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HOUSE OF COMMONS DEFENCE COMMITTEE

Ministry of Defence Annual Report and Accounts 2010–11

Government Response to the Committee’s Eighth Report of
Session 2010–12

First Special Report of Session 2012–13

Ordered by the House of Commons

The Committee published their report on the Ministry of Defence Annual Report and Accounts 2010–11 on 26 January, as HC 1635. The Government’s response to the conclusions and recommendations which were contained in the Committee’s Report, is set out below.

1. While we recognise that compliance with the International Financial Reporting Issues Committee Interpretation 4 (IFRIC 4) and International Accounting Standard 17 on leases will be more onerous for the MoD than other departments, it is importance for public transparency and proper conduct of Government business that all departments comply with Government accounting policy. In October 2011, we wrote to the Chancellor of the Exchequer to ask for his policy on Government Departments who fail to meet Treasury financial reporting requirements; we have still not received a reply despite reminders. We deplore this. The Treasury should either explain why it is not enforcing the standards which it has imposed and to which the MoD has, in common with all other departments, agreed or explain what it is going to do to change these standards for the MoD. (Paragraph 13)

HM Treasury has now responded to the Committee’s letter of October 2011, clarifying that there will be no changes in regulation for the MoD. The MoD is expected to meet Government Financial Standards, as all departments are, and is currently working to do so. Until such time that it does, HM Treasury expects the qualification placed on the MoD accounts by the NAO to remain.

2. The MoD should comply with the C&AG’s recommendation that the MoD should identify contracts where the risk of inappropriate accounting treatment is highest and should target further efforts on higher value, higher risk contracts as soon as contract renegotiations resulting from the Strategic Defence and Security Review are completed. It should ensure that it applies IFRIC 4 to all new contracts immediately. In response to this Report, the MoD should provide a timetable for completion of this work and a reliable estimate for when it expects the C&AG to give the MoD a clear audit opinion. (Paragraph 14)

Work undertaken during the implementation of International Financial Reporting Standards in 2009–10 highlighted that those contracts most at risk of containing a lease (IFRIC 4), for accounting purposes, are the single source strategic procurement arrangements with the UK’s main defence contractors. These are also the highest value contracts managed by the Department. Once contract re-negotiations resulting from the Strategic Defence and Security Review (SDSR) are complete, effort will be concentrated on reviewing these single source arrangements.

SDSR negotiations will continue into 2012–13 after which MoD will need to agree with the various contractors a mechanism for identifying and valuing, on an ongoing basis, any assets deemed to be leases and therefore recorded on the MoD Statement of Financial Position (SoFP) and the costs of doing so. The contractors will expect to be recompensed for the considerable work this will involve. Therefore, it is estimated that C&AG will not be able to provide MoD with a clear audit opinion on IFRIC 4 until 2014–15 at the earliest.

In the meantime MoD has been reviewing all new competitive contracts in accordance with the requirements of IFRIC 4 since the start of 2011–12. To date none of these arrangements have been identified as requiring MoD to include the contractor’s assets on the Department’s SoFP.

3. We remain concerned that, despite improvements in the audit trail for Bowman radios, the MoD cannot guarantee that it will be able to provide the NAO with adequate audit evidence about the radios for the 2011–12 Resource Accounts. This situation is unsatisfactory and is

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