Councils are set to be given a grace period of three years to prepare for the impact of accounting changes to their pooled investments introduced by IFRS9.
The government has bowed to pressure from the sector to introduce a statutory override, albeit temporarily, to the accounting standard which will require council treasurers to book some investments at fair value through profit and loss rather than “other comprehensive income”.
A consultation document published this week said: “Having considered the risks and incentives, the government proposes introducing a time limited statutory override, requiring local authorities to reverse out fair value movements recognised on pooled investment funds to unusable reserves for a period of three years to 1 April 2021.
“This is because it recognises that local authorities need time to either divest themselves of financial instruments that they no longer wanted to bear the risks of holding in an orderly way, or to build up revenue reserves to mitigate the impact of fair value movements on instruments they wanted to continue to hold.”
David Green, strategic director at treasury adviser Arlingclose, said the principle of a statutory override could prevent councils being incentivised to buy single bonds, equities and properties over lower-risk pooled bond, equity and property funds.
However, he said: “We don’t see why those incentives should be reintroduced in 2021; we will therefore be lobbying for a permanent override and recommend that local authorities do the same.”
The government consultation however, says that it believes, “…it is desirable that ultimately, local authorities account for holdings in pooled investment funds in the same way as any other reporting entity… .”
Stephen Sheen, local government accountancy consultant, said: “This is not a deliverance against the impact of IFRS 9, but a postponement.
“Councils won’t be able to avoid the accounting changes but in the next three years they will be able to store up money in earmarked reserves to provide a contingency for future losses.”
“The statutory override gives people three years to be calm and plot a way through this new world.”
Alarm had been raised in the sector last year about the introduction of IFRS9, with some experts warning that councils engaged in commercial activities face reductions of more than 10% in their general fund.
CCLA chief executive Michael Quicke, whose firm manages funds for nearly 600 local authorities, welcomed the consultation, saying, “At a time of great pressure on local government finances, and with interest rates likely to remain low for some time, it is clearly sensible to allow this flexibility so local authorities are able to harness the power of investment markets to help enhance their work with local communities.”
Rob Whiteman, chief executive of CIPFA, said that gains and losses on the sale of an investment can have “very real consequences” and so the changes to accounting for local authority investments, brought in by IFRS9, is an important step.
He added: “It is likely that many collective investment vehicles will meet the classification requirements from 1 April 2018 so that the gains and losses will be chargeable to income and expenditure.”
From a technical standpoint, Whiteman argues that the issue is whether the collective investment vehicles qualify for the election under IFRS9 for movements in fair value of investments in an equity instrument, to be chargeable to fair value through other comprehensive income.
To meet that qualification, he says: “…the investment would need to meet the definition of an equity instrument in accounting standards and whether that election properly represents the financial performance and position of the local authority in the financial statements.”
Elsewhere in the consultation document, the government indicated that it is not minded to create a statutory override to mitigate the impact of the change in the impairment allowances model from incurred losses to expected losses under IFRS 9.
It said: “This is because local authorities who will be required to recognise substantial impairments have taken deliberate decisions to take on a more risky loan book and it is right that they recognise the potential costs of that strategy.”
Green said: “We agree that the impairment and disclosure matters raised in the consultation will have a lesser impact on most authorities.
“Our clients have indicated they are able to manage these without the need for an override following our training and ongoing technical advice on the subject.”
Local authorities and other interested parties are invited to respond to the consultation which is open from 25 July to 28 September 2018.
Seven questions in the consultation
Q1. Do you agree that local authorities should be allowed to reverse out the impact of fair value movements on pooled investment funds to unusable reserves? If not, why not and what alternative approach would you propose?
Q2. Do you agree that the statutory override should be time limited? If not, why not? If it is time limited, is a three year period appropriate?
Q3. If you agree that local authorities should be allowed to reverse out the impact of fair value movements on pooled investment funds should this be limited to pooled property funds or apply to all pooled investment funds, and why?
Q4. Do you agree that local authorities should be required to disclose the net profit/loss reversed out of the general fund to mitigate the impact of the introduction of IFRS 9, as a separate line in the Unusable Reserves note? If not, please explain why not and detail the alternative approach you would prefer.
Q5. Do you agree that the Government should not create a statutory override to protect local authorities from the impact of the move to an expected loss model to calculate impairments on loans and debt? If you disagree please explain why with case study examples if relevant.
Q6. Do you agree that the Government should not create a statutory override for any of the disclosure requirements introduced by the new standard?
Q7. Do you agree with the proposal to extend the Regulation allowing local authorities not to charge back-pay awards for equal pay claims for a further two years to 2020? If not, please explain why not.
