IFRS   Update for Local Government Practitioners

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2. Why IFRS? . International Financial Reporting Standards (IFRS) aim to harmonise financial reporting in a world of cross-border trade and investment, and increased globalisation. To date, over 100 countries, from Canada to China, have adopted the rules, or say that they intend to adopt them. The

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IFRS Update for Local Government Practitioners

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1. 1 IFRS – Update for Local Government Practitioners Intro Today is about What do you need to do to get ready for IFRS The Timetable, actions and planning for a successful IFRS implementation. Intro Today is about What do you need to do to get ready for IFRS The Timetable, actions and planning for a successful IFRS implementation.

2. 2 Why IFRS? International Financial Reporting Standards (IFRS) aim to harmonise financial reporting in a world of cross-border trade and investment, and increased globalisation. To date, over 100 countries, from Canada to China, have adopted the rules, or say that they intend to adopt them. The International Accounting Standards Board (IASB) expects that to increase to 150 countries by 2011. IFRSs have been adopted by both the Australian & New Zealand public sectors so a transition to these standards is perfectly possible though it will involve a great deal of preparation & implementation work. Not all IFRSs will be relevant to the public sector & it will be necessary to determine which ones will require a greater focus. Other Reasons for IFRS to be instituted !: Globalisation of trade and capital markets Rapid pace of change in IT and the easy transfer of funds electronically around the world and the willingness to invest abroad International banking and securities trading arrangements have been much more harmonised IFRS have tended to be used much more worldwide Other Reasons for IFRS to be instituted !: Globalisation of trade and capital markets Rapid pace of change in IT and the easy transfer of funds electronically around the world and the willingness to invest abroad International banking and securities trading arrangements have been much more harmonised IFRS have tended to be used much more worldwide

3. 3 Messages from HM Treasury Budget Report March 2007 – Paragraphs 6.59 to 6.60 The annual financial statements of government departments and other entities in the public sector are currently prepared using accounting policies based on UK Generally Accepted Accounting Practice. In order to bring benefits in consistency and comparability between financial reports in the global economy and to follow private sector best practice, this Budget announces that from the first year of the CSR period these accounts will be prepared using International Financial Reporting Standards adapted as necessary for the public sector. This Budget announced the Government’s intention that Whole of Government Accounts would be published for the first time for the 2008-09 financial year on an IFRS basis WGA will now be published for the first time on an IFRS basis in 2009/10 Slide No 3 Read Through the Slide Further info This revised timetable is to allow time to complete the alignment of local and central government accounting policies and to enable WGA to be prepared on the new IFRS basis. WGA was meant to be on an IFRS basis from 2008-09 as part of a coherent package of developments in financial reporting introduced at the same time. The timetable for this has now changed.Slide No 3 Read Through the Slide Further info This revised timetable is to allow time to complete the alignment of local and central government accounting policies and to enable WGA to be prepared on the new IFRS basis. WGA was meant to be on an IFRS basis from 2008-09 as part of a coherent package of developments in financial reporting introduced at the same time. The timetable for this has now changed.

4. 4 Slide 4 Working from right to left… Full IFRS-based accounts are required for the 10/11 financial year Therefore comparatives will be needed for 09/10 To get comparatives for the income statement for 09/10, an IFRS-based opening balance sheet at 1 April 2009 will be needed and will need to be published New IFRS Code of Practice being prepared now – aim to consult on draft version during spring of 2009 to allow publication autumn 2009 This gives sufficient time for regulations to be brought in where CLGSlide 4 Working from right to left… Full IFRS-based accounts are required for the 10/11 financial year Therefore comparatives will be needed for 09/10 To get comparatives for the income statement for 09/10, an IFRS-based opening balance sheet at 1 April 2009 will be needed and will need to be published New IFRS Code of Practice being prepared now – aim to consult on draft version during spring of 2009 to allow publication autumn 2009 This gives sufficient time for regulations to be brought in where CLG

5. 5 Slide 5 LG IFRS based input into the WGA system – will probably be in 2009\10 Central government will move to IFRS in 2009\10 a year later than was originally envisaged due to the complications arising from the potential accounting treatment of PFI schemes under IFRIC 12 i.e. to what degree they should or should not be accounted for on public sector balance sheets. For central government, the financial reporting manual suitably adapted by IFRS (the IFREM) will be the main driving tool for the adoption of IFRS in the central government arena.Slide 5 LG IFRS based input into the WGA system – will probably be in 2009\10 Central government will move to IFRS in 2009\10 a year later than was originally envisaged due to the complications arising from the potential accounting treatment of PFI schemes under IFRIC 12 i.e. to what degree they should or should not be accounted for on public sector balance sheets. For central government, the financial reporting manual suitably adapted by IFRS (the IFREM) will be the main driving tool for the adoption of IFRS in the central government arena.

