Councils granted statutory override of the requirements of IFRS 9 relating to fair value movements on pooled investment funds for 5 years

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23 Nov, 2018

The Ministry of Housing, Communities and Local Government (MHCLG) has issued its summary of consultation responses and the Government response to a consultation which sought views on ways to mitigate the effects of IFRS 9 'Financial Instruments' on local authority accounting.

Local authorities who will be required to apply IFRS 9 for the 2018 to 2019 financial year had expressed concern to the Government claiming that some of the provisions of IFRS 9 would have negative impacts.

The consultation, published in July 2018, indicated that local authorities would be principally affected by the introduction of IFRS 9 in the following ways:

  • More income statement volatility. IFRS 9 raises the likelihood that more assets will have to be measured at fair value, with changes in fair value recognised through profit and loss. This is most likely to impact local authorities with investments in pooled investment funds.
  • Earlier recognition of impairment losses on receivables and loans, including trade receivables. Entities will be required to consider providing for possible future credit losses from the first reporting period in which a loan or receivable is recognised in the accounts. Local authorities will need to consider whether they have any trade receivables or loans, for example loans made to local SMEs that fall within scope of the standard.
  • Significant new disclosure requirements. Those entities that are more significantly impacted by these new disclosure requirements may need new systems and processes to collect the necessary data.

The consultation sought potential mitigations to the above, specifically on mitigating the impact of fair value movements on pooled investment funds.

Following feedback to the July consultation, the Government has indicated that it intends to:

  • Require local authorities to account for fair value movements on financial instruments in accordance with proper practices as set out in the Code on Local Authority Accounting published by The Chartered Institute of Public Finance and Accountancy (CIPFA).
  • Introduce a mandatory statutory override requiring local authorities to reverse out all unrealised fair value movements resulting from pooled investment funds from profit/loss to an unusable reserve. This is intended to mitigate the impact of fair value movements on the balanced budget requirement. It will be mandatory and will apply to both the losses and the gains that would otherwise impact on the revenue account under IFRS 9. This will be effective from financial year commencing 1 April 2018.
  • Extend the proposed period for which the statutory override applies to five years. The Government will keep use of the override under review.
  • Require Local Authorities to disclose the net impact of the unrealised fair value movements in a separate unusable reserve throughout the duration of the override.

There will be no override for the expected loss model or for the extra disclosures that IFRS 9 will require.

The consultation summary document and draft regulations are available on the MHCLG website.

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