A Pen Portrait of the Main IFRSs relevant to Local Authority accounts

1. A Pen Portrait of the Main IFRSs relevant to Local Authority accounts

2. Principal IFRS relevant to local authorities • presentation of IFRS accounts • PFI • leases • property, plant and equipment (fixed assets) • investment properties • infrastructure assets • intangible assets • employment benefits • segmental reporting • cash flow statements • income recognition • grants and government assistance • group accounts

3. Presentation of financial statements • IAS 1 (Presentation of financial statements) • deals with overall format • accounting principles • IFRS 1 (First Time adoption) requires • bodies to account as if always followed IFRS • detailed transitional reporting requirements • CIPFA consulting on format for LG accounts

4. IAS 1 Revised – Contents UK GAAP IFRS Statement of financial position Balance Sheet Profit and Loss Account Statement of Income Cashflow Statement Cashflow Statement Statement of Comprehensive Income STRGL Statement of Changes in Equity Movement in s/h Funds Notes to the Accounts Notes to the Accounts

5. IAS 8 – Hierarchy • management use judgement to ensure information is relevant and reliable and provides a faithful representation (includes substance) • hierarchy of sources of guidance • standards on specific matters • refer to standards on similar matters • then Framework • then pronouncements of other standard setting bodies, other literature and industry practice

6. Estimates, judgements and corrections • increased disclosures on estimates and judgements that have material impact on accounts • prior year adjustments may be more frequent in the future as these are now required for material errors rather than the higher fundamental error test currently included in FRS 3

7. PFI accounting for 2009-10 • LG will be expected to follow iFReM as within WGA boundary from 2010-11 • CIPFA publishing guidance for interim procedures for 2009-10 based on IFRIC 12 • bodies will have to consider whether falls within scope for infrastructure assets or whether accounting treatment • issues to resolve on partial adoption of IFRS accounting

8. Information requirements for PFI reviews • schedule of PFI schemes • details for individual schemes • Project Agreement • any variations from initial agreement • financial model • capital contributions • accounting entries

9. IFRIC 12 Service Concessions • covers infrastructure assets • applies control tests rather than risks and rewards • controls over use of asset during service concession • controls at end of service concession • expected that for most PFI schemes will result in "on balance sheet" treatment • key question remains what is impact?

10. IFRIC 12 Decision Tree Does the grantor control the services the operator must provide and at what price? Does the arrangement contain a lease (IFRIC4)? Grantor recognises expenditure as it falls due No No Yes Yes No Grantor recognises lease in accordance with IAS 17 Does the grantor control, any significant residual interest at the end of the service arrangement? Yes No Is the infrastructure specifically constructed or acquired for the service arrangement, or was it previously recognised as an asset by the operator? The operator is given access to existing infrastructure of the grantor for the purpose of the service arrangement. Yes Yes The grantor continues to recognise the infrastructure on balance sheet as property, plant and equipment (IAS 16) or as a leased asset (IAS 17). Report property as asset and related liability. Recognise interest and service expenditure as it falls due.

11. Practical issues (1) • determine whether account under IFRIC 12 or leasing standards • detailed understanding of component parts of scheme • capital new build • refurbishment • lifecycle replacements • service • SPV and other costs

12. Practical issues (2) • determining fair value of assets at scheme inception or transition date • calculating implicit interest rate • accounting for RPI increases and payment deductions • contract variations • PFI procurement costs • information for detailed disclosures

13. Overall considerations on leases • experience from private sector that IFRS results in more leases being accounted for as finance leases • requires more judgement as this is based on qualitative assessment of risks and rewards rather than 90% test • factors that would normally indicate a finance lease • factors that that may indicate a finance lease • separate consideration of land and buildings where appropriate • need to consider substance of lease arrangements • CIPFA guidance

14. land and buildings split land buildings operating lease (unless title passes) need to determine if finance or operating lease how split? based on fair values of leasehold interest IAS 17 – Leases of land and buildings

15. Embedded leases Will need to consider whether an arrangement includes an embedded lease under IFRIC 4 • the arrangement is dependent on the use of a specific asset or assets (evidence may be that it is not economically feasible or practicable for the supplier to perform its obligation through the use of alternative assets) • the arrangement conveys a right to use the asset

16. Review for embedded leases • schools • rental of school equipment • IT equipment • street lighting • maintenance contracts • "reagent" contracts and managed equipment services are probably embedded leases

17. Practical issues • starting point is analysis of outstanding leases to understand key elements of lease agreements • obtaining supporting documentation • risk assessment of leases requiring detailed consideration of materiality and nature of lease • identifying all property transactions inc peppercorn property rentals • determining fair value of asset at lease inception

18. Lease classification indicators • operating leases • short term property leases • car hire • finance leases • long term building leases • any leases with secondary rental periods • specialist equipment other than very short term rentals

19. Fixed Assets Referred to as Property, Plant and Equipment under IFRS • property valuation • component accounting inc depreciation • impact on depreciation through revaluation of expected residual value of assets • equipment valuation • accounting for impairments • assets held for sale