6. 6 IFRS 1 – The Implementation Gateway for IFRS – Presentation and Disclosure To comply with IAS 1, an entity’s first IFRS financial statements (closedown 2010/11) shall include; Three statements of financial position (balance sheet), two statements of comprehensive income (I&E), two statements of cash flows, two statements of changes in equity (STRGL), related notes, including comparative information. MOST IFRS ACCOUNTING IS RETROSPECTIVE – YOU ACCOUNT FOR THINGS AS IF THEY HAD ALWAYS BEEN UNDER IFRS RULES You will need to go back into the past especially with valuations etc  The above slide is paragraph 36 of IFRS1 IAS 1 covers presentation of financial statements Except as described in paragraph 37, this IFRS 1 does not provide exemptions from the presentation and disclosure requirements in other IFRSs. Paragraph 37 of IFRS 1 states: Some entities present historical summaries of selected data for periods before the first period for which they present full comparative information under IFRSs. In any financial statements containing historical summaries or comparative information under previous GAAP, an entity shall:   (a) Label the previous GAAP information prominently as not being prepared under IFRSs; and (b) Disclose the nature of the main adjustments that would make it comply with IFRSs. An entity need not quantify those adjustments. The above slide is paragraph 36 of IFRS1 IAS 1 covers presentation of financial statements Except as described in paragraph 37, this IFRS 1 does not provide exemptions from the presentation and disclosure requirements in other IFRSs. Paragraph 37 of IFRS 1 states: Some entities present historical summaries of selected data for periods before the first period for which they present full comparative information under IFRSs. In any financial statements containing historical summaries or comparative information under previous GAAP, an entity shall:   (a) Label the previous GAAP information prominently as not being prepared under IFRSs; and (b) Disclose the nature of the main adjustments that would make it comply with IFRSs. An entity need not quantify those adjustments.

7. 7 Selected - Transition arrangements (Chapter 10 of the Draft CIPFA IFRS Code) The depreciated historical cost of an asset as at 1 April 2009 shall be deemed to be the depreciated historical cost of that asset as at 31 March 2009 under the 2009 SORP IFRS 1 requires disclosures explaining how the transition from UK GAAP to IFRS affects the reported financial position, financial performance an cash flow – the Code instead requires an authority to disclose any material differences between amounts presented under the SORP 2009 and the IFRS based Code. This includes the balance sheet so any material difference in the IFRS balance sheet as at 1 April 2009 from UK GAAP balance sheet at 1 April 2009 will need to be disclosed If there are no material differences then you should include in the notes to the accounts a statement to that effect Under IFRS 1 there are some exemptions that apply that make life (a little) easier No need to go backwards on changing revaluations unless they are wrong!Under IFRS 1 there are some exemptions that apply that make life (a little) easier No need to go backwards on changing revaluations unless they are wrong!

8. 8 The IFRS Local Government Planning Pyramid Slide 6 April 2010 – go live date for the 2010\2011 final accounts 2010/11 doesn’t mean March 2011 because of budgets Budgets will need to allow for impact of IFRS on council tax, HRA – This should be negated by the issue of CLG mitigation regulations. These regulations will need to be in place in time for the first budgetary process under IFRS To do so, need to know if impact mitigated by regulations. May not need regulations, but need to plan as if we do Regulations – can only be drafted when good idea of what is in the Accounting Code for 2010\11 Accounting code for 2010\11 is being drafted now Finally, WGA 2009/10 will be IFRS based: PFI (not a problem if early implementation) Infrastructure (top level adjustment from information already supplied?)Slide 6 April 2010 – go live date for the 2010\2011 final accounts 2010/11 doesn’t mean March 2011 because of budgets Budgets will need to allow for impact of IFRS on council tax, HRA – This should be negated by the issue of CLG mitigation regulations. These regulations will need to be in place in time for the first budgetary process under IFRS To do so, need to know if impact mitigated by regulations. May not need regulations, but need to plan as if we do Regulations – can only be drafted when good idea of what is in the Accounting Code for 2010\11 Accounting code for 2010\11 is being drafted now Finally, WGA 2009/10 will be IFRS based: PFI (not a problem if early implementation) Infrastructure (top level adjustment from information already supplied?)

9. 9 CIPFA\LASAAC Board has considered what the IFRS Local Government code of practice for 2010/11 will look like, and all sections of the new code have already been drafted please see: http://www.cipfa.org.uk/pt/cipfalasaac/ifrs_structure.cfm CIPFA/LASAAC formally consulted on the Code during early summer 2009. Consultation closed on the 11th of September 2009 – But in reality probably comments on the draft sections are still welcome, and can be sent to [email protected] The PFI arrangements in the 2009 SORP apply now in 2009/10 – A year earlier than full IFRS. Decisions concerning the development of the accounting code will be published on the new CIPFA/LASAAC website (www.cipfa.org.uk/pt/cipfalasaac) Slide 7 Further info First bullet – Structure of the Code -- The table shows the proposed structure of the IFRS-based Code of Practice on Local Authority Accounting. This is subject to change as the development of the Code progresses or as circumstances change. Where CIPFA/LASAAC has approved a section of the Code, this is noted in the Status column. In most cases, the section will be available to download by clicking the icon in the download section. Please note that these sections may not have been considered by FRAB, and are therefore subject to change. Further changes may also happen to ensure consistency with other aspects of the Code that had not been prepared when the section of the Code in question was approved, or if circumstances change (e.g. change in legislation). In particular, transition arrangements may change if regulations to eliminate or minimise the effect of the change are introduced. – Slide 7 Further info First bullet – Structure of the Code -- The table shows the proposed structure of the IFRS-based Code of Practice on Local Authority Accounting. This is subject to change as the development of the Code progresses or as circumstances change. Where CIPFA/LASAAC has approved a section of the Code, this is noted in the Status column. In most cases, the section will be available to download by clicking the icon in the download section. Please note that these sections may not have been considered by FRAB, and are therefore subject to change. Further changes may also happen to ensure consistency with other aspects of the Code that had not been prepared when the section of the Code in question was approved, or if circumstances change (e.g. change in legislation). In particular, transition arrangements may change if regulations to eliminate or minimise the effect of the change are introduced. –

