COMMISSION STAFF WORKING DOCUMENT

Accompanying the document

Report from the Commission to the Council and the European Parliament

Towards implementing harmonised public sector accounting standards in Member States The suitability of IPSAS for the Member States

TABLE OF CONTENTS

CHAPTER 1................................................................................................................................ 5

1........... Background and rationale for the assessment................................................................... 5

1.1........ The appropriateness of the accruals principle is indisputable, be it for macro or micro fiscal monitoring 5

1.2........ Towards a harmonised accounting standard?................................................................... 8

1.3........ Overview of the staff working document.......................................................................... 8

CHAPTER 2.............................................................................................................................. 11

2........... Description of IPSAS standards.................................................................................... 11

2.1........ Introduction.................................................................................................................. 11

2.2........ Suite of standards......................................................................................................... 12

2.3........ The features of the standards......................................................................................... 15

2.4........ The process of IPSAS standard-setting......................................................................... 32

2.5........ Structure, organisation and governance arrangements of the IPSAS Board..................... 35

Annex 2.1: Schematic representation of the IPSAS standards, grouped by their main focus........... 39

Annex 2.2: References concerning the IPSAS standards.............................................................. 40

CHAPTER 3.............................................................................................................................. 42

3........... Current state of play in public accounting and auditing in the EU..................................... 42

3.1........ Diversity within and across the Member States.............................................................. 42

3.2........ Overview of public sector accounting practices.............................................................. 42

3.3........ Links to IPSAS in the government accounting systems of the Member States................. 44

3.4........ Public sector accounting and auditing in each Member State.......................................... 47

CHAPTER 4.............................................................................................................................. 71

4........... The relationship between Government Finance Statistics and IPSAS.............................. 71

4.1........ Introduction.................................................................................................................. 71

4.2........ Background.................................................................................................................. 71

4.3........ Conceptual differences between IPSASs and statistical guidelines.................................. 72

4.4........ Presentational differences.............................................................................................. 75

4.5........ Latest initiatives............................................................................................................ 76

4.6........ Commission considerations........................................................................................... 77

CHAPTER 5.............................................................................................................................. 79

5........... IPSAS and accruals implementation processes.............................................................. 79

5.1........ Introduction.................................................................................................................. 79

5.2........ Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities — IPSASB Study 14...................................................................................................................... 79

5.3........ First-time adoption project of IPSAS Board................................................................. 84

5.4........ Views expressed on process and timetable in the public consultation.............................. 85

5.5........ Implementation experiences.......................................................................................... 86

5.6........ Cost of adopting accruals accounting as experienced or estimated by countries.............. 93

Annex 5.1: Cost of accruals implementation................................................................................. 96

CHAPTER 6.............................................................................................................................. 98

6........... The need for harmonised standards and suitability of IPSAS.......................................... 98

6.1........ Advantages of harmonised accruals-based public accounting standards.......................... 98

6.2........ Advantages and disadvantages of IPSASs as the harmonised standards....................... 102

6.3........ Benefits and costs of implementing IPSAS or other harmonised accruals accounting standards 109

6.4........ Conclusions concerning the IPSAS standards, governance and resources..................... 110

Annex 6.1: Detailed comments on the substance of certain IPSASs............................................ 112

Annex 6.2: Experience of adopting IFRS in the EU.................................................................... 116

Annex 6.3: Adoption process for accounting rules applicable to EU institutions and bodies......... 119

Annex 6.4: List of IPSASs and related accounting rules applicable to EU institutions and bodies. 120

CHAPTER 7............................................................................................................................ 122

7........... How to move towards implementing EPSAS?............................................................. 122

7.1........ European Public Sector Accounting Standards — EPSAS.......................................... 122

7.2........ Governance of a future EPSAS................................................................................... 122

7.3........ A process and a timetable towards EPSAS................................................................. 122

Annex 7.1: A possible classification of the IPSAS standards...................................................... 125

CHAPTER 1

1. Background and rationale for the assessment

This staff working document accompanies the Report from the Commission to the Council and the European Parliament responding to the request in Article 16(3) of Council Directive 2011/85/EU on requirements for budgetary frameworks of the Member States that ‘by 31 December 2012, the Commission shall assess the suitability of the International Public Sector Accounting Standards for the Member States’.

In the current context of the financial crisis, the role of fiscal discipline in safeguarding economic and monetary union is evident. The corollary of this is that monitoring fiscal discipline should rely on high-quality measurement of the fiscal situation of each Member State. Financial stability is based on trust, and lack of trust in the way the financial situation of the government of Greece was measured has been one element in the sovereign debt crisis. These concerns are reflected in Article 126 of the Treaty on the Functioning of the European Union (TFEU). More rigorous monitoring of the fiscal situation and building better tools to measure and forecast this fiscal situation are the focus of Directive 2011/85/EU[1], of the so-called 6-pack and the 2-pack legislative packages[2], and of the present staff working document.

This document discusses how one of these tools, the possible role of harmonised accruals-based EU public sector accounting standards, can be used to build this trust.

1.1. The appropriateness of the accruals principle is indisputable, be it for macro or micro fiscal monitoring

There are two principle methods of accounting — cash and accruals — which differ as to the time at which a transaction is recorded. Cash-based accounts record transactions when the amount is received or paid. Accruals-based accounts record when the transaction occurs, regardless of when the payment is actually received or made. Financial management, whether at the macro level (general government) or at the micro level (the government entity) should be based on the principle of accruals accounting. It is important, nevertheless, to note that moving to accruals-based accounts need not mean that the cash basis is abandoned. Cash data remain important, and in many Member States they are used as the basis for government budgeting.

The macro level is already accruals based …

Currently, fiscal monitoring at EU macro level uses a statistical framework. Article 126 TFEU states that ‘Member States shall avoid excessive government deficits’ and requires the Commission to monitor the ratio of planned or actual government deficit, and the ratio of government debt, to gross domestic product. Neither of these indicators should in principle exceed the reference values specified in Protocol No 12 on the excessive deficit procedure, annexed to the Treaties. The Protocol defines these values as 3 % and 60 %, respectively, for deficit and debt, and lays down the requirement that they follow the definitions of the European System of Integrated Economic Accounts (ESA 95), which is the statistical framework for describing the economy.

ESA 95 records flows on an accruals basis, which it defines as ‘when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled’. Data based on accruals accounting are indispensable for macro-economic analysis, and in particular for analysing the fiscal situation of general government as a macro agent. GDP, the principal indicator in national accounts, is the aggregate sum of all the outputs of the economy. Output in national accounts is measured on an accruals basis as the economic value created during the reference period, whether or not this output was actually sold during the period. Thus, rather than record output as equal to sales (cash basis), market output is measured as sales plus changes in inventories (accruals basis). Starting with this fundamental way of recording output, the accruals-based approach to measurement is followed throughout the system of national accounts, including for general government.

Accruals accounting is indispensable to the sound monitoring of macro-economic fiscal policy, as it links the accounting recording to the moment the policy is decided and implemented. For example, a VAT rate increase implemented in December will most probably lead to a rise in government cash revenues only in January, taking into account the delay in collecting the tax. However, in accruals accounting this increase in revenue will already start to be recorded in December, to reflect the fact that taxpayers will have already started to pay the higher tax in December. Also, as for a private company, accruals accounting makes it possible to assess the correct balance sheet position of a government at the end of the period, because it takes into account all obligations and claims due at this date, as well as other assets. In the VAT example above, the asset side of the balance sheet at end-December is boosted by the potential VAT to be paid in January. Accruals accounting also makes it possible to relate the change in the balance sheet to revenues and expenses generated during the period. Moreover, accruals accounting in the public sector is a useful tool to avoid some of the window-dressing that is made possible by cash accounting, where payments can be advanced or postponed in order to record them in the period of the government's choosing. Finally, the important advantage of accruals over cash accounting is that both assets and liabilities are consistently recorded, making it possible to have a complete and consistent picture of the real financial position and of whether it is sustainable.

It is because of these advantages that policymakers opted to use ESA 95 as the accounting framework for fiscal monitoring under the Maastricht Treaty, and why this document takes it as given that macro fiscal reporting should be accruals based.

… and accruals accounting is also essential at micro level …

Whatever is true for macro-economic accounts for the entire general government sector, which is composed of thousands of micro-entities, should also apply to those micro-entities (or at least those of economic significance). Compiling accruals-based accounts for central government budget entities, or for government agencies or large municipalities, is essential to enable the managers of these entities to monitor their economic and balance sheet performances.

