LGA response: Invitation to comment on the 2025/26 Code of Practice on Local Authority Accounting

Introduction

1.    There is a clear and widely accepted need to simplify local authority financial reporting. The complexity of local authority accounts has contributed significantly to the current crisis in local audit (although it is not the only cause) and there is a need for reporting to be simplified in order for the scale and size of audits to become more proportionate.
2.    The current consultation on the 2025/26 accounting code includes some proposals that address some specific issues, particularly with regard to asset valuations. This is a crucial area for long term audit reform. Careful consideration needs to be given to the details of the proposals; although some of the proposals can be supported, others need to be re-considered. The approach to how International Financial Reporting Standards (IFRS) impact on local authority financial reporting should also be reviewed.  We have commented in detail in answer to the individual questions.

Specific Questions

Question 1. Focus on longer-term reforms. Do you agree with the approach of advancing the agenda in the context of longer-term reforms and implementing changes from the Thematic Review in 2025/26? If not, why not? Please provide your views on why this might be the case.

3.    In our response to the thematic review, we made a number of suggestions as to how non-investment asset valuations for local authorities should be approached, particularly infrastructure assets.
4.    When HM Treasury subsequently consulted on the Non-investment Asset Valuation for Financial Reporting Purposes - Exposure Draft and implementation of the outcomes of the thematic review in February 2024 it stated that although the Exposure Draft covers the whole of the public sector, “the Relevant Authority for each jurisdiction within that boundary (ie Whole of Government Accounts) will have their own due process for proposing and approving changes to their accounting regime.” And also that “this consultation does not supplant those processes.” This gives a certain amount of latitude in application to local government which should be used so that the approach taken to asset valuations is in the best interests of financial reporting for councils.
5.   It should also be noted that the Government has not formally published an outcome of the further consultation (nor, technically, of the original thematic review consultation; although it did publish the further consultation and exposure draft it did not report on responses to the original consultation). This makes it hard to trace through the current status of “the context of the longer-term reforms and implementing the changes from the thematic review” which is referred to in the current consultation. Further, as we have noted before in an earlier response to a CIPFA consultation, CIPFA / LASAAC has not published any agendas, papers or minutes since November 2021. This lack of transparency makes it very hard to understand the points that have been made and accepted or rejected and why, and where some of the current proposals have come from.
6.    It is crucial that the methodology for valuation of non-investment assets covered by the thematic review does not create problems that will either prolong or re-ignite the crisis in local audit. The special circumstance of local government must be taken into account in any decisions affecting the requirements placed on local authorities. It is more important that the proposals take account of this, which may mean some divergence from the rest of the public sector, than that the proposals are implemented for 2025/26.

Question 2. Approach to changes for operational property, plant and equipment. Do you agree with the proposal to maintain the use of existing use value? If not, why not? Please provide reasons for your view.

7.    Yes. Where these are assets that could potentially be sold for their current use, it is right that the figure in the accounts is meaningful and related to the value that could be realised.

Question 3. Specialised assets - the use of depreciated replacement cost in local authority measurement. Would you support a future move to value operational property, plant and equipment based on their current site and not consider alternative sites? If not, why not? Please provide reasons for your view.

Question 4. Specialised assets - the use of depreciated replacement cost in local authority measurement. If operational property, plant and equipment is valued based on their current site. Should the modern equivalent approach still be applied to the area of the site? If not, why not? Please provide reasons for your view.

8.    Questions 3 and 4 are closely related. In our response to the thematic review we argued that the book value in the accounts for such assets plays little role in decision making. The book value does not have a great deal of meaning as there is no market for the asset in its current form nor would there be any intention of selling it. If circumstances change and the asset were to be considered for sale, a completely new valuation would have to be made on the basis of what could be realised from a sale.
9.    This was recognised in the thematic review and the original proposal was that the valuation in the accounts should be on a historic cost basis. It is not clear where the alternative proposal to use Depreciated Replacement Cost has come from and why it is justified (as mentioned earlier the lack of formal response in the thematic review consultation by HM Treasury makes it hard to trace this through).
10.    If historic cost were to be used, as was originally proposed, there would be no need to consider further complications such as “current site versus alternative site”. For assets such as these, where the book value of the assets is little more than a paper figure and does not play any significant role in decision making, the valuation process should be made as simple as possible.

