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Developing financial reporting guidance for the public sector: Memorandum of Understanding between the relevant authorities

18 April 2012

1. The Financial Reporting Advisory Board (FRAB) is responsible for providing independent advice to the Relevant Authorities on financial reporting principles and standards.  The “Relevant Authorities” for this purpose are HM Treasury in respect of central government, the Scottish Government, the Executive Committee of the Northern Ireland Assembly and the Welsh Assembly Government in respect of central government and the health sector in their territories, the Department of Health and Monitor in respect of the health sector in England, and CIPFA/LASAAC¹  in respect of local authority accounts across England, Wales, Scotland and Northern Ireland.
2. This Memorandum of Understanding sets out the operational arrangements for developing financial reporting guidance for the public sector in the United Kingdom (UK).
   
   

   Financial reporting guidance for the public sector

3. Financial reporting guidance for the UK public sector is set out in the following; collectively referred to in this document as ‘the Manuals’the Financial Reporting Manual (FReM) for government departments and their arms length bodies;
   
   • the NHS Accounting Manuals for the NHS;
   • the FT Annual Reporting Manual for Foundation Trusts ; and
   • the Code of Practice on Local Authority Accounting in the United Kingdom.
4. The Manuals shall be prepared using EU adopted IFRS, subject to such adaptations² as are necessary for the public sector context.  When considering an amendment to the Manuals, which may involve an adaptation of EU-adopted IFRS, this will be determined by reference to the guidance in Annex A.  Proposals for adaptation of EU adopted IFRS shall normally be shared with the FRAB prior to proceeding with public consultation.
5. The Relevant Authorities ensure that the financial reporting guidance set out in the Manuals is kept up to date. 
   
   

   Due process

   The FRAB working group

6. The Relevant Authorities shall establish a FRAB Working Group whose membership shall comprise:
   
   • the FRAB Secretary; and
   • representatives from each of the other relevant authorities.
     The Group shall be chaired by the FRAB Secretary.
7. When proposing amendments to the Manuals the Relevant Authorities shall discuss those proposals with the FRAB Working Group. 
8. The Working Group shall consider the proposals for consistency across the public sector, or seek reasons for sector-specific differences being proposed. 
9. The representatives from CIPFA/LASAAC and the devolved administrations shall advise of any impacts the proposals might have on Council Tax and whether there are acceptable alternative treatments. 
   
   

   Public consultation

10. Once discussed by the Working Group, the Relevant Authority shall consult publicly on the proposal.  Where the proposal will be considered by the FRAB without deliberation by any other body, the proposal shall be published on the HM Treasury website by the FRAB Secretariat in a FReM Exposure Draft (FED).  Each FED shall be numbered and the FRAB secretariat shall be responsible for maintaining a FED register.
11. Where the proposal will instead be considered by another body as part of its Due Process (for example, CIPFA/LASAAC), the proposal shall be published in a suitable document for the purpose.
12. The public consultation shall comprise placement on the Relevant Authority’s own website and by targeted circulation or consultation as appropriate.  The public consultation period shall be at least eight weeks. 
13. The Relevant Authority shall, except where respondents have requested confidentiality, place responses on their websites. 
    
    

    Papers considered by the FRAB or other bodies

14. The Relevant Authorities shall analyse and summarise the responses in the paper that is taken either to the FRAB for approval or, where a separate body (for example, CIPFA/LASAAC) deliberates, to that body.  Only where the responses to the consultation do not support the proposal should the FRAB Working Group be consulted again.
15. The FRAB secretariat shall aim to distribute papers to FRAB members at least ten days prior to the meeting date.  Other bodies need to build into their Due Process arrangements an allowance for adherence to this timetable.
16. All FRAB papers and Minutes of meetings shall be published on the FRAB website by the FRAB Secretariat in accordance with the FRAB’s publication policy.
17. Where a separate body considers the responses to its consultation, that body shall be responsible for agreeing the content of its Manual(s).  That separate body shall present for approval to the FRAB:
    0 the full and final text of the Manual(s) prior to its being issued for the first time; and, thereafter
    0 a list of differences between the Manual(s) and the FReM.
18. Where requested, the FRAB Chairman shall provide a letter to the separate body summarising the results of FRAB’s considerations of the proposals under paragraph 18.
    
