By Garry Smith, Associate and Senior Consulting Actuary at Barnett Waddingham
The audit backlog has existed for some time, but following a great deal of detailed work across the industry, the joint statement issued on Friday 9 February from the DLUHC and the NAO detailed proposals to clear the backlog and embed timely audit.
Included is a proposal for the Chartered Institute of Public Finance and Accountancy (CIPFA) to make temporary changes to the Code of Practice in Local Authority Accounting for 2023/2024 and 2024/2025. Should these proposals be implemented, what would be the implications for pensions reporting?
The overall outlook
The general thrust of the various proposals in the joint statement is to have a “reset” phase which clears the backlog of audits for years up to and including 2022/23 by 30 September 2024. This backstop date applies even if auditors issue a modified opinion due to not being able to complete all audit work by that date. From that point on, and to mitigate the risk that backlogs will re-emerge, the audit system will enter a “recovery” phase with progressively reducing timescales for signing-off subsequent audits. This will allow assurance to be rebuilt over several audit cycles.
To aid the recovery process, CIPFA will consult on proposals that reduce pensions disclosure requirements for at least two years, with the idea being that reduced disclosures will ease the burden on auditors and aid the system getting back on its feet. At this point in time, CIPFA has not yet issued the full consultation, so we can only go on the headlines provided by DLUHC.
As currently set out, the proposal is to reduce the disclosure requirements around pension liabilities / assets to be in line with UK Generally Accepted Accounting Practice (GAAP) - instead of International Financial Reporting Standards (IFRS) - for the 2023/24 and 2024/25 reporting periods. It is not totally clear what this means – it could be that instead of reporting under IAS19, pensions costs and net liabilities in local authority accounts will be prepared in line with FRS102. Alternatively, it could be that calculations are carried out as per IAS19, but only those parts that would be needed by FRS102 are actually disclosed.
Might this (not) help?
In broad terms, the pensions accounting framework under UK GAAP is reasonably consistent with IFRS, although IAS19 is more definitive with less room for subjective interpretation than the more loosely worded FRS102.
While it is true that FRS102 has slightly less extensive disclosure requirements, our view is that a move to UK GAAP (if that is what is proposed) can actually make auditing more difficult if there is more work needed to decide if a particular interpretation is in line with the more loosely worded standard. So rather than FRS102 being “easier” to audit than IAS19, there are arguments that the opposite can be the case.
Dancing on the (asset) ceiling
The application of asset ceilings have been a complicating factor for recent audits. IAS19 is clarified by IFRIC14 to provide a much clearer set of criteria of when, and to what extent, a pension surplus can be recognised in the accounts. There is no such direct clarification in UK GAAP. Furthermore, there is one important aspect where IAS19 and FRS102 explicitly differ – and that is whether an additional liability due to an onerous funding commitment needs to be included. It is not clear in the proposals how the inconsistencies between IFRS and UK GAAP would be managed.
The perils of unintended consequences
We do not believe that any of the actuarial firms have contributed to the auditing backlog through late production of accounting reports. However, for the 2023/24 period, preparations are well underway to produce 31 March 2024 reports under IAS19 for local authorities hitherto assumed to employ IFRS. A last-minute change to using UK GAAP, whether for the full calculations or only for disclosures, could definitely throw a spanner in the works. Any potential gains for the preparers or auditors of accounts from slightly less detailed disclosures might easily be undone merely by the extra work required to implement the change of approach.
Conclusion
At this stage, and until we have the opportunity to review CIPFA’s proposals in detail, we are keen not to dismiss the proposals out of hand. And we recognise that all parties are acting creatively to try to resolve a complex situation. However, we remain to be convinced that moving the accounting goalposts from IFRS to UK GAAP so late in the day will do much, if anything, to help with signing-off the pensions aspects of local authority accounts over the coming two years.
This is definitely one for local authorities to keep an eye on, and we encourage them to participate in the various DLUHC, NAO and CIPFA consultations over the coming few weeks. We will provide an update when the detailed CIPFA consultation is released.
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