CIPFA in Yorkshire and the Humber Accounting requirements under the LG SORP and IFRS Leeds 30 January 2008

1. CIPFA in Yorkshire and the Humber Accounting requirements under the LG SORP and IFRSLeeds30 January 2008

2. Seminar contents what are the major changes under the 2007 SORP? what is IFRS and how will this be applied for the public sector? what are key features of IFRS? what are the principal issues relating to implementation of IFRS for LG bodies? what should we do now to prepare for the changes?

3. What are the major changes under the 2007 SORP?

4. Changes under the 2007 SORP Further significant changes as part of UK GAAP harmonisation accounting for revaluation reserve and capital adjustment account accounting for financial instruments no other significant reporting changes

5. Setting up revaluation reserve reserve balance represents the difference between depreciated historical cost and carrying value of fixed assets changes to opening balances zero opening balance on revaluation reserve balances on FARA and CFA at 1 April 2007 to be amalgamated as Capital Adjustment Account carrying value at 31 March 2007 treated as proxy for historic cost

6. Accounting implications keep separate balances for individual assets detailed asset registers to track depreciation and revaluation adjustments by asset consider use of grouped assets (such as classes of council houses) to keep track of movements of large numbers of similar assets use balances in respect of individual assets when accounting for revaluations due to fall in prices will not be possible to write off non enhancing expenditure against this reserve

7. Financial instruments background 2006 SORP identified financial instruments as the most significant remaining departure from UK GAAP many local authorities have significant outstanding borrowings complex instruments significant unamortised debt premiums 2007 SORP incorporates requirements of FRS 26 (Recognition and Measurement) and FRS 29 (Disclosure) these standards are IFRS compliant

8. What are financial instruments? A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another. The term " financial instrument"covers both financial assets and financial liabilities and includes both the most straightforward financial assets and liabilities such as trade receivables and trade payables and the most complex ones such as derivatives and embedded derivatives. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another. The term " financial instrument"covers both financial assets and financial liabilities and includes both the most straightforward financial assets and liabilities such as trade receivables and trade payables and the most complex ones such as derivatives and embedded derivatives.

9. Financial assets bank deposits trade receivables (debtors) loans receivable other receivables and advances investments

10. Financial liabilities trade payables and other payables (creditors) borrowings financial guarantees

11. Expected areas of difference Financial instruments where carrying value may be significantly different under 2007 SORP unamortised premiums or discounts on the early repayment of loan debt stepped interest rate loan debt soft loans allowances for impairment or uncollectability of financial assets financial guarantee contracts assets classified as available for sale

12. Accounting for premiums and discounts premiums and discounts on early redemption of debt now recognised in I&E as incurred other than in very rare cases unamortised premiums to be written off SI permits spreading of premiums over greater of debt repaid or replacement debt for Council Tax

13. Disclosures significantly increased disclosure requirements fair value of financial assets and liabilities nature of risks including sensitivity to interest rate changes

14. What is IFRS and how will it be applied to the public sector?

15. What constitutes IFRS? accounting standards International Financial Reporting Standards (IFRS) issued by the IASB International Accounting Standards (IAS) issued by International Accounting Standards Committee (IASC) urgent issues statements International Financial Reporting Interpretations Committee issues Interpretations of Standards (IFRICs) SIC Interpretations hierarchy to determine treatment if there are no specific rules International Financial Reporting Issues Committee issues Interpretations of Standards (IFRICs) � these are equivalent to UITF IAS = old SSAPs / newer standards equivalent to FRS are issued as IFRS List of standards in handoutsInternational Financial Reporting Issues Committee issues Interpretations of Standards (IFRICs) � these are equivalent to UITF IAS = old SSAPs / newer standards equivalent to FRS are issued as IFRS List of standards in handouts

16. Some key differences under IFRS many of underlying principles are common but there are significant differences ��� IFRS more rules based no overall substance standard equivalent to FRS 5 longer with more detailed requirements terminology recognition, measurement, presentation, disclosure fair value receivables, payables and inventory

