LGA response: Invitation to comment on the 2024/25 Code of Practice on Local Authority Accounting in the United Kingdom, October 2023

• The Local Government Association (LGA) is the national voice of local government. We are a politically led, cross party membership organisation, representing councils from England and Wales.
• Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.
• This response has been cleared by the lead members of the LGA’s Economy and Resources Board.

• We welcome the chance to comment on the 2024/25 Code of Practice on Local Authority Accounting. This is an annual consultation and is a useful exercise in ensuring the Code is set each year in consultation with practitioners and the sector. We note that this year the consultation includes 28 questions and that only the first 10 actually relate directly to the 2024/25 Code. The remaining 18 questions are about CIPFA / LASAAC’s strategy. These include many important issues that deserve serious consideration. It may have been easier to manage, and may have generated more responses, if these issues had been consulted on as a separate exercise from the consultation on the annual Code. 
• We note that there are several instances where changes to the Code are being considered in order to bring it into line with international standards, but that the proposal is that the specific changes will not be made because they are not relevant to local authorities. We strongly support this approach. It is our view that international standards should be applied when necessary but will only add complexity if applied when not relevant.

Limitation of changes

Question 1. Do you agree with the approach to the changes to the Code ie to limit the changes to the 2024/25 Code? If not, why not? Please provide your views on why this might be the case.

• We do not see any problems with this approach, but we suggest that you need to be mindful of any views expressed by local authority accounts practitioners. 

Readiness assessment

Question 2. Where do you consider your authority is in terms readiness for the mandatory implementation of IFRS 16?

• Confident of being ready for implementation for 2024/25 financial year
• Somewhat confident of being ready for implementation for the 2024/25 financial year
• Unsure of whether the authority will be fully ready for the financial year
• Not confident of the authority being ready for implementation for 2024/25 financial year
• Do not consider the authority will be ready for implementation for the 2024/25 financial year.

This question is for individual local authorities to answer. 

Question 3. What further support do you think CIPFA should provide to support mandatory implementation for the 2024/25 financial year?

• This question is for individual local authorities to answer.

Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)

Question 4. Do you agree with CIPFA/LASAAC’s view on the changes included for Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)? If not, why not? What alternatives do you suggest? 

• This appears to be a technical adjustment. While it is unlikely to have a big impact on local authorities, it may add a further layer of complexity and further complicate the accounts. We would ask whether there is an opportunity to treat it in the same way as proposal to treat the Amendments to IAS 1 Presentation of Financial Statements as covered in question 5 below.

Amendments to IAS 1 Presentation of Financial Statements

Question 5. Do you agree with the proposed approach not to require changes to the Code for Amendments to IAS 1 Presentation of Financial Statements? If not, why not? What alternatives do you suggest?

• This is a very specific instance, and it seems unlikely it will have a material impact on local authorities. The suggested approach of not making the change would therefore seem to be sensible.

Amendments to IAS 12 International Tax Reform: Pillar Two Model Rules

Question 6. Do you agree with the proposed approach not to require changes to the

Code for Amendments to IAS 12 International Tax Reform: Pillar Two Model Rules? If not, why not? What alternatives do you suggest?

• This is another very specific instance and we agree that this one would not affect local authorities or local authority owned companies. The suggested approach of not making a change is therefore supported.

Supplier Finance Arrangements

Question 7. Do you agree with the proposed approach not to require changes to the Code for Supplier Finance Arrangements? If not, why not? What alternatives do you suggest? 

• We support the approach of not making this change on the basis that it is not going to be appropriate for local authorities.

Service concession arrangement transition arrangements

Question 8. Do you agree with the proposed amendments to the transition arrangements for service concession arrangement (PFI PPP) liabilities? If not, why not? What alternatives do you suggest?

• This proposal will affect a small number of local authorities. We suggest that their views need to be taken into account.

IFRS 17 Insurance Contracts

Question 9. Do you agree with CIPFA/LASAAC’s approach to the implementation of IFRS 17 Insurance Contracts in the Code? If not, why not? What alternatives do you suggest?

• We note this has been raised in consultations on previous Codes. In earlier responses we suggested that CIPFSA / LASAAC should be guided by responses from practitioners working in the sector. This remains the case. That said, we note the comment that IFRS 17 is primarily aimed at insurance companies and that implementation is not expected to result in any accounting changes for local authorities.

