Reconciling a “True and Fair” View of Public Accounting with Realities


Posted by Johann Seiwald[1]

The fourth meeting of the International Public Sector Accounting Standards (IPSAS) Board in 2016 was held in Stellenbosch, South Africa from December 6-9, 2016. As usual, the meeting focused on the board’s core business of setting accounting standards for the public sector. The agenda covered a broad range of technical accounting topics such as heritage assets, revenues and non-exchange transactions, leases, financial instruments, social benefits, and public sector combination. But issues of more general interest were also discussed.

One such issue is why IPSAS should discuss topics on which the private sector has already developed a standard? For example, there is quite a close similarity between IPSAS and the International Financial Reporting Standards (IFRS) which apply to companies. But there are also some differences. For example, it is common in the public sector to provide leases below market value or even for free, which is not a market transaction. The approach taken by the board was expressed by one of its members: “Even though I do not believe there are many differences between private and public sector arrangements for leasing transactions, we should not follow blindly.” So the board scrutinizes the private sector IFRS and assesses the appropriateness of the various standards for the public sector. It came to the conclusion, for instance, that a specific accounting model for concessional loans (so-called “peppercorn leases”), aligned with IFRS, should be developed that reflects the non-exchange aspects (i.e., services provided by the government for no equivalent value in exchange) of public sector leases.

Even though some accounting approaches are technically complex (such as the five-step performance obligation approach for recognizing revenues used by IFRS) and difficult to implement, the IPSAS board believes that oversimplification could undermine accountability. The board’s dedication to the “true and fair view” approach to public accounting is the main driver of its work, and wins over implementation constraints.

The discussions in Stellenbosch resulted in a new IPSAS 40 for Public Sector Combinations, which provides accounting rules for amalgamations and acquisitions of public sector entities (e.g., merger of local governments, or reintegration of a corporations into government), and the approval of several chapters for upcoming “exposure drafts” and “consultation papers”.[2]

To ensure high quality standard setting, some of the discussions in Stellenbosch were rather technical and detailed, going through drafts page by page, making sure that new standards are aligned with existing ones, are internally consistent, and that definitions are clear and non-contradictory. However, the conceptual discussions at the initial stage of standard setting often touch on broader topics such as the nature of concessional leases, liabilities resulting from social benefits, or the conceptual differences between material (e.g., historic buildings), immaterial (e.g., penal codes), and natural heritage assets (e.g., public statues and art works in national collections).

The Consultative Advisory Group (CAG) established in June 2016 contributed a less technical view on accounting. The group comprises a chair and 20 members from the public and private sectors, and advises the board on its strategy, work program, and project priorities. At their meeting in Stellenbosch, the CAG discussed recent international trends in fiscal reporting. Members argued that a broad, integrated perspective to reporting is beneficial, but the purpose of general purpose financial statements should not be lost or “overburdened with issues that are not in the center of financial reporting”. The merits of performance reporting, for example, were acknowledged by the CAG but should not be not given the highest priority for IPSAS.

The theme of improving communication and education was central to the meeting, especially emphasized by the CAG. The board noted the need to better communicate its work to a range of targeted audiences that include the media, politicians, and rating agencies. Powerful stories are a useful device to help in communicating the benefits of IPSAS. “One such story could be”, one member suggested, “the case of a country where the mere introduction of IPSAS led to a better credit rating, and this helped convince the minister of finance about the benefits of accounting information.” Nevertheless, not all innovations in financial reporting are welcomed by politicians. One participant commented that a move to accrual accounting may be resisted because of pressure to disclose information (e.g., on long-term pension liabilities) that is uncomfortable for politicians, and makes them more accountable for their financial performance.

Concerning the application of the current IPSASs for financial instruments, board members noted the lack of understanding in the public sector of the instruments themselves and their accounting treatment. As a result, governments enter into transactions they are unable to manage and are unaware of the risks involved. “The problem is not the complexity of the accounting standards but the weak capacity and understanding of authorities to deal with the instruments”, one board member explained. In order to understand how to apply the standards, governments need to learn about the characteristics of the financial instruments. Thus the board decided to include guidance material in the consultation paper to be released in mid-2017.

The development of a new standard is generally a two- to three-year project and the IPSASB works on around ten projects in parallel. The discussions of the projects in progress will be continued at the board’s next meeting in March 2017 in Washington DC.

[1] Johann Seiwald, Senior Economist, Fiscal Affairs Department, IMF, attended the Stellenbosch meeting of the IPSAS Board.

[2] Consultation papers are documents of the first consultation phase in the IPSAS standard setting process, describing the issues and raising questions to users, such as which accounting approaches are preferred. Exposure drafts are used in the second phase, seeking feedback from users on a preliminary draft of the standard.

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