20. IFRS rules on valuation • valuation rules under IAS 16 • usually market value undertaken by professionally qualified valuers • for specialist properties where market value cannot be determined can use DRC or income approach • valuations should be obtained with sufficient regularity to ensure fair value is kept up to date • assets held for disposal under IFRS 5

21. iFReM requirements on valuation • for DRC valuations • MEA (Modern Equivalent Asset) • "instant build" approach • alternative site valuation in some circumstances • enhancements to existing assets • capitalise as assets under construction • any write of cost on first valuation in use is accounted for as impairment • depreciated historic cost permitted for non property assets with short lives, otherwise use fair value

22. Impairments (IAS 36) • an impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount • the recoverable amount is the higher of its fair value less costs to sell and its value in use • iFReM defines value in use as being at least equal to cost of replacing service potential • asset write under IAS 16 - use credit balance in revaluation reserve and then through I&E

23. IAS 16 – Depreciation • useful life reviewed each year end • residual value reviewed each year end • residual value – current value • record material components separately

24. Practical issues on component accounting • IAS 16 requires items of property, plant and equipment with a cost that is significant in relation to the total cost of the item to be depreciated separately • practical issues • what constitutes "significant"? • level of detail for component accounting • can fixed asset registers record required level of detail

25. What are investment properties? • property (land or a building-or part of ) held to earn rentals or for capital appreciation or both • examples within standard • land held for long-term capital appreciation • land held for an undetermined future use • a building owned by the entity and leased out under one or more operating leases • a building that is vacant but is held to be leased out under one or more operating leases

26. Investment properties • will require detailed review on reasons property is held • IAS 40 permits either fair value or cost approach • iFReM requires fair value • annual valuations required • movements accounted for through I&E account

27. Assets held for sale • to be classified as ‘held for sale’: • a non-current asset must be available for immediate sale in its present condition • its sale must be highly probable, and • it must be genuinely sold, not abandoned. • assets held for sale should be measured at the lower of carrying amount (book value) and fair value less costs to sell (net selling price). • presented separately on the face of the balance sheet.

28. Infrastructure assets • arrangements for local authorities on roads accounting still to be determined but values could be very material • iFReM requires • held at DRC based on service potential • subsequent expenditure will be capitalised when it enhances or replaces service potential • depreciation charge will be value of service potential replaced through maintenance programme adjusted for results of condition survey • interim arrangements to collect data for WGA

29. Intangible assets • IAS 38 covers accounting treatment for intangibles • detailed rules governing circumstances for capitalisation may result in recognition of more intangibles • CIPFA guidance

30. Employment Benefits IAS 19 • accrue for holiday pay earned but not yet taken • covers other employment benefits • injury benefit • early retirements • discounting rate

31. Practical issues on holiday pay • simple calculation if you have data….. • pattern of untaken holidays may vary between years depending on timing of Easter • many authorities do not have comprehensive holiday pay records • establish estimation basis • consider whether future systems changes required

32. Segmental Reporting • increased disclosures relating I&E results to net assets • operating segments are identified using basis for internal reporting • awaiting guidance from CIPFA • retention of BVACOP? • authorities left to determine own split?

33. Reportable segments • segment must be reported separately if: • revenue > 10% total revenue, or • assets > 10% total assets, or • results > 10% of higher of • total profit from profitable segments • total loss of loss making segments • if external revenue of identified reportable segments < 75% of total external revenue, must identify additional segments to reach 75%

34. IAS 7 Cash flow statements • can use indirect method permitted by 2008 SORP • simplified headings • reports movements in cash and cash equivalents • cash equivalents are short-term highly liquid investments that are readily converted into known amounts of cash and subject to insignificant risk of changes in value, which is assumed if the instrument’s maturity is 90 days or less

35. IAS 18 Income recognition • revenue is defined as a gross inflow of benefits that result in an increase in equity other than increases relating to contributions from equity participants • income arises from sale of goods or provision of services • does income arise from activities, government grant or is it a capital contribution?

36. Grants and government assistance • Government assistance provides an economic benefit to an entity qualifying under certain criteria • Government grants are assistance in the form of transfers of resources in return for past or future compliance with certain conditions relating to the operating activities of the entity • Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets

37. Practical considerations relating to grants • IAS 20 and SSAP 4 are very similar except IAS 20 allows grants that relate to assets to be shown as deferred income or deducted from cost of asset • continued need to track deferred income balances against asset lives to facilitate release to income • treatment of PFI support grants • detailed disclosure requirements

38. Group accounts • principles for subsidiaries consistent under IFRS 3 • subsidiaries determined based on control tests • accounted for using purchase method • definition of associates under IAS 28 based on power to exercise significant influence irrespective of whether is exercised • joint ventures accounted for under IAS 31 • IFRS 3 recognises that entities under common control outside scope - CIPFA / LASAAC consider these should be accounted for using merger accounting