Consultation outcome

Consultation on changes to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 - IFRS 9

Updated 6 April 2023

Applies to England

Scope of the consultation

Topic of this consultation:

This consultation seeks views on the proposals for amending the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003.

Scope of this consultation:

Consultation on amendments to the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003.

Geographical scope:

These proposals relate to England only.

Impact assessment:

The proposed policy changes are not within the scope of the Reducing Regulation Committee and so do not need an Impact Assessment for this purpose.

Basic information

Body/bodies responsible for the consultation:

Department for Levelling Up, Housing and Communities

Duration:

This consultation will last for 8 weeks from 11 August 2022 until 7 October 2022.

Enquiries:

For any enquiries about the consultation please contact: la.financialcontrolframework@levellingup.gov.uk

How to respond:

You may respond by completing an online survey.

Alternatively you can email your response to the questions in this consultation to la.financialcontrolframework@levellingup.gov.uk.

If you are responding in writing, please make it clear which questions you are responding to.

When you reply it would be very useful if you confirm whether you are replying as an individual or submitting an official response on behalf of an organisation and include:

• your name,
• your position (if applicable),
• the name of organisation (if applicable),
• an address (including post-code),
• an email address, and
• a contact telephone number

1. Summary

1. The Department for Levelling Up, Housing and Communities (the Department) has policy responsibility for local authority accounting. In practice, under the Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (the Regulations) authorities must comply with the accounting practices set out in the Code of Practice on Local Authority Accounting (the Code) prepared by the CIPFA LASAAC Local Authority Accounting Code Board (the Board)^{[footnote 1]}. The Code is reviewed continuously and is issued annually.

2. The government can also set accounting practices to be followed by local authorities by making provisions in the Regulations, under powers provided by the Local Government Act 2003 section 21. Where the practices set out in Regulations differ from those in the Code, authorities must follow the Regulations. Such provisions are referred to as ‘statutory overrides’, and are normally only introduced by the government in strictly limited circumstances where they are absolutely necessary.

3. In 2018, following concerns from the sector regarding the adoption of International Financial Reporting Standard 9 (IFRS 9) into the Code, the government introduced a statutory override to mitigate the risks highlighted by the sector. At that time, authorities had expressed concern that reporting changes brought in by IFRS 9 would mean that the fair value movements in certain assets would need to be reflected in budgets. This would have particularly affected investments in pooled investment funds, a type of investment widely held in the sector. Authorities argued that the increased volatility to budgets could impact service delivery or place undue burdens on council taxpayers.

4. The statutory override mitigates these putative risks by requiring authorities to remove the impacts of the fair value movements of pooled investment funds from their budgets and record them in an unusable reserve . The statutory override was time-limited to five years, from 1 April 2018 and ending 31 March 2023. At that time, the government said that it would keep use of the statutory override under review but made no further commitments.

5. The government is now carefully considering the available options. These are: to allow the existing statutory override to expire; extend the statutory override for an additional period of time; or make it permanent. In making this decision it is important that the government fully understands the potential financial and other impacts that each option will have on the sector and to consider alongside other issues such as adherence to accounting practices. It is the aim of this consultation to collect the views of authorities and other stakeholders, and to collect additional information needed to understand the financial risks associated with both continuing the statutory override or allowing reversion to the Code.

2. Background

6. Since 2010/11, the Code has been based on International Financial Reporting Standards (IFRS), adapted for local government by the Board. Therefore, as new international standards are introduced, they are incorporated into the Code and become proper accounting practices for local authorities. In January 2018, IFRS 9: Financial Instruments came into force in the UK and was integrated into the Code, effective from 1 April 2018.

7. IFRS 9 prescribes the accounting treatment of financial instruments, replacing International Accounting Standard 39. The standard introduced a number of changes from its predecessor, including improvements to the reporting and transparency of risks associated with holding financial instruments. In part, these changes reflected the need to address weaknesses in reporting requirements that are regarded as having contributed to the 2007-2008 financial crisis.

8. Prior to implementation of IFRS 9, the sector expressed concerns over some of the new provisions in the standard. Specifically, it would have a significant effect on local authorities with investments in pooled investment funds, a form of investment widely used by the sector as part of treasury management: the CCLA Local Authorities Property Fund is one example. Under IFRS 9, authorities with such investments would, for the first time, need to account for movements in the market value of those funds through their revenue account.