Question 5. Frequency of valuations for operational property, plant and equipment and the use of indexation. Do you agree with the suggestion that, for non-investment assets that are not social housing, the Code should withdraw the IAS (International Accounting Standard) 16 requirement for revaluations to be made with sufficient regularity that ensures the carrying amount does not differ materially from that which would be determined using the current value at the end of the reporting period. Instead replacing this with a quinquennial revaluation or a five-year rolling basis, supported by indexation in the intervening years? If not, why not? Please provide reasons for your view.

Question 6. Frequency of valuations for operational property, plant and equipment and the use of indexation. Do you agree that authorities should use the ‘best available’ indices and in the extremely rare circumstance that no index is available, authorities should not be required to revalue those assets more frequently than every three years? If not, why not? Please provide reasons for your view.

Question 7. Frequency of valuations for operational property, plant and equipment and the use of indexation. Do you agree that, under the adaptation to IAS 16, full revaluation outside the five-yearly cycle will only be required where there are indicators of impairment under IAS 36? If not, why not? Please provide reasons for your view.

Question 8. Frequency of valuations for operational property, plant and equipment and the use of indexation. Do you agree that CIPFA should issue guidance on indices to be used to which local authorities must have due regard? If not, why not? Please provide reasons for your view.

11.    Questions 5 to 8 (and also question 9 below) are closely linked. We have previously supported the use of indexation (for example in our response to proposed short term measures in March 2024). We also argued that such indexation should be mandated and that indexes to be used should be specified centrally (either by CIPFA / LASAAC or by MHCLG). This would eliminate the scope for different interpretation so that audit work can concentrate solely on matters of fact (such as calculations). This should result in a simplification of approach and a significant reduction in time taken.

Question 9. Frequency of valuations for operational property, plant and equipment and the use of indexation. Indices will need to reflect conditions as at 31 March as best possible. Therefore, it’s likely that indices would be available to practitioners around March each year. Would this approach be feasible for practitioners? If not, why not? Please provide reasons for your view.

12.    See answer to questions 5 to 8 above. On this very specific point we suggest that the views of practitioners should be followed as to whether this is feasible or not. We have heard views from some practitioners that this is only likely to be feasible if the date for the draft accounts remains at 30 June and is not moved to 31 May.

Question 10. Frequency of valuations for operational property, plant and equipment and the use of indexation. Do you have any comments on practical considerations for indexation and what should be included in application guidance issued to practitioners for the use of indices to assist with implementation?

13.    See answers to questions 5 to 9 above. No further comments.

Question 11. Frequency of valuations for operational property, plant and equipment and the use of indexation. Do you agree with the proposal to make no changes to how social housing assets are valued using the EUV-SH (existing use value – social housing) basis, since the beacon approach appears to be working effectively? If not, why not? Please provide your views on why this might be the case.

14.     This is a detailed point and we suggest that views of Chief Finance Officers, in councils that have social housing, should be followed.

Question 12. Intangible assets. Do you agree with the proposal to withdraw the option to measure intangible assets using the revaluation model? If not, why not? Please provide reasons for your view.

15.    We have not heard that this proposal will cause problems.

Question 13. Transitional arrangements. Do you agree with the proposed effective date of financial year 2025/26 for the changes? If so, why?
If not, do you have a suggestion for an alternative effective date? If so, why?

Question 14. Transitional arrangements. Are there any significant operational challenges you consider might be encountered during the implementation of this proposed approach to the valuation of non-investment assets?