10. 10 Standards applicable to local authorities will be constantly reviewed by CIPFA in Code update reports. These will refer to each IAS, IFRS, IFRIC interpretation, SIC interpretation and IPSAS that will be applicable on 1 April 2010 CIPFA produced an Update Report that includes a column headed "Current Local Authority Action Required". In some cases there will be no entry in this column, however local authorities will still need to plan how they will eventually implement those standards and ensure they can satisfy the information requirements. Latest Code update report is 26th January 09 – Could be used as an impact assessment - relevant web address is : http://www.cipfa.org.uk/pt/cipfalasaac/ifrs_reports.cfm The full draft code can be viewed at: http://www.cipfa.org.uk/pt/cipfalasaac/ifrs.cfm Slide 8 Further info Where a section of the Code has been approved by CIPFA/LASAAC (this will be included in the Code Update Report), this will also be reflected on the page showing the proposed structure of the Code, and in most cases the section will be available for download. These sections will be subject to further change when they are considered by FRAB, to ensure consistency with other sections of the Code still under development or as circumstances change. The Update Report currently highlights a number of areas which will be developed following the "Back to Basics" consultation. Slide 8 Further info Where a section of the Code has been approved by CIPFA/LASAAC (this will be included in the Code Update Report), this will also be reflected on the page showing the proposed structure of the Code, and in most cases the section will be available for download. These sections will be subject to further change when they are considered by FRAB, to ensure consistency with other sections of the Code still under development or as circumstances change. The Update Report currently highlights a number of areas which will be developed following the "Back to Basics" consultation.

11. 11 Consultation process concluded on 11 September 2009 – I’m sure you all replied !!! Report to CIPFA/ LASAAC on 29th September with any changes to the draft Code Likely to be clarification issues rather than significant changes in principle Summary will be available via the website along with CIPFA/ LASAAC papers Final IFRS Code taken to FRAB on 8th October for approval Publication early Dec 09 SORP 2009 is the last SORP to be overseen by the ASB – we will now come under the FRAB

12. 12 CLG / Devolved Administrations Regulations being finalised by 31 Dec 2009 RICS RICS papers 9 & 10 available Component accounting guidance available Oct 09 Role of valuation professionals in understanding the fixed asset valuation agenda is crucial – Work with them Guidance notes for IFRS Code of practice are being developed and will be approved by LAAP and published in Dec 09 Rough guide to IFRS capital reserves will be available shortly to FAN subscribers

13. 13 The Main differences between current UK GAAP and IFRS A CIPFA commissioned study, considered the potential impact of IFRS on the CIPFA SORP on a standard by standard basis. Following areas would have a significant impact for financial reporting in local authorities if the SORP moved to IFRS: Leases Segmental reporting PFI Disclosure requirements (Recognised in the first principles review) A major area of difference between the current FReM & the SORP is the valuation basis for infrastructure assets, where the FReM requires a current valuation basis and the SORP an historical cost basis (both are consistent with UK GAAP). June 2008 CIPFA Paper to HM Treasury agreeing to move to current valuation basis for infrastructure assets – timing probably post 2010/11. Leasing Recognition and measurement of leasing arrangements – Likelihood that more leasing arrangements will have to be recorded on the balance sheet – All lease agreements in authorities will need to be reviewed – Separate valuation for land and buildings PFI The Treasury’s Financial Reporting Advisory Board has urged the government to implement a strict interpretation of new international accounting rules, which could add £23bn of debt on to the government’s books. Over recent years, Frab has expressed a number of concerns about inconsistent accounting treatments of Private Finance Initiative deals. But its June 25 2007 annual report noted that the public sector’s move to International Financial Reporting Standards from 2008/09 will mean ‘material differences’ in accounting for PFI deals and ‘present a positive opportunity for the public sector to achieve greater consistency in accounting for PFI’. While approximately half the debts associated with PFI deals are not registered on public sector balance sheets, a move from UK Generally Accepted Accounting Practice to IFRS should, in theory, see the outstanding £23bn moved ‘on balance sheet’, Frab noted. Although the standards are drawn up with a view to application in the private sector, Frab said it ‘would normally expect symmetry in the accounting treatment by the public and private sector parties to a PFI contract. That is, the asset should appear on one party’s balance sheet, not on both, nor on either. ‘In the board’s view [current IFRS guidance on PFI accounting] gives a strong indication of what public sector accounting should be,’ Frab continued. Segmental Reporting IFRS8 gives managers a lot of discretion in carving up their business segments for reporting purposes. The Accounting Standards Board has proposed adoption of the rule with a review in a year and a half. Core principle—An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. Lot of descriptive info as well – close links to the way that profit centres are considered internally. Current BVACOP will need to move from UK GAAP to an IFRS basis and CIPFA will need to address this. Infrastructure assets Infrastructure asset revaluation probably post 2010\11 after the IFRS changes have been addressed -- £25m funding from the Department of Transport to do this for England. For 2009-10 only. CIPFA recognises resourcing issues. Infrastructure assets – no decision on the scope for financial reporting of them until the autumn of 2009 – we will need to make changes to our capital asset software systems to cope with infrastructure asset issues. Disclosure notes in the private sector increased the length of the accounts by up to 50% more – First Principles review recognises this as a risk factor and trusts its simplification Leasing Recognition and measurement of leasing arrangements – Likelihood that more leasing arrangements will have to be recorded on the balance sheet – All lease agreements in authorities will need to be reviewed – Separate valuation for land and buildings PFI The Treasury’s Financial Reporting Advisory Board has urged the government to implement a strict interpretation of new international accounting rules, which could add £23bn of debt on to the government’s books. Over recent years, Frab has expressed a number of concerns about inconsistent accounting treatments of Private Finance Initiative deals. But its June 25 2007 annual report noted that the public sector’s move to International Financial Reporting Standards from 2008/09 will mean ‘material differences’ in accounting for PFI deals and ‘present a positive opportunity for the public sector to achieve greater consistency in accounting for PFI’. While approximately half the debts associated with PFI deals are not registered on public sector balance sheets, a move from UK Generally Accepted Accounting Practice to IFRS should, in theory, see the outstanding £23bn moved ‘on balance sheet’, Frab noted. Although the standards are drawn up with a view to application in the private sector, Frab said it ‘would normally expect symmetry in the accounting treatment by the public and private sector parties to a PFI contract. That is, the asset should appear on one party’s balance sheet, not on both, nor on either. ‘In the board’s view [current IFRS guidance on PFI accounting] gives a strong indication of what public sector accounting should be,’ Frab continued. Segmental Reporting IFRS8 gives managers a lot of discretion in carving up their business segments for reporting purposes. The Accounting Standards Board has proposed adoption of the rule with a review in a year and a half. Core principle—An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. Lot of descriptive info as well – close links to the way that profit centres are considered internally. Current BVACOP will need to move from UK GAAP to an IFRS basis and CIPFA will need to address this. Infrastructure assets Infrastructure asset revaluation probably post 2010\11 after the IFRS changes have been addressed -- £25m funding from the Department of Transport to do this for England. For 2009-10 only. CIPFA recognises resourcing issues. Infrastructure assets – no decision on the scope for financial reporting of them until the autumn of 2009 – we will need to make changes to our capital asset software systems to cope with infrastructure asset issues. Disclosure notes in the private sector increased the length of the accounts by up to 50% more – First Principles review recognises this as a risk factor and trusts its simplification

