Treasury managers and section 151 officers are overwhelmingly in favour of the IFRS 9 statutory override being extended or made permanent, according to a Room151 survey.
The survey showed that 87% of respondents supported this approach – 68% thought the override should be made permanent and 19% thought it should be extended. Responses were received from a range of local authorities, including districts (40%), unitaries (18%), London boroughs (10%), other boroughs (9%) and mets (9%).
IFRS 9 is the standard covering financial instruments and took effect in local government from the 2018-19 financial year. However, there were concerns that this could significantly impact councils with holdings in pooled investment funds.
Following a consultation, the government agreed to a five-year statutory override of IFRS 9’s requirements relating to fair value movements on pooled investments. This arrangement is due to expire in 2023-24, and so the government will have to decide if IFRS 9 will then be implemented fully or if the override should continue.
A spokesperson for the Local Government Association told Room151 that the government had been right to implement the statutory override in 2018. “This survey shows that there is now strong support in the sector for the override to be extended or made permanent and the LGA will continue to discuss this with the government and make sure that the sector’s voice is heard,” he added.
David Green, strategic director at treasury advisers Arlingclose, welcomed the fact that local authorities had “decisively backed” the override being made permanent.
“External auditors’ narrow interpretation of accounting standards back in 2018 created an anomaly where fair value changes in directly held bonds, equities and property didn’t affect the general fund, but fair value changes in pooled funds of those investments did. Government responded with a temporary override, to avoid authorities cutting services or raising council tax, and a majority of authorities agree this should now be made permanent,” he said.
He pointed to the volatility shown in the survey – with 28 of the 77 respondents registering both losses and gains over the three years examined.
“The swings in fund values of the pandemic demonstrate the benefit of the override. Seventy-four percent of respondents’ portfolios were in loss territory in March 2020, compared to just 28% in March 2022. Why would you want half of local authorities cutting services or raising taxes at the start of a pandemic, just to reverse it two years later when the market recovers?”
If the override is not extended or made permanent, there would inevitably be an impact on services. When asked what the result would be, 19% of respondents said they would “accept lower investment income and the consequent impact on service spending”.
MRP negativity
The survey also looked at how the proposed changes on Minimum Revenue Provision (MRP) would impact authorities. Very few respondents viewed the proposals positively, with the budget (56%), capital programme (52%), service delivery (49%) and prudent financial management (34%) all impacted negatively.
Nearly one-quarter (23%) of respondents said that the additional annual revenue cost would be up to £5m if they made full MRP in line with the government guidance.
In response, Green said: “Government should relax its proposals for MRP on loans that are being repaid on schedule, as there is no point in authorities charging the whole loan principal to revenue where it is highly likely to be repaid.”
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