Amyas Morse, the auditor general of the National Audit Office (NAO), has qualified his audit opinion on the Ministry of Defence's (MoD) 2012-13 accounts on a number of grounds, including failure to comply with International Financial Reporting Standards (IFRS).

For the fourth year running, the NAO says the MoD has failed to comply with IFRS requirements for determining whether a contract contains a lease giving the department exclusive or near-exclusive use of assets and capability. Typically such contracts will involved the production of specialist items such as submarines by commercial facilities. The watchdog says that given the potential number and size of these contracts,' material omissions from the financial statements are likely'.

NAO also disagrees with the way the MoD has accounted for the handing back of garrisons and training facilities in Germany, following the announcement in March 2013 that the Army will move back to the UK. The disagreement relates to the accounting treatment adopted in respect of 'impairments' to the German estate which are due to the fact that the assets will be used for a substantially shorter time than had previously been envisaged.

NAO says the full value of the impairment should have been charged to the MoD's net operating costs, whereas the MoD has charged £597m to net operating costs with the remaining £907m charged to the revaluation reserve. It says that had the MoD accounted for the full value of the impairment as it deemed appropriate, the department would have exceeded the resources voted to it by parliament for 2012-13 by £395m.

In the report, Morse says the MoD has made 'significant progress' with long-standing problems relating to the valuations of military equipment.