14. 14 Leases – Chapter 4.2 of the Code Likely that a large of proportion of operating leases will become finance leases. Because IAS 17 requirements are much stricter to allow operational definition. For example the 90% rule does not apply. Implications of being on balance sheet. Account for property and land differently – therefore have to separate. Need to analyse all leases to ensure correct classification and perform correct accounting treatment retrospectively (depreciation etc). MRP implications Look for embedded leases as well in some asset hire agreements Adopt a matrix approach to lease classification Effects on GF of lease re-classifications – Mitigation issues Under IFRS requirements the following situations would result in the lease being classified as a inance lease:- The lease transfers ownership of the asset to the lessee by the end of the lease term; The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value so as to make it reasonably certain the option will be exercised; The lease term is for the major part of the economic life of the asset; The present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset (not the 90% rule) ; and The leased assets are of such a specialised nature that only the lessee can use them without major modifications. MRP implications The effect of the guidance here is to ensure that the combined impact of the finance charge and MRP for finance leases and on-balance sheet PFI schemes is equal to the rental or service charge payable for the year. This will ensure that, if the impending move to International Financial Reporting Standards in local government has the effect of bringing more PFI schemes on balance sheet, there will be no effect on the charge to the revenue account. However, the Department will, if necessary, issue further guidance when the accounting implications of that change become clearer. But as noted above not all PFI would be covered under IFRIC 12 - only relates to infrastructure assets - others dealt with under leasing standard in IFRS - not clear how these would be dealt with under CIPFA proposals Under IFRS requirements the following situations would result in the lease being classified as a inance lease:- The lease transfers ownership of the asset to the lessee by the end of the lease term; The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value so as to make it reasonably certain the option will be exercised; The lease term is for the major part of the economic life of the asset; The present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset (not the 90% rule) ; and The leased assets are of such a specialised nature that only the lessee can use them without major modifications. MRP implications The effect of the guidance here is to ensure that the combined impact of the finance charge and MRP for finance leases and on-balance sheet PFI schemes is equal to the rental or service charge payable for the year. This will ensure that, if the impending move to International Financial Reporting Standards in local government has the effect of bringing more PFI schemes on balance sheet, there will be no effect on the charge to the revenue account. However, the Department will, if necessary, issue further guidance when the accounting implications of that change become clearer. But as noted above not all PFI would be covered under IFRIC 12 - only relates to infrastructure assets - others dealt with under leasing standard in IFRS - not clear how these would be dealt with under CIPFA proposals

15. 15 Intangible Assets (IAS 38) Recognition of a wider range of intangibles – mainly internally generated. Authorities continue to recognise all intangible assets that were previously recognised on their balance sheet. Impairments All impairments taken to the revaluation reserve in the first instance for each respective asset then thereafter the income and expenditure account (or its replacement). IAS 38 requires strict criteria to be met before an internally generated intangible asset may be recognised. These criteria are met where an authority can demonstrate: the technical feasibility of completing the asset so it will be available for use or sale; its intention to complete the asset; its ability to use or sell the asset; how the asset will generate future economic benefits or deliver service benefits (either by demonstrating a market for the asset or the usefulness of the asset); the availability of adequate resources to complete the asset; and its ability to measure reliably the expenditure attributable to the intangible asset during its development. The 2 different types of impairment Consumption of Economic Benefit (e.g. obsolescence or physical damage to a fixed asset) – taken to I & E first under the SORP. General Fall in Prices (e.g. a significant decline in a fixed asset’s market value) IAS 38 requires strict criteria to be met before an internally generated intangible asset may be recognised. These criteria are met where an authority can demonstrate: the technical feasibility of completing the asset so it will be available for use or sale; its intention to complete the asset; its ability to use or sell the asset; how the asset will generate future economic benefits or deliver service benefits (either by demonstrating a market for the asset or the usefulness of the asset); the availability of adequate resources to complete the asset; and its ability to measure reliably the expenditure attributable to the intangible asset during its development. The 2 different types of impairment Consumption of Economic Benefit (e.g. obsolescence or physical damage to a fixed asset) – taken to I & E first under the SORP. General Fall in Prices (e.g. a significant decline in a fixed asset’s market value)

