CIPFA and the ICAEW have called for a time-limited extension to the IFRS 9 statutory override, with the standard then fully applied after two years.
The recommendation came in a joint response to a consultation issued by the Department for Levelling Up, Housing and Communities (DLUHC) on the statutory override of IFRS 9, the standard covering financial instruments. Under the override, fair value movements in the value of pooled funds are recorded by local authorities in an unusable reserve rather than in the general fund.
Both accountancy institutes stressed that their preference was for there not to be an override for IFRS 9 in local government. However, given that the economic uncertainty caused by Covid-19 had disrupted the market for pooled assets, they understood the justification for a strictly time-limited extension.
“We recommend that the government considers an extension that expires after two years, on 31 March 2025, and is clear in any accompanying commentary that there will not be a further extension,” they write.
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Pooled investment funds
IFRS 9 was introduced into the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the UK in 2018. However, there were concerns that this could significantly impact councils with holdings in pooled investment funds.
As a result, the government agreed to a five-year statutory override of IFRS 9’s requirements relating to fair value movements on pooled investment funds. This arrangement expires on 31 March 2023 and the government issued a consultation on future options that closed on 6 October 2022.
Three options were proposed: allow the statutory override to elapse; extend the override on a time-limited basis; or make the statutory override permanent.
We do not believe there is a case for local authorities diverting from the highest standards in their reporting of investments in pooled funds as they are investing in the same type of instruments as professional investors.
Joint response
The two institutes have been in talks for some time discussing the potential for “closer working” and it is significant that they have chosen to respond on this issue jointly. They argue that IFRS 9 was designed to improve the understanding of risks from investments and “there is a concern that the override partly undermines this”.
Sarah Sheen, CIPFA’s standard setting manager, said: “CIPFA is of the view that statutory overrides should only be used in circumstances where there is particular local government context or where IFRS as implemented in the code leads to perverse outcomes.”
Sheen suggested that this was unlikely to be the case for the implementation of IFRS 9 for pooled investments in the long term.
Oliver Simms, the ICAEW’s manager for audit and assurance, added: “We do not believe there is a case for local authorities diverting from the highest standards in their reporting of investments in pooled funds as local authorities are investing in the same type of instruments as professional investors.
“We share CIPFA’s view that removing the IFRS 9 override as soon as practical would help local authorities improve their financial and risk management by ensuring that the financial impacts of pooled fund investments are transparently reported.”
S151s ‘prefer permanent override’
The issue has proved controversial, with two treasurer societies – the Society of County Treasurers (SCT) and the Society of District Council Treasurers – calling for the override to be made permanent.
Speaking to Room151 earlier this year, Chris Tambini, SCT president, said that the override had protected councils from volatile market movements. “We would welcome some certainty on this, so rather than another time-limited extension, we would support a permanent extension.”
A survey conducted by Room151 in May 2022 also found that treasury managers and section 151 officers were in favour of the IFRS 9 statutory override being made permanent. Sixty-eight percent of respondents supported this approach, while 19% thought it should be extended.
Local authorities are not required to take fair value gains and losses on directly held bond, equity and property investments to their general fund, so we do not see the argument for taking a different approach with similar investments held via pooled funds.
‘Purist’ accounting approach
David Green, strategic director at treasury advisers Arlingclose, told Room151 that the pooled fund override was correcting an anomaly rather than creating one as suggested by CIPFA and the ICAEW.
“Local authorities are not required to take fair value gains and losses on directly held bond, equity and property investments to their general fund, so we do not see the argument for taking a different approach with similar investments held via pooled funds. The end of the override may incentivise direct investment, meaning authorities lose the benefits of diversification and expert fund management that come with pooled funds,” he said.
“Local authority accounts are full of statutory overrides and adjustments, including for depreciation, MRP, capital receipts, pension liabilities, holiday pay, premiums and discounts, soft loans and many more. Will CIPFA’s closer working with ICAEW see a more purist accounting view adopted in these areas too?”
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