17. How will IFRS be applied for the public sector? financial reporting in government is determined by the Financial Reporting Manual (FReM) which applies UK GAAP to the public sector other public sector bodies adopting in 2008-09 draft IFRS compliant manual (I- FReM) issued but some areas to be resolved PFI infrastructure assets heritage assets final I- FReM expected in early 2008 CIPFA dealing with application for LG HM Treasury working through Financial Reporting Advisory Board (FRAB) HM Treasury working through Financial Reporting Advisory Board (FRAB)

18. SORP proposals for IFRS implementation for 2009-10 and subsequent years (1) OPTION A continue to adopt internationally based financial reporting standards within the SORP through the application of UK GAAP, which includes and follows the ASB�s convergence agenda in addition ensure that consolidation information, appropriate to the sector, is available for whole of government accounts

19. SORP proposals for IFRS implementation for 2009-10 and subsequent years (2) OPTION B � no SORP? Local authority accounting guidance to come within a FRAB-linked framework based on FReM specific local authority guidance with a legislative basis is developed and maintained by the SORP Board.

20. CIPFA / LASAAC Press Release � January 2008 local authorities to adopt IFRS from 2010-11 transition date will be 1 April 2009 develop IFRS based SORP to be endorsed by FRAB (rather than ASB) will need consolidation adjustments for next three accounting periods for WGA

21. What are the key features of IFRS?

22. IAS 1 � Contents IAS 1 sets out the basic components of a set of IFRS financial statements. PLEASE LOOK AT THE EXAMPLE PROFORMAS IN THE HANDOUTS Although at first glance these items look very similar to our UK proformas, please do not be too complacent. Redrafting a set of accounts into IFRS formats does need a lot of work. UK terminology should not be used. You may not think that this so important, but it gives the wrong impression if you use UK words/phrases/presentation. AIM companies are risky enough and do not need to five the wrong impression on something so straightforward. The FRRP are unlikely to be as lenient as they were with the full list conversions. Big difference is the cash flow � only three headings and includes cash equivalents. IAS 1 only requires one year of accounts to be presented, but does require one year of comparatives for all numerical information, and for narrative if relevant to understanding the current year. If you look at a set of IFRS accounts, you should be able to navigate your way through them as the overall structure is similar to a set of UK GAAP accounts. Notes to the accounts � more details than UK GAAP, especially where areas of judgment or estimation involved. If a client provides a Statement of Changes in Equity as a primary statement they must also provide SORIE information � therefore must show (IAS 1.96) profit/loss for the period each item of income or expenditure which has been taken directly to equity total income and expense for the period effects of changes of accounting policy and error corrections Capital and reserves movements (IAS 1.97) full comparatives. If the client adopts the amendment to IAS 19 and takes actuarial gains and losses directly to equity � they must prepare a SORIE IAS 1 sets out the basic components of a set of IFRS financial statements. PLEASE LOOK AT THE EXAMPLE PROFORMAS IN THE HANDOUTS Although at first glance these items look very similar to our UK proformas, please do not be too complacent. Redrafting a set of accounts into IFRS formats does need a lot of work. UK terminology should not be used. You may not think that this so important, but it gives the wrong impression if you use UK words/phrases/presentation. AIM companies are risky enough and do not need to five the wrong impression on something so straightforward. The FRRP are unlikely to be as lenient as they were with the full list conversions. Big difference is the cash flow � only three headings and includes cash equivalents. IAS 1 only requires one year of accounts to be presented, but does require one year of comparatives for all numerical information, and for narrative if relevant to understanding the current year. If you look at a set of IFRS accounts, you should be able to navigate your way through them as the overall structure is similar to a set of UK GAAP accounts. Notes to the accounts � more details than UK GAAP, especially where areas of judgment or estimation involved. If a client provides a Statement of Changes in Equity as a primary statement they must also provide SORIE information � therefore must show (IAS 1.96) profit/loss for the period each item of income or expenditure which has been taken directly to equity total income and expense for the period effects of changes of accounting policy and error corrections Capital and reserves movements (IAS 1.97) full comparatives. If the client adopts the amendment to IAS 19 and takes actuarial gains and losses directly to equity � they must prepare a SORIE

23. IAS 1 � Overall considerations IFRS all or nothing overall considerations going concern accruals consistency materiality and aggregation offsetting (generally not permitted) comparative information balances are designated as current or non current This is similar to FRS 18 as amended by FRS 21. IAS 1 identifies 5 fundamental concepts which apply generally. This is similar to FRS 18 as amended by FRS 21. IAS 1 identifies 5 fundamental concepts which apply generally.