Question 10.  Do you agree with the timing of the implementation of IFRS 17 Insurance Contracts in the Code ie in the 2025/26 Code? If not, why not? What alternatives do you suggest?

• Given that implementation of IFRS 17 for the public sector has been put back to 2025/26 this seems to be the right approach.

Overview of performance and summary financial information

Question 11. Do you agree with CIPFA/LASAAC’s proposals to add a new section to the narrative report overview of performance and summary financial information? If not, why not? What alternatives do you suggest? Please set out the reasons for your response.

• Care needs to be taken with these proposals. There is a danger that they will add to the burden for both accounts preparers and also for auditors. While the overall objective may be to provide something that is more understandable, the immediate impact could be to increase the amount of work and by doing so unintentionally add to or extend the current crisis in local audit. We therefore recommend that before any proposals are taken forward they are subject to a further separate and full consultation with the sector, including full worked examples and consideration of the impact on workload of accounts preparers and local auditors.
• We are also concerned that although the aim is to provide clarity and simplicity, the outcome could be lack of clarity (by overlaying additional information on existing reporting) and confusion (through conflicting with nationally published information). 

Question 12. Do you agree that these new specifications should be voluntary for 2024/25? If not, why not? What alternatives do you suggest? 

• See our answer to question 11. We suggest that further thought and consultation is required before implementation, including worked examples and assessment of impact on workloads. That said, voluntary implementation by a small number of local authorities working closely with CIPFA on this on a pilot basis could be a way of achieving that; 2024/25 is unlikely to be the right year to do that given that the audit crisis is unlikely to be resolved by then.

Question 13.Do you agree with the content of the overview of performance? If not, why not? What alternatives do you suggest?

• See answer to the last two questions. We believe this should be reviewed separately and in more detail before proceeding.

Question 14 Do you agree with the proposals for the inclusion of summary financial information? If not, why not? What alternatives do you suggest? Please set out the reasons for your response. 

• See answer to the last three questions. We believe this should be reviewed separately and in more detail before proceeding.
• The specific proposals here are a good example of why significantly more work needs to be done on this before considering proceeding. The list of items in the exposure draft (certainly as first issued) is slightly different from that in the consultation document, and one item in particular is a cause for concern and its inclusion could lead to unintended consequences and significant confusion.
• Item (f) in the consultation document (this is item g in the exposure draft as originally published) is “The authority’s underlying need to borrow to finance capital expenditure ie its reported capital financing requirement in accordance with paragraph 4.1.4.3 5); borrowing as a proportion of a council’s total income for the current and preceding year and forecast for the following three years and an explanation of what the trends indicate in terms of capital financing.” This has a similar aim to the first capital risk metric published in the Levelling Up and Regeneration Bill, which is “the total of a local authority’s debt (including credit arrangements) as compared to the financial resources at the disposal of the authority.” In addition the Office for Local Government (OfLog) published a further metric with a similar aim yet defined differently (“total debt as a percentage of core spending power”). It can be noted, for example, that DLUHC’s proposed definition for “financial resources” is for it to be based on a measure of “expenditure” – this will therefore be different from the “income” measure proposed by CIPFA / LASAAC and different again from the “core spending power” used by OfLog. There is therefore a clear danger that should these proposals be taken forward there will be three different metrics being published for each local authority with roughly the same aim but using three different data sets and giving three different answers. The result will be confusion.
• We therefore urge CIPFA / LASACC to undertake significant further work on this and give serious consideration to the possible consequences before proceeding. As outlined in previous answers, we also urge that this is subject to a further separate and full consultation with the sector, including full worked examples and consideration of the impact on workload of accounts preparers and local auditors.

Question 15.   Do you agree with the list of specifications for summary financial information? If not, why not? What alternatives do you suggest? Please set out the reasons for your response.

• This seems to be a repeat of question 14. See answer to question 14. 

Format and structure of the Code

Question 16.  Do you have any comments on the structure and format of the Code in relation to accessibility? Please set out the reasons for your response.

