18 November 2010 UNCLASSIFIED

Development of Financial Reporting in the UK

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Agenda

• Financial reporting across the public sector;• Resource Accounting & Budgeting;• Legal framework for accounts production in Central

Government;• Government Financial Reporting Manual (FReM);• The move to IFRS;• Whole of Government Accounts

Departmental Financial Reporting FrameworksThe various frameworks have different purposes and rules:

National Accounts: fiscal performance is measured by reference to the National Accounts

Budgets: are used to control public spending and need to align with the National Accounts to support fiscal control

Estimates: seek annual Parliamentary authority for departments’ spending that isn’t authorised elsewhere

Resource Accounts: report departments’ actual spend for the year on a ‘commercial’ basis, adapted for the public sector, and compare outturn with Estimates

Resource Accounting & Budgeting (RAB)

RAB is an accrual based approach to Government accounting and budgeting

More than just simply the adoption of accrual accounting

Aims to translate the Government’s policy priorities into departmental strategies and budgets, and then reports to Parliament on the efficiency and effectiveness of services provided

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The Move to Full Resource Accounting and Budgeting

• RAB was launched in 1993• White Paper in 1995• Implementation Process

• 1997-1998 – Unaudited and unpublished shadow DRA’s• 1998-1999 – Audited and unpublished shadow DRA’s• 1999-2001 – Audited and published shadow DRA’s• 2001-2002 – Live DRA’s

• Post-implementation Review5

Impact of resource accountingAdvantagesFor Parliament:•Information on use of resources – VFM•Enhanced accountability•Importance of Cash flow management remains

For central government•Strategic approach to decision-making•Enhanced fiscal framework•Modernising Government

For Departments•Resource management•Linking inputs to outputs•Understanding full costs of activities•Incentivised management of assets and liabilities

Issues

•Resource requirements in managing financial information.•Level of uncertainty in accruals accounting

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Legal framework for accounts production in Central Government

Government Resources and Accounts Act 2000

Powers granted to HM Treasury under this Act

Other key features

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Government Financial Reporting Manual (FReM) The technical accounting guide to the preparation of financial

statements

Prepared by HM Treasury following consultation with the FRAB and issued by relevant authorities in England, Wales, Scotland and Northern Ireland

Applies to all entities prepared on an accruals basis and consolidated within WGA, but not to Local Government, Public Corporations that are not Trading Funds and NHS Trusts and NHS Foundation Trusts

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Financial Reporting guidance across the public sector• HM Treasury – FReM

• Department of Health – NHS accounting manuals

• Monitor – Financial Reporting Manual for Foundation Trusts

• CIPFA-LASAAC – Code of Practice on Local Authority Accounting in the UK

• Devolved Administrations9

The Financial Reporting Advisory Board (FRAB)• Independent review board for the move to RAB• Government Resources and Accounts Act 2000• Annual Report to Parliament• Responsibilities

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Why IFRS?

• Improved transparency and accountability

• Best practice financial reporting standards for public interest entities

• Private vs Public sectors• Use of Economic Resources• Alternatives?

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The IFRS Plan

• Formal announcement to implement

IFRS from 2008-09

• Round tables and consultation

• Stocktake meeting with departments

• Delayed implementation to 2009-10

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The IFRS Timetable4 Point Trigger Point Plan

2008 2009 2010

2008/09 IFRS

Comparatives

2009/10 IFRS reporting

Transition date

Opening IFRS

balance sheet

(1 April 08)

Comparative

IFRS year end; IFRS-

based annual

budgets

First IFRS year end

2009/10 annual report

and accounts (and 2008/09

comparatives)

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IFRS IMPLEMENTED

• 2009-10 IFRS based resource accounts &

accounts of arm’s length bodies (ALBs)

• Areas for future improvements in financial

reporting include• Lease accounting• Accounting policy note• Errors and omissions• Financial instruments• Fair value measurement

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IFRS Issues – Departments and Arm’s Length Bodies during implementation• Restatement and terminology (IFRS 1/ IAS 1)• Service Concession Arrangements (IFRIC 12)• Leases (IFRIC 4 / IAS 17)• Financial instruments (IAS 39)• Property, Plant & Equipment (IAS 16)

• Networked assets;• heritage assets; and • componentisation.

• Recognition of Intangible Assets (IAS 38)• Leave accruals (IAS 19)• Segment Reporting (IFRS 8)

Background to WGA

First stated as Government’s intention in Code for Fiscal Stability 1998

Embedded in Government Resources and Accounts Act 2000 (with separate legislative / administrative arrangements for Scotland / NI)

Dry runs commenced in 2001-02 initially only for central government, with WGA first expected to be published 2005-06

Deferred to 2008-09, but then again to 2009-10 when IFRS was delayed a year for central government

Orders laid to allow account to be published for 2009-10

What is WGA?• Set of consolidated financial statements for the public sector

(including central government, devolved administrations, local authorities, NHS and public corporations)

• Based on International Financial Reporting Standards• Most ambitious set of accounts in the world in terms of public

sector coverage• Will look and feel like a set of private sector accounts with a

management commentary, financial statements, disclosure notes and audit opinion

• First accounts will be for 2009-10 which we are aiming to publish around Spring 2011

• Early years likely to be qualified – but this is the start of a journey

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Why produce WGA• The only audited set of data across the public sector • Improving transparency and accountability to Parliament

and to the taxpayer• New measure of the government’s financial position,

including provisions, PFI and contingent liabilities, to complement existing measures

• Potential to support longer term fiscal forecasting and management

• Comparability across different parts of the public sector, and with the private sector, as financials produced on a consistent basis

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What’s new in WGA• Brings the UK public sector accounts together in one place• Based on the audited accounts of public sector bodies

(already published), but WGA consolidates these, removing transactions and balances with other parts of government

• It will include assets and liabilities which are not part of measures used for the purpose of national statistics - due to measurement and conceptual differences. The WGA net balance sheet position will not, for example, match PSND

• Makes transparent PFI, pension liabilities and government guarantees

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How do we pull together WGA?

• Small team at the centre in the Treasury• Each entity completes a data collection pack• Uploaded into COINS• Feed into sub-consolidations

• Central government• Health• Local Authorities• Public corporations

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Risks and Issues• Timeliness

• Quality

• Counterparty transactions and balances

• Convergence of accounting policies

• Boundary for WGA

• Completeness

• External reaction

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