16. 16 The accounting treatment set out in this Appendix shall apply where: (a) The local authority controls or regulates what services the operator must provide with the property, to whom it must provide them, and at what price; and where (b) The local authority controls - through ownership, beneficial entitlement or otherwise - the significant residual interest in the property at the end of the term of the arrangement. Where the property is used for its entire life, and there is little or no residual interest, the arrangement would fall within the scope of IFRIC 12. This applies to 2009\10 – right now Where these IFRIC12 control tests are met, this Appendix E applies to all property acquired, constructed or enhanced by the operator for the purpose of the PFI arrangement, including property to which the local authority gives the operator access. This Appendix also applies to property provided by the operator that previously appeared on the operator's balance sheet. Under IFRIC 12, these assets are recognised as the authority’s assets because the authority controls their use (i.e. as if the authority owned them rather than leased them), so they will be on our local authority balance sheet.  Authorities will need to review those schemes that are already on balance sheet.  It's unlikely that the accounting for these will change, but it can't be guaranteed - a scheme that was on balance sheet because the risks and rewards were with the authority might not meet all the IFRIC 12 tests if, for example, the property had a significant residual interest and didn't revert to the authority at the end of the contract. Where these IFRIC12 control tests are met, this Appendix E applies to all property acquired, constructed or enhanced by the operator for the purpose of the PFI arrangement, including property to which the local authority gives the operator access. This Appendix also applies to property provided by the operator that previously appeared on the operator's balance sheet. Under IFRIC 12, these assets are recognised as the authority’s assets because the authority controls their use (i.e. as if the authority owned them rather than leased them), so they will be on our local authority balance sheet.  Authorities will need to review those schemes that are already on balance sheet.  It's unlikely that the accounting for these will change, but it can't be guaranteed - a scheme that was on balance sheet because the risks and rewards were with the authority might not meet all the IFRIC 12 tests if, for example, the property had a significant residual interest and didn't revert to the authority at the end of the contract.

17. 17 Review PFI scheme contracts / documentation. Apply IFRIC 12 tests – To determine what comes back to BS & what does not. Identify opening asset values and corresponding liabilities and interest rates. Take out the old transactions and put in new transactions. Separate between MRP, interest, service charges and principal repayments. Account as if the PFI scheme was always on our Balance sheet, depreciation etc. Council Tax impacts? – Finance charges coming back into I + E. Previous Accounting treatments of the unitary charge will need to be reversed also as a starting point A POSSIBLE PROCESS PROCESS – Take out all the unitary payment debits that were previously charged payments to revenue. Get back to the starting point of the PFI. What was the capital value of the PFI at its inception? Split it between Land, service charges and building elements if possible. Debate within CIPFA as to how far this can be accomplished. Reconstruct the payments from the inception date of the PFI till now Land element -- if it is possible to split out the land element then it too will most likely be a finance lease (unless the land does not revert back to the grantor) Building element – will most likely be a finance lease Service charges – will be a charge to revenue For the buildings element set up an asset and a balance sheet liability which will match together. For the service elements ensure the debits hit revenue as before For the building element ensure that the principal element reduces the balance sheet liability amount and the interest hits revenue. However there will now be an additional MRP element which will hit revenue ( which can match the capital repayment amount within the PFI) Please be careful to ensure that any future calculation of MRP takes into account the fact that MRP may have previously been accounted for under the new capital financing regulations if authorities have opted for the choice of ensuring that MRP charge = the repayment of liability. Please ensure there is no double counting of the MRP in the SMGFB. Amount hitting the general fund will be similar to what it was before? Or the same? – No interest charge adjustment through the SMGFB Previous Accounting treatments of the unitary charge will need to be reversed also as a starting point A POSSIBLE PROCESS PROCESS – Take out all the unitary payment debits that were previously charged payments to revenue. Get back to the starting point of the PFI. What was the capital value of the PFI at its inception? Split it between Land, service charges and building elements if possible. Debate within CIPFA as to how far this can be accomplished. Reconstruct the payments from the inception date of the PFI till now Land element -- if it is possible to split out the land element then it too will most likely be a finance lease (unless the land does not revert back to the grantor) Building element – will most likely be a finance lease Service charges – will be a charge to revenue For the buildings element set up an asset and a balance sheet liability which will match together. For the service elements ensure the debits hit revenue as before For the building element ensure that the principal element reduces the balance sheet liability amount and the interest hits revenue. However there will now be an additional MRP element which will hit revenue ( which can match the capital repayment amount within the PFI) Please be careful to ensure that any future calculation of MRP takes into account the fact that MRP may have previously been accounted for under the new capital financing regulations if authorities have opted for the choice of ensuring that MRP charge = the repayment of liability. Please ensure there is no double counting of the MRP in the SMGFB. Amount hitting the general fund will be similar to what it was before? Or the same? – No interest charge adjustment through the SMGFB

18. 18 Chapter 4.1 of the Code – Property, Plant and Equipment (PPE) (1) Purpose Principles of initial recognition and subsequent accounting Key considerations Recognised at cost including costs of preparation for use. Revaluations requirements continue (as at present) Components to be identified and treated separately w.e.f 1.4.2010 Depreciation reflects the pattern/use of consumption IAS 23 Borrowing Costs Capitalisation of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset is still being considered by CIPFA/LASAAC. International Accounting Standard 16 – PPE Its purpose how to initially recognise and account for assets in the future Key considerations; What can be included in the costs of the asset at recognition (discuss in a minute) Revaluation requirements basically needs to continue as at present Components needs to be separately identified and accounted for Depreciation applied – does it reflect the use of the asset/pattern of consumption (option 4 of MRP) Note IAS 23 allows for the capitalisation of borrowing costs – The Code CIPFA/LASAAC/FRAB are still considering it. International Accounting Standard 16 – PPE Its purpose how to initially recognise and account for assets in the future Key considerations; What can be included in the costs of the asset at recognition (discuss in a minute) Revaluation requirements basically needs to continue as at present Components needs to be separately identified and accounted for Depreciation applied – does it reflect the use of the asset/pattern of consumption (option 4 of MRP) Note IAS 23 allows for the capitalisation of borrowing costs – The Code CIPFA/LASAAC/FRAB are still considering it.

