Accounting updates: August 2014

In our round-up of the latest accounting news, we consider how NHS organisations are struggling to balance their books, public sector accountability and risk management, the latest plans to consult on lease accounting announced by EFRAG and IAS 19 for bearer plants is given green light

Financial directors across the NHS reveal that increasing numbers of its organisations are struggling to balance the books, along with indications of widespread overspending and a greater number crippled by a deficit over the 2012/13 financial year, a report shows.

The number of organisations overspending or reporting a deficit has increased since the 2012/13 financial year, while more organisations are reporting an actual deficit than planned to at the beginning of this financial year, the Healthcare Financial Management Association (HFMA) has found following a survey of 188 finance directors across England.

The report, NHS Financial Temperature Check - in which FDs were questioned about the financial challenges facing the NHS - shows that in the last financial year, clinical commissioning groups (CCGs) and provider trusts delivered planned financial savings of 2.3% and 4.5% respectively, but this was not the case across the board and fell short of the overall planned savings (2.5% and 4.8% respectively).

Looking ahead at the financial position for 2014/15, only a third (36%) of provider trust finance directors are ‘quite’ or ‘very’ confident of achieving their financial targets, with one in five (20%) expressing concerns about this and most (44%) saying it was too early to say.

 That proportion drops significantly in the long term, as just 12% of provider trusts and 25% of CCGs feel ‘quite’ or ‘very’ confident that their financial targets will be achieved in 2015/16.

As for expectations, the report showed that over 39% of FDs expect the quality of services in the NHS to improve over the next few years and over half (53%) expect quality to hold steady.

Paul Briddock, HFMA director of policy, said: ‘We are seeing financial problems materialise in organisations that have previously been stable.

‘The financial outlook looks increasingly challenging, but despite this, it is encouraging to see that finance directors do not see quality deteriorating – in fact, many think quality will improve.’

Only 36% of provider trust finance directors are ‘quite’ or ‘very’ confident of achieving their financial targets for 2014/15

The report also sets out finance directors’ opinions about the action that should be taken to reduce the financial pressures. Most called for the pace on service transformation to be picked up and also wanted to see more debate with the general public and politicians about the need for change in the NHS to make it fit for the future.

Public sector accounting is flawed

Shortcomings in accounting and financial reporting are masking the true state of public sector finances across Europe and pose major risks to the public interest, according to a joint ICAEW-PwC report.

The report says that ensuring democratic accountability and fiscal sustainability in Europe’s public sector is critical, and highlights the need for transparent, better information about government accounts so that citizens can understand the long-term implications of public spending.

The report discusses key insights which have been identified through a series of debates on how to secure sustainable public finances across the EU, bringing together governments, the accountancy profession, academia and other key stakeholders.

Among them is the need to improve the financial literacy of citizens, policy-makers, and intermediaries, so that everyone has a basic understanding of EU countries’ financial situation and the impact of future fiscal sustainability challenges.

Another topic highlighted by the report is the importance of ensuring that the introduction of accruals accounting throughout the public sector in Europe is not seen as an end in itself.

Patrice Schumesch, PwC global partner for public finance and accounting, said: ‘Accruals accounting is just one piece in the jigsaw – albeit a critical one: to reap the full benefits of reform, a comprehensive change management process, involving the broader financial management and governance systems of the public sector, is required.’

The report is available at

IFRS 9 changes hit banks as capital requirements increase

Despite the potentially significant impact for banks of new rules on accounting for losses -which are due to be implemented as part of IFRS 9, Financial Instruments - one in four bank boards have little or no awareness of the forthcoming changes, according to research by Deloitte.

Over half of banks surveyed about their views on the new IFRS 9 loss accounting rules, which the International Accounting Standards Board (IASB) is to issue shortly, say these will increase loan loss provisions by up to 50%, according to Deloitte’s global IFRS banking survey.

In addition, 70% of banks expect these new provisions to exceed current regulatory measures, potentially increasing the amount of capital that banks will need to hold.

This capital requirement could drive up the cost of certain product lines, with 56% stating that the pricing of lending will be affected, considerably more than the 9% who reported this in 2011.

The survey also suggested that balance sheet comparability is causing some concern, with 45% stating it will be more difficult to compare loan loss provisioning in banks’ financial statements.

In addition, demand for transparency around credit risk is increasing, as investors and regulators want to understand the details of banks’ risks.

However, Deloitte says banks are reporting implementation challenges in meeting these needs, as their focus shifts from the technical aspects of the standard to the practical implications.

Coordinating finance, credit and risk resources is a major concern, and IT changes will be required to support new measurement and disclosure requirements.

Mark Rhys, global IFRS banking partner at Deloitte said: ‘The sheer range of systems can make it difficult to reconcile data extracted from different sources; something that is compounded when the data quality is poor.

‘Three years is most frequently cited as the necessary lead time for all phases of IFRS 9.

‘A 2018 effective date will put teams under pressure: work must get under way soon.’

The research was based on responses from 54 global banking groups from Europe, the Middle East and Africa, Asia Pacific and the Americas.

