Implementing IFRS in local government: value adding or additional pain?

Abstract

PurposeThe aim of this paper is determine the impact financial reporting obligations and, in particular, the International Financial Reporting Standards (IFRS) have on local government management decision making. In turn, this will lead to observations and conclusions regarding the research question: “Does reporting under the IFRS regime add value to the management of local government?”Design/methodology/approachFollowing analysis of a survey instrument distributed to all local governments in all states of Australia, this research reports on interviews within Australia's largest state – New South Wales (NSW).FindingsIn general, findings suggest that for smaller councils and those situated away from the major cities, the time spent on complying with IFRS and various other legislative demands results in management accounting issues often being downplayed.Research limitations/implicationsA further paper needs to be conducted in order to determine in the second year of implementation the impact of IFRS – both in Australia and, in the future, in other countries – where local government is implementing IFRS. Practical implications will be evident when all Australian states are compared as NSW is the only state where an IFRS template has been produced for all local authorities.Originality/valueThis is the first known analysis of IFRS in local government in Australia, and possibly the world. It utilises both survey and interview instruments within an institutional theory framework to capture the full richness of data available.

Local Governments, Unexpected Depreciation and Financial Performance Adjustment

“…The underlying driver of incentives to smooth financial performance differs between the private and public sector. In a public sector environment the stewardship role is a greater function of management (Pilcher and Dean, 2009). Public sector management is perceived to have a greater responsibility to maintain assets under control, and use those assets effectively to deliver services in a balanced and value‐added manner (Lawton et al, 2000).…”

“…There are increasing pressures on public sector management to provide financial accounting information detailing a steady and predictable level of financial performance so as to demonstrate sound future fiscal sustainability (Pilcher and Dean, 2009). As noted above, external financial reporting (based on accrual‐based accounting principles) is becoming an essential element of the operational process of the public sector in nations such as Australia, plus of importance to decision‐making of external stakeholders.…”

“…For example, Australian local governments (as in some other national jurisdictions) are facing intensive rationalization pressures. Financial management based on accrual‐based accounting information is viewed as a pivotal factor underpinning the decision of state governments on the nature, extent and form of local government amalgamations (Pilcher and Dean, 2009). Decisions to place a local government on a financial sustainability ‘watch list’ is commonly based predominantly on external reported financial accounting information such as in the case of NSW 4 .…”

The Impact of IFRS Adoption on Public Sector Financial Statements

“…The adoption of IFRS in the public (governmental) sector has not been widely researched except by Rixon and Faseruk (2009) in Canada, Pilcher and Dean (2009a, b) in Australia, and Heald and Georgiou (2009) in the UK. Rixon and Faseruk examined the impact of adoption of IFRS by Canadian public sector entities.…”

“…Due to a lack of detailed guidance for public sector entities, the Canadian entities used diverse interpretations of IFRS that led to non‐comparable financial statements. Pilcher and Dean (2009b) investigated the implementation of IFRS in local government reporting in Australia and found that IFRS requirements for local government are time consuming and costly, adding little value to the management of local government and often causing decoupling of internal and external financial reports. Heald and Georgiou (2009) discussed conceptual, technical and timetable issues in relation to UK government accounts.…”