9. As authorities have a statutory requirement to set a balanced budget each year, the need to reflect movements in value in the revenue account would affect budget setting and determination of council tax. Authorities set out concerns that the volatility of movements in value could negatively impact service delivery, as losses would count as expenditure that reduces available resources, while unrealised gains could not be spent as they would need to be set aside to manage future volatility. As some authorities had built up exposure to pooled investment funds over a number of years this presented a potentially significant risk to the sector.

10. In light of the concerns raised, the government undertook a consultation to determine what, if any, action was needed to mitigate the financial risks. It published the formal response in November 2018 and consequently introduced a statutory override, effective from 1 April 2018. The statutory override is mandatory and requires local authorities to reverse out all unrealised fair value movements resulting from pooled investment funds, and to disclose the net impact of the unrealised fair value movements in a separate unusable reserve throughout the duration of the statutory override. It therefore removes the potential risks of such value changes from annual budgets, though losses or gains will still ultimately impact authorities when the investments are sold.

11. The statutory override was introduced on a temporary basis, limited to 5 years from 1 April 2018 to 31 March 2023. The consultation initially proposed a three-year time limit, but this was extended to five years to give local authorities the assurance needed for their medium term financial planning whilst also allowing time for them to consider their investment strategies. The length of the statutory override period was in recognition that authorities have built up investments in pooled asset over a number of years, and required time to either divest of those assets or build sufficient reserves to manage volatility without negative consequences.

12. The statutory override was not, however, made permanent at that time. The consultation response makes clear that the government fully supports the objectives of IFRS 9 and believes it is right that local authorities are required to recognise the real cost of holding pooled investment funds in the same way as any other entity. Furthermore, that the introduction of the statutory override means that local authorities are not subject to the same requirements as the private sector on when to recognise those risks arising from their borrowing and investment activities. For that reason, the government did not think it appropriate to put in place a permanent deviation from normal accounting practices.

13. No specific commitment was given at that time as to the future of the statutory override past the five-year period of implementation. Instead, the government undertook to keep use of the statutory override under review.

3. Scope of the consultation

14. Unless action is taken by the government, the statutory override is due to end as of 31 March 2023. If allowed to elapse, the provisions made through the regulations will cease to have effect and local authorities will be required to apply IFRS 9, as adopted by the Code, with respect to pooled investment assets. Fair value movements on pooled investment assets will, therefore, likely need to be reflected in local authorities’ revenue accounts and be taken into account in setting budgets in accordance with the statutory balanced budget requirement.

15. The government is carefully considering the future of the statutory override. In making any decision, it is important for the government to understand the risks and benefits of either allowing the statutory override to elapse, thereby bringing local government financial reporting in line with other entities, or to keep the statutory override in place on either an extended or permanent basis. If extended, the additional question will be for how long the statutory override should be extended.

16. The government is not proposing any further amendments or modifications to substance of the statutory override at this time, beyond its considering continuation for financial years following 31 March 2023.

4. Matters for consideration

17. The government considers that there are three options for the future of the statutory override:

a. Allow the statutory override to elapse. Local authorities will be required to apply IFRS 9 as adopted by the Code. Application of the standard is the responsibility of local authorities and subject to external audit, but it is expected that without the statutory override in place fair value movements on pooled investment funds will need to be recognised as losses or gains to the revenue account. Local authorities will have to take into account such losses or gains in setting a balanced budget each year. As at 31 March 2023, the balance on the unusable reserve created by the statutory override will need to be brought back to usable reserves.

b. Extend the statutory override on a time-limited basis. The government would amend the statutory provision to continue from 1 April 2023 for a specified number of years, after which the statutory override would elapse unless further extended. A further option could be to make clear that the government does not expect the statutory override to be extended further, following any extension.

c. Make the statutory override permanent. The government would amend the statutory provision to remove any time limit and the statutory override would continue to apply from 1 April 2023, unless a future decision were to be made to remove or modify the regulations.

18. The arguments for continuing the statutory override remain substantively the same as in 2018. The main difference is that the sector has now had five years to prepare for the possibility of the statutory override ending, and has had the opportunity to review investment strategies and either appropriately reduce the exposure to pooled investment funds, or put in place mitigation measures such building reserves to manage volatility.

19. Local authorities may, of course, have chosen to continue to invest in pooled investment funds over this period, but should have done so taking into account the risks of such investments and the impact of the statutory override elapsing. It is arguable that following the five-year period of the statutory override, no authority should be holding investment assets for which it cannot adequately manage the risk of fair value movements to its revenue account.

