IFRS 16 raises accounting challenge for public sector bodies

The Financial Reporting Advisory Board (FRAB), the oversight body for accounting framework compliance across the public sector, has highlighted ongoing issues around public sector compliance with new lease accounting standard, IFRS 16

The implementation and forward planning for three new International Financial Reporting Standards (IFRS) affecting the public sector was the main priority for FRAB over 2017-18. The standards will impact all public sector bodies, including the Treasury, Department of Health and Social Care, NHS Improvement, the Executive Committee of the Northern Ireland Assembly, Scottish Government, Welsh Government and the Chartered Institute of Public Finance and Accountancy (CIPFA).

The significant changes to lease accounting as a result of the introduction of IFRS 16 were a major concern for FRAB throughout 2018 with a number of implementation challenges.

Initial estimates identified some 55,000 leases in central government and 75,000 in the public sector as a whole, but FRAB said the ‘it believed this was an understatement of the number of leases across the whole of government and expected this number to increase as departments undertake more work on the implementation of IFRS 16’.

FRAB stated: ‘Oversight of the implementation project has taken a considerable amount of the Board’s attention during the year... with three areas where interpretations to IFRS 16 were considered:

• all short-term leases should be exempt from applying IFRS 16;

• clarifying the definition of a contract where there is no enforceability in Crown-to-Crown agreements; and

• mandating the choice of certain options available on transition.

FRAB opted to mandate the exemption for short-term leases in the public sector to maintain consistency, and that the revised definition of a contract should be included as a legitimate public sector interpretation.

It also recommended that the Financial Reporting Manual (FReM) should not specify a monetary value for which assets would be determined as low value but that instead, the Treasury could offer some guidance to assist preparers.

‘The potential misalignment on the recognition of leases between IFRS 16 and European System of Accounts 2010 (ESA 10) was the most significant since the adoption of IFRS, and will influence transition arrangements as well as accounting policy choices,’ warned FRAB.

This is a public sector specific issue and FRAB will continue to monitor the impact of the divergence of approaches. The report states that FRAB ‘will continue to receive regular updates on the potential misalignment in the coming year, including an update on the action plan from the Office of National Statistics and the Treasury on how they intend to address the issue’.

IFRS 9 and IFRS 15

Over the period of this report, FRAB oversaw the final preparations for the introduction of the latest IFRS accounting standards – IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, and has been heavily involved in the on-going implementation process for IFRS 16 Leases, which came into effect for accounting periods commencing 1 January 2019, and posed a number of alignment issues for public sector bodies.

The introduction of IFRS 9 in the public sector from 1 April 2018 followed a four-year implementation plan and FRAB provided expert opinion on the proposed application of the standard as well as ensuring the adaptations and interpretations of the standard for the public sector were appropriate and fit for purpose.

The rollout of IFRS 15, the new revenue recognition standard, was closely monitored to ensure consistency of revenue recognition and a general improvement in the usefulness of the financial statements.

A key factor for the public sector was an emphasis on the importance of applying materiality when considering relevant disclosures to ensure that the extensive disclosure requirements of IFRS 15 would not be too burdensome to public sector bodies.

Non-financial reporting

FRAB has also agreed the key elements of the Non-Financial Reporting Regulations, introduced for periods beginning on or after 1 January 2017, for entities with a public interest, with over 500 employees, as result of EU Directive (2014/95/EU). It has also adopted the Financial Reporting Council (FRC) guidance on the Strategic Report, which is now included in the 2017-18 FReM to maintain alignment of public sector reporting with best practice in the private sector.

Priorities for 2019

Although the report did not reference Brexit in any context, there is likely to be an impact on public sector accounting frameworks and endorsement procedures depending on the nature of the Brexit deal.

Going forward, FRAB will focus on the impact of the IFRS 16 on the public sector and the pre-planning for IFRS 17 Insurance Contracts, although this standard has now been delayed until 2021. It will also monitor the progress with the application of the revised Conceptual Framework, currently under review by the International Accounting Standards Board (IASB), which will come into force in 2020.

21st Report of the Financial Reporting Advisory Board Report for the period April 2017 to March 2018 issued 24 January 2019

Report by Sara White

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