19. 19 Chapter 4.1 of the Code – Property, Plant and Equipment (PPE) (2) An asset is recognised as PPE when Future economic benefits or service potential (>1 year) are probable, Cost can be measured reliably, They are tangible i.e. physical in substance Criteria applies to all costs when incurred, including Initial acquisition or construction costs Subsequent enhancement costs I will discuss new assets and allowable expenditure a little later I will discuss new assets and allowable expenditure a little later

20. 20 Chapter 4.4 of the Code – Investment Property, (1) Purpose Principles of initial recognition and subsequent accounting considerations Key considerations Applies to assets held for future income streams and /or capital appreciation Definition Investment property is land and/or buildings held solely for the purpose of earning rentals and/or capital appreciation. Assets which earn rentals AND provide services are not investment properties and should be dealt with a PPE Some amendments for the public sector under IPSAS16 have been made but as yet have not caught up with the changes subsequently made to IAS40, so for the time being IAS 40 will be used.Some amendments for the public sector under IPSAS16 have been made but as yet have not caught up with the changes subsequently made to IAS40, so for the time being IAS 40 will be used.

21. 21 Chapter 4.4 of the Code – Investment Property, (2) Suggested examples Land held for long term capital appreciation rather than short term sale Land held for a currently undetermined future use Buildings owned by authority that is subsequently leased out. A building held under a finance lease that is subsequently sub leased to another entity. Note: All the building must be available for lease not just part of it. Key long term, property exclusively acquired to subsequently sell is covered under IAS2 inventories i.e. being held for a short period of time Where use undetermined it is regarded as being held for capital appreciation All the building must be available for lease not just part of it.Key long term, property exclusively acquired to subsequently sell is covered under IAS2 inventories i.e. being held for a short period of time Where use undetermined it is regarded as being held for capital appreciation All the building must be available for lease not just part of it.

22. 22 Chapter 4.4 of the Code – Investment Property, (3) Initial recognition Investment property shall be measured at cost. Where no payment is made or asset exchanged the asset should be measured at fair value or at the carrying value of the asset given up Leased assets lower of NPV of lease payment and fair value . Definition of FAIR VALUE (3) is ‘the amount that would be paid for the asset in its highest and best use, i.e market value. The fair value of investment property held under a lease is the lease interest Cost = Purchase price plus transactions costs directly attributable FAIR VALUE third definition is ‘the amount that would be paid for the asset in its highest and best use, ie market value. The fair value of investment property held under a lease is the lease interest reference Code For SORP the requirement is to hold the property at net realisable value (effectively market value) As fair value is market value it is assumed there will be little change to the current carrying amount. Cost = Purchase price plus transactions costs directly attributable FAIR VALUE third definition is ‘the amount that would be paid for the asset in its highest and best use, ie market value. The fair value of investment property held under a lease is the lease interest reference Code For SORP the requirement is to hold the property at net realisable value (effectively market value) As fair value is market value it is assumed there will be little change to the current carrying amount.

23. 23 Chapter 4.4 of the Code – Investment Property, (4) Subsequent recognition Measured at fair value Gain or loss recognised in Expenditure and Income Account Further steps – for a gain -- DR GF and Cr CAA – (within movement in Reserves Statement) Investment properties are not depreciated. As fair value is based on existing market conditions authorities will need to regularly assess that value Any Gain or loss to E&I (ref IAS40 para 35) Further steps – for a gain -- DR GF and Cr CAA – (within movement in Reserves Statement) Further steps – for a loss – CR GF AND DR CAA – (WITHIN THE MOVEMENT IN RESERVES STATEMENT) As fair value is based on existing market conditions authorities will need to regularly assess that value Any Gain or loss to E&I (ref IAS40 para 35) Further steps – for a gain -- DR GF and Cr CAA – (within movement in Reserves Statement) Further steps – for a loss – CR GF AND DR CAA – (WITHIN THE MOVEMENT IN RESERVES STATEMENT)

24. 24 Chapter 4.9 of the Code – Non Current assets Held for Sale (1) Purpose Identifying assets that no longer contribute to the delivery of services. Key considerations Need to be presented separately on the balance sheet Sale must be highly probable (usually within 1 year) to qualify and can include the exchange of assets Assets can be grouped ‘Disposal Groups’ Assets to be scrapped or abandoned are not held for sale, as no sale will take place. No depreciation to be applied once identified. Normal churn Terminology – Non current assets are those that no longer contribute to the delivery of services Today we are discussing the held for sale assets NOT covering discontinued operations In SORP assets called ‘surplus assets held for disposal’, under IFRS called ‘assets held for sale’ Can bundle together assets as ‘disposal groups’ if intention to sell in single transaction Sale needs to be highly probable (commitment to sell - evidence would help, e.g .put on open market) This regulation does not preclude the normal churn in relation to asset disposal e.g. vehicles, consider materiality here. (answer from Paul Mason below) In theory all assets should go through held for sale once the criteria are met.  In practice, most vehicles etc. will be carried at depreciated historical cost.  This is unlikely to be more than fair value if authorities have applied depreciation properly, so carrying amount would remain the same, so movement to held for sale would produce no entries.  Only issue would be classification of assets at the balance sheet date (where amounts were material).  Terminology – Non current assets are those that no longer contribute to the delivery of services Today we are discussing the held for sale assets NOT covering discontinued operations In SORP assets called ‘surplus assets held for disposal’, under IFRS called ‘assets held for sale’ Can bundle together assets as ‘disposal groups’ if intention to sell in single transaction Sale needs to be highly probable (commitment to sell - evidence would help, e.g .put on open market) This regulation does not preclude the normal churn in relation to asset disposal e.g. vehicles, consider materiality here. (answer from Paul Mason below) In theory all assets should go through held for sale once the criteria are met.  In practice, most vehicles etc. will be carried at depreciated historical cost.  This is unlikely to be more than fair value if authorities have applied depreciation properly, so carrying amount would remain the same, so movement to held for sale would produce no entries.  Only issue would be classification of assets at the balance sheet date (where amounts were material). 