24. IAS 8 � Selecting accounting policies where a standard specifically applies to a transaction it should be used departure from accounting standards rare in absence of specific standard � follow hierarchy standards refer to standards on similar matters then Framework then pronouncements of other standard setting bodies, other literature and industry practice As we have already mentioned departures from IFRS are likely to be very rare. IAS 8.7 is specific in its guidance which states that where a standard applies to a specific transaction then it should be followed. If no standard exists which covers the transaction being considered, then there is a hierarchy which must be followed in order to determine an appropriate accounting policy.As we have already mentioned departures from IFRS are likely to be very rare. IAS 8.7 is specific in its guidance which states that where a standard applies to a specific transaction then it should be followed. If no standard exists which covers the transaction being considered, then there is a hierarchy which must be followed in order to determine an appropriate accounting policy.

25. IFRS 1 � First time adoption of IFRS applies to first annual financial statements in which explicit statement made that IFRS adopted must prepare, but need not present, transitional balance sheet must use consistent accounting policies throughout all periods presented in first IFRS financial statements do not revise previous estimates unless there is objective evidence that indicates an error IFRS applied retrospectively as if always followed IFRS Please remember that IFRS 1 will only apply to the first full set of IFRS accounts which are those in which an explicit statement is made. In order to restate all of their financial information, a transitional balance sheet need to be prepared, to provide an opening position for the comparative period. To comply with the underlying concept of consistency, the same accounting policies must be used for all periods presented and these should be based on the IFRS which are in play at the first reporting date. An entity must prepare, but does not have to present a transitional balance sheet. However, a reconciliation of equity must be given. The reconciliation should provide enough detail for a user to understand the material adjustments which have been made. Additional disclosures are required when some of the exemptions available under IFRS 1 are taken up. Financial instruments - an entity is allowed to designate a previously recognised financial asset or financial liability as FVTPL or AFS. The entity shall disclose the fair value of financial assets or financial liabilities designated into each category at the date of designation and their classification and carrying amount in the previous financial statements Property, plant and equipment - if an entity uses fair value in its opening IFRS balance sheet as deemed cost for an item of property, plant and equipment, an investment property or an intangible asset, it must disclose, for each line item in the opening IFRS balance sheet: (a) the aggregate of those fair values; and (b) the aggregate adjustment to the carrying amounts reported under previous GAAP In order to make the transition to IFRS it is necessary to treat this as lots of changes in accounting policies. We know that this means that they are dealt with retrospectively, which means the client will need to go back and restate all of their financial information as if the new IFRS had always been followed. This would mean going back and changing all past transactions from the time the company was incorporated until now. This of course could be a momentous task and could take a vast amount of time and resources. As such, IFRS 1 contains some exemptions which may be followed which are intended to make the process a bit more manageable. These will be covered in more detail later on today, however, in brief those exemptions are: (please click to next slide) Please remember that IFRS 1 will only apply to the first full set of IFRS accounts which are those in which an explicit statement is made. In order to restate all of their financial information, a transitional balance sheet need to be prepared, to provide an opening position for the comparative period. To comply with the underlying concept of consistency, the same accounting policies must be used for all periods presented and these should be based on the IFRS which are in play at the first reporting date. An entity must prepare, but does not have to present a transitional balance sheet. However, a reconciliation of equity must be given. The reconciliation should provide enough detail for a user to understand the material adjustments which have been made. Additional disclosures are required when some of the exemptions available under IFRS 1 are taken up. Financial instruments - an entity is allowed to designate a previously recognised financial asset or financial liability as FVTPL or AFS. The entity shall disclose the fair value of financial assets or financial liabilities designated into each category at the date of designation and their classification and carrying amount in the previous financial statements Property, plant and equipment - if an entity uses fair value in its opening IFRS balance sheet as deemed cost for an item of property, plant and equipment, an investment property or an intangible asset, it must disclose, for each line item in the opening IFRS balance sheet: (a) the aggregate of those fair values; and (b) the aggregate adjustment to the carrying amounts reported under previous GAAP In order to make the transition to IFRS it is necessary to treat this as lots of changes in accounting policies. We know that this means that they are dealt with retrospectively, which means the client will need to go back and restate all of their financial information as if the new IFRS had always been followed. This would mean going back and changing all past transactions from the time the company was incorporated until now. This of course could be a momentous task and could take a vast amount of time and resources. As such, IFRS 1 contains some exemptions which may be followed which are intended to make the process a bit more manageable. These will be covered in more detail later on today, however, in brief those exemptions are: (please click to next slide)

