Agenda Item No

The Vale of Glamorgan Council

Audit Committee: 24th September 2009

Report of the Director of Finance, ICT & Property

IFRS Implementation Update

Purpose of the Report

1.             To update the Audit Committee on the latest position regarding the implication of the introduction of the International Financial Reporting Standards (IFRS).

Recommendation

1.             That the Audit Committee notes the contents of this report.  A further report will be presented at an appropriate time in the future.

Reason for the Recommendation

1.             To ensure issues relating to the changes in accounting practice are highlighted to the Audit Committee.

Background

2.             As previously advised to Committee, 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 (UK GAAP).

3.             In order to bring the benefits of consistency and comparability between financial reports in the global economy and to follow private sector best practice, the 2010/11 financial statements will need to be prepared using IFRS, adapted as necessary for the public sector.  In order to achieve this, comparative data will be required for 2009/10 thus allowing the necessary adjustments to be made to the 2010/11 opening balances.

4.             Initial proposed changes were advised to Audit Committee in January 2009.

Relevant Issues and Options

5.             CIPFA has produced a draft code and is currently undertaking consultation.  The final code will be issued in Autumn 2009.  Work has been undertaken by the Authority in relation to the major areas of change and the following progress has been made.

Leasing

6.             Under IFRS, the method for classifying leases into “operating” or “finance” will change.  All of the Council’s leasing arrangements need to be reviewed to ensure the correct classification.

7.             In order to achieve this, all departments, including Schools, have been asked to provide details of lease agreements they have arranged relating to equipment.  From the replies received, leases have been grouped according to the types of asset.  A de minimus of £40,000 total rental per annum has been set for each asset group.  The only asset groups that are above this level are photocopiers and the new printers contract.  A sample of photocopier lease agreements, with a selection of suppliers, has been obtained and they are in the process of being reviewed.  Details of all the authority’s leased vehicles has also been obtained and is currently being reviewed.

8.             There are 3 properties leased by the Authority, with an annual rental of over £40,000.  In order to be able to fully assess these leases, the valuation of the property at the inception of the lease, its residual value at the end of the lease and the economic life of the property is required.  Valuers are due to be appointed later this year as part of the asset revaluation rolling programme and they will be asked to provide the required information on these properties as part of that appointment.  In addition, properties with an annual rental of under £40,000 will be reviewed to determine the lease term.  If the lease term covers a long period, then valuers will also be asked to provide information on these additional properties.

Component Accounting

9.             Under IFRS, component accounting will require that the different elements of an asset are to be depreciated separately, if they are significant in relation to the total cost of the asset e.g. roof.  This change does not have to be actioned retrospectively.  A revaluation of assets due to be undertaken in 2009/10 will be considered for component valuation, though not a requirement under existing rules.

Employment Benefits

10.        Under IFRS, there will be a requirement to accrue for holiday pay earned, including flexi and time in lieu, but not yet taken as at 31st March each year.  There is an added complication for the Vale of Glamorgan Council as some departments have staggered leave years.

11.        Most school based staff do not have a flexible annual leave entitlement and are only able to take leave during the school holidays.  A specific formula has been agreed by CIPFA to calculate the leave accrual for these staff.  It is anticipated that this figure will be significant.

12.        With regard to other employees, a sample of 10% of whole time equivalents (WTE) from across the Authority, were asked to provide relevant information regarding their annual leave.  191 replies were received from the 197 questionnaires issued.  It is anticipated that the figure to be accrued will be lower than that for school based staff.

13.        Guidance on how to treat the above two accruals in the accounts is currently being awaited.

Segmental Reporting

14.        IFRS requires increased disclosure in the notes of the accounts to provide information on reportable segments, based on the authority’s internal reporting.  A segment’s expenditure must be 10% or more of the gross expenditure or income within the net cost of services.  These segments must total at least 75% of the expenditure within the net cost of services.  Having reviewed the format of financial information provided to Cabinet, it is considered that the segments that could be used should be based on directorates, with smaller directorates being amalgamated. 

Further Work

15.        Following completion of the work already outlined above, the opening 2009/10 balance sheet will have to be restated to an IFRS basis.  The authority’s financial statements will need to be reviewed, as the 2010/11 accounts will have to be presented in a different format, with additional notes and disclosures.

16.        There is a proposal that an all Wales Chief Accountants group is set up so that officers can discuss issues and share experiences.  Throughout the implementation, discussions will continue to be held with the authority’s external auditors.

Resource Implications (Financial and Employment)

17.        In order to avoid additional costs, the authority has started work on the implementation at an early stage, however it should be noted that the implementation will take up a considerable amount of officer time.

Legal Implications (to Include Human Rights Implications)

18.        The Council must ensure that it produces financial statements which comply with all relevant accounting standards.

Crime and Disorder Implications

19.        None as a direct consequence of this report.

Equal Opportunities Implications (to include Welsh Language issues)

20.        None as a direct consequence of this report.

Corporate/Service Objectives

21.        Reliable Financial Statements assist the Council in managing its assets more efficiently and thereby promotes the achievement of the Council's aims in respect of Corporate Resources.

Policy Framework and Budget

22.        This report is in accordance with the Policy Framework and budget.

Consultation (including Ward Member Consultation)

23.        No further consultation is proposed.

Relevant Scrutiny Committee

24.        Corporate Resources

Background Papers

Draft IFRS documentation

Contact Officer

Carolyn Michael - Accountant

Tel 01446-709444

Officers Consulted

External Audit Manager – Grant Thornton UK LLP

Responsible Officer:

Sian Davies, Director of Finance, ICT & Property