Question 15. Transitional arrangements. Do you agree with the approach to transition as set out in the exposure draft? If not, why not? Please provide reason for your view.

16.    Overall, the views of practitioners on transitional arrangements should be followed. We would support moving as quickly as practical and those practitioners we have spoken to believe 2025/26 is a practical implementation date.

Question 16. IFRS (international Financial Reporting Standard) 17 Insurance Contracts. 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?

Question 17. IFRS 17 Insurance Contracts. 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?

17.    It is accepted that local authority accounts need to follow a set of recognised standards. The current balance between IFRS rules and the legislative framework underpinning local government means that the accounting code of practice attempts to combine and consolidate two accounting rule books, one professionally based, the other based on legislation. As a result, accounts reform has fallen down, trying to reconcile two unreconcilable reporting requirements and the result, if a change has been made at all, has largely been either an unsatisfactory compromise or an additional layer of complication, rather than clarity and simplification. 
18.    Adherence to IFRS renders the accounts more complex, and it also means that every change in IFRS needs to be reflected by a further change in the local authority accounting code, which usually creates extra work for hard pressed accounting teams and auditors. There is a strong case for special treatment for local authority accounts to distinguish them from those laid down by international standards in the light of this.
19.    In our response to the consultation on the 2024/25 accounting code we noted that IFRS 17 is primarily aimed at insurance companies and that implementation is not expected to result in any accounting changes for local authorities. In the light of this, CIPFA / LASAAC needs to be able to demonstrate why allocating resources to the implementation of IFRS 17 in the accounting code is a priority now and how it adds value to local authority financial reporting and is not just an additional unnecessary layer of complexity.

Question 18. Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates (Lack of Exchangeability). Do you agree with the proposed approach not to require changes to the Code for Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates (Lack of Exchangeability)? If not, why not? What alternatives do you suggest?

20.    We understand from discussions with some local authority finance practitioners that this is unlikely to have an impact on local authorities, although if that is the case it not clear why making such a change is a priority at this time.

Question 19. Fair value gains and losses on pooled investments (England and Wales). CIPFA/LASAAC would seek local authority views on their current approach to investments in pooled investments and what their future approach might be for these investments if the override was not in place? Please set out the reasons for your response.

21.    We have long supported making the IFRS 9 statutory override permanent or, as a minimum, extending it for another five years. The IFRS 9 statutory override was introduced in 2018 following concerns raised by the sector, including by CIPFA, that without it councils would be subject to unnecessary financial volatility that would have unwanted impacts. Having the override in place means that councils do not have to make unnecessary cuts in service in response to variations in paper valuations of pooled investments.
22.    Having the override in place does not mean that local authorities do not have to monitor or measure changes in value at balance sheet date, just that such changes, particularly temporary changes, do not affect the revenue account directly in the short term.

Question 20. Reporting infrastructure assets. Do you agree with CIPFA/LASAAC that the temporary solution for reporting of infrastructure assets should be maintained? This requires statutory support in those jurisdictions where infrastructure assets are held on local authority balance sheets (England, Scotland and Wales). If not, why not? Please provide reasons for your view.

23.    Yes. The current temporary solution has been critical in unlocking the log jam in local audit that was caused by the issue of valuation of infrastructure assets. It needs to remain in place until a suitable and proportionate long-term solution has been agreed and implemented. It may be that the current exemption will work as a long-term solution.

Question 21. Reporting infrastructure assets. Do you agree that that implementation of financial reporting in accordance with IAS 16 will require at least a one-off exercise to measure infrastructure assets at depreciated replacement cost? If not, why not? Please provide reasons for your view.

Question 22. Reporting infrastructure assets Do you have any views on simplifications that might apply to the measurement of DRC (depreciated replacement cost)? Please provide an explanation of any simplifications that might be used and a reason for your proposals.