25. 25 Chapter 4.9 of the Code – Non Current assets Held for Sale (2) Measurement Immediately before reclassification the asset(s) shall be measured at lower of carrying value or fair value 4(= market value) less costs to sell. Any loss or gain should be treated in the same way as any revalued asset Assets held for sale are not depreciated (differs from current SORP/FRS15) Disposal Any gain or loss on disposal is treated in the same manner as any asset disposal. Measurement 4.9.1.1 Fair value. For this section of the Code, fair value is to be interpreted as the amount that would be paid for the asset in its highest and best use, ie market. Code ref 4.9.2.5 Cost to sell are directly attributable and essential to that sale, excluding financing costs See Ref IFRS5 para 22b – gains No depreciation, differs from SORP (under FRS15 deprecation required) Disposal – gain/loss same treatment as current SORPMeasurement 4.9.1.1 Fair value. For this section of the Code, fair value is to be interpreted as the amount that would be paid for the asset in its highest and best use, ie market. Code ref 4.9.2.5 Cost to sell are directly attributable and essential to that sale, excluding financing costs See Ref IFRS5 para 22b – gains No depreciation, differs from SORP (under FRS15 deprecation required) Disposal – gain/loss same treatment as current SORP

26. 26 Principal valuation methods Fixed Assets valuation Infrastructure e.g. roads Community assets e.g parks, historic buildings and Assets under construction (until completed) are all held at historic cost. NOTE Infrastructure asset valuation is likely to change to current value in the near future, discussions are taking place within the (D)CLG on this Council housing – as currently - existing use value on the basis that the house remains for social use. Rules below (if required) Existing Use Value – Social Housing2(EUV-SH) is the estimated amount for which a property should exchange, on the date of valuation, between a willing buyer and a willing seller, in an arm’s-length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion, subject to the following further assumptions that: • the property will continue to be let by a body and used for social housing • at the valuation date, any regulatory body, in applying its criteria for approval, would not unreasonably fetter the vendor’s ability to dispose of the property to organisations intending to manage their housing stock in accordance with that regulatory body’s requirements • properties temporarily vacant pending re-letting should be valued, if there is a letting demand, on the basis that the prospective purchaser intends to re-let them, rather than with vacant possession • any subsequent sale would be subject to all of the above assumptions. Property assets (excluding held for sale and investment properties) are at fair value, value in use or depreciated replacement cost FAIR VALUE type 1 (there a 4 definitions) defines fair value (for land and buildings) as the amount that would be paid for the asset in its existing use. This requirement is met by providing a valuation on the basis of exiting use value (EUV) in accordance with UKPS 1.3 of the RICS Valuation Standards. Plant and equipment (due to their short lives) are mostly at historic cost (as assumed market value) unless it is considered that a revaluation is necessary Infrastructure e.g. roads Community assets e.g parks, historic buildings and Assets under construction (until completed) are all held at historic cost. NOTE Infrastructure asset valuation is likely to change to current value in the near future, discussions are taking place within the (D)CLG on this Council housing – as currently - existing use value on the basis that the house remains for social use. Rules below (if required) Existing Use Value – Social Housing2(EUV-SH) is the estimated amount for which a property should exchange, on the date of valuation, between a willing buyer and a willing seller, in an arm’s-length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion, subject to the following further assumptions that: • the property will continue to be let by a body and used for social housing • at the valuation date, any regulatory body, in applying its criteria for approval, would not unreasonably fetter the vendor’s ability to dispose of the property to organisations intending to manage their housing stock in accordance with that regulatory body’s requirements • properties temporarily vacant pending re-letting should be valued, if there is a letting demand, on the basis that the prospective purchaser intends to re-let them, rather than with vacant possession • any subsequent sale would be subject to all of the above assumptions. Property assets (excluding held for sale and investment properties) are at fair value, value in use or depreciated replacement cost FAIR VALUE type 1 (there a 4 definitions) defines fair value (for land and buildings) as the amount that would be paid for the asset in its existing use. This requirement is met by providing a valuation on the basis of exiting use value (EUV) in accordance with UKPS 1.3 of the RICS Valuation Standards. Plant and equipment (due to their short lives) are mostly at historic cost (as assumed market value) unless it is considered that a revaluation is necessary

27. 27 Draft code makes distinction between shorter term employee benefits (falling within 12 months) and other longer-term employee benefits (not falling within 12 months of the balance sheet date). Different approach for the 2 types. Draft code makes distinction between shorter term employee benefits (falling within 12 months) and other longer-term employee benefits (not falling within 12 months of the balance sheet date). Different approach for the 2 types.