There have been a number of initiatives around the world over recent decades, seeking to improve the way public money is used, and to make public entities more accountable. Using accruals accounting to measure the assets and liabilities of government entities can provide answers to essential questions, such as: What are the important assets and liabilities of government entities and how effectively are they managed? Has the financial position improved or deteriorated during a certain period? How vulnerable are government entities to changing economic conditions and financial adversity?

In the interests of accountability, government entities should report on their use of public resources. This should include information that enables citizens and their representatives to assess (a) how the entity has carried out its responsibilities for managing public resources, (b) how those resources have been used to deliver the entity’s objectives, and (c) compliance with the necessary controls regulating the use of public money. Such reporting informs economic, political and social decision-making. While individual citizens, and other non-expert users of general purpose financial reports, may have little or no direct capacity to make resource allocation decisions concerning individual government entities, their elected representatives may do.

In summary, the implications of not having robust and transparent accruals accounting for financial reporting and financial management may include an increased risk that government services are being delivered ineffectively or inefficiently, and that investment decisions do not take full account of the potential costs and benefits, for example because they are made with a short-term focus, without paying due regard to their full future costs and benefits. Robust accounting standards are important to ensure that, in difficult financial times, the reported financial information remains both reliable and credible (i.e. trustworthy and accepted as such). Strong standards reduce the scope and the temptation to manipulate information in order to hide problems. The sooner a problem is recognised the sooner it can be addressed. Having early warning of problems often means that their impact is much less than otherwise.

Accruals accounting which conforms to robust accounting standards provides the transparency needed for markets to function properly, without which investors in government securities might enter into transactions without a proper understanding of the level of associated risk. This in turn could create a contagion risk, acting as a significant impediment to financial stability. Transparent financial reporting leads to greater market confidence and lower interest costs.

… finally, micro and macro can converge on the principle of accruals accounting

Accruals accounting is the basis for all macro statistical accounting, such as in the ESA, since it is best suited for analysis, surveillance and policy advice. But the ESA is a macro statistical framework. It is not applicable at the micro level of individual entities. Thus, compiling ESA accounts means using the available entity-level accounts, which have themselves been compiled according to national government accounting standards, and transforming them into ESA terms. When these national government accounting standards are cash-based there is a need to transform them into accruals data, and this can create many difficulties[3]. Having entity-level audited financial reporting data on an accruals basis would substantially reduce the risk of systematic errors in the data used for preparing government finance statistics and hence in the data used for policy-making.

Overall, the case for the ‘principle’ of accruals accounting at macro and micro levels is clear. This document will therefore dwell no further on the ‘principle’ of accruals but rather consider the question ‘which accruals-based system?’

1.2. Towards a harmonised accounting standard?

Member States are legally bound to adhere to the statistical principles and quality criteria laid down in Article 338(2) TFEU. However, even where accruals-based public accounting data are available, there is currently a lack of comparability and coherence between the government accounting standards applied in different Member States, and even within individual Member States. Having common accounting standards would ensure higher-quality and more transparent financial reporting, giving reassurance that government accounts provide a complete and comparable view of the financial position and performance of each Member State, and imparting international acceptance and legitimacy. In the context of enhanced budget integration within the EU, common high-quality accruals standards could be an essential tool for achieving the necessary reliability and comparability of the reported information.

The Excessive Deficit Procedure (EDP) ‘macro’ statistics would be considerably improved by requiring all government entities to use the same accounting standards. It would enable a common bridge table to be used between the upstream accounts and the ESA accounts; this would greatly facilitate the work needed to produce data of the highest quality, as well as the verification process. Having integrated revenue/expenditure and balance sheets would make it easier to eliminate statistical discrepancies. There would be in-built information on contingent liabilities. It would facilitate the emergence of a network of European auditors, able to share their resources, training, and experience in applying a single set of accounting standards. These developments would advance the internal market in financial services, including ancillary services related to public sector auditing. Last but not least, it could pave the way, in the medium term, to a fully integrated public finance system, in which macro accounts could finally be built by aggregating harmonised micro accounts.

This document therefore focuses on the case for harmonised public sector accounting standards in the EU. What it boils down to is ‘Are the IPSASs a suitable set for these future harmonised public accounting standards for the EU Member States?’

1.3. Overview of the staff working document

1.3.1. Description of IPSAS

Chapter 2 describes the International Public Sector Accounting Standards (IPSAS). The links between the private and public sectors in all EU countries create a strong need for connected financial reporting between these sectors, and accruals accounting systems such as IPSAS are very strongly connected to private sector accounting standards. Governments need to achieve the same high quality and transparency of financial reporting as the private sector. IPSASs are developed by the International Public Sector Accounting Standards Board, which is a standing committee of the International Federation of Accountants. They aim ‘to enhance the quality and transparency of public sector financial reporting’. The process of standard setting, the governance of IPSAS and the 32 accruals-based standards are described, along with one cash-based standard.

1.3.2. Current state of play in public accounting and auditing in the EU

ESA data are derived from Member States’ public accounting data, which vary from purely cash-based to full accruals, passing through many intermediate mixed modes. In practice a wide range of accounting systems are used across the EU and even in different government entities within individual countries. Chapter 3 of this document gives an overview of government accounting and auditing practices in the EU Member States.

1.3.3. The relationship between GFS and IPSAS

The United Nations System of National Accounts (SNA) 2008 discusses the links between national accounts and business accounting practices and recognises ‘the increasing use of international accounting standards by corporations and in the public sector’[4]. In particular it frequently refers to ‘the International Public Sector Accounting Standards Board (IPSASB) norms. In several cases, notably on pension liabilities and intangible assets, the feasibility of including certain items in the SNA is dependent on the application of the international accounting standards’[5]. The ESA, which is the European version of the SNA, also considers that ‘In order to extract information from business accounts, national accountants should understand the international accounting standards for private corporations and for government bodies. The standards for private corporations are drawn up and maintained by the International Accounting Standards Board (IASB), and for government bodies, by the International Public Sector Accounting Standards Board (IPSASB)’[6].

However, the accruals standards that have been developed for the SNA or the ESA are not fully consistent with the accruals standards developed under IPSAS. Chapter 4 of this document gives an overview of the relationship between IPSAS and SNA/ESA-based government finance statistics.

1.3.4. IPSAS and accruals implementation processes

Chapter 5 gives an overview of previous work by the IPSAS Board to facilitate the transition to the accruals basis of accounting, and of their ongoing project on ‘First-time adoption’.

This chapter also summarises the views expressed on the adoption process and on the timetable in the Commission’s public consultation on the suitability of IPSAS for adoption by Member States[7], which was held in the context of this assessment, and which provides an overview of the costs experienced by countries and entities which have undertaken an accruals implementation project.

1.3.5. Advantages and disadvantages of IPSAS adoption

In practice IPSAS has some important advantages and disadvantages as a reference for the general government entities of EU Member States. The pros and cons of each of the 32 accruals-based standards and of adopting the suite as a whole are discussed in Chapter 6. This part of the document draws on the results of a public consultation and on the focused discussions within a task force composed of experts and practitioners from the Member States.

There is an annex detailing the process used for adopting IFRS accounting standards for the private sector in the EU, and a description of the process used to adopt the accounting rules applicable to the Institutions and other bodies of the EU, which are based on IPSAS[8].

1.3.6. Conclusions, proposals and timetable

Chapter 7 of this document presents the Commission’s conclusions. It sets out the expected benefits, summarises the available information on costs, and discusses the conditions and a possible timetable for adopting harmonised accounting standards for all entities of general government in the EU Member States.

CHAPTER 2

2. Description of IPSAS standards

2.1. Introduction

The International Public Sector Accounting Standards (IPSASs) are accounting standards developed by the International Public Sector Accounting Standards Board, a standing committee of the International Federation of Accountants (IFAC). IFAC is an international body representing 167 member bodies in 127 countries. Its aim is ‘strengthening the accountancy profession around the world by developing high quality professional standards’. IFAC established the Public Sector Committee, the predecessor of the IPSAS Board, as the standard-setting body for public sector entities in 1987; it initiated the standard-setting programme in 1996.

IPSAS are a set of accounting standards that, according to the IPSAS Board’s mission statement, aim ‘to enhance the quality and transparency of public sector financial reporting’. This objective is to be achieved by:

· ‘Establishing high-quality standards for use by public sector entities;

· Promoting the acceptance, and the international convergence to, IPSASs;

· Providing comprehensive information for public sector financial management and decision making; and

· Providing guidance on issues and experiences in financial reporting in the public sector’[9].

