Accounting for transport infrastructure – The long and winding road

Suresh Patel is Director, Public Services at Mazars LLP

Since CIPFA released the original Code of Practice on Transport Infrastructure Assets in 2010, those of us with an interest in local government financial reporting have known that the implications of changing the measurement basis for assets captured by the code will be significant.

My own preoccupation has reached the point where I struggle to go anywhere in the car without looking at bridges, culverts, illuminated  signage, bollards, traffic lights, footways, cycleways and roads without audibly pondering  ‘I wonder if they’re on my council’s balance sheet and if so, how they’re going to go about valuing them?’.  Sad, I know.

With confirmation that local authorities are required to implement the requirements for the first time in 2016/17, the sheer size and complexity of the network of transport assets managed by local authorities is leading many in the sector to begin to worry (or continue to worry) about how prepared authorities are to meet the challenges that implementing the code brings.  So what do those who are a little late to the party need to know?

The changes sound simple but they’re really not
On the face of it, changing a measurement basis for a group of assets doesn’t sound that complicated but speak to any council highways asset manager, engineer or capital accountant and they’ll tell you it’s actually a bit of a nightmare.  A depreciated replacement cost measurement basis requires reliable information on the quantity and age or condition of the relevant assets.  When we’re talking about a collection of assets as diverse as a major A-road all the way down to the humble grit-bin this is not a simple task (particularly as not many authorities have traditionally held detailed information on these assets).

The numbers involved are ridiculous
One of the primary reasons for the change is the continuing qualification of the Whole of Government Accounts on the grounds of inconsistency in the measurement basis for transport infrastructure assets between central and local government.   HM Treasury estimates that the impact of this inconsistency is a potential £232bn understatement of asset values, which gives us a good idea of the scale of the restatements required by each local authority adopting the code.  Even a fairly small unitary authority is likely to have a few billion pounds worth of assets on their balance sheet with larger county areas potentially exceeding £10bn.  Clearly, these amounts will dwarf pretty much everything else on their balance sheets.

There is help out there – but take care!
CIPFA and their partners have done a really good job over the last few years in helping authorities prepare for the change.  There are a range of tools available which may (or may not) be of help to authorities, and the code itself provides fairly detailed information and guidance to support practitioners.

Although these tools may provide a useful guide or basis for estimating inventory, care must be taken in their use.  Practitioners should challenge the data and assumptions underpinning the tools and assure themselves they provide a reasonable basis for estimating their asset inventory, depreciation or valuation.  If you don’t do this, then you can expect to have a tough time from your auditor when they come to review the reasonableness of your estimates.

We can learn lessons from the introduction of IFRS
The transition to IFRS-based accounting taught us a lot about how difficult it can be for some authorities to deliver difficult financial reporting projects where cooperation between finance and non-finance professionals is required.  You’ve only got to spend 10 minutes in the company of a highways engineer to understand that their knowledge of their field is vast and far beyond what I (as a bean counter) could possibly understand.  It’s also clear that when it comes to financial reporting they’re often not on the same page as we are. So, local authority accountants need to ensure there is a shared understanding of exactly what is required and when.  An early discussion around materiality will be critical in ensuring everybody knows where they stand.

This leads us nicely on to project planning.  CIPFA LAAP issued a helpful bulletin earlier in the year outlining a suggested project plan and timetable.  I’d encourage all practitioners to read it and actually give some honest thought to how ready they are.  As well as the nitty gritty of getting accurate information on the assets, an equally valid risk is that posed by the fact that, in many cases, the transport infrastructure project is being driven by one capital accountant and one representative from highways.  In times of continuing budget cuts and shrinking headcounts across the board, the resilience risks are obvious and shouldn’t be taken lightly.

You should engage with your auditor
I know practitioners are used to hearing this from their auditor, but in respect of infrastructure assets we really mean it.  As with all major projects that have a financial reporting impact, we always see the value in engaging as early as possible with our clients, and the feedback we’ve had from them in respect to workshops we ran in January has been positive.  We intend to hold similar follow-up sessions over the next 18 months in the run-up to producing 2016/17 accounts so that we can continue to highlight the risks and areas of the project that are likely to receive the most audit attention.  If you’ve not already had similar conversations with your auditors, I’d encourage you to do so as soon as possible.