International Financial Reporting Standards (IFRS) are coming to local authorities. How do they affect the way I do my job?

Julian Rickett, public sector partner at PricewaterhouseCoopers responds:

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Property professionals may think this only affects accountants, but IFRS is not just an issue for the finance department.

Implementing these accounting standards by March 2011 will represent a significant shift in the way that local authorities account for assets, liabilities and transactions. Property accounting, as you might imagine, will see many changes over the next 12 months.

But it is important that all property professionals understand the implications of IFRS and what it means for the future.

There are two areas where the impact is particularly significant: the carrying value of property, and component accounting for different elements of the property asset.

Firstly, property is currently recorded in the accounting records at either historic cost or valuation.  IFRS introduces the concept of ‘fair value’ as a valuation basis for certain classes of asset.

In most cases, this will be taken to be equivalent to the Existing Use Valuation (EUV), making it relatively straightforward. This becomes an issue when establishing a value for assets that have been reclassified under IFRS.

For example, under IFRS the definition of ‘investment property’ changes, potentially leading to the recognition of additional assets.  IFRS also requires separate accounting and valuation of assets held for sale, again leading to potential valuation issues.

There are other valuation issues too.

Finance leases will need to be split between their land and property elements to enable separate accounting.  If an authority leases a building through a finance lease then it will need to identify the value of the land that the property stands on.

Component accounting is the second major change. Currently, major components with substantially different useful economic lives are accounted for separately. This means the very largest assets possibly have two or three components.

Under IFRS, it is anticipated that the number of assets with separate components will increase. For example, if an  authority has housing stock then this may be a major issue.  Roofs, windows, kitchens and boilers should, arguably, all be accounted for as separate components of each dwelling.

IFRS is being introduced at a time of significant financial challenge for local authorities, and in this context it is easy to dismiss it as simply an accounting change.  However, the best authorities see IFRS as an opportunity to get a strategic grip on their asset bases.

Looking forward, asset management is going to be key for authorities to manage their way through the financial challenge, and property professionals should be central to making this happen.  This is an opportunity to review assets, to improve records, and to enhance processes for collecting data about assets.

We recommend that conversations between property and finance colleagues take place now as early planning will help avoid problems later.

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