CIPFA and ICAEW have submitted a joint response to the Department for Levelling Up, Housing and Communities (DLUHC) consultation on the future of the statutory IFRS 9 Financial Instruments statutory override for local authorities. The response calls for the override to end as soon as possible with any extension to be limited in both time and scope.

DLUHC introduced the override following the introduction of IFRS 9 into the CIPFA LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (“the Code”) in 2018 because of concerns that movements in the value of pooled funds could impact local authority budget setting. The override means that local authorities record the fair value movements in a specific, unusable reserve rather than in their general fund.

The override was intended to last for five years until 31 March 2023 to give local authorities time to adapt their investment strategies. The consultation asked for views of whether the override should end, be extended or be made permanent.

CIPFA and ICAEW hold the view that the override should come to an end as soon as possible. Both institutes believe that high standards in financial reporting support effective treasury and risk management in the public sector and, therefore, support the application of IFRS 9 to these investments. 

Local authorities invest in the same sort of pooled funds as professional investors (under MIFID II) and, therefore, both institutes do not consider that there is a case for a long-term statutory override of the IFRS 9 requirements. The response raises concerns that the override partly undermines the purpose of IFRS 9 to ensure that investment risks are reported transparently. 

The override artificially insulates the general fund from the movements in the value of investments in pooled funds and risks incentivising these investments at the expense of an effective appraisal of the different investment opportunities.

CIPFA and ICAEW’s joint response argues against a permanent or open-ended extension of the override. They do not consider that it would otherwise incentivise riskier investments as local authorities should make investments driven by prudent treasury management and in accordance with statutory guidance and relevant CIPFA Codes of Practice. 

Furthermore, they question whether the override’s removal would have a significant or lasting impact on the audit process because the override does not change the valuation of investments in pooled funds on the balance sheet. Both institutes consider that the benefits of moving to reporting under IFRS 9 as implemented in the Code outweigh any short-term impact. 

Nevertheless, CIPFA and ICAEW recognise that COVID-19 and economic uncertainty has temporarily disrupted the market for assets within pooled funds and hindered the ability of local authorities to review their investment strategy ahead of the expiry of the override. The joint response proposes a practical approach involving a limited extension of the override for two years restricted to investments entered into prior to the introduction of the override in 2018.

Oliver Simms, ICAEW’s Manager for Audit and Assurance, commented: “We do not believe there is a case for local authorities diverting from the highest standards in their reporting of investments in pooled funds as local authorities are investing in the same type of instruments as professional investors.

“We share CIPFA’s view that removing the IFRS 9 override as soon as practical would help local authorities improve their financial and risk management by ensuring that the financial impacts of pooled fund investments are transparently reported.” 

Sarah Sheen, CIPFA’s Standard Setting Manager, commented: “CIPFA is of the view that statutory overrides should only be used in circumstances where there is particular local government context or where IFRS as implemented in the Code leads to perverse outcomes. We agree with ICAEW that this is unlikely to be the case for the implementation of IFRS 9 for these types of investments in the long term.” 

• Read CIPFA and ICAEW’s joint response to the consultation.

• CIPFA invites any local authority that has issues from changes in the regulations to contact policy.technical@cipfa.org.