• The current arrangement whereby the Code is only accessible behind a paywall has a significant negative impact on its accessibility. This point was made with some force in several submissions of evidence made to the Levelling Up and Housing Committee’s recent inquiry into Financial Reporting and Audit in local authorities, and it was also mentioned in our own submission. It was raised with the Minister when he gave oral evidence. The biggest improvement that CIPFA / LASAAC could make to accessibility, transparency, equality and openness would be to address this anomaly which is linked to an outdated business model that dates from the time when the Code was only available on paper. 
• This is not just a problem for the Accounting Code, but the same problem exists for all Codes and guidance maintained by CIPFA. This causes great difficulties. It has been the situation that (retired) CIPFA members acting as experts working on CIPFA panels or forums responsible for reviewing such codes and guidance are unable to access the latest versions of the documents they are supposed to be reviewing and maintaining. This is clearly a ridiculous situation.
• It is appreciated that making the Code open to all may mean that CIPFA will need to find an alternative source of funding. 

Question 17.  In terms of the approach to content of IFRS as adapted or interpreted for the public sector context, are you content with the current approach in the Code or would you prefer the drafting to be more like that of the FReM? Please set out the reasons for your response.

• In our submission to the Levelling Up and Housing Committee’s recent inquiry into Financial Reporting and Audit in local authorities, we made the point that “An alternative to the use of statutory overrides would be for the inclusion of IFRS considerations in the local authority accounting codes to be on an as needed basis. Adherence to the standard would no longer be by default. Instead IFRS would only be applied to the codes when it clearly improves the quality of financial information to aid decision making and makes a significant contribution to consistent reporting through whole of government accounts (WGA).” 

Question 18. Are the adaptations and interpretations of standards affecting application for UK local government clearly presented and easily identified in the Code? Please set out the reasons for your response.

Question 19. Do you agree with the suggested revised structure of the Code? If not, why not? What alternatives do you suggest? Please set out the reasons for your response.

Question 20. Do you agree that the specifications for statutory adjustments should be brought together in one place in the Code, ideally alongside the provisions for the Movement in Reserves Statement? If not, why not? What alternatives do you suggest? Please set out the reasons for your response.

Question 21. Are there any other issues relating to the structure and format of the Code? Please set out the reasons for your response. 

• All the above are areas where CIPFA should take account of comments from practitioners working in the sector who have to use the Code on a day-to-day basis.

Sustainability reporting

Question 22. What do you consider is the best approach to the introduction of sustainability reporting in local government? Please set out the reasons for your response. 

• We agree with CIPFA / LASAAC’s view that local government sustainability reporting should follow international and UK public sector best practice, but that in several areas it is not yet well developed. We also note that the proposal to introduce reporting of environmental sustainability into the capital strategy under the provisions of the Prudential Code was dropped or watered down after consultation in 2021 amid concerns that it intruded into councils’ own policy making.  Councils are having to deal with a wide range of challenges and additional burdens. In that context sustainability reporting has to be a low current priority and working on changes to it would direct resources away from priorities such as working to resolve the current crisis in local audit. This area could then be revisited when wider standards have been agreed but for now a postponement is the right approach.

Local audit and accounting issues

Question 23. Do you have any views on where accounting can be changed to ease the burden on the local audit and accounts preparation system? Please set out the reasons for your response.

• We would refer you to the LGA's submission made to Levelling Up and Housing Committee. Paragraphs 17 to 26 cover the longer-term considerations. In addition, we have made strong representations about the need to focus audit time away from matters of low risk and particularly away from spending unwarranted time on valuation of certain assets that will not affect local decision making. We would also refer CIPFA / LASAAC to our submission to HM Treasury’s consultation on non-investment asset valuations for annual accounts purposes, where we argued strongly for HM Treasury to consider an alternative way of valuing infrastructure assets that avoids time and effort being spent on preparing and auditing asset valuations where the book value of the asset has no impact on service delivery or local decision making. We made similar points in our response to the recent survey from CIPFA on the possible introduction of Depreciated Replacement Cost as a method of valuing infrastructure assets. Our response highlighted significant concerns with the impact on council accounts of using this methodology and called for a rethink.

Statutory specifications for local authority financial reporting

Question 24. CIPFA/LASAAC would seek local authority views on their approach to investments in pooled investments and what the future approach might be to accounting for these investments when the statutory overrides come to an end? Please set out the reasons for your response.