The standards are accruals based, with the exception of one standard which addresses cash-based accounting[10].

They set out recognition, measurement, presentation and disclosure requirements in relation to ‘General Purpose Financial Reporting’ (GPFR), and related financial disclosures, in a government’s annual reporting.

GPFR comprises not only financial statements (referred to as General Purpose Financial Statements [GPFS]) but also refers to all financial reports intended to provide information that is relevant to the needs of users[11].

In some cases the IPSAS Board may issue non-binding guidance on general purpose financial reporting. It may include non-financial, post and prospective financial, compliance, and additional explanatory information[12].

The core of financial reporting under IPSASs consists of:

· The statement of financial position (IPSAS 1);

· The statement of financial performance (IPSAS 1);

· The cash flow statement (IPSAS 2);

· The statement of changes in net assets/equity (IPSAS 1); and

· The notes to the financial statements, or annex (IPSAS 1).

IPSASs are applicable by governments at national and regional level (e.g. state, provincial, territorial governments), as well as at local level (e.g. municipalities, towns) and related government entities (e.g. agencies, funds, extra-budgetary entities). IPSAS standards are also used by some intergovernmental organisations, but are not designed to apply to government business enterprises (GBEs)[13].

2.2. Suite of standards

Currently there are 32 IPSAS standards on the accruals basis of accounting. They are numbered by order of issuance. Further standards are being developed.

The majority of these accruals-based standards, where there are no public sector specificities to take into account, are based primarily on existing International Financial Reporting Standards (IFRS), in line with the explicit and overarching aim of convergence between IPSAS and IFRS[14]. This is intended to ensure that most transactions common to the private and the public sector are accounted for in the same way.

Public sector-specific standards

In some cases adaptations to IFRSs are needed to meet the specific requirements of the public sector. Where there is no corresponding IFRS to meet a particular public sector requirement, the IPSAS Board issues a new specific public-sector-oriented IPSAS.

IPSASs which have been issued on public sector-specific topics so far and which do not have an equivalent in IFRS are:

IPSAS 21 Impairment of non-cash-generating assets

IPSAS 22 Disclosure of information about the general government sector

IPSAS 23 Revenues from non-exchange transactions (taxes and transfers)

IPSAS 24 Presentation of budget information

IPSAS 32 Service concession arrangements (public-private partnerships).

To enhance initiatives of common interest, the International Accounting Standards Board (IASB) and IFAC signed a memorandum of understanding in 2011 which defined their respective roles in the standard-setting process and in terms of communication and cooperation between them, including in the area of public sector accounting standards.

Any entity wishing to declare itself ‘IPSAS compliant’ must apply all IPSAS standards.

IPSAS measurement bases

Since measurement bases for the different types of assets and liabilities are a key aspect of many IPSASs, a brief description of them precedes the summary of the standards.

The measurement basis determines the value or amount at which an asset or liability is stated at initial recognition and subsequently in financial statements. The principal measurement bases used in IPSAS correspond to those of IFRS[15]. They are:

(a) historical cost (cost); and

(b) fair value and, related to that, market value.

Historical cost represents the amount of cash or cash equivalents paid to acquire the asset (it is an entity-specific rather than market-based price). In the context of property, plant and equipment, historical cost includes the transaction costs and any directly attributable costs associated with bringing the asset to the location and up to the condition necessary for it to be capable of operating in the manner intended by management.

Where assets are purchased in exchange transactions, a historical cost measurement is easily obtainable and simple to apply. Issues arise when assets are not purchased in a single straightforward transaction or when they are constructed by the entity, where many costs (e.g. labour, materials, energy) have to be allocated. Where several assets are acquired in a single transaction, the price paid must be allocated to the individual assets. Moreover, where assets are subsidised or contributed, a transaction price, even if available, would not faithfully represent historical cost. IPSAS therefore specify that where an asset is acquired through a non-exchange transaction, its cost is deemed to be its fair value at the date of acquisition.

Liabilities measured on the historical cost basis are stated at the amount received in the transaction under which the obligation is assumed.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction. The definition applies equally to buyers and sellers.

In the absence of market-based evidence, because of the specialised nature of certain items of plant and equipment, fair value may need to be estimated by using a surrogate such as depreciated replacement cost or reproduction cost.

Similar to fair value, IPSAS also defines market value as the amount obtainable from the sale, or payable on the acquisition, of a financial instrument in an active market. It therefore reflects the economic and financial environment prevailing at the reporting date.

Fair value is used as the initial measurement basis for financial instruments[16]. It is also the subsequent measurement basis for many financial instruments, especially financial assets (most financial liabilities are subsequently measured at amortised cost using the effective interest method). IPSAS 17 — Property, plant and equipment — allows both the cost model or fair value under the revaluation model, for measurement after initial recognition.

Where markets are active and liquid, fair value measurement is likely be straightforward to apply.

However, in some cases, a market price may not be directly observable. In such cases, observable market-based information may, where available, be used to estimate fair value, but there are cases where valuation models do not rely on observable data. For example, the fair valuation of highly specialised assets (which are encountered frequently in the public sector) or of heritage assets may require more challenging valuation techniques.

In the case of non-exchange transactions (where an asset is acquired for free or at a very low price or where the asset is donated) IPSAS takes the approach that fair value (as at the date of acquisition) is more faithful, representing the actual value received by the entity as a result of the transaction.

Other measurement bases and measurement approaches in IPSAS include amortised cost, current replacement cost (for inventories), net realisable value, settlement amount, recoverable amount, and present value, the definitions of which are, in the IPSAS glossary:[17]

Amortised cost of a financial asset or financial liability: The amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability.

Current replacement cost: The cost the entity would incur to acquire the asset on the reporting date[18].

Net realisable value: The estimated selling price in the ordinary course of operations, less the estimated costs of completion and the estimated costs necessary to make the sale, exchange or distribution.

Settlement amount: The best estimate required to settle the present obligation in recognition of provisions, and defined as the amount that an entity would rationally pay to settle the obligation at the reporting date or to transfer it to a third party at that time.

Recoverable amount (of an asset or a cash-generating unit): The higher of an asset’s or a cash-generating unit’s fair value less costs to sell and its value in use.

Recoverable amount (of property, plant, and equipment): The higher of a cash-generating asset’s fair value less costs to sell and its value in use.

Recoverable service amount: The higher of a non-cash-generating asset’s fair value less costs to sell and its value in use.

Present value: The discounted cash flows expected to be generated by the asset in the ordinary course of operations. Accordingly, the present value of a liability comprises the discounted cash flows required to be paid to settle the liability in the ordinary course of operations. This measurement basis is used, for example, for measuring provisions where the effect of the time value of money relating to the settlement of the obligation is material. Specific examples of present value are given by IPSAS 21 and 26 for measuring value in use of non-cash-generating assets and cash-generating assets respectively.

More details on these measurement bases and approaches can be found in the description of the standards in the next section of this document.

The IPSAS Board has recently issued an Exposure Draft, Measurement of Assets and Liabilities in Financial Statements, which considers appropriate measurement bases for assets and liabilities, dependent on the economic circumstances. When finalised, this might lead to a change in the measurement bases used in IPSASs. Any change in existing requirements will be preceded by a thorough due process[19].

2.3. The features of the standards

The 2012 edition of the Handbook of International Public Sector Accounting Pronouncements, which contains the text of each IPSAS and other explanatory material, is available at:

https://www.ifac.org/publications-resources/2012-handbook-international-public-sector-accounting-pronouncements

Short summaries of the accruals standards are provided below. They draw on the information on the IPSAS Board website, in the IPSAS Board handbooks and in other published summaries, to which references are given at the end of this chapter.

IPSAS 1: Presentation of financial statements

IPSAS 1 occupies a key position among the current 32 IPSAS standards in that it sets the objective and the elements required for the presentation of general purpose financial statements (GPFS) by public entities under the IPSAS accruals basis of accounting[20].

IPSAS 1 requires a fair representation of the financial position, financial performance and cash flows of an entity. This implies the faithful representation of the effects of relevant transactions, other events and conditions in accordance with IPSAS definition and recognition criteria.

In order to comply with this requirement an entity must comply with general qualitative characteristics which derive inspiration from generally accepted accounting practices and which apply to all IPSAS.

The standard also specifies that an entity can only claim IPSAS compliance when it complies with the requirements of all IPSASs.

The IPSAS qualitative characterises are:

· understandability

· relevance

· materiality

· reliability

· faithful representation

· substance over form

· neutrality

· prudence

· completeness

· comparability (across time and between entities)[21].

