IPSAS: A True Global Standard for Government Accounting?

Posted by Sailendra Pattanayak 

The cornerstone of any government financial reporting system is accurate, consistent, and timely reporting of government expenditures and revenues, and assets and liabilities. Only then can financial reporting serve its purpose of accountability to parliament and the public at large for the appropriate use of public money. Most countries have laws, rules, and regulations defining their government accounting and reporting systems, but these usually reflect each country’s legal/regulatory/administrative tradition as well as its specific needs.

As part of the discussions the IMF has with country authorities on modernizing government accounting systems, a number of questions regularly emerge. Are accounting systems capable of producing financial statements/reports that can provide a valid assessment of the government’s financial performance and financial position? In an era of increasing globalization in which the governments are rated on their creditworthiness, can governments produce financial statements that are understandable and comparable across countries? Can we standardize the preparation of government financial statements across all countries? This is an ongoing discussion with and within countries. The development of the International Public Sector Accounting Standards (IPSAS) is an attempt to address some of these questions.

Recognizing the need for common accounting standards for use by public sector entities, the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC) was established in late 1986. In August 1997, the PSC embarked on a Standards Program directed at developing International Public Sector Accounting Standards (IPSASs) for financial reporting by public sector entities at the local, state, and national government levels. The initial phase of the Standards Program included developing IPSASs based on International Accounting Standards (IASs) promulgated by the former IASC (International Accounting Standards Committee) , or their subsequently revised versions, to the extent appropriate for the public sector. The IASs were originally developed for the private sector. The International Accounting Standards Board (IASB) is the successor of the IASC. The IASB is responsible for developing the International Financial Reporting Standards or IFRSs (new name for the IASs issued after 2001) primarily for business enterprises. In November 2004, the PSC’s name was changed to the International Public Sector Accounting Standards Board (IPSASB) and its terms of reference updated to reflect that the IPSASB would focus on issuing IPSASs. In 2005, the IPSASB reaffirmed its commitment to the objective of converging IPSASs with IFRSs, unless there is a public sector specific reason for a departure.

The IPSASs are accounting standards for use by public sector entities around the world in the preparation of financial statements. IPSASs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events in general purpose financial statements of all public sector entities. Public sector entities include national governments, regional governments (for example, state, provincial, territorial), local governments (for example, city, town) and their component entities (for example, departments, agencies, boards, commissions), unless otherwise stated. The Standards do not apply to Government Business Enterprises. Government Business Enterprises apply IFRSs, which are issued by the International Accounting Standards Board (IASB). IPSASs include a definition of Government Business Enterprises.

IPSASB prepares accounting standards for both accrual basis and cash-basis of accounting. The latter is meant as a stepping stone towards adopting the accrual basis of accounting.  There have been 26 standards issued on the accrual basis of accounting and one standard on the cash basis of accounting. Further standards are being prepared. The majority of accrual-based IPSASs are based on IFRSs. There are also IPSASs which are public sector specific, notably on revenue from non-exchange transactions, on general government sector disclosures and on budget reporting.

The Cash Basis IPSAS includes mandatory and encouraged disclosures sections. The Cash Basis IPSAS encourages an entity to voluntarily disclose accrual based information, although its core financial statements will nonetheless be prepared under the cash basis of accounting. An entity in the process of moving from cash accounting to accrual accounting may wish to include particular accrual-based disclosures during this process. When the accrual basis of accounting underlies the preparation of the financial statements, the financial statements will include the statement of financial position, the statement of financial performance, the cash flow statement and the statement of changes in net assets/equity. When the cash basis of accounting underlies the preparation of the financial statements, the primary financial statement is the statement of cash receipts and payments.

The IPSASB acknowledges the right of governments and national standard setters to establish accounting standards and guidelines for financial reporting in their jurisdictions. Some sovereign governments and national standard setters have already developed accounting standards that apply to governments and public sector entities within their jurisdiction. IPSASs may assist such standard-setters in the development of new standards or in the revision of existing standards in order to contribute to greater comparability. IPSASs are likely to be of considerable use to jurisdictions that have not yet developed accounting standards for governments and public sector entities.

However, the debate continues as to: (i) whether the IPSASs, which are mostly derived from the IFRSs, have been adequately adapted to the specific needs of the public sector; (ii) whether the coverage of the IPSASs is comprehensive enough to meet all public sector accounting and reporting requirements; and (iii) as governments migrate from the cash to accrual based accounting, can specific standards and/or guidelines be developed to cover the transition phase.