David Green argues that local authorities’ distinct role in providing public services to residents justifies the imposition of special accounting rules and overrides.
So the Department for Levelling Up, Housing and Communities has followed the joint recommendation from CIPFA and ICAEW to only extend the IFRS 9 pooled fund statutory override in England for two years, rather than to make it permanent as most local authorities and their representative bodies requested. Apparently, since local authorities invest in “the same sort of instruments” as other investors, they should follow the same accounting rules.
With ICAEW’s private sector remit now influencing CIPFA’s recommendations for the public sector, I wonder what other local authority specific rules could be heading for the dustbin.
Local authorities also borrow using the same sort of instruments as other borrowers. So, if they repay them early, maybe they should take the premium or discount straight to revenue, and do away with the statutory override that allows premium costs and requires discount savings to be spread over the period they relate to.
Councils also provide similar pensions to some other employers. Defined benefit pensions are on the wane in the private sector but, where they still exist, changes in the value of the pension liability impact on profit and loss immediately.
I guess we should therefore bin the statutory override that requires such impacts on local authority accounts to be deferred until they are reflected in updated employers’ contributions.
And, of course, local authorities incur the same sorts of capital expenditure as other organisations, including on vehicles, offices, investment property, and even schools and care homes. Why then do we reverse out depreciation, revaluation and impairment costs from the revenue account, add in minimum revenue provision, and restrict the use of the proceeds of sale?
Is it just possible that International Financial Reporting Standards designed for the private sector have some rough edges that make them less suitable for local authorities, so that a few special rules are needed?
Dustbin of history
Following CIPFA’s and ICAEW’s logic, these rules would also be consigned to the dustbin of history. Most local authorities have very high balances in their capital adjustment account; moving these into the General Fund would certainly fill the black hole in revenue budgets for many years to come.
Or maybe, just maybe, local authorities focusing on providing public services to local residents are rather different organisations to companies generating a profit for their shareholders. Is it just possible that International Financial Reporting Standards designed for the private sector have some rough edges that make them less suitable for local authorities, so that a few special rules are needed?
I look forward to CIPFA and ICAEW pushing for a roll back of these statutory overrides too. Otherwise, they will be supporting an accounting framework that keeps the fair value override in place for investment property, shares in commercial subsidiaries and solar bonds, but not for professionally managed and highly diversified pooled funds. And looking at recent section 114 reports, that sounds like a recipe for disaster.
David Green is strategic director at Arlingclose Ltd.
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