The standard expressly recognises constraints and trade-offs concerning the relevance and the reliability requirements and more specifically with regard to:

· timeliness

· balance between benefit and costs

· balance between qualitative characteristics.

It also gives definitions of key accounting terms, such as assets, liabilities, future economic benefits or service potential, net assets/equity, revenue, expense, economic entity, government business enterprise, and materiality. It gives general guidelines on how to apply the going concern concept, the consistency of presentation, materiality and aggregation, offsetting and comparative information.

GPFS must comprise the following components:

· a statement of financial position (balance sheet)

· a statement of financial performance

· a statement of net assets/equity

· a cash-flow statement

· a comparison of budget and actual amounts, if the budget is published

· notes on the basis of the preparation of the statements, accounting policies, disclosures, supplementing and explanatory information.

IPSAS 1 lays down minimum requirements on the presentation of financial position and financial performance line items. It also specifies further minimum requirements on the presentation of financial statements, notably with respect to periodicity (at least annual), the coverage of the main financial statements and the classifications to be used within them. With regard to classifications, the items on the statement of financial position (balance sheet) should be classified by maturity (as an exception, classification by liquidity applies when this provides more reliable and relevant information), and there is a choice of how to break down expenses in the statement of financial performance (income statement): between nature and function[22].

An illustrative financial statement structure is appended to the implementation guidance.

IPSAS 2: Cash flow statement

This standard requires the reporting of changes in the entity’s cash and cash equivalents during a given period.

The statement of cash flow must identify the sources of cash inflows, the items on which cash was expended during the period (outflows), and the cash and cash equivalents balance as of the reporting date.

It should classify activities as operating (i.e. from taxes, sales of goods and services, etc.), investing (i.e. cash flow related to property, plant, equipment and other long-term assets, equity or debt instruments, loans, futures contracts, etc.), or financing (i.e. flows related to short or long-term borrowing).

Two methods for compiling the cash flow statement from operating activities are allowed: the direct method (recommended), and the indirect method.

Under the direct method major classes of gross cash receipts and gross cash payments are disclosed. Entities reporting cash flows from operating activities using the direct method are also encouraged to provide a reconciliation of the surplus /deficit from ordinary activities with the net cash flow from operating activities.

Illustrative examples of cash flow-statements are appended to the standard.

IPSAS 3 Accounting policies, changes in accounting estimates and errors

This standard sets the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of errors.

Accounting policies are the principles, bases, conventions, rules and practices applied by an entity in the preparation and presentation of financial statements. Changes in accounting estimates are adjustments to the carrying amount of assets and liabilities or changes in the useful life of an asset which result from new and more reliable and relevant information and that, accordingly, do not constitute corrections of errors.

The standard provides for a situation where there is no applicable IPSAS available for a transaction, other event or condition.

It prescribes a basis for management judgment in choosing accounting policies — to comply with the qualitative characteristics set out in IPSAS 1 — including the following elements:

(1) IPSASs and any relevant implementation guidance dealing with similar and related issues;

(2) The definitions, and recognition and measurement criteria, for assets, liabilities, revenue and expenses described in other IPSASs; and

(3) The most recent pronouncements of other standard-setters, notably IFRS, and accepted public and private sector practices.

The standard also deals with the correction of material prior-period errors. These are to be corrected retrospectively in the financial statements for one or more prior periods after their discovery, by restating the comparative amounts for the prior periods in which the error occurred, or by restating the opening statement of financial position if the error occurred before the earliest period presented. There are recognised limitations and constraints in respect of retrospective application and retrospective restatement.

IPSAS 4 The effects of changes in foreign exchange rates

This standard prescribes how entities should account for their foreign currency transactions and foreign operations in their financial statements, and how an entity may translate financial statements into a ‘presentation currency’ (the currency in which the financial statements are presented). This differs from the functional currency, which is the currency of the primary economic environment in which the entity operates. The standard sets the rules for general issues such as the exchange rates to be used (in general spot rates at the time of transaction or position) and the accounting treatment of changes in exchange rates.

IPSAS 5 Borrowing costs

This standard prescribes the accounting treatment for borrowing costs, which include interest and other related expenses (i.e. amortisation of discounts or premiums on borrowings) incurred by an entity in connection with the borrowing of funds.

Two accounting treatments are allowed:

(1) The expense model (benchmark treatment) under which all borrowing costs are recognised as expenses in the period when they are incurred; and

(2) The capitalisation model (alternative treatment) under which borrowing costs directly attributable to the acquisition or construction or production of a qualifying asset as part of the cost of the asset are capitalised, but only when it is probable that these costs will result in future economic benefits or service potential to the entity, and the costs can be measured reliably. Examples of qualified assets include office buildings, hospitals, and infrastructure assets.

IPSAS 6 Consolidated and separate financial statements

This standard sets requirements for preparing and presenting consolidated financial statements for an economic entity under the accruals basis of accounting. Together with IPSAS 7 and 8 it also prescribes how to account for investments in controlled entities, jointly controlled entities and associates in separate financial statements.

The standard defines ‘control’ as the power to govern the financial and operating policies of another entity so as to benefit from its activities.

Consolidated financial statements are financial statements of an economic entity defined as a group that includes one or more controlled entities, based on a line-by-line aggregation of similar or identical financial and non-financial items (proportionate method). The only exception is for controlled entities where control is intended to be temporary and held for disposal within 12 months and for which management is actively seeking a buyer.

Minority interests are accounted for separately in net assets/equity.

IPSAS 7 Investments in associates

This standard provides the basis for accounting by an investor where the investment in the associate takes the form of a shareholding or other formal equity investment.

It applies to all investments in which an investor has significant influence (except for a venture capital organisation or a mutual fund, unit trust or similar entity, such as an investment-linked insurance fund, which are measured at fair value).

Significant influence is defined as the power to participate in the financial and operating policy decisions of the investee, but not to exercise control or joint control over those policies. It is presumed to be present if the investment held, directly or indirectly, is 20 % or more of the voting power over the associate.

The equity method is used for all investments in such associates. Under the equity method, the investment is initially recorded at cost. It is subsequently adjusted according to the investor’s share of the investee’s post-acquisition change in net assets/equity. The investor’s statement of financial performance reflects in its surplus/deficit its share of the investee’s surplus or deficit.

IPSAS 8 Interests in joint ventures

This standard prescribes the accounting treatment required for interests in joint ventures, regardless of the structures or legal forms within which the joint venture takes place. It applies to all investments in which the investor has joint control, which is defined as the agreed sharing of control of two or more parties over an activity by a binding arrangement.

Joint ventures may be classified as jointly controlled operations, jointly controlled assets and jointly controlled entities.

Different accounting treatments apply for each of these types of joint venture. For jointly controlled entities, two accounting policies are permitted: the proportionate consolidation method (see the description under IPSAS 6) and the equity method (see the description under IPSAS 7).

IPSAS 9 Revenue from exchange transactions

This standard prescribes the accounting treatment for revenue arising from exchange transactions and events.

Exchange transactions are defined as transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to the other party in exchange.

The general principles are that revenue is recognised when it is probable that economic benefits or service potential will flow to the entity, and the amount of the revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable.

When revenue is from the rendering of services and the outcome can be reliably estimated, the reference is to the stage of completion of the transaction at the reporting date. For practical reasons, the standard allows recognition on a straight-line basis over the specified timeframe.

Revenue from the sale of goods can be recognised, subject to the general principles, when: significant risks and rewards have been transferred to the purchaser; there is a loss of effective control by the seller over the good sold; the amount of revenue and the costs incurred or to be incurred in respect of the transaction can be reliably measured; and it is probable that the economic benefits or service potential associated with the transaction will flow to the entity.

Interest is to be recognised on a time proportion basis that takes into account the effective yield on the asset; royalties are recognised as they are earned in accordance with the substance of the relevant agreement; and dividends or their equivalents are to be recognised when the shareholder’s or the entity’s right to receive payment is established.

IPSAS 10 Financial reporting in hyperinflationary economies

This standard concerns entities reporting in the currency of a hyperinflationary economy, to ensure that the information provided in any financial statement (including the consolidated financial statement) is meaningful.

Any non-monetary items that are not carried at amounts current at the reporting date (such as net realisable value and fair value) must be restated to amounts which are current at the reporting date by applying a general price index. The surplus or deficit from the net monetary position must be disclosed separately in the statement of financial performance.

IPSAS 11 Construction contracts

This standard prescribes the accounting treatment for revenue and costs associated with construction contracts for cases where the public sector entity acts as a contractor. It gives guidelines on items to include in contract costs and contract revenue.

