One reason local council accounts are impenetrable to most readers is that they attempt to present the figures in two different ways: one to comply with accounting standards, and one to meet statutory requirements. This attempt to have it both ways has produced complexity rather than clarity. It might be time to accept that the approach is unsustainable.
Local government minister Alison McGovern confirmed in a statement that she is working with CIPFA and the devolved governments to simplify financial reporting for local authorities. Simplification has been on the sector’s wish list for many years, but like many optimistic resolutions, has never been realised.
Most explanations of the problem focus on ‘statutory overrides’. Although local authorities are required to set a balanced budget, numerous statutory provisions mean that a budget may be legal even when projected income does not in fact equal projected expenditure. The statutory provisions override standard accounting practice.
Statements of accounts deal with this problem by presenting two versions of the council’s expenditure and funding: one prepared under International Financial Reporting Standards (IFRS), and another prepared on a statutory basis. The Local Authority Accounting Code of Practice requires the two sets of figures to be reconciled in notes that even accountants struggle to understand.
This dual presentation means that local authorities are trying to have their cake and eat it. They prepare accounts under IFRS, as has been mandatory for larger public bodies since 2009; and they attempt to show their financial position as defined for statutory purposes.
The problem has worsened over time. Statutory overrides have increased in number and scale, and they increasingly define financial performance in a way that is removed from standard accounting practice.
For example, local authorities have not been required to account for deficits on special educational needs and disabilities services, despite the Office for Budget Responsibility estimating these deficits reached £6bn nationally.
Until now, standard-setting for local authorities has sought to accommodate both ‘accounting’ and ‘statutory’ approaches. Unfortunately, the result has been that statements of accounts have become increasingly complex, and the users of the accounts may not grasp the messages.
It might be time to accept the primacy of IFRS accounts. Central government accounts are prepared under IFRS, interpreted and adapted through the Financial Reporting Manual. The Local Authority Accounting Code of Practice is likewise based on IFRS. While IFRS itself is often criticised as complex, both the FReM and the Code provide mechanisms for tailoring the standards to public sector needs.
Embracing IFRS fully would mean local authorities preparing a statement of accounts broadly similar to those of government departments and large corporate bodies. A reconciliation between the IFRS deficit or surplus and the statutory General Fund out-turn would remain but would sit in a separate accountability statement rather than in the main accounts. This would make the core statements more readable, while allowing the scale and impact of statutory overrides to be clearly understood.
Making changes to established practices is never easy, and many technical details would need careful consideration. For local authorities affected by reorganisation in 2027 or 2028, the change will not be worthwhile and exemptions would be sensible.
For the sector as a whole, however, recognising that we cannot have our cake and eat it could lead to more meaningful and accessible financial reporting.