Urgent CIPFA consultation on temporary changes to the accounting code (Infrastructure assets)

The current issues with local audit are complex and have a number of causes including a limited number of firms within the market and a shortage of suitably qualified auditors working for those firms. This situation has been made worse by tighter and stricter regulation of auditors following audit scandals in the private sector and more recently by the difficulty of auditing under COVID restrictions. 


About the Local Government Association

  1. The Local Government Association (LGA) is the national voice of local government. We are a politically led, cross party membership organisation, representing councils from England and Wales.
  2. Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.
  3. This response has been cleared by the LGA’s Resources Board Lead Members.

General points

4. The current issues with local audit are complex and have a number of causes including a limited number of firms within the market and a shortage of suitably qualified auditors working for those firms. This situation has been made worse by tighter and stricter regulation of auditors following audit scandals in the private sector and more recently by the difficulty of auditing under COVID restrictions. The issues are multi-faceted and complex and will take time to address. They require a concerted response from a range of stakeholders including Central Government, the audit firms, the regulators and CIPFA.

5. Work on long term arrangements for local audit has commenced following the report of the Redmond review in 2020. Recently the Government published the outcomes of last year’s consultations on Restoring trust in audit and corporate governance, which covered audit across all sectors, and on the Local audit framework (which covered setting up the Audit Reporting and Governance Authority (ARGA) as the system leader for local audit). The LGA responded to both consultations (Restoring trust in audit and corporate governance. LGA response and Local Audit Framework technical consultation: LGA response) and we will continue to work with the Government on the proposals as they develop and are implemented.

6. In addition, DLUHC and HM Treasury recently sent a joint letter to members of the Local Audit Liaison Committee which outlined the measures being taken to address audit delays.  The letter includes several points of relevance to the code and to the valuation of infrastructure assets, including the work HM Treasury is doing on a thematic review of non-investment asset valuation which is due to be concluded in the autumn. This review may help with providing a long-term solution to the issues raised in the current consultation.

7. The issues under consideration in the current consultation are adding to the problems being experienced by local audit. It is worth noting that these issues do not arise from any recent changes to the code. We note and agree with the statement in the consultation document that “Accounting for infrastructure in local government has not historically been considered to be an area of significant audit risk, due to the inalienable nature of the assets”. The practical practice of the last 25 years or so has not obviously caused any problems for general users of local authority accounts or for the provision of local services, and it is disappointing that this has now become an issue, and not one caused by CIPFA LASAAC. Nevertheless, if a temporary change to the code can provide a temporary solution that means that this particular issue ceases to be a factor preventing local authority audits being finalised then that is to be supported. However, there are still many other factors causing delays in finalising local authority audits and these need to be resolved.

Individual questions

Question – “Background to infrastructure assets”

Question 1: Has the (…) description (in the consultation document) set out all the technical and practical difficulties for reporting infrastructure assets? If not, please provide further information and details for CIPFA LASAAC and the Task and Finish Group.

      8. The description in the consultation document aligns with the difficulties that
            have been reported to us.

Question – “Deliberations by the Task and Finish Group and CIPFA LASAAC”

Question 2: Has the (…) description (in the consultation document) of the deliberation of the Task and Finish Group considered all the relevant issues for the reporting infrastructure assets? If not, please provide further information and details for CIPFA LASAAC and the Task and Finish Group.

      9. The description in the consultation document considers all the immediately relevant issues that have been reported to us. We strongly agree with the reported view of the Task and Finish Group “that for any solution the costs must not outweigh the benefits to the users of the financial statements and other stakeholders.” The solution must be proportionate to the problem being solved.

Questions – “Temporary Solution for the Reporting of Infrastructure Assets” (Questions 3 to 6)

Question 3: Do you agree that the net book value of infrastructure assets is generally capable of being relied on? If not, why not? Please provide your views on why this might be the case?

Question 4a: Do you agree that replacement expenditure takes place when parts of assets have been fully consumed so that the proposed adaptation (included for the avoidance of doubt) is appropriate? If not, why not? Please provide your views on why this might be the case?

Question 4b: Do you agree with the proposed wording of the adaptation ie that:

‘…the carrying amount of the part of the asset derecognised may be a zero amount…’

or do you consider that the wording should be more affirmative and indicate that it is a zero amount? Please provide the rationale for your response.

Question 5: Do you agree that, temporarily, the gross historical cost and accumulated depreciation need not be reported? If not, why not? What alternatives do you suggest?

Question 6: Do you agree with CIPFA LASAAC’s new sentence providing additional guidance for the depreciation of infrastructure assets? If not, why not? What alternatives do you suggest?

      10. The technical proposals outlined in questions 3 to 6 appear to be reasonable. However, we would suggest that the views of individual local authorities and of finance practitioners within the sector should be taken into account. The important point in our view is whether the proposals will unblock this immediate additional problem with finalising local accounts, and we believe that will be the case. However, as noted above, there are still many other outstanding factors that will continue to cause delay in finalising local authority audits.

Question 7: Do you agree with the time period for the amendments to the Code ie from 1 April 2010 to the financial year commencing 1 April 2022? If not, why not? What alternatives do you suggest?

(Note that this change is from the move to the IFRS-based Code as of 1 April 2010.)

      11. We understand that this time period is necessary to achieve the proposed change. However, as a minimum, we suggest that the amendments should be extended into the code for the year 2023/24 as well, at the time the code for that year is set. We believe that this will be necessary to give time for alternative permanent solutions to be explored and, if appropriate, implemented.

Questions – Possible Longer-Term Solutions

Question 8: What are your views on the possible solutions to the approach to derecognition and the reporting of infrastructure assets? Please set out the rationale for your response.

      12. As stated above, we strongly agree with the view of the Task and Finish Group that the cost of any long-term solution must not outweigh the benefits to the users of the financial statements and other stakeholders. The solution must be proportionate to the problem being solved. This factor should continue to be uppermost when considering long term solutions. In the meanwhile, as outlined above, we suggest that the temporary amendments be extended into the code for 2023/24.

Question 9: What are your views on the measurement of infrastructure assets at depreciated replacement cost? Please set out the rationale for your response.

      13. We do not have views on this. We suggest that the views of individual local authorities and of finance practitioners within the sector should be taken into account.

Question – Other Infrastructure Assets

Question 9: Please outline the other types of infrastructure assets and comment on whether more guidance might be needed for these assets. Please set out the rationale for your response.

      14. We would refer you to responses from individual local authorities and from finance practitioners within the sector.

Consultation document

Contact

Bevis Ingram
Senior Adviser Finance
Phone: 079 2070 2354
Email: [email protected]