When the outcome of a construction contract can be reliably estimated, the standard rules are for accounting under the ‘stage of completion’ method, according to which revenue and costs are to be recognised by reference to the stage of completion of contract activity at the reporting date (percentage of completion method). If the outcome cannot be reliably estimated, revenue is recognised only to the extent of contract costs which have been incurred and that will probably be recoverable, and contract costs are recognised as expenses in the period in which they are incurred.

IPSAS 12 Inventories

This standard prescribes the accounting treatment of inventories, notably the amount of costs to be recognised as an asset and carried forward until the related revenues are recognised. The inventories to be covered include goods specifically related to the public sector, such as goods purchased or produced for distribution for ‘no charge or for a nominal charge’, as well as strategic stockpiles and weapons.

Inventories outside the scope of this standard include work in progress under construction contracts (covered by IPSAS 11), financial instruments (covered by IPSAS 28 and 29), biological assets and agricultural produce (covered by IPSAS 27), work in progress of services to be provided for no or a nominal charge directly in return from the recipients.

Initial measurement is in general at cost. Inventories are subsequently to be measured at the lower of cost and net realisable value. Where inventories are acquired through a non-exchange transaction, their cost is to be measured as their fair value at the date of acquisition. However, inventories are required to be measured at the lower of cost and current replacement cost where they are held for distribution at no charge or for a nominal charge or for consumption in the production process of goods to be distributed at no charge or for a nominal charge.

When inventories are sold, exchanged or distributed, the carrying amount is to be recognised as an expense in the period in which the related revenue is recognised. If there is no related revenue, the expense is recognised when the goods are distributed or related services have been rendered.

IPSAS 13 Leases

This standard prescribes, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases.

The classification of leases depends on the substance of the transaction rather than the form of the contract. A lease is classified as a finance lease if it transfers substantially all risks and rewards incidental to ownership of an asset. The title may or may not be eventually transferred. Examples of criteria that lead to such a classification are:

· The lease covers the major part of the asset’s life, or the lessee has the option to purchase the asset at a price sufficiently lower than fair value so that it is reasonably certain that the option will be exercised;

· The ownership is transferred at the end of lease term;

· The present value of lease payments is substantially equal to or greater than the leased asset’s fair value.

All other leases are classified as operating leases.

The standard does not cover leases related to exploring non-regenerative resources, licensing agreements for intellectual property and copyrights, investment property covered under IPSAS 16, and certain leases related to biological assets covered under IPSAS 27.

The standard sets the rules of accounting for the leased asset, the outstanding liabilities, the lease payments and the finance revenue in the financial statements of the two parties, for each of the two categories of lease.

IPSAS 14 Events after the reporting date

This standard concerns events, favourable or not for the entity, that occur between the reporting date and the date when the financial statement is authorised for issue.

Events after the reporting date that provide evidence of conditions that existed at the reporting date are considered to be ‘adjusting events’; events after the reporting date that indicate conditions arising only after the reporting date are considered to be ‘non-adjusting events’.

The reporting date is the last day of the reporting period to which the financial statements relate. The date for authorisation for issue is the date on which the financial statements have to be finalised for issue. The audit opinion is provided on those finalised financial statements.

Only adjusting events should be taken into account in reported financial statements.

This standard also deals with the ‘going concern’ concept. The standard requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting date indicate that the going concern assumption is not appropriate.

IPSAS 15 Financial instruments

This standard will be superseded by IPSAS 28 to 30 from 1 January 2013, and is therefore not described here. IPSAS 15 nevertheless remains applicable until the new standards apply or become effective.

IPSAS 16 Investment property

This standard prescribes the accounting treatment for investment property and related disclosures.

An investment property is property held (whether by the owner or under a finance lease) to earn rentals or for capital appreciation or both.

The standard does not cover property for use in the production or supply of goods or services or for administrative purposes, or property for sale in the ordinary course of operations, and does not apply to owner-occupied property or property that is being constructed or developed for future use as investment property.

Investment property is to be recognised as an asset when and only when:

· It is probable that the future economic benefits or service potential that are associated with the investment property will flow to the entity; and

· The cost or fair value of the investment property can be measured reliably.

The standard requires investment property to be measured initially at its cost, including transaction costs. Where an investment is acquired through a non-exchange transaction at no cost, or for a nominal charge, its cost is to be measured at its fair value at the date of acquisition. After recognition an entity may choose to measure the property using either a fair value model or a cost model. If a cost model is chosen, the fair value of the investment property must also be disclosed.

IPSAS 17 Property, plant and equipment

This standard prescribes the accounting principles for property, plant and equipment assets.

These assets include infrastructure assets, such as road networks, sewer systems, and communication networks, special military equipment, heritage assets, and natural, technological and environmental assets.

According to this standard, items of property, plant and equipment are to be recognised as assets only if it is probable that the future economic benefits or service potential associated with the item will flow to the entity, and the cost or fair value of the item can be measured reliably.

The initial recognition of such an asset is generally at cost, with the components of cost described by the standard. For assets acquired through a non-exchange transaction, the cost to be recorded is their fair value at the date of acquisition.

For measurement after recognition, IPSAS 17 allows a choice of accounting models to apply to an entire class of property, plant and equipment:

· Cost model: the asset is carried at cost less any accumulated depreciation and any impairment losses; or

· Revaluation model: the asset is carried at a revalued amount, which is its fair value at revaluation date less subsequent depreciation and impairment losses.

Depreciation is charged systematically over the asset’s useful life and separately for each part of the asset’s class. The depreciation method must reflect the pattern in which the entity is expected to consume the asset’s future economic benefits or service potential.

Subsequent related expenditure on these assets should be added to an asset when they improve the condition of the asset and it is probable that the future economic benefits in excess of the originally assessed value of the existing asset will flow to the entity.

Under this standard the recognition of heritage assets is optional. An entity which recognises heritage assets is required to comply with the standard’s disclosure requirements with respect to those heritage assets that are recognised and may, but is not required to, apply the standard’s measurement requirements.

IPSAS 18 Segment reporting

This standard establishes principles for the disclosure of financial information by segment, which may be either service or geographical segments.

Each entity is required to analyse its organisation and reporting system to determine each distinguishable activity or group of activities as separate segments where this is appropriate for the purpose of evaluating the entity’s past performance and of making decisions about the future allocation of resources.

An entity must then disclose for each individual segment the segment revenue, expense, assets and liabilities, based on the accounting policies applied for the whole group. The standard gives guidelines on how such items can be defined and measured.

IPSAS 19 Provisions, contingent liabilities and contingent assets

This standard defines these items, prescribes appropriate recognition criteria and measurement bases for them, and sets out related disclosure requirements.

The scope of the standard excludes social benefits provided by an entity for which it will not receive consideration that is approximately equal to the value of goods and services provided, directly in return from the recipients of the benefits (i.e. for free or at a ‘not significant price’). Other exceptions from the scope of the standard are, notably, provisions arising from financial instruments carried at fair value, provisions arising in relation to income taxes and employee benefits, and provisions covered by other IPSAS.

Contingent assets and liabilities are defined as possible assets and obligations arising from past events whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. A contingent liability may also be a present obligation that arises from past events but is not recognised because an outflow of resources is not probable or the amount of the obligation cannot be measured with sufficient certainty.

Contingent assets and liabilities are not recognised by an entity in its financial statement, but are disclosed.

By contrast, provisions are a liability which result from present obligations and for which it is probable that an outflow of resources will be required to settle the obligations, but whose timing or amount are uncertain. Provisions are recognised by the entity when a reliable estimate is available and measured at the best estimate of settlement amount of the expenditure needed to settle the obligations. When a large population of items is involved in measuring the amount of provision, the expected value method of estimation should be used, by weighting all possible outcomes by their associated probabilities.

IPSAS 20 Related party disclosures

This standard aims to ensure that financial statements disclose the existence of related party relationships, where control exists, and provides for the disclosure of information about transactions between the entity and its related parties (for example agency arrangements, leases, licence agreements, finance arrangements, provision of guarantees).

Related parties include parties which control or have significant influence over the reporting entity, such as controlling entities, associates, owners and their close family members, major investors, key management personnel, and entities controlled by the reporting entity.

Disclosure of remuneration of key management personnel and their close family members (including an analysis by type of remuneration) is also required.

IPSAS 21 Impairment of non-cash-generating assets

This standard, which was specifically developed for the public sector, prescribes the procedures that an entity applies to determine whether a non-cash-generating asset — not held with the primary objective of generating a commercial return — is impaired and to ensure that impairment losses are recognised.

