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March 24, 2010

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.


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The IPSAS may be the international standards for public sector accounting, but they cannot claim to represent best practice as, to my knowledge, not a single country has yet implemented them. This does appear to represent a serious flaw which it is hoped the current review of the Cash Basis IPSAS will address.

The key problem is the mandatory requirement of the Cash Basis IPSAS to produce consolidated accounts which include all controlled entities (including government companies, business enterprises and all parastatal organisations). Many countries have decided that this is not practically possible, is too onerous or would produce misleading information. This includes a number of governments who would otherwise like to have implemented the Cash IPSAS including India, Malaysia, Mongolia, Ghana, Uganda and Malta.

The global recession has indicated that there are still serious flaws with private sector accounting - it did not disclose the toxic debts, for example. This is an additional reason for concluding that the private sector approach to accounting is not appropriate for the public sector.

What is needed is some extensive research to identify current best practice in public sector accounting and to codify this. We need to develop international standards, from the bottom up, based on existing best practice not on pre-conceived ideas borrowed from the private sector.

We also need to ensure that cost effective standards and approaches are adopted. These should be based on independent and authoritative research into the actual benefits achieved from the implementation of the proposed approaches. This type of evidence, from the UK, for example shows that the adoption of accrual accounting involved significant costs and the benefits were limited - see http://tinyurl.com/ceuj72

Andy has rightly pointed out that including the controlled entities is a bottleneck for countries to go in for cash IPSAS. I agree, more research and study of best practices need to be given attention for a model code of procedures and practice on IPSAS. It is time to track down and assimilate good ideas that exist beyond the radar of the IPSAS.

Also, I think, there is an issue about the accounting treatment of grants released by the national government, for capital expenditure (as well as social infrastructure to some extent)abs assets creation by the sub-national tiers of the government and controlled entities (in IPSAS as well as GFS). If treated as current expenditure, the accounting and budget performance looks skewed!

Sailendra! Good and informative write up!

Best practice in budgeting requires that a government's budget be comprehensive and transparent. If that is the case, the same should apply to governments’ annual financial statements. Annual financial statements need to report on the budget comprehensively so that the legislature can review the management of all revenues and expenditures and monitor the performance of all government entities – including government controlled entities such as state-owned enterprises. Entities need to be monitored as individual entities and collectively as the government as a whole, the latter because parliament needs to review the overall financial position of government.

There is no doubt that the production of consolidated financial statements is a difficult exercise, but it is necessary to produce meaningful financial statements that properly present the financial position of the government. The inclusion of controlled entity data into consolidated financial statements should not provide misleading information; the opposite should be true. Consolidated financial statements present the overall financial health of the government and are a guide for parliament and the public of how well the government is performing its stewardship function. To be able to use financial statements for this purpose they need to properly include the surplus or deficit of controlled entities on consolidation. Macro economists, for the purpose of developing macroeconomic policies may wish to exclude the surplus or deficit of government controlled bodies for that purpse. However, to exclude this information from consolidated financial statements could mislead parliament and the public on the use of government monies and the financial health of the government.

Developing nations are having difficulty in adopting internationally recognized standards of best practice in public financial management including International Public Sector Accounting Standards (IPSAS). The reasons for this are many and include capacity limitations and the political environment. Additionally, modern day accounting is a complex discipline not made any easier by accounting standards that choose to use unnecessarily complex language. In this regard IPSAS, both cash and accrual could be improved to provide better guidance to countries, especially developing countries in their efforts to produce meaningful financial information. However, any improvements should not mean less comprehensiveness and transparency

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