In two years’ time, much of the public sector will convert to International Financial Reporting Standards (IFRS). But, as Mike McDonagh, Midlands audit sector lead – public sector at KPMG in Birmingham explains, managers must start work now or face consequences
The next four or five years will see one of the most fundamental changes in accounting that the public sector has ever seen. The introduction of IFRS over this period will create both opportunities and challenges for the public sector.
The NHS will be one of the first areas of the public sector to convert to IFRS accounting, with all health bodies having to prepare their financial statements in accordance with the new standards by the end of March 2010, with local government following a year later. While 2010 appears to be a long way off at the moment, the lessons learned from the private sector’s conversion highlights the need to build in more time.
The private sector converted to IFRS between January 2004 and December 2006 and, during this process, it became clear that the task was much bigger than anticipated and frequently generated a significant amount of additional work as the deadline drew ever nearer. As a result, it is important that the public sector takes on board these learning points to ensure a smooth and successful conversion.
Based on our and corporates’ experiences, we have identified key factors that must be taken into consideration.
Firstly, the time it takes. Planning is key and the whole issue of the conversion must be embraced by management and cannot be seen as something that can be fixed nearer the time.
The most successful conversion teams began working on the project at least 18 to 24 months ahead of their first IFRS reporting date. This is especially important when you take into consideration the requirement of a comparative set of accounts.
This requires public sector organisations reporting according to IFRS a year prior to full implementation in order to provide a comparison.
Secondly, IFRS has brought a considerable amount of complexity to financial accounts, both for the results reported and also the amount of disclosures that companies are now required to make.
The sheer volume of IFRS requirements means that it often takes a long time for people to become familiar and thus confident with it. This learning curve is vital and must be factored in at an early stage or errors can occur close to implementation deadline.
The third point centres on the need for ownership. The process of moving to IFRS is not simply a series of technical accounting changes.
It is a cultural transformation as much as an accounting one. It is not possible to have IFRS as a year-end top-up – it is much wider than this.
Consideration has to be given to the impact that IFRS will have on an organisation’s systems and processes, its people and, ultimately, the financial results, especially in relation to the impact it will have on the budgeting for, and performance of, the business.
The final key factor relates to the organisation’s leadership. All successful projects had a nominated leader who was given the appropriate amount of time to ensure that the project was kept on-track.
It does not need to be a full-time job, but it is not something that can be viewed as simply an add on to someone’s, no doubt already busy, schedule.
This task must be given due consideration, commitment and time, together with proper priority within the organisation.
KPMG’s public sector audit team has been in discussions with a variety of public sector organisations to discuss what will be needed, the timing of the conversion and what they have to do to successfully prepare for it.
From these discussions, it is clear that changes made by the Treasury (for central government and the NHS) and the Joint Committee, that draws up the local government statement of recommended practice, to the implementation timetable has raised questions, leading in turn to a delay in prioritising this issue on their agenda. As a result, many public sector organisations have not yet begun to carry out any work on preparing for this conversion.
This will need to change quickly if the conversion is to be successfully delivered within the timetable set out.
The current timetable varies with different areas of public sector coming on board at different times.
Central government departments, NHS foundation trusts and the NHS are all scheduled for their conversion to occur in the financial year 2009/10, with local government scheduled to occur in 2010/11.
However, the education, charities and social housing sectors are currently awaiting confirmation of their final timeframe of convergence of UK GAAP with IFRS.
It is obvious from the private sector conversions that with the right approach, a smooth conversion to IFRS is achievable.
Our experience tells us that this new accounting framework is very different to the familiar UK GAAP, and therefore the practical challenges of implementation should not be underestimated.
Early consideration and planning, followed by a project action plan will be key to achieving a successful conversion within the public sector.
Now is the time for the public sector to start thinking about the task ahead.