IFAC and CIPFA release framework for public sector

In a move to raise governance standards across the public sector, the International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) have issued a new framework outlining best practice with a focus on sustainability and control checks of external auditors

The International Framework: Good Governance in the Public Sector is designed to encourage better governed and managed public sector entities by improving how they set and achieve their intended outcomes. Enhanced stakeholder engagement, robust scrutiny and oversight of those charged with primary responsibility for determining an entity’s strategic direction, operations and accountability leads to more effective interventions and better outcomes for the public at large.

The framework sets out good practice principles for the fundamental aspects of public sector governance. It also facilitates the review and update of national governance codes for the public sector and, where specific principles and guidance do not already exist, provides a basis for improvement.

Chair of CIPFA International Ian Ball said: ‘Public sector governance must focus explicitly on sustainable economic, social and environmental outcomes, and this publication is unprecedented in highlighting the central role that outcomes and the public interest should play in the processes and structures of public sector governance.

‘Our focus on sustainability is especially important as public sector entities, from local councils to national governments, must consider the long-term impact of their current decisions, especially in safeguarding the interests of future generations.’

Increased focus on the critical role that good governance plays in the public sector has been a recent development. Growing awareness of the substantial role of poor public sector governance in the sovereign debt crisis and other public sector failures has made the appropriate application of governance standards and arrangements increasingly important.

The ideas and insights outlined in the framework, which includes a foreword from Mervyn King, chairman of the International Integrated Reporting Council and author of the King Report on Governance for South Africa, were developed using a wide-ranging literature review and in consultation with IFAC and CIPFA.

The framework is useful for all those specifically involved with governance, including governing body members, senior managers, and internal and external auditors. Furthermore, this Framework provides the public with a resource to challenge substandard governance practices in public sector entities.

The report is available here

EFRAG reconsults on lease accounting

The European Financial Reporting Advisory Group (EFRAG) and the national standard-setters of France, Germany, Italy and the UK have launched an additional public consultation on the two different approaches for lessees proposed by the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) in their revised Exposure Draft, Leases, for comment by 22 August 2014.

The core principle of the Exposure Draft is that lessees shall recognise assets and liabilities for all leases, other than short-term leases.

The IASB proposed a single model based on Type-A lease accounting while the FASB proposed a model that, based on IAS 17, Leases, criteria, distinguishes leases that are in effect purchases and other leases; these are accounted for using a straight line cost recognition pattern.

The additional consultation aims to identify transactions that would qualify as leases under the proposals, but in constituents’ view are in substance service transactions that should not be recognised by a lessee.

It also seeks to determine constituents’ views of the two alternative approaches and their preference.

Participants are requested to answer the questions found in the consultation document on the scope of the proposals and alternative approaches, and to submit their replies to their respective national standard setter or to EFRAG directly.

The consultation document is available at

IASB issues IAS 16 reporting rules for bearer plants

The much-debated revisions to the standard on the financial reporting of bearer plants as property, plant and machinery, have now been published by the International Accounting Standards Board (IASB). This effectively changes the status of bearer plants, such as grape vines, rubber trees and oil palms, for accounting purposes.

The change to the accounting reporting procedure means that from 1 January 2106 bearer plants will have to be accounted for in the same way as property, plant and equipment in IAS 16, Property, Plant and Equipment.

The amended reporting was introduced because their operation is similar to that of manufacturing. Consequently, the amendments include them within the scope of IAS 16, instead of IAS 41, Agriculture.

The produce growing on bearer plants will remain within the scope of IAS 41.

However, there will be no change to biological assets outside the definition of bearer plants. Under IAS 41, this means that they will continue to be measured at fair value less costs to sell.

This is based on the principle that the biological transformation that these assets undergo during their lifespan is best reflected by fair value measurement.

However, bearer plants do not fall under this definition as they are used solely to grow produce over several periods.

At the end of their productive lives they are usually scrapped. Once a bearer plant is mature, apart from bearing produce, its biological transformation is no longer significant in generating future economic benefits. The only significant future economic benefits it generates come from the agricultural produce that it creates.

Entities are required to apply the amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

The limited-scope project was not intended to address fair value disclosure requirements for other assets in IAS 16. Consequently, the IASB decided not to require fair value disclosures for entities with bearer plants.

The major changes implemented as a result of stakeholder response to the exposure draft issued in June 2013 include:

  1. modifying one of the criteria in the definition of a bearer plant from ‘not intended to be sold as a living plant or harvested as agricultural produce, except for incidental scrap sales’ to ‘has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales’. This modification was intended to ensure that the amendments capture only those plants used solely in the production or supply of agricultural produce;
  2. clarifying that differences between fair value and the carry8ing amount determined in accordance with IAS 41 (fair value less costs to sell) are recognised in opening retained earnings when an entity first applies the amendments; and
  3. in the period when the amendments are first applied, exempting entities from the requirement in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to disclose the amount of any adjustment for the current period for each financial statement line item affected. This is intended to relieve entities from the need to maintain dual accounting systems in the year of initial application. Entities would still be required to provide those disclosures for each prior period presented in the financial statements.

However, the standard setter rejected requests from stakeholders to include bearer livestock and plants in the new reporting structure.

It also refused to waive fair value measurement of growing produce. One of the reasons for this stance was that this was a limited scope project so would not make sense to rush through amendments without due exposure and consultation.

A summary of the amendments can be found at


Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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