24.    Valuing infrastructure assets on a Depreciated Replacement Cost basis would have a real major negative impact on local authorities and add significantly to the complexity of local authority accounts. It should be avoided. It would create a great deal of extra work for those involved in preparing and auditing local authority accounts. It would significantly alter balance sheet figures without actually altering real finances. The notional values of roads would increase by around £100 billion (according to Office for National Statistics estimates) and would dwarf and mask real figures for other assets that are meaningful and do impact on local authority finances. This would make local authority accounts harder to understand and goes against the stated aim of simplifying local authority accounts. 
25.   We have commented extensively on possible alternative long-term solutions in our responses to HM Treasury's Thematic Review of non-investment asset valuations and to CIPFA's Survey on Reporting of Infrastructure Assets and also in our submission to the Public Accounts Committee enquiry into Whole of Government Accounts 2021/22. 
26.    Accepting that the figures in local authority final accounts for values of infrastructure assets can never be more than notional will enable a more radical and realistic approach to be taken. The valuation of local authority infrastructure assets could be undertaken on a standard cost basis – such as a standard value for each mile of road. This would then mean that the value in the accounts would be easy to calculate, easy to audit and it would be based on real service information that should already be in the accounts.

Question 23. Improvement projects. Do you have any suggestions on which items should be prioritised in CIPFA/LASAAC’s strategic plan? Please provide reasons for your suggestions.

Question 24. Other changes to local authority financial statements and the reports that accompany them. Do you have any suggestions for improving local authority financial statements and the reports that accompany them? Please provide reasons for your suggestions.

27.    Questions 23 and 24 are linked. In setting and consulting on its strategic plan, CIPFA / LASAAC should engage with the sector on an ongoing basis. It would be helpful if it would publish up to date agendas, papers and minutes.
28.    There are several areas that have previously been highlighted that add burdens without adding value to the accounts, particularly relating to valuations of pensions, property, plant and equipment, and other non-investment assets generally. The added complexity from the current approach to pension valuations makes the balance sheet harder to understand and makes comparison much more difficult, both between councils and between years. Current approaches mean that fluctuations in pension valuations, which have little to do with the underlying finances of a council, can greatly distort the accounts and make the financial position misleading to readers of accounts. The position of local government in having a funded scheme makes the issue of pension reporting and valuation for all admitted bodies particularly important. This is an area that must not be overlooked.
29.    We continue to endorse the long standing call by the Local Government Pension Scheme Advisory Board for the separation of the pension fund annual accounts in England from the administering authorities’ own accounts; this is already the case for the LGPS in Scotland and Wales. The problems with local audit have had an impact on the timely publication of finalised audited pension fund accounts and this has caused problems for the accounts of employers in the Local Government Pension Scheme (LGPS). There are over 18,000 separate employers in the scheme, far more than those that are directly affected by the local audit problems. So long as pension fund accounts remain part of the main local authority accounts, problems unrelated to the issuing of audit opinions on the pension fund itself will continue to impact on pension fund accounts.

Question 25. Changes to IFRS standards that could impact on the Code. Do you have views on the impact of the new IFRSs on the specifications of the Code? Please set out the reasons for your response.

30.    As outlined in our response to questions 16 and 17 above, in our view rigid adherence to IFRS renders the accounts more complex, and it also means that every change in IFRS needs to be reflected by a further change in the local authority accounting code, which usually creates extra work for hard pressed accounting teams and auditors. There is a strong case for special treatment for local authority accounts to distinguish them from those laid down by international standards in the light of this.

Question 26. Changes to IPSAS (International Public Sector Accounting Standards) standards that could impact on the Code. 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.

31.    International Public Sector Accounting Standards (IPSAS) have been suggested by some as being a more suitable alternative to IFRS as they are more closely aligned to the needs of local government. This is an area that could be explored further, but the priority must be to prioritise improvements to local authority financial reporting.

Question 27. Other areas where additional guidance might be required. 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.

32.    We have no further comments at this time

Contact:
Bevis Ingram
Senior Adviser Finance
Phone: 079 2070 2354
Email: [email protected]