Assets that are excluded from the scope of the standard include assets arising from construction contracts and financial assets, inventories, investment property that is measured using the fair value model, and property, plant and equipment and intangible assets that are regularly revalued in accordance with the revaluation models in IPSAS 17 and 31.

The standard states that an entity must assess whether there is an indication that such an asset may be impaired. An impairment loss should be recognised immediately in surplus or deficit when the carrying amount of the asset exceeds its recoverable service amount, which is itself determined as the higher of (a) the asset’s fair value less costs to sell and (b) its value in use. In impairment testing it is not always necessary to determine both fair value and value in use; where either of these amounts exceeds the asset’s carrying amount, the asset is not impaired.

The standard describes possible alternative approaches to determining fair value less cost to sell for the (frequent) cases of public sector assets not traded in an active market, and defines the value in use of a non-cash-generating asset as the present value of the remaining service potential as determined by a suitable approach (to be chosen from a depreciated replacement cost approach, a restoration cost approach, and a service units approach).

IPSAS 22 Disclosure of financial information about the general government sector

This standard, which was specifically developed for the public sector, establishes disclosure requirements for those governments that elect to present information about the general government sector (GGS) in their consolidated financial statements. This IPSAS specifically sets aside the application of IPSAS 6, thereby allowing an aggregate presentation which can reconcile the statistical reporting boundary for the general government sector with the IPSAS reporting boundary.

The standard requires a different treatment for investments in the public corporations sectors to what is normally required by IPSASs. IPSAS 6 requires full consolidation of all controlled entities on a line-by-line basis; IPSAS 22, on the other hand, requires the public financial corporations sector and the public non-financial corporations sector to be presented as investments (i.e. in the form of shares or other equity) of the general government sector in other sectors.

The standard specifies the disclosures to be made in respect of the general government sector, which include:

(a) Major classes of assets, liabilities, revenue, expenses, and cash flows;

(b) The significant controlled entities that are included in the general government sector and any changes in those entities;

(c) A reconciliation of the general government sector disclosures and the consolidated financial statements of the government, showing separately the amount of the adjustment to each equivalent item in those financial statements.

IPSAS 23 Revenue from non-exchange transactions (taxes and transfers)

This standard, which was specifically developed for the public sector, prescribes requirements for the financial reporting of revenue arising from non-exchange transactions, other than non-exchange transactions that give rise to an entity combination.

Non-exchange transactions are transactions in which an entity either receives assets or services or has liabilities extinguished, without directly giving approximately equal value in exchange to the other party. Notable examples of non-exchange transactions are taxes and transfers.

The standard recognises as assets (and therefore as revenue, except where a related liability is recorded) the inflow of resources from non-exchange transactions when:

· the definition of assets (from IPSAS 1) is met, and

· the asset is recognised (when it is probable that the future economic benefits or service potential associated with the asset will flow to the entity; and the fair value of the asset can be measured reliably).

An asset acquired through a non-exchange transaction should initially be measured at its fair value as at the date of acquisition. Revenue from non-exchange transactions should be measured as the amount of the increase in net assets recognised by the entity.

On the specific matter of taxes, the standard establishes a general principle that an entity is to recognise an asset in respect of taxes when the taxable event occurs — to be determined by individual jurisdictions on a tax-by-tax basis — and the asset recognition criteria are met. The assets should be measured at fair value, which may mean using an estimation based on historical experience in cases where there is a separation between the timing of the taxable event and the collection of taxes. If necessary, this estimation may be revised in accordance with IPSAS 3.

IPSAS 24: Presentation of budget information in financial statements

This standard, which was specifically developed for the public sector, requires a comparison of (original and final) budget amounts and actual amounts to be disclosed in the financial statements of entities (for those entities which are required or elect to make their approved budgets publicly available). The comparison must be made either as a separate additional financial statement or as additional budget columns in the primary financial statement (the latter only where the financial statements and the budget are prepared on a comparable accounting basis). All comparisons of budget and actual amounts must be presented on a comparable basis to the budget (i.e. accruals or cash).

An explanation of material differences between the budget and actual amounts, and certain other disclosure items, are also to be presented. Notably, where the financial statement and the budget are not prepared on the same basis, there must be a reconciliation at an aggregate level of (a) the actual amounts on a comparable basis to the budget as presented in the ‘statement of comparison of budget and actual amounts’, and (b) the amounts presented in the financial statement.

IPSAS 25 Employee benefits

This standard prescribes the accounting and disclosure for employee benefits. It requires an entity to recognise accrued employee benefits as an expense and liability. The principle underpinning the accounting treatment is that the cost of providing employee benefits is to be recognised in the period in which the benefit is earned by the employee (service rendered), rather than when it is paid or payable.

All forms of consideration provided by an entity to its employees in exchange for services rendered are treated under the standard (i.e. short-term benefits, post-employment benefits, other long-term benefits, and termination benefits), other than share-based transactions and employee retirement benefit plans.

Post-employment benefit plans (predominantly pensions) are further classified as either:

(a) Defined contribution plans; or

(b) Defined benefit plans,

and the accounting treatment of these benefits depends on this sub-classification.

Under a defined contribution plan, the entity’s obligation for each period is determined by the (generally undiscounted) contribution; consequently no actuarial assumptions are required to measure the liability and the expense and there is no actuarial gain or loss to be recorded.

Under defined benefit plans, the actuarial obligations are more complex to calculate and there is held to be a probability of actuarial gain and loss.

The standard examines the main parameters needed to calculate the actuarial cost, notably:

(1) The present value of defined benefit obligations and the fair value of any plan assets (net pension liabilities);

(2) Current service cost (the annual pension contribution required to cover future liabilities);

(3) Using the projected unit credit method to measure its obligations and costs;

(4) Attributing benefits to periods of service under the plan’s benefit formula, unless an employee’s service in later years will lead to a materially higher level of benefit than in earlier years;

(5) Using unbiased and mutually compatible actuarial assumptions concerning demographic variables (such as employee turnover rate and mortality of recipients) and financial variables (such as discount rate, future salaries level, future medical costs). Financial assumptions should be based on market expectations at the reporting date, for the period over which the obligations are to be settled. The rate used to discount post-employment benefit plans should reflect the time value of money.

Extensive note disclosures are required for post-employment benefits (for example on the actuarial assumptions used).

IPSAS 26 Impairment of cash-generating assets

This standard sets out the procedures that an entity applies to determine whether a cash-generating asset is impaired and to ensure that impairment losses are recognised. The standard also specifies when an entity should reverse an impairment loss and prescribes the necessary disclosures.

Cash-generating assets are defined as assets held with the primary objective of generating a commercial return.

Assets that are excluded from the scope of IPSAS 26 include assets arising from construction contracts and financial assets, inventories, investment property measured using the fair value model, property, plant and equipment and intangible assets regularly revalued in accordance with the revaluation models in IPSAS 17 and 31, and deferred tax assets and assets arising from employees’ benefits.

Under this standard, an entity must assess at each reporting date whether there is any indication that an asset may be impaired. In that case, the entity must estimate the recoverable amount.

An impairment loss of a cash-generating asset is the amount by which the carrying amount of an asset exceeds its recoverable amount.

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use.

The impairment test is performed under criteria listed in the standard.

IPSAS 27 Agriculture

This standard prescribes the accounting treatment and disclosures for agricultural activity.

It applies to biological assets and agricultural produce at the point of harvest when they relate to agricultural activity, with the definition of agriculture activity determining which of those assets fall within the scope of the standard (i.e. the standard does not deal with biological assets used in activities such as research, education or transport).

The standard requires an entity to recognise a biological asset or agricultural produce when:

(a) The entity controls the asset as a result of past events;

(b) It is probable that future economic benefits or service potential associated with the asset will flow to the entity; and

(c) The fair value or cost of the asset can be measured reliably.

Biological assets (including those acquired through non-exchange transactions) and agricultural produce are measured at fair value less costs to sell. The standard establishes initial and subsequent measurement requirements for biological assets and agricultural produce at the point of harvest. Generally, the quoted market price in an active market represents the best measure of the fair value of a biological asset or of agricultural produce. If an active market does not exist, the standard provides guidance on choosing another measurement basis.

IPSAS 28 Financial instruments: Presentation

IPSAS 29 Financial instruments: Recognition and measurement

IPSAS 30 Financial instruments: Disclosures

Taken together, standards 28, 29, and 30 deal with the different aspects of reporting for financial instruments.

