Local government accounts are notorious for their complexity. The 2020 Redmond review of local audit described them as ‘impenetrable’. This matters for local residents and councillors, who are the primary users of the accounts. Without easily accessible measures of performance, a council cannot be held to account.
The government reiterated in December 2025 that it is working with the accounting profession and the devolved governments to simplify local financial reporting, as part of a package of reforms that will culminate in the creation of a new Local Audit Office (see AB’s ‘Simplifying councils’ accounts’ article last year). But how in practice can accounts simplification be achieved?
The reconciliation notes are byzantine in their complexity
The heart of the problem is that local authority accounting serves two masters. Since 2010, local authorities have had to comply with IFRS Accounting Standards (elsewhere in the world, IPSAS, which are closely aligned with IFRS, have been adopted in the public sector). In addition, local councils must present financial information in a way that shows their funding requirements for council tax-setting purposes, which leads to a number of ‘statutory overrides’ that supersede the IFRS accounts.
For presentation purposes, the solution adopted by accounting professionals in local authorities in 2010 was to seek to combine the two approaches, IFRS and statute. As a result, the accounts have become longer and more complex.
Reconciling information prepared on an accounting basis to information prepared on a funding basis requires a long series of notes to the accounts. In my local authority’s accounts, these run to 12 pages. The notes are byzantine in their complexity, and even accountants struggle to understand them.
Unclear
And the problem is not just complexity. There is a loss of clarity about councils’ financial position. For example, under statute, local authorities do not account for deficits on the provision of special educational needs and disabilities (SEND) services. The government has promised that it will take on these costs, which the Office for Budget Responsibility estimates at £6bn a year in aggregate. For the time being, though, they are local authorities’ responsibility but are excluded from the accounts.
Another way in which expenditure is excluded from the accounts for statutory purposes is that, with the government’s agreement, certain local authorities are permitted to capitalise revenue expenditure under arrangements for exceptional financial support. In 2024/25, 19 local authorities agreed capitalisation directions with the government, averaging £70m each. The arrangements helped these authorities, most of which reported deficits under the accounting basis, to report a more positive outturn on a funding basis.
It is not sustainable to continue trying to serve two masters
Pick a team
It is not sustainable for local authority accounts to continue trying to serve two masters. The problem needs to be resolved by accepting that either IFRS Accounting Standards or statute law should provide the definitive accounting record.
The advantage of IFRS Accounting Standards is that they ensure consistency across the public and private sectors, and are part of a widely understood accounting framework, supported by extensive documentation and experience. Their adoption by local authorities in 2010 was seen at the time as onerous, but they are now widely accepted. While they are not always appropriate for the public sector, legislation permits their adaptation to meet the needs of local authority accounts users.
However, statutory overrides create complexity and can lead to a loss of clarity about the financial position. In the examples above, SEND deficits are excluded from the accounts, and capitalisation directions can mislead by reducing deficits.
In my view, local authorities need to embrace IFRS Accounting Standards fully, in the interests of clarity and meaningful financial reporting.
Impact
In practice, this would mean preparing the core financial statements and notes on an IFRS basis. Separately, as with central government accounts, an ‘accountability report’ would list the statutory overrides and so reconcile the IFRS surplus or deficit to the outturn for statutory/funding purposes. The term ‘accountability report’ recognises that it presents the outturn for which councillors are statutorily accountable.
The accountability report would present the authority’s results alongside its budget, giving clarity about how it had performed in comparison with the assumptions made when setting the council tax at the start of the year. The user of the accounts would be able to see, preferably on a single page, both the council’s performance against budget, and how the outturn relates to the financial position in IFRS terms.
The accountability report would draw on existing information and help reduce the number of notes in the main accounts. The overall impact should be a reduction in the burden on preparers of the accounts, as well as simplification for the user.
As with any major change to financial reporting, the reforms proposed here will need careful consideration. But ultimately they should improve the quality of local authority accounts.
Local authority audit and accounting is undergoing major reform with the creation of the Local Audit Office (see AB‘s ‘Reforming broken audits’ last year). Simplifying the accounts by embracing IFRS fully and introducing an accountability report is an essential part of this reform.
