financial Reporting Standard (IFRS) accounting standards at the finance panel discussion that took place during Room151’s recent Monthly Online Treasury Briefing.
There could be “mistakes” or loss of income if local authorities get their response to any changes in the borrowing landscape wrong, he said.
IFRS 9: expiry would complicate things
The statutory override that was implemented in 2018 in consideration of the impact of accounting changes to pooled investments introduced by IFRS 9 was initially for a five-year period, but was recently extended for two years.
Concerns remain that the override will be allowed to expire, although Green said there were “good reasons” this would not be the case.
If the statutory override did expire, however, this would “put local authorities off investing in pooled funds as it will disadvantage those compared to other types of investment”.
Green said “it would be a shame” if this situation were to arise, as he called pooled funds “good, highly diversified, externally managed investments to make” and “probably far more sensible than trying to run corporate bond portfolios, or equity portfolios, or property portfolios yourself”.
He added that, in his opinion, the result would be that people would either try to “do it themselves and make mistakes” or they would “invest in cash only and lose the income”. However, he acknowledged that “not everyone agrees with that outlook”.
In the event of the statutory override expiring, Green said local authorities would also need to build up reserves “so they can manage fluctuations in price themselves rather than rely on the override”.
Local authorities would also look for other products, he said. “There are things similar to pooled investment funds which don’t need the override,” Green stated, noting that Arlingclose was currently helping some clients look at those “for their new investments now”.
“There’s options out there,” he concluded, “but none of them are as simple or as good as the pooled investment funds.”
IFRS 16: a ‘net positive’
Assessing the possible effects of IFRS 16, the leasing accounting standard, on the borrowing landscape this year and beyond, Green said there would “ideally be no impact”, but that there would “probably be some” in practice.
“IFRS 16 doesn’t affect the contracts authorities have got with leasing companies, but it requires you to account for them as if it is debt, rather than a service payment,” he said.
So, in theory, there is “no change at all” when borrowing from the PWLB or other local authorities, “but when you produce your 2024/25 accounts and there’s a big pile of debt on there where there wasn’t before, it will make your debt pile look bigger and your credit look smaller,” Green explained.
However, he noted that all lenders would be aware of IFRS 16 and would take it into consideration. “Generally, when doing credit settlement with you, with leases off the balance sheet they would have done an assessment to bring it onto the balance sheet themselves,” Green said.
“That’s one of the ideas of IFRS 16: it makes the preparer of the accounts do that calculation – what is the debt associated with our credit and leases – rather than make the reader of the accounts do that calculation, with less information than the preparer.”
Concurring with Green’s assessment, James Graham, pension fund and treasury investments manager at Kent County Council, said that there would “hopefully be a net positive for us when we are looking at a post-IFRS 16 landscape”.
LOBOs: something to ‘be aware of’
Arlingclose’s Green also gave an update on existing Lender Option Borrower Option (LOBO) loans, as he said a lot of these had matured or been “called back” in the last “year or two as rates have been high unexpectedly”. He noted that with LOBOs, the lender was in control of the maturity date.
Additionally, the lender can demand the money back with two days’ notice, Green said, which is “something to be aware of”.
He commented: “I am aware of one or two defaults with people not paying back the loans just because they can’t get the cash flow in a couple of days.”
Room151’s Monthly Online Treasury Briefings take place on the last Friday of every month. Please click here to register for the next one, on Friday 28 June.
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