IPSAS 28 establishes principles for presenting financial instruments as liabilities or equity, and for offsetting financial assets and financial liabilities.

IPSAS 29 establishes principles for recognising and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

IPSAS 30 prescribes disclosures that enable financial statement users to evaluate the significance of financial instruments, an entity’s financial position and performance, the nature and extent of the risks of financial instruments to which an entity is exposed, and how the entity manages the risks.

The following gives an overview of each standard on financial instruments but is not intended to give a comprehensive description of their requirements.

IPSAS 28

This standard establishes a number of definitions, including financial instruments, financial asset and financial liability, and requires financial instruments to be classified from the perspective of the issuer, according to the substance of the arrangement.

It prescribes principles for classifying and presenting financial instruments as liabilities or equity instruments, for related interest, dividends, losses and gains, and for offsetting financial assets and liabilities. It also deals with more specific instruments such as puttable instruments, treasury shares, and members’ shares in cooperative entities, and with specific public sector instruments such as concessionary loans and financial guarantee contracts entered into at nil or nominal consideration.

The standard does not cover interests in controlled entities (IPSAS 6), associated (IPSAS 7) or joint ventures (IPSAS 8), employer rights and obligations under employee benefit plans (IPSAS 23), obligations arising from insurance contracts (except for derivative and financial guarantee contracts), insurance contracts that contain a discretionary participation feature, and share-based payment transactions. It does, however, include insurance contracts that involve the transfer of financial risks.

IPSAS 29

This standard establishes principles for the recognition, derecognition and measurement of financial assets and financial liabilities.

The accounting treatment depends on the category of financial instrument, based on a classification specified in the standard.

Financial assets are classified (for the purpose of measuring a financial asset after initial recognition) in four categories:

(1) Financial assets at fair value through surplus or deficit;

(2) Held to maturity investments;

(3) Loans and receivables; and

(4) Available for sale financial assets.

Financial liabilities are classified in two categories (for the same purpose):

(1) Financial liabilities at fair value through surplus or deficit; and

(2) Other financial liabilities.

An entity is required to recognise a financial asset or a financial liability in its statement of financial position when that entity becomes a party to the contractual provisions of the instrument.

When a financial asset or financial liability is initially recognised, the entity is to measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss (surplus or deficit), any transaction costs that are directly attributable to the acquisition or issue of the asset or liability.

An entity may opt to recognise normal purchases and sales of securities in the market place consistently either at trade date or settlement date.

After initial recognition, the entity should measure:

· Financial assets at fair value through surplus or deficit at fair value without any deduction of cost, and available-for-sale financial assets, including derivatives that are assets, at their fair value without any deduction for any transaction cost they may incur on sale or other disposal;

· Loans and receivables and held-to-maturity investments at amortised cost, using the effective interest method;

· Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments; these are to be measured at cost.

Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction. The standard also establishes requirements on how to determine fair value (i.e. quoted prices in an active market).

Subsequent measurement of financial liabilities also depends on their classification. Financial liabilities at fair value through surplus or deficit, including derivatives that are liabilities, are measured at their fair value (gains and losses are recognised in surplus or deficit). Other financial liabilities are measured at amortised cost.

The standard also provides guidance on accounting for concessionary loans. These are loans granted to or received by an entity on below-market terms. In this case there is a difference between the fair value of the concessionary loan and the loan proceeds. In the case of a concessionary loan received by a public sector entity, any difference between the fair value of the loan and the transaction price (the loan proceeds) is accounted for in accordance with IPSAS 23. The exchange component is recognised and initially measured in accordance with IPSAS 29. In the case of a concessionary loan granted by a public sector entity, the standard requires that the difference between the fair value of the loan and the transaction price (the loan proceeds) be treated as an expense.

IPSAS 30

This standard establishes disclosure requirements, which include general information about financial assets and financial liabilities by category, and special disclosures when the fair value option under IPSAS 29 is used. It also covers reclassifications, de-recognitions, pledges of assets, embedded derivatives, and breaches of terms of agreements. Specific disclosures are required for concessionary loans, information and accounting policies, hedge accounting, the fair values of each class of financial assets and financial liabilities, and qualitative and quantitative disclosures about exposures to risks and the management of those risks (the three types of risks identified as credit, liquidity and market risks).

IPSAS 31 Intangible assets

This standard prescribes the accounting treatment for intangible assets that are not covered by other standards, including certain public-sector-specific issues such as intangible heritage assets.

An intangible asset, whether purchased or self-created, is recognised if it is probable that the future economic benefits or service potential that are attributable to the asset will flow to the entity, and the cost or fair value of the asset can be measured reliably.

The definition of an intangible asset includes a requirement that the asset be identifiable (in other words, the asset must be separable from the entity, or arise from a binding arrangement including contractual or legal rights).

Examples of intangible assets that may be recognised by public sector entities in accordance with the standard include acquired computer software, databases, acquired patents and copyrights in areas such as tourism, research, education, and health, and research and development activities.

This standard does not cover powers and rights conferred by legislation, a constitution, or by equivalent means; nor does it cover goodwill arising from an entity combination.

All research costs are expensed when incurred (there is no intangible asset created). Development costs are capitalised only after the entity can demonstrate that the technical and commercial feasibility of the resulting product or services has been established, that the entity intends to complete the intangible asset and use it or sell it, and that it is able to use it or sell it.

The initial measurement is at cost. The standard allows a choice for the subsequent measurement of intangible assets, which may be accounted for using a cost model or a revaluation model. Under the cost model, assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. If an intangible asset has a quoted market price in an active market, the use of a revaluation model is permitted.

IPSAS 32 Service concession arrangements: Grantor

This standard, which was specifically developed for the public sector, prescribes the accounting and reporting requirements for service concession arrangements by the grantor, where the grantor is a public sector entity.

Service concession arrangements are defined as binding arrangements between a grantor and an operator that involve the delivery of public services related to the service concession asset.

Where there is a service concession arrangement, the grantor recognises a service concession asset (and a liability) if:

(a) The grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and

(b) The grantor controls — through ownership, beneficial entitlement or otherwise — any significant residual interest in the asset at the end of the term of the arrangement.

For a ‘whole-of-life’ asset, only the conditions under (a) need to be met.

For initial measurement the grantor must recognise the asset at fair value. Subsequently the asset will be accounted for as a separate class of asset, as either a non-financial asset or an intangible asset, and thereafter measured using the appropriate standard.

Financial reporting under the cash basis of accounting

Although IPSAS is an accruals-based accounting standard, there is also an IPSAS cash basis standard.

The objective of this standard is to provide guidance on financial reporting under the cash basis of accounting, which recognises transactions and events only when cash is received or paid by the entity.

The information required under this standard covers the sources of cash raised during the period, the purpose for which the cash was used and the cash balance at the reporting date. Cash is considered to be controlled by an entity when it can use it to achieve its objectives or can benefit from the cash and exclude or regulate the access of others to that benefit.

The standard gives a definition of cash, including cash equivalents: defined, as in IPSAS 2, as short maturity (i.e. three months or less from the date of acquisition) investments that are readily convertible to a known amount of cash and which are subject to an insignificant risk of change in value.

The financial statements under this standard comprise a statement of cash receipts and payments, accounting policies and explanatory notes. When the entity makes its approved budget publicly available, it may include a comparison of budget and actual amounts either as a separate additional financial statement or as an additional budget column (where the budget and financial statement are prepared on a comparable basis).

The statements of cash receipts and payments disclose the opening and closing cash balances of the entity, the total cash receipts and payments and an appropriate sub-classification thereof, which are normally reported on a gross basis. The standard requires entities to report in a separate column of the statement of cash receipts and payments the total payments and the sources and uses of expenditures made by third parties on behalf of the entity, directly settling obligations or purchasing goods and services for the benefit of the entity, and separating payments made by third parties which are not part of the reporting economic entity which it belongs. General purpose financial statements under the cash basis are to be presented at least annually.

The standard also gives general guidelines on the application of consistency of presentation, aggregation and materiality, comparative information and correction of errors.

Total external assistance (defined as all official resources which the recipient can use or otherwise benefit from in pursuit of its objectives) received in cash should be disclosed separately in the statement of cash receipts and payments. The entity should also disclose separately, either in the financial statement or in the note, total external assistance paid by third parties. The standard also provides for disclosures of external assistance received in the form of loans or grants.

There is also guidance on consolidated financial statements of cash receipts and payments.

