The events of the last few years have made local authority financial reporting challenging to say the least. Paul Dossett summarises our new report, which covers everything you need to consider in your 2020 financial statements.
Local authorities across the country are now working in an environment that is completely different to the one they were in just months ago. The effect of COVID-19 will not be limited to the 2019/20 and 2020/21 financial years. This has several ramifications that local authorities will need to carefully consider in preparing and finalising their 2019/20 narrative report, financial statements and annual governance statement.
Our report indicates the key challenges for local authority financial reporting, including the regulatory impact.
A decade of austerity for local authorities
Current challenges for the industry from the coronavirus outbreak follow a decade of austerity, triggered by the financial crisis of 2008/09, which had already placed considerable strain on local authorities’ finances. The response to the pandemic has caused numerous operational issues for the local authority sector, including:
- Increased demand for local authority services, including adult and child social care, services for the homeless, public health and support for the vulnerable
- A reduction in key sources of income
- Closure of local authority offices, premises and facilities
- Delivery of new responsibilities to administer coronavirus grants and business-rates relief
- Staff sickness and absences
These issues are likely to have a significant impact, both in the short and long term and local authorities need to consider how this could affect their financial reporting.
In line with Chartered Institute of Public Finance and Accountancy (CIPFA) guidance1, our report highlights the key areas you need to cover in your report, including:
Valuation of non-current assets
The CIPFA Code of Practice on Local Authority Accounting requires that, where assets are revalued to ‘current value’, the revaluations should be sufficiently regular to ensure that carrying amounts do not differ materially from current value at the end of the reporting period. Certain assets are required to be measured at fair value, reflecting market conditions at the end of the reporting period.
Our expectation is that authorities will assess the impact of valuation uncertainty arising as a result of the pandemic and provide appropriate disclosure in their financial statements in relation to major sources of estimation uncertainty.
Impairment of financial assets and statutory debt
Measures taken to control the pandemic are leading to heavy economic losses and most large economies will see unprecedented falls in economic output. In preparing 2019/20 financial statements, authorities will need to take into account the potential for impairment of statutory council tax and non-domestic rate debtor balances, but also the three-stage impairment model within IFRS 9 Financial Instruments, which is applicable to financial assets, including trade receivables, loan receivables, deposits and other debtors.
Additional disclosure is likely to be required around COVID-19 in most areas of the narrative report, including the impact on the external environment, significant changes to services and key objectives, significant changes to governance arrangements and the outlook for the authority, including details of known budget pressures and changes in resources, and the authority’s plans for dealing with any shortfalls.
Going concern and any associated material uncertainties will need significant consideration and may have an impact on both the audit report, narrative financial reporting and accounting policy disclosures in the accounts.
In the most severe situations, some local authorities may consider approaching the Ministry of Housing Communities and Local Government (MHCLG) regarding the potential issue of a notice under s114 of the Local Government Finance Act 1988.
Significant judgements and estimates
During the outbreak, any disclosures on significant judgements and estimates will need to be sufficiently detailed and updated to reflect the current situation, as well as any changes in underlying assumptions and sources of estimation uncertainty.
Post-balance sheet events
Both adjusting and non-adjusting events will need to be considered. For 2019/20 financial statements, the existence of coronavirus was recognised during the financial year and some of its impacts and actions taken by the government were known by the reporting date of 31 March 2020.
However, new information about the likely severity and duration of the effects of the outbreak will continue to emerge and careful analysis and judgement will be required to determine whether this information is ‘adjusting’ on the basis that it provides new evidence about the year-end situation, or is a non-adjusting event that should be disclosed.
Governance and controls
Social distancing measures and staff absences are likely to have had a significant impact on authorities’ governance arrangements. MHCLG laid regulations before parliament in April 2020 to provide flexibility in relation to local authority, police and crime panel meetings held between 4 April 2020 and 6 May 2021.
These regulations provide for remote access to meetings of local authorities by members of a local authority, the press and the public. The regulations also enable local authorities to hold and alter the frequency and occurrence of meetings without requirement for further notice and they disapply provisions requiring local authorities to hold annual meetings.
Impact on audit work and external scrutiny
Planned audit approaches are likely to change due to logistical issues, as well as a heightened risk in several areas, resulting in additional testing being required. Social distancing will have a significant impact on how auditors obtain the evidence they require, as well as how they communicate.
You will see an increase in the use of technology as you may see more substantive testing, particularly if the operation of internal controls has been affected. Auditors and local authorities will need to work together to identify what alternative measures are possible in the current environment without reducing the quality of audit evidence.
MHCLG laid the Accounts and Audit Regulations (Coronavirus) (Amendment) Regulations 2020 before parliament in April 2020. The effect of the regulations is to extend the timetable for local authorities to prepare their draft 2019/20 statement of accounts to 31 August 2020. The regulations also extend the deadline for the publication of statements of accounts, together with any certificate or opinion of the local auditor, to 30 November 2020.
To assist local authorities navigate financial reporting challenges, our technical experts will share sector insights, key considerations and practical guidance through a series of virtual events.
To discuss local authority financial reporting further, get in touch with Paul Dossett.