28. 28 You need to start think of this now!!!! You need to start think of this now!!!!

29. 29 Areas likely to be mitigated:- - Employee benefits. - Changing classification of leases. - PFI. CLG and the devolved authorities are working on mitigation this autumn – CIPFA input into this from the recent consultation Implementation costs:- - Investigating leases, employee benefits, PFI etc - External advice. - Preparing opening Balance Sheet and 2010/1 accounts (comparisons etc) – private sector experience. - Costs of valuations - components. - System changes. HR and Property - Implications across the organisation not just Finance. System changes including accounting, HR and property. Share resources across counties / regionsSystem changes including accounting, HR and property. Share resources across counties / regions

30. 30 Finance (corporate and service accountants) Human Resources Procurement Estates - Valuation Legal Services External Auditors External advisors – how would they be used? What will you do yourselves? – Don’t contract it all out – retain institutional memory? Need a project manager – likely to be finance?Need a project manager – likely to be finance?

31. 31 Need to be briefed now making them aware of timescales and implications. Need to share impact assessment with them and outline reports. Highlight additional resource requirements. Audit implications – opening balance sheet and 2010/1 accounts. Communication with Audit Committee. The accounts will look different – There can be no surprises for members. System changes including accounting, HR and property.System changes including accounting, HR and property.

32. 32 What are key focus areas? – traffic lights? Group accounts mentioned – because might want to review your group structures because of power to control. The definition of associates under IAS 28 is based on the power to exercise significant influence irrespective of whether it is exercised or not. Authorities will need to review their relationships with subsidiaries, associates and joint ventures in advance of IFRS coming into full effect during 2010\11. Will they need to include more associates within their group accounts or will they choose to simplify some of these relationships? Also if you are require information from a group or associate this will be on an IFRS basis Group accounts mentioned – because might want to review your group structures because of power to control. The definition of associates under IAS 28 is based on the power to exercise significant influence irrespective of whether it is exercised or not. Authorities will need to review their relationships with subsidiaries, associates and joint ventures in advance of IFRS coming into full effect during 2010\11. Will they need to include more associates within their group accounts or will they choose to simplify some of these relationships? Also if you are require information from a group or associate this will be on an IFRS basis

33. 33 Carryout a high level analysis of PFI, leases, tangible assets, employee benefits and other areas. Construct an impact assessment. Identify changes to accounting polices. Identify key staff needed in the process. Train key staff on the IFRS. Identify information required for the opening balance sheet. Implications for budgets. Please Read LAAP bulletin 80 – CIPFA outline IFRS -- See overleaf for the highlights Based on a draft LAAP Bulletin that is shortly to be introduced shortly from CIPFA. This will be an outline project plan for IFRS Based on a draft LAAP Bulletin that is shortly to be introduced shortly from CIPFA. This will be an outline project plan for IFRS

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37. 37 Do you have a project plan in place for IFRS transition? Do you have a project manager and wider team in place to deliver the project plan? Is the team multi disciplinary and include members of HR, Legal, Estates, IT ? Is there understanding of the importance of the project at senior level - Chief Exec, Director of Finance, Corporate Directors? Have audit committee and Cabinet been informed of the IFRS project plan ?

38. 38 Have you got a comprehensive list of your lease agreements? Have you determined which of those leases are now finance or operating? Both lessee and lessor arrangements Have you reviewed your service arrangements for embedded leases ? Do you have information on leave entitlements at 31.03.09? Have you reviewed your assets against IFRS definitions to ensure they are recorded in the right category?

39. 39 On a scale of 1 -10 how prepared are you ????

40. 40 Donated assets – Possible Accounting -- Dr Asset Fair Value – Cr Donated Assets Reserve? Borrowing costs – to be capitalised or not if they can be related to a capital scheme ? – Not in the IFREM but valuers do include capitalised borrowing costs in their valuations – jury still out Government Grants (IAS 20) – Government grants recognised in revenue account straight away unless there are attached conditions to the grant (Negation of GGD account( jury still out on that one Service financial information will be included in the Comprehensive Income and Expenditure statement in BVACOP format – Defined segments will be reported in the notes to the accounts and reconciled to BVACOP Material segment is circa 10% of your overall expenditure – related to your internal reporting needs –minimum hassle intended by CIPFA

41. 41 Change in Accounting Policy will in future require three balance sheets opening and closing for the comparative period and the current year position ( As in the IFRS transition scenario) Authorities will be expected to disclose the expected accounting impact of future editions of the CIPFA code – ( hopefully these future editions will prescribe retrospective disclosure requirements relating to changes in accounting policies – May lead to additional disclosures SORP 2009 only requires authorities to correct prior period errors when they were fundamental BUT IFRS requires the restatement of previous years accounts when errors are material – May lead to more frequent restatements of accounts Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Fundamental errors are errors discovered in the current period that are of such significance that the financial statements of one or more prior periods can no longer be considered to be reliable at the date of their issue. Normally, fundamental errors relate to application of a wrong account principle such as an incorrect interpretation of a certain laws or statutes. Material Omissions or misstatements of items are if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: (a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Fundamental errors are errors discovered in the current period that are of such significance that the financial statements of one or more prior periods can no longer be considered to be reliable at the date of their issue. Normally, fundamental errors relate to application of a wrong account principle such as an incorrect interpretation of a certain laws or statutes. Material Omissions or misstatements of items are if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor. Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: (a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

42. 42 Reminder of IFRS financial statements Para 3.4.2.18 The order of the statements is recommended but not required. Authorities shall present the statements in the order that best enables users to understand the statements Para 3.4.2.18 The order of the statements is recommended but not required. Authorities shall present the statements in the order that best enables users to understand the statements

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