Development of Financial Reporting in the UK

1. Development of Financial Reporting in the UK UNCLASSIFIED

2. Agenda • Financial reporting across the public sector; • Resource Accounting & Budgeting; • Legal framework for accounts production in Central Government; • Government Financial Reporting Manual (FReM); • The move to IFRS; • Whole of Government Accounts

3. Departmental Financial Reporting Frameworks • The various frameworks have different purposes and rules: • National Accounts: fiscal performance is measured by reference to the National Accounts • Budgets: are used to control public spending and need to align with the National Accounts to support fiscal control • Estimates: seek annual Parliamentary authority for departments’ spending that isn’t authorised elsewhere • Resource Accounts: report departments’ actual spend for the year on a ‘commercial’ basis, adapted for the public sector, and compare outturn with Estimates

4. Resource Accounting & Budgeting (RAB) RAB is an accrual based approach to Government accounting and budgeting More than just simply the adoption of accrual accounting Aims to translate the Government’s policy priorities into departmental strategies and budgets, and then reports to Parliament on the efficiency and effectiveness of services provided 4

5. The Move to Full Resource Accounting and Budgeting • RAB was launched in 1993 • White Paper in 1995 • Implementation Process • 1997-1998 – Unaudited and unpublished shadow DRA’s • 1998-1999 – Audited and unpublished shadow DRA’s • 1999-2001 – Audited and published shadow DRA’s • 2001-2002 – Live DRA’s • Post-implementation Review

6. Impact of resource accounting Advantages Issues Resource requirements in managing financial information. Level of uncertainty in accruals accounting • For Parliament: • Information on use of resources – VFM • Enhanced accountability • Importance of Cash flow management remains • For central government • Strategic approach to decision-making • Enhanced fiscal framework • Modernising Government • For Departments • Resource management • Linking inputs to outputs • Understanding full costs of activities • Incentivised management of assets and liabilities

7. Legal framework for accounts production in Central Government • Government Resources and Accounts Act 2000 • Powers granted to HM Treasury under this Act • Other key features

8. Government Financial Reporting Manual (FReM) The technical accounting guide to the preparation of financial statements Prepared by HM Treasury following consultation with the FRAB and issued by relevant authorities in England, Wales, Scotland and Northern Ireland Applies to all entities prepared on an accruals basis and consolidated within WGA, but not to Local Government, Public Corporations that are not Trading Funds and NHS Trusts and NHS Foundation Trusts 8

9. Financial Reporting guidance across the public sector • HM Treasury – FReM • Department of Health – NHS accounting manuals • Monitor – Financial Reporting Manual for Foundation Trusts • CIPFA-LASAAC – Code of Practice on Local Authority Accounting in the UK • Devolved Administrations

10. The Financial Reporting Advisory Board (FRAB) • Independent review board for the move to RAB • Government Resources and Accounts Act 2000 • Annual Report to Parliament • Responsibilities

11. Why IFRS? • Improved transparency and accountability • Best practice financial reporting standards for public interest entities • Private vs Public sectors • Use of Economic Resources • Alternatives?

12. The IFRS Plan • Formal announcement to implement IFRS from 2008-09 • Round tables and consultation • Stocktake meeting with departments • Delayed implementation to 2009-10

13. The IFRS Timetable 2008/09 IFRS Comparatives 2009/10 IFRS reporting • 4 Point Trigger Point Plan 2008 2009 2010 Transition date Opening IFRS balance sheet (1 April 08) Comparative IFRS year end; IFRS-based annual budgets First IFRS year end 2009/10 annual report and accounts (and 2008/09 comparatives)

14. IFRS IMPLEMENTED • 2009-10 IFRS based resource accounts & accounts of arm’s length bodies (ALBs) • Areas for future improvements in financial reporting include • Lease accounting • Accounting policy note • Errors and omissions • Financial instruments • Fair value measurement

15. IFRS Issues – Departments and Arm’s Length Bodies during implementation • Restatement and terminology (IFRS 1/ IAS 1) • Service Concession Arrangements (IFRIC 12) • Leases (IFRIC 4 / IAS 17) • Financial instruments (IAS 39) • Property, Plant & Equipment (IAS 16) • Networked assets; • heritage assets; and • componentisation. • Recognition of Intangible Assets (IAS 38) • Leave accruals (IAS 19) • Segment Reporting (IFRS 8)

16. Background to WGA • First stated as Government’s intention in Code for Fiscal Stability 1998 • Embedded in Government Resources and Accounts Act 2000 (with separate legislative / administrative arrangements for Scotland / NI) • Dry runs commenced in 2001-02 initially only for central government, with WGA first expected to be published 2005-06 • Deferred to 2008-09, but then again to 2009-10 when IFRS was delayed a year for central government • Orders laid to allow account to be published for 2009-10

17. What is WGA? • Set of consolidated financial statements for the public sector (including central government, devolved administrations, local authorities, NHS and public corporations) • Based on International Financial Reporting Standards • Most ambitious set of accounts in the world in terms of public sector coverage • Will look and feel like a set of private sector accounts with a management commentary, financial statements, disclosure notes and audit opinion • First accounts will be for 2009-10 which we are aiming to publish around Spring 2011 • Early years likely to be qualified – but this is the start of a journey UNCLASSIFIED

18. Why produce WGA • The only audited set of data across the public sector • Improving transparency and accountability to Parliament and to the taxpayer • New measure of the government’s financial position, including provisions, PFI and contingent liabilities, to complement existing measures • Potential to support longer term fiscal forecasting and management • Comparability across different parts of the public sector, and with the private sector, as financials produced on a consistent basis UNCLASSIFIED

19. What’s new in WGA • Brings the UK public sector accounts together in one place • Based on the audited accounts of public sector bodies (already published), but WGA consolidates these, removing transactions and balances with other parts of government • It will include assets and liabilities which are not part of measures used for the purpose of national statistics - due to measurement and conceptual differences. The WGA net balance sheet position will not, for example, match PSND • Makes transparent PFI, pension liabilities and government guarantees UNCLASSIFIED

20. How do we pull together WGA? Small team at the centre in the Treasury Each entity completes a data collection pack Uploaded into COINS Feed into sub-consolidations Central government Health Local Authorities Public corporations UNCLASSIFIED

21. Risks and Issues Timeliness Quality Counterparty transactions and balances Convergence of accounting policies Boundary for WGA Completeness External reaction UNCLASSIFIED