26. IFRS 1 � Disclosure first full set of IFRS financial statements normal IFRS disclosures at least one year's comparatives required IFRS 1 requires explanation of effect of transition reconcile profit/equity from UK GAAP to IFRS cash flow statement changes As the next set of accounts which will be sent to shareholders will be based on a whole new accounting framework, some extra disclosure will be necessary to enable users to understand the impact of the transition. The first full set of IFRS accounts will simply be prepared following IFRS. No �extra� disclosure will be necessary as users have not seen this information presented under a different accounting framework before. At least one year of comparatives are required, and these will have been published before under a different framework. As such, users need to be told how this information differs as a result of the new accounting policies adopted. Reconciliations are required of profit and equity. The reconciliations shall give sufficient detail to enable users to understand the material adjustments to the balance sheet and income statement. A reconciliation of the changes to the cash flow statement are required as this will now include cash equivalents within the cash flow movements.As the next set of accounts which will be sent to shareholders will be based on a whole new accounting framework, some extra disclosure will be necessary to enable users to understand the impact of the transition. The first full set of IFRS accounts will simply be prepared following IFRS. No �extra� disclosure will be necessary as users have not seen this information presented under a different accounting framework before. At least one year of comparatives are required, and these will have been published before under a different framework. As such, users need to be told how this information differs as a result of the new accounting policies adopted. Reconciliations are required of profit and equity. The reconciliations shall give sufficient detail to enable users to understand the material adjustments to the balance sheet and income statement. A reconciliation of the changes to the cash flow statement are required as this will now include cash equivalents within the cash flow movements.

27. What are the principal issues relating to implementation of IFRS for LG bodies?

28. What are the major differences between IFRS and the SORP? PFI infrastructure assets leases property, plant and equipment (fixed assets) prior year adjustments employment benefits segmental reporting cash flow statements

29. PFI most LG schemes accounted as "off balance sheet" under existing guidance no direct IFRS equivalent Govt seeking to develop public sector guidance following FRAB meeting in February application of hierarchy likely to result in �on balance sheet� treatment impact on reported financial position balance sheet recognition of assets and liabilities timing of I&E costs risk that existing Treasury Guidance withdrawn before IFRS adopted by local authorities

30. Infrastructure assets Values could be very material currently accounted for at depreciated historical cost value at 31 March 1994 was amount of outstanding loans subsequent additions at cost renewals accounting used as proxy for depreciation IFRS does not permit renewals accounting FReM requires valuation at current cost temporary fix planned for WGA using length, width etc

31. Accounting for leases May result more leases being accounted for as finance leases separate consideration of land and buildings accounting based on qualitative assessment of risks and rewards rather than 90% test disclose total outstanding operating lease commitment

32. Property, Plant and Equipment valuation of non specialist buildings at market value rather than existing use value frequency of valuations impact on depreciation through revaluation of expected residual value of assets component depreciation accounting for impairments investment properties

33. Prior year adjustments may be more frequent in the future these are now required for material errors rather than the higher fundamental error test currently included in FRS 3

34. What should we do now to prepare for the changes?

35. Key success criteria Other sectors have already done this so don't seek to reinvent the wheel planning people systems time effective communication

36. Planning Plan early to ensure that sufficient resources are allocated and required information is available project team project scope identify key focus areas initial systems impact assessment business management internal training external consultations and discussions

37. Conclusions complex accounting for financial instruments but effects mitigated through statutory override asset valuation issues including infrastructure assets significant impact for bodies with material PFI schemes or leases early planning is critical to ensuring that IFRS can be successfully implemented bodies that have effective plans should encounter few difficulties in accounting under IFRS IFRS accounts are longer and with more detailed disclosures discuss with auditors

38. Any Questions?