    

    Implementation dates

19. The version of the FReM for financial years starting on 1 April shall be available by the preceding 1 January and shall incorporate all EU- adopted IFRS effective as at that date – that is, 15 months before the end of the financial year to which the FReM relates, unless exceptional circumstances prevent this.  The Relevant Authorities should aim to have the relevant versions of the other Manuals available by 1 April for the financial year starting on that day and ending on the following 31 March.
20. Mid-year updates to the Manuals should not be driven by changes in accounting standards, but only by those necessary to address regulatory or adaptation issues that emerge after publication of the relevant version of the Manual.
    
    

    Influencing the development of accounting standards

21. The secretariats of the FRAB and CIPFA/LASAAC shall monitor the activities of the International Accounting Standards Board (IASB) and the International Public Sector Accounting Standards Board (IPSASB).  The two secretariats shall, working together, prepare analyses of relevant Consultation Papers and Exposure Drafts issued by either standard setter, for discussion with the FRAB and prepare responses as directed. 
    Review
22. This Memorandum of Understanding shall be reviewed at least every five years or earlier at the request of one of the Relevant Authorities.
    
    

    Signatures

23. Dated and signed on behalf of the Relevant Authorities:

Lindsey Fussell
Director, Financial Management and Reporting
HM Treasury

Aileen Wright
Deputy Director Finance
Scottish Government

Martin Sollis
Deputy Director of Finance
Welsh Assembly Government

Janet Perry
NHS Chief Financial Controller
Department of Health

Fiona Hamill
Treasury Officer of Accounts
Department of Finance and Personnel,  Northern Ireland Assembly

Robert Davidson
Portfolio Director
MONITOR

Ian Carruthers
Policy and Technical Director
CIPFA

 

Annex A

Adaptations of EU-adopted IFRS for the UK public sector context.

Overall approach

In determining whether the public sector context requires an adaptation of EU-adopted IFRS, the Relevant Authorities will consider the following:

i)  Whether applying the requirements of the relevant financial reporting standard would mean that the accountability and decision making objectives of public sector financial reporting would not be adequately met;

ii)  Whether applying the requirements of the relevant financial reporting standard would mean that the qualitative characteristics of public sector financial reporting would not be adequately met; and

iii)  Whether applying the requirements of the relevant financial reporting standard would result in impracticability issues.

Indicators of the potential need for an adaptation

The factors below may indicate an adaptation of EU-adopted IFRS is necessary for the public sector context:

• Accountability or regulatory framework differences;
• Governance or financial management differences;
• Alignment with other government financial frameworks;
• The existence of specific powers;
• The impact of social benefits or other non-exchange activities;
• The existence of contributed/donated assets
• The existence of non-cash generating activities or assets;
• Differences related to the structure or service potential of assets;
• Sustainability issues; 
• EU-adopted IFRS not addressing the public sector circumstances, or not doing so adequately;
• Different or additional guidance in a relevant International Public Sector Accounting Standard (IPSAS); or
• Practical difficulties with implementation in the public sector or  cost/benefit considerations.

Development process

In determining the type and form of the proposed adaptation of EU-adopted IFRS the Relevant Authority shall consider the applicability in the context of the following guidance sources:

• International Public Sector Accounting Standards, as issued by the International Public Sector Accounting Standards Board;
• The relevant international Conceptual Framework, as developed by the standard setters in the absence of more specific guidance in a standard;
• Other financial reporting standards relevant to the public sector.

In following normal due process for developing proposed amendments to the Manuals, relevant papers are to document the extent and reasons for proposing any adaptation of EU-adopted IFRS.

 

¹ The Chartered Institute of Public Finance and Accountancy/Local Authority (Scotland) Accounts Advisory Committee Local Authority Accounting Code Board.
² An adaptation of EU-adopted IFRS includes an adaptation, interpretation, deferral or clarification of IFRS as considered necessary in the context of the UK public sector.

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