Is Europe Ready for EPSAS?

Posted by Franck Bessette[1]

The sovereign debt crisis has underlined the need for governments of the European Union (EU) to clearly demonstrate their financial stability and for more rigorous and more transparent reporting of fiscal data. The EU promotes a system of harmonized accruals-based accounting standards for all entities of the government sector. IPSAS is currently the only internationally recognized set of standards. It is founded on the international financial reporting standards (IFRS), widely applied by the private sector, and at present comprises 32 accrual-based accounting standards, plus one cash-based standard. A recent report by the European Commission assesses the suitability of IPSAS for the Member States.  

The report notes that 15 out of 27 EU Member States already make some link to IPSAS. Of these countries, nine have national standards based on or in line with IPSAS, five make some references to it, and one country uses IPSAS in accounting at the local government level. However, despite recognition of the high value of IPSAS, no Member State has implemented the standards in full. Fully harmonized accrual-based public-sector accounting would provide a firmer basis for evaluating the financial position and performance of government activities at all levels.

The report concludes that:

On the one hand, it seems clear that IPSAS cannot easily be implemented in EU Member States as it stands currently. On the other hand, the IPSAS standards represent an indisputable reference point for potential EU harmonized public sector accounts. The following concerns will need to be addressed:

• Currently, the IPSAS standards do not describe sufficiently precisely the accounting practices to be followed, taking into account that some of them offer the possibility of choosing between alternative accounting treatments, which would limit harmonization in practice;

• At its current state of development, the suite of standards is not complete in terms of coverage or its practical applicability to some important types of government flows, such as taxes and social benefits, and does not take sufficient account of the specific needs, characteristics and interests of public-sector reporting. A major issue is the capacity of IPSAS to resolve the problem of consolidating accounts on the basis of the definition used for general government, which is now a core concept of fiscal monitoring in the EU;

• At present, IPSAS can also be regarded as insufficiently stable, since it is expected that some standards will need to be updated once work is completed on the current project of completing the IPSAS conceptual framework, expected in 2014; and

• At present, the governance of IPSAS suffers from insufficient participation of EU public-sector accounting authorities…… Any reform [of governance arrangements] should ensure that the independence of the standard-setting process is strengthened, while public-sector-specific needs are effectively addressed. In addition, the IPSAS Board currently seems to have insufficient resources to ensure that it can meet, with the necessary speed and flexibility, the demand for new standards and guidance on emerging issues in the evolving fiscal climate, particularly in the wake of the crisis. 

 On the other hand, most stakeholders agree that IPSAS would be suitable as a reference framework for the future development of a set of European Public Sector Accounting Standards (EPSAS).”

The formal decision to move towards European Public Sector Accounting Standards (EPSAS) is not yet taken and the report recognizes that many conditions would have to be met and many issues would arise in the process. The report also recognizes that it would be important not to create unnecessary divergence between EPSAS and IPSAS, and between EPSAS and IFRS, given that government-controlled entities may already be required to report on an IFRS basis or according to national commercial accounting standards.

While there may be risks in creating specific regional public sector accounting standards, Andreas Bergmann, chair of the IPSAS Board, nevertheless welcomed the report:

 “The adoption of accrual accounting by EU Member States would represent a historic step in the direction of achieving governmental transparency and serving the public interest ….. Developing high-quality accounting standards like the IPSASs will require a rigorous process to ensure the EPSASs are of the same caliber. The Board offers the EU’s public sector accounting authorities its full cooperation and resources in producing, adopting, and implementing EPSASs.

The European Commission’s report will be followed by a conference, “Towards Implementing European Public Sector Accounting Standards,” to be held on May 29-30, 2013 in Brussels. Watch this space for news of further developments...

Download Report

[1] Franck Bessette is a Senior Financial Management Specialist in the Latin America and Caribbean region of the World Bank.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.