Statutory overrides to some parts of the new IFRS9 accounting standard could be introduced in by the end of the next financial year, a government official has revealed.
Gareth Caller, head of the local government finance unit at the Ministry of Housing, Communities and Local Government (MHCLG), told a conference this week that a consultation on the issue could be imminent.
Local authorities have voiced worries that, although the aims of IFRS9 are reasonable, they could harm local authority financial resilience.
In Room151’s 2018 Local Government Finance & Treasury Current Affairs Survey of 86 section 151 and treasury officers, set to be released in full next week, 80% of respondents support the introduction of a statutory override, with only 2% against the idea (18% undecided).
Speaking to CIPFA’s Treasury Management Network Conference this week, Caller said: “Every time you consult on statute you need to get agreement from all government departments.
“Subject to that, we are planning to consult on potential statutory overrides to elements of IFRS9. I think we are looking at pooled property funds specifically.
“That is because we recognise that lots of local authorities have invested historically under a different framework, and it is unfair to penalise them for that.
“And, also, … if we had just changed the investment guidance to suggest that local authorities shouldn’t be investing in individual properties purely to generate yield, it is very odd to then say that you have to recognise the fair value movements of a less risky form of investment fund.”
Caller told the conference that, assuming responses were positive, the government “would be looking to lay whatever changes come out of the consultation before end of this financial year”.
The official also said he had “agonised” over the issue when it was first raised by worried council treasury officers and representative bodies.
He said: “If you think about the genesis of IFRS9 — the financial crisis of 2008 — it was all about trying to get reporting entities to recognise potential losses on investments and structures that they held as soon as they became aware, as soon as they thought they were likely, rather than recognising all the potential profits up front and leaving losses to the last possible moment.
“Those are entirely laudable and sensible objectives, and the idea behind it is to improve financial reporting overall.
“On the other hand, we always need to think about the impact of that on the balanced budget requirement, which is a key financial control on local authorities. That is why we want to consult.”
Also speaking to the conference, Grant Patterson, a director and national public sector financial reporting lead at auditor Grant Thornton, said it was unlikely many investments would escape the new rules.
In January, David Green, client director at treasury adviser Arlingclose, suggested councils might be able to make a one-off “election” to take losses on bond and property funds to an unusable reserve.
However, Patterson said: “The National Audit Office coordinates a technical group for auditors to make sure we are consistent across the piece. We think a lot of these will be caught.
“Our view is that they should be going through fair value profit and loss, but a lot will depend on your local arrangements and contracts on that investment.
“While we might have a general view that we expect them to go through that, it all comes down to the individual terms of that investment as to where the accounting goes.”
