Future of the IFRS 9 statutory override: mitigating the impact of fair value movements of pooled investment funds

In 2018, following concerns from the sector regarding the adoption of International Financial Reporting Standard 9 (IFRS 9) into the Code of Practice on Local Authority Accounting (the Code), the government introduced a statutory override to mitigate the risks highlighted by the sector.  At that time, authorities had expressed concern that reporting changes brought in by IFRS 9 would mean that the fair value movements in certain assets would need to be reflected in budgets. This would have particularly affected investments in pooled investment funds, a type of investment widely held in the sector. Authorities argued that the increased volatility to budgets could impact service delivery or place undue burdens on council taxpayers. 

The statutory override mitigates these putative risks by requiring authorities to remove the impacts of the fair value movements of pooled investment funds from their budgets and record them in an unusable reserve.  The statutory override was time-limited to five years, from 1 April 2018 and ending 31 March 2023. At that time, the government said that it would keep use of the statutory override under review but made no further commitments.

Unless action is taken by the government, the statutory override is due to end as of 31 March 2023. If allowed to elapse, the provisions made through the regulations will cease to have effect and local authorities will be required to apply IFRS 9, as adopted by the Code, with respect to pooled investment assets. Fair value movements on pooled investment assets will, therefore, likely need to be reflected in local authorities’ revenue accounts and be taken into account in setting budgets in accordance with the statutory balanced budget requirement.

The government is now carefully considering the available options. These are: to allow the existing statutory override to expire; extend the statutory override for an additional period of time; or make it permanent. In making this decision it is important that the government fully understands the potential financial and other impacts that each option will have on the sector and to consider alongside other issues such as adherence to accounting practices.

It is the aim of this consultation to collect the views of authorities and other stakeholders, and to collect additional information needed to understand the financial risks associated with both continuing the statutory override or allowing reversion to the Code.