THE DUST has settled on the implementation of IFRS across the UK public sector, but the implementation of Whole of Government Accounts (WGA) remains a problem area. Two major areas of difficulty need to be addressed in the wake of qualification of the 2009/10 accounts. Specifically, the adequacy of processes used for gathering data on material transactions between public sector bodies that need to be eliminated on consolidation, and the divergence of accounting policies across the public sector.
The Treasury is keen to move towards greater convergence across the public sector and eliminate these problems. In a paper to the Financial Reporting Advisory Board (FRAB), it set out its vision of the way forward. The proposal is to aim for a single Financial Reporting Manual (FreM) covering the whole public sector.
The main problem sector is local government, which prepares accounts of the greatest complexity – largely because of political decisions that accounting changes should not affect levels of local taxation. This means the accounting deficit of a council may be significantly different from the funding requirement from taxation and government grants.
The key divergences identified in the Treasury document are that both issues can be addressed without the need for change in the legislative framework. These are the basis of valuation of infrastructure assets (chiefly roads) and the presentation of non-current assets relating to schools, particularly church schools, where the interpretation of the recognition requirements of IAS16 – the accounting standard that sets out how entities should report their investment in property, plant and equipment – has varied from council to council.
The Treasury’s paper comments: “This impacts on WGA as assets may not be reported by any public sector body or reported twice resulting in a potential qualification of the accounts. The National Audit Office has voiced concerns over inconsistent accounting for schools assets and indicated that the impact could be material to the 2010/11 WGA.”
The Chartered Institute of Public Finance and Accountancy (CIPFA) has included proposals on these areas in the recently closed consultation on the Code of Practice for the 2013/14 financial year. The proposals concern the recognition of non-current assets relating to schools and – with effect from the 2014/15 financial year – the carrying of infrastructure assets will be carried on the basis of depreciated replacement cost.
It should be said that these issues are not new and have been a cause of concern for more than a decade. When the initial work on WGA began, nearly ten years ago, the issue of schools was already a concern. Other major issues remain outstanding. Chiefly, the issue of depreciation on fixed assets being a charge against local taxation, removing the single largest barrier to IFRS accounts reflecting the funding requirement, and with it a significant driver of complexity in local authority accounts.
Solving all the issues
Convergence will not, however, solve all the issues. There has been much debate about the primary purpose of public sector accounts and questions raised as to the relevance and meaningfulness of these accounts. A few months ago, the Journal of Finance and Management in Public Services published a paper by Malcolm Prowle, Donald Harradine and Roger Latham, a former finance director and ex-president of CIPFA, of the Nottingham Business School.
The authors argue that public sector accounts have become unnecessarily complex, irrelevant to the needs of users and costly to produce: “We have concerns that statutory financial accounting in the public sector has become more complex for two reasons. Firstly, accounting practices in the public sector have blindly followed those in the private sector without any consideration of the differences between the two types of organisation and the relevance of information provided. Secondly, it may be in the interest of the accounting profession and the auditors to have more complex arrangements.”
Aside from this polemical point, they raise an important issue in arguing that the accounts of public sector bodies fail to meet the information needs of users. How, they ask, can accounts promote accountability? The authors suggest three areas where public sector accounts fail to do this. They argue that accountability requires accounts to show that “public funds have been used according to plan – given that statutory financial accounts only show actuals and not planned, it does not seem that they can meet this need”.
The report further states that public funds must also be shown to have been used effectively and efficiently. “It is difficult to see how this need can be met from existing statutory accounts. Even if accounts were compared with other similar organisations, the lack of detail contained in statutory accounts would provide little useful information about effectiveness and efficiency,” the authors say.
“If accountability and stewardship is seen as an amalgamation of the above, then it does not seem that statutory financial accounts meet this information need to any large degree.”
On the issue of cost, the authors admit they have little reliable data but argue, on the basis of illustrative figures, that costs are likely to be significant and that, in times of austerity, this money might be better spent on services.
The fact that public and private sectors may need different accounting standards is recognised by the existence of the International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Board. Some years ago, before the implementation of IFRS, commentators were pointing to US GAAP as a possible model, with separate standards for public and commercial entities.
International standards offer a similar approach. IPSAS have not been formally adopted in the UK but are second in the hierarchy of standards. That is to say they are consulted over matters that cannot be resolved by consulting the standards or the IFRIC interpretations.
In practice, the IFRS-based accounts of UK public sector bodies already largely comply with IPSAS.
A paper produced by the Society of Local Government Managers in New Zealand earlier this year identified 180 differences between IPSAS and IFRS, of which only two were of any significance (which were mainly related to segmental reporting). The conclusion was that it was much ado about very little. Implementation of IPSAS is not likely to change very much.
Indeed, the authors of the Nottingham paper say they “reject the obsession with international approaches. The key is to have arrangements which are relevant to the UK.”
Realistically, the UK public sector is not going to abandon IFRS any time soon and the paper does not make any mention of the issues arising from joint ventures, commercial entities owned by public sector bodies, and the trend towards commercialisation of the provision of public services over the last couple of decades – all of which have driven the transition to more commercial-style accounts as much as an alleged conspiracy of the accounting profession.
As the body chiefly concerned with developing financial accounting in the public sector, CIPFA will be well aware of the criticisms – however, it rejects the view that the current accounting regime is not appropriate.
CIPFA comments: “Compliance with IFRS and IPSAS is driven by the need for financial statements to have a sound conceptual basis rather than by a desire to follow the private sector. IFRS/IPSAS-based financial statements show the economic effect of transactions and highlight key information that is needed for long-term decision making.
“Unfortunately, what the standards do expose is the limitations of the council tax legislation, which doesn’t allow for asset depreciation and long-term pension costs. It is actually the budgetary framework that is divorced from the economic reality of what is happening on the ground.
“The objectives of public sector financial reporting are to provide information that is useful for accountability purposes and for decision-making purposes. While financial statements based on the budgetary framework may be helpful for accountability purposes, they would obscure information needed for decision making. Done well, IFRS/IPSAS-based financial reporting can meet both objectives.”
The institute also restates its main target: “CIPFA is committed to working with the public sector to identify and promote best practice and to improve the financial statements.” ?