Senior figures in the local government finance sector have called for a statutory override to shield local authorities from the impact of new accounting rule IFRS9.
Local authorities face continued uncertainty over how the new rules will require them to account for gains and losses on financial assets under what has been dubbed “the most complicated accounting standard ever issued”.
In November, government officials said they will need very strong evidence from councils before ameliorating IFRS9 rules adopted last week which require local authorities to account for pooled investment losses and gains in their general funds.
However, many in the sector are pushing hard for action, arguing that although the aims of IFRS9 are reasonable, they could harm local authority financial resilience.
Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy (CIPFA), told Room151: “CIPFA/LASAAC has acknowledged that in accordance with the aims of the standard that fair value gains and losses should be reported transparently and fairly, that is consistently with all other accounting entities in the UK and overseas (applying IFRS).
“However, CIPFA recognises two difficulties: first it is important that the impact of unrealised losses or gains should not affect the taxpayer through actual reduction or increases in the council’s reserves; and secondly, clearly, councils culturally treat the instruments under discussion as balance sheet investments.”
Whiteman said that CIPFA has received widespread concern from treasurer societies, and that it is working with the Ministry of Housing, Communities and Local Government (MHCLG) and each of the devolved administrations in support of a statutory override.
Local government accountancy expert Stephen Sheen, said that the clear intention of the International Accounting Standards Board was not properly reflected in the wording of IFRS9 and International Accounting Standard 32.
He said that this has resulted in “an unsettled argument that now needs to be had between individual authorities and their auditors”.
On whether collective investment vehicles are affected by the new rules, he said: “As we are talking about an accounting policy choice, authorities need to consider the treatment that best reflects the substance of the transaction, not the most favourable fiscal outcome.
“In my view, there isn’t then much of an argument for hiding gains and losses on these vehicles away and changes in value should be recognised in the financial statements as income and expenditure as they arise.
“But in order to be consistent with the treatment of other investments (particularly property), there is a strong case for statutory adjustments to defer the impact on council tax until the point that gains and losses are realised.”
If no statutory override is granted by government, councils may face the prospect of reassessing the structure of any standalone companies they have set up, according to consultant Peter Worth.
He said: “Councils went into those instruments with a clear intention that they should be making a profit. You can’t have it one way but not the other way.
“I think many authorities may not have considered IFRS9 and may need to revisit their company structures.
“It should make authorities think about commercialisation a bit more clearly. What this does, and investment guidance does, is make it clear that if you have a realised loss it will have to be picked up by the taxpayer at some point.”
David Green, strategic director at treasury adviser Arlingclose, said his firm is advising clients that they can use the option to account for equity instruments at “fair value through other comprehensive income” for their strategic investments in pooled funds, meaning that there would be no additional impact on revenue.
He said: “We don’t class these funds as puttable instruments, because investors have no contractual right to receive their cash back. We don’t agree that a fund’s history of meeting redemption requests means that investors should account for a right to receive future requests, as that contradicts IFRS guidance on similar investments.
“And in any case, the guidance on the definition of equity investments says that it includes some puttable instruments.”
John Kelly, client investment director at investment manager CCLA, said: “I would observe the consequence of the uncertainty around IFRS9 has been a reduction in investment activity with an orderly queue forming awaiting news of a possible government over-ride.”