20. The government is mindful, however, that councils have a statutory requirement to set balanced budgets each year, which most other entities do not. Private companies applying IFRS 9 may take losses in one year that are reversed out the next, whereas authorities will have to consider such movements when setting the balanced budget and the council tax requirement. Furthermore, many authorities consider investing in pooled asset funds to be a sensible approach to cash-management. It is not the government’s intent to stop sensible treasury management strategies.

21. During the 2018 consultation, some authorities indicated that if a statutory override for pooled investment funds is not introduced, there is a risk that it would be seen as incentivising riskier investments such as in property. The government considers this a low risk. Since 2018, changes have been made to both the Prudential Framework and the lending terms of the Public Works Loan Board to constrain investments that are primarily for yield. Investing in commercial property is, therefore, unlikely to be a viable alternative to pooled investment funds. The CIPFA issued Treasury Management In The Public Services: Code Of Practice, which authorities must have regard to under the Regulations, also provides guidance that authorities should priorities security, liquidity, yield (in that order) in considering treasury investments; investments in property are unlikely to meet the requirement for liquidity.

22. The arguments for allowing the statutory override to elapse are also similar to those originally posited in 2018. Specifically, that the government agrees with the aims of IFRS 9 to ensure that all reporting entities recognise the risks that they are running as a result of their borrowing and investment activities and that the statutory override means that authorities are not subject to the same requirements as the private sector on when to recognise that risk. This may mean that authorities are storing risk with respect to pooled investment funds that will ultimately lead to financial problems in the future. The extent to which this is the case will need to be tested through this consultation and sector engagement.

23. As a general principle, the government does not take the implementation of statutory accounting overrides lightly. They are normally only introduced in strictly limited circumstances when absolutely necessary. As set out, any statutory override introduced has the effect of reducing the comparability and transparency of local authority accounts with the accounts of other entities.

24. Other considerations that must be taken into account include the impact of the COVID pandemic on the value of assets, financial pressures facing councils due to wider economic issues and the problems facing the timeliness of audited accounts. The government is mindful that any decisions with respect to the statutory override do need to consider the interaction with other prevailing issues and it is important, where possible, to avoid taking action that in aggregate increases risk for the sector.

5. Questions

Q1 In your view, what should the future of the IFRS 9 override be post March 2023 [elapse/extend/make permanent]? Please set out your rationale.

Q2. Please describe any financial consequences for your authority if the statutory override is allowed to elapse from 31 March 2023?

Q3. What are the advantages and disadvantages of investing in pooled investment funds for your LA?

Q4. How would removing the statutory override change your current approach to investing in pooled investment funds?

Q5. Assuming the statutory override elapses March 2023, what impact might this change have on your audit process?

Q6. (a) Assuming that the statutory override is continued beyond March 2023, do think it should be time-limited or permanent? Please set out your rationale.

(b)If you think it should be time-limited, what do you consider the appropriate length of time it should be extended?

Q7. (a) If applicable, has your authority taken steps to reduce its exposure to the risks associated with pooled investment funds ahead of the statutory override potentially ending 31 March 2023? Please provide details.

(b) If your authority has not taken steps to reduce its exposure to risks from pooled investment funds, please set out the rationale for this.

Q8. Do you agree that by not recognising the fair value movement of pooled investment funds this reduces effective risk management and potentially creates future risks? Please provide details.

Q9. What is the fair value of your authorities pooled investment fund investments as at 31 March 2022?

Q10. Please set out the value of the gains/losses from your authorities investments in pooled investment funds for 2019/20, 2020/21, 2021/22 recognised under proper practices. Please give both absolute value and as percentage movement for each year.

Q11. What is the balance on the unusable reserve as created by the statutory override as at March 2022?

About this consultation

This consultation document and consultation process have been planned to adhere to the Consultation Principles issued by the Cabinet Office.

Representative groups are asked to give a summary of the people and organisations they represent, and where relevant who else they have consulted in reaching their conclusions when they respond.

Information provided in response to this consultation may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Environmental Information Regulations 2004 and UK data protection legislation. In certain circumstances this may therefore include personal data when required by law.

If you want the information that you provide to be treated as confidential, please be aware that, as a public authority, the Department is bound by the information access regimes and may therefore be obliged to disclose all or some of the information you provide. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the Department.