• In 2018 CIPFA was part of calls to make a permanent statutory override on IFRS 9 to mitigate the impact of fair value movements on pooled investment funds. CIPFA gave evidence to the Public Accounts Committee that the override was needed (as “there could be a real revenue hit from the ups and downs”) and this was reflected in the committee’s final report in June in 2018.
• In 2018 the CIPFA response to the Government’s consultation on the statutory override to IFRS 9 included the following comment: “On balance therefore CIPFA considers that to be consistent with the treatment of other transactions in local authority financial reporting it would be useful if this statutory override was permanent and that gains and losses on these financial instruments should only be recognised against the General Fund on derecognition of the instrument, with fair value movements being recognised in the Financial Instruments Adjustment Account until derecognition. CIPFA would also note that the transparency afforded by the Standard is not lost as the gains and losses would still be recognised in the Surplus or Deficit on the Provision of Services (although we recognise that this would result in an additional statutory adjustment).”
• This is the opposite of the view expressed in the current (2023) consultation document that “CIPFA and CIPFA/LASAAC are concerned that the statutory override results in less transparent reporting as the fair value movements are not immediately charged to General Fund balances.”
• It is our view that CIPFA was correct in its view in 2018 that the statutory override does not affect transparency and that its more recent view is more narrowly focussed and fails to see the whole picture by ignoring figures published in the annual accounts.
• It is reported in the 2022 consultation outcome that 92 (88%) of the 104 responses received (including the LGA) were in favour of making the override permanent; CIPFA was one of only five (less than 5%) in favour of making the override time limited. CIPFA should review its stance on this as it is clear that its views are out of kilter with the views of the majority of its members and of local authorities. The arguments that CIPFA made in 2018 in favour of making the statutory override permanent are still just as relevant today as they were then, and are more convincing than the arguments it made in the 2022 response and in the current consultation. We urge CIPFA to follow its original arguments instead. CIPFA should join with its membership and the rest of the sector (as it did in 2018) in lobbying for the override to be further extended or made permanent rather than coming to an end at the end of 2024/25.

Question 25. CIPFA/LASAAC would seek the views on the impact of the DSG on financial reporting and local authority plans for the end of the amendments to the regulations. Please set out the reasons for your response.

• This is a major issue, and it is right that CIPFA / LASACC has highlighted it. We outlined our views in our response to the DfE‘s SEND and Alternative Provision Improvement Plan Right Support, Right Place, Right Time, published earlier this year. While the decision taken by DLUHC to extend the Statutory Override on the treatment of DSG deficits to March 2026 provides some breathing room, we do not believe that councils have the levers to work with partners “to put themselves in the best position so that when the ‘statutory override’ comes to an end, local authorities are able to demonstrate their ability to deal with remaining DSG deficits." (As was stated in the plan). The Department must go further and guarantee financial support to ensure that every council’s Dedicated Schools Grant (DSG) deficit will be eliminated by 2026 when the Statutory Override ends.
• Further details of other actions that we believe can help are outlined in our response, linked above.

Recognition of the net defined benefit pensions asset

Question 26. What are your views on the Code’s provisions in relation to the asset ceiling and the recognition of the net defined benefit pensions asset? Please set out the reasons for your response. 

• We agree that this is a relatively new issue as an increasing number of local government pension funds are now in surplus and the scheme as a whole seems to be in that position for the first time in many years (according to the latest Scheme Advisory Board scheme valuation report). We are aware that CIPFA is currently working on a draft bulletin (Bulletin no 15) which will cover this issue. We suggest that any proposals to amend the Code in response should be made following discussion with relevant experts in the sector, especially the recently established Local Government Pension Scheme Advisory Board’s surpluses working group which was set up to consider some of the factors around surpluses.Changes to IPSAS (International Public Sector Accounting Standards) standards which could impact on the Code

Question 27. Do you have views on the impact of new IPSAS on the specifications of the Code as they augment the interpretations of the local government context? Please set out the reasons for your response.

• This is an area where CIPFA / LASAAC should take account of views of practitioners who work in the sector.

Other areas where additional guidance might be required

Question 28.Are there any areas within the Code where additional guidance or improvements to the Code would be helpful? Please support your answer by giving details of the amendments you would suggest. 

This is an area where CIPFA / LASAAC should take account of views of practitioners who work in the sector

Consultation on the 2024/25 Code of Practice on Local Authority Financial Reporting in the United Kingdom

Deadline for responses was 17 October 2023, 11.00pm

Bevis Ingram, Senior Adviser Finance

[email protected]