Stephen Sheen: Brexit and the accounting implications
0“If only I’d known …!” many local government accountant Brexiteers might now be wailing, as the prospect of an end to IFRS recedes.
Amidst all the clamour of the recent referendum, one thing was strangely missing from the debate, particularly for those of us who keep banging on about it outside of such feverish times. Local government accounting.
One might have thought that the internationalisation of accounting practices across UK central and local government would have been of interest to those who wanted to take back control of their country.
However, it is actually the fact that the UK’s public sector accounting framework is far more advanced in its embrace of International Financial Reporting Standards (IFRS) than any other European Union country’s.
Our adoption of accruals accounting would be enough to give us a hefty lead over most member states.
But its extension to include IFRS-based current value techniques for such things as property, plant and equipment, pensions liabilities and financial instruments leaves Latvia (apparently) trailing a distant second.
Continued membership of the EU would actually have been a threat to our advanced position.
The project to develop European Public Sector Accounting Standards for member states risked the establishment of a framework that would be less far-sighted than what we currently have. A matter of reining in the UK fully so as not to frighten the EU carthorses.
“If only I’d known …!” many local government accountant Brexiteers might now be wailing, as the prospect of an end to IFRS recedes.
But if Brexit is unlikely to have an impact on the accounting standards that we use, there is a more immediate problem of how to account for the effects of Brexit within this framework. The market volatility initiated by the Leave vote is likely to have a substantial effect on values of property, investments and the assets held on the authority’s behalf by the pension fund.
If your authority has yet to publish its Statement of Accounts for 2015/16, the consequences of the Leave vote are required to be explained where they have impacted on the figures in the financial statements.
The financial statements are not to be adjusted, because accounting standards require them to reflect conditions as they applied at the year-end.
For instance, the balance sheet will continue to show investments at the value they had before the market dip. However, if material changes have taken place there needs to be a note setting out estimates of the financial effects of events following the referendum.
Such a note would cover such things as:
- reassurance about the continued applicability of the going concern concept
- revaluation losses on property and other assets
- losses in the value of investments and on foreign currency transactions
- increases in the net pensions liability as a result of reductions in the value of investments held by the pension fund
The note can be limited to descriptions of the effects of the referendum, but only if it is impossible to make reliable estimates for adjusted figures.
A more discursive commentary can be added to the Narrative Report, projecting the effect of Brexit on the authority’s financial plans.
Any additional material will need careful drafting. In circumstances such as these, loose wording can result in a note that effectively says “… none of the important figures in the financial statements can be trusted anymore”.
Disclosures should supplement the financial statements, not kick the chair from underneath them.
Still, a small task when compared with the work ahead in confronting the effects of Brexit on the authority’s financial plans.
Stephen Sheen is the managing director Ichabod’s Industries, a consultancy providing technical accounting support to local government.
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