The Department for Levelling Up, Housing and Communities will at all times process your personal data in accordance with UK data protection legislation and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties. A full privacy notice is included below.

Individual responses will not be acknowledged unless specifically requested.

Your opinions are valuable to us. Thank you for taking the time to read this document and respond.

Are you satisfied that this consultation has followed the Consultation Principles? If not or you have any other observations about how we can improve the process please contact us via the complaints procedure.

Personal data

The following is to explain your rights and give you the information you are entitled to under UK data protection legislation.

Note that this section only refers to personal data (your name, contact details and any other information that relates to you or another identified or identifiable individual personally) not the content otherwise of your response to the consultation.

1. The identity of the data controller and contact details of our Data Protection Officer

The Department for Levelling Up, Housing and Communities (DLUHC) is the data controller. The Data Protection Officer can be contacted at dataprotection@levellingup.gov.uk or by writing to the following address:

Data Protection Officer
Department for Levelling Up, Housing and Communities
Fry Building
2 Marsham Street
London
SW1P 4DF

2. Why we are collecting your personal data

Your personal data is being collected as an essential part of the consultation process, so that we can contact you regarding your response and for statistical purposes. We may also use it to contact you about related matters.

We will collect your IP address if you complete a consultation online. We may use this to ensure that each person only completes a survey once. We will not use this data for any other purpose.

Sensitive types of personal data

Please do not share special category personal data or criminal offence data if we have not asked for this unless absolutely necessary for the purposes of your consultation response. By ‘special category personal data’, we mean information about a living individual’s:

• race
• ethnic origin
• political opinions
• religious or philosophical beliefs
• trade union membership
• genetics
• biometrics
• health (including disability-related information)
• sex life; or
• sexual orientation.

By ‘criminal offence data’, we mean information relating to a living individual’s criminal convictions or offences or related security measures.

3. Our legal basis for processing your personal data

The collection of your personal data is lawful under article 6(1)(e) of the UK General Data Protection Regulation as it is necessary for the performance by DLUHC of a task in the public interest/in the exercise of official authority vested in the data controller. Section 8(d) of the Data Protection Act 2018 states that this will include processing of personal data that is necessary for the exercise of a function of the Crown, a Minister of the Crown or a government department i.e. in this case a consultation.

Where necessary for the purposes of this consultation, our lawful basis for the processing of any special category personal data or ‘criminal offence’ data (terms explained under ‘Sensitive Types of Data’) which you submit in response to this consultation is as follows. The relevant lawful basis for the processing of special category personal data is Article 9(2)(g) UK GDPR (‘substantial public interest’), and Schedule 1 paragraph 6 of the Data Protection Act 2018 (‘statutory etc and government purposes’). The relevant lawful basis in relation to personal data relating to criminal convictions and offences data is likewise provided by Schedule 1 paragraph 6 of the Data Protection Act 2018.

4. With whom we will be sharing your personal data

We will not be sharing your data with any organisation outside of the Department for Levelling Up, Communities and Housing.

5. For how long we will keep your personal data, or criteria used to determine the retention period

Your personal data will be held for two years from the closure of the consultation.

6. Your rights, e.g. access, rectification, restriction, objection

The data we are collecting is your personal data, and you have considerable say over what happens to it. You have the right:

a. to see what data we have about you

b. to ask us to stop using your data, but keep it on record

c. to ask to have your data corrected if it is incorrect or incomplete

d. to object to our use of your personal data in certain circumstances

e. to lodge a complaint with the independent Information Commissioner (ICO) if you think we are not handling your data fairly or in accordance with the law. You can contact the ICO at https://ico.org.uk/, or telephone 0303 123 1113.

Please contact us at the following address if you wish to exercise the rights listed above, except the right to lodge a complaint with the ICO: dataprotection@levellingup.gov.uk or

Knowledge and Information Access Team
Department for Levelling Up, Housing and Communities
Fry Building
2 Marsham Street
London
SW1P 4DF

7. Your personal data will not be sent overseas

8. Your personal data will not be used for any automated decision making

9. Your personal data will be stored in a secure government IT system

1. The CIPFA LASAAC board is a partnership between CIPFA (England, Northern Ireland and Wales) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC). It is responsible for preparing, maintaining, developing and issuing the Code of Practice on Local Authority Accounting for the United Kingdom. ↩