Moreover, the standard encourages (but does not make mandatory) additional disclosures. Notably, notes to the financial statements may provide additional information about liabilities, such as payables and borrowings, and some non-cash assets such as receivables, investments and property, plant and equipment.

2.4. The process of IPSAS standard-setting

The IPSAS Board (formerly the ‘Public Sector Committee’ [PSC]) issues standards, exposure drafts for future standards, guidelines, studies and other documents[23].

The IPSAS Board develops a ‘multi-year’ work plan on which the Board reports annually[24] as part of the IFAC annual report. The latest work plan for 2013-14 is currently under public consultation for the first time. The work plan defines the projects and initiatives the Board will undertake for the themes for which it considers there is a need to formulate guidance.

The IPSAS Board members, in performing their role, are required to act independently of the organisations which employ them, thereby providing independent standard-setting for the public sector.

2.4.1. The due process

The IPSAS Board adopts a formal process for the development of IPSAS that seeks input and feedback from its constituents[25] on important projects, strategic priorities and technical issues in relation to its work programme. The process provides the opportunity for comment from a large base of interested parties: auditors, preparers (including treasuries and finance ministries), standard-setters, professional accounting bodies, academics, lawyers, and other individuals. The meetings of the Board are open to the public. Agenda papers, including the minutes of the Board’s meetings, and meeting highlights are published on the Board’s website: http://www.ifac.org/public-sector.

As regards the IPSAS standards themselves, the due process starts with a decision by the Board on whether a standard on a certain matter should be developed or not, or if an existing standard should be revised. If the Board approves, a project will be initiated. Depending on the topic, the process for projects normally includes the following major components:

· Consideration of relevant pronouncements (i.e. those issued by IASB, national standard-setters, professional accounting bodies);

· Consultation paper and/or exposure draft for public comment;

· Consideration of comments received on consultation paper and/or exposure draft within the comment period;

· Approval of the standard and its issuance[26], which includes a ‘basis for conclusion’ to explain how the Board reached its position.

The same procedure applies for the withdrawal of a standard.

A consultation paper may be issued in some cases to explore the subject in detail, providing the basis for further discussion and development. Then, or possibly without a consultation paper phase, an exposure draft of the proposed IPSAS is developed, commonly with the input of a task force or task-based group. All exposure drafts and consultation papers are published on the IPSAS Board website with a fixed comment period, typically a minimum of four months. Comments received are discussed by IPSAS Board members, and are also published on the IPSAS Board website.

The approval of consultation papers, exposure drafts, and IPSASs requires the affirmative vote of at least two-thirds of the IPSAS Board members (which corresponds currently to at least twelve of those present at the meeting).

The IPSAS Board has established ‘rules of the road’ which describe the process for reviewing and modifying IFRS (and in some cases the interpretations of the International Financial Reporting Interpretations Committee (IFRIC)[27]).This process was established with the aim of converging the IPSASs with the International Financial Reporting Standards. The IPSASB’s staff provides the analysis for the Board’s discussion of whether or not an IFRS should be adapted for the public sector, i.e. whether there are public-sector-specific reasons for departing from those standards. This convergence process has an indirect effect in that the current IPSASs are based on concepts and definitions of the IASB’s conceptual framework, modified where necessary for a public-sector-specific approach. The current development of the independent IPSAS conceptual framework therefore addresses the recognised need to focus specifically on the public sector perspective.

IPSASs which are ‘converged with IFRS’ are IFRSs adapted to the public sector context. This requires changes to the style and terminology, and the addition of public-sector-specific examples, but may also involve simplification, clarification, better definition, or amendment arrangements for initial adoption/transitional provisions, to reflect the different public sector environment.

If there are public-sector-specific reasons to depart from IFRS then a second step is applied. This involves either modifying an IASB document and adapting the terminology and style, or initiating a new public-sector-specific project, for example if a topic has not been addressed by IASB or if the public-sector-specific issue is deemed to be so fundamental as to warrant a departure from the IFRS.

2.4.2. Structure and format of IPSASs

Guidelines are used to structure IPSASs as follows:

· Overall structure of IPSASs;

· Objective;

· Definitions;

· Basis for conclusions;

· Consequential amendments and effective date;

· Appendices.

In addition a paragraph is dedicated to the scope of the standards.

IPSASs usually contain both authoritative and non-authoritative material. This is indicated in the relevant standards.

Authoritative guidance normally includes the following sections: Objective, Scope, Definitions, Accounting requirements, Disclosure requirements, and Transitional provisions (where additional to IPSAS 3), Effective date and Appendices on application guidance, other authoritative guidance, and amendments to other IPSASs.

The Basis for conclusions, Illustrative decision trees, tables and examples, and Implementation guidance are normally non-authoritative.

The Objective section is the core text of each standard and summarises its purpose. Definitions are provided for terms which are central to the standard. The Basis for conclusions provides background information on the issue and the rationale for adopting a particular approach in a standard where alternatives have been discussed and rejected. The basis for conclusions should also explain the public-sector-specific reasons why the IPSAS differs from the underlying IFRS[28].

2.5. Structure, organisation and governance arrangements of the IPSAS Board

The IPSAS Board operates under the umbrella of the IFAC, which also supports other independent standard-setting boards:

· International Auditing and Assurance Standards Board

· International Accounting Education Standards Board

· International Ethics Standards Board for Accountants

The IFAC, through its standard-setting boards, establishes international standards on ethics, auditing and assurance, accounting education, and public sector accounting, and promotes convergence to the standards issued by the boards as well as to the IFRSs set by the IASB.

IFAC member bodies and associates are professional accounting organisations (in public practice, education, government service, industry, and commerce). A list of IFAC members and associates is available on the IFAC website[29].

2.5.1. Membership

The IPSAS Board is composed of 18 volunteer members including a chair and a deputy chair. Members are appointed by the IFAC Board, with 15 members nominated by IFAC member organisations and three members appointed as public members. A public member is expected to reflect the wider public interesto[30]. The IFAC Board has agreed an amendment to the membership criteria effective January 2014 to withdraw the right for IFAC member bodies to be the sole groups who can nominate members for 15 seats. Instead these 15 members can be nominated from a broader constituency, for example governments, public agencies, international organisations, or the general public in addition to IFAC member bodies.

The selection process for the IPSAS Board encompasses factors such as the personal and professional qualifications of a nominee and representational constraints, including gender balance and geographical representativeness of the IPSAS Board, sector of the accountancy profession, knowledge of institutional arrangements, size of the organisation, and level of economic development.

In 2012 the geographical composition of the Board was as follows:

Europe: France, Germany, Italy (public member), UK, Romania, Switzerland (chair and public member)

The Americas: USA, Canada (two members, one of whom is a public member), Uruguay

Asia: Japan, China, Pakistan

Africa: Kenya, Morocco, South Africa

Australasia: Australia, New Zealand

Members currently include representatives from ministries of finance (four members), government audit and accounting institutions (eight members), public practice (two members), academia (three members), and industry (one member). Membership does not include major international bodies, which attend IPSAS Board meetings as official non-voting observers (including Eurostat and the Budget DG for the European Commission, and the International Monetary Fund and the United Nations). The standard term for IPSAS Board members is three years, but a member may serve one additional consecutive term, up to a maximum of six years. The chair may serve three consecutive terms, for a total of nine years. Members' commitment is part-time[31]. The IPSAS Board is currently assisted by 8.5 full-time equivalent staff (one FTE is a visiting fellow), around a third of whom are European nationals, mainly based in Canada[32].

2.5.2. Funding

The current funding scheme of the IPSAS Board is strongly dependent on IFAC (International Federation of Accountants), Government of Canada, CICA (Canadian Institute of Chartered Accountants) and some multilateral development banks (World Bank, Asian Development Bank). Other sources of revenue include other international, national and regional government entities, for example the governments of China, New Zealand and Switzerland, as well as the United Nations in the past. Some support in the form of personnel may also come from national standard-setters, audit firms and national authorities (currently Governmental Accounting Standards Board USA, UK Accounting Standards Board (past), Ernst & Young and the New Zealand External Reporting Board).

As regards finance, the 2011 IFAC report sets out the latest figures for 2011 for IPSAS Board revenues: Total revenues of $ 2 048 093 are financed from external contributions: $ 632 545 (Canada, World Bank, ADB, etc.), IFAC: $ 1 416 528[33]. IFAC (taken together with the Forum of Firms, a voluntary group of 23 large private accounting company networks that support and promote the consistent application of high-quality audit practices and standards worldwide)[34] sources account for 69 % of financing.

In the same period, the IFRS Foundation raised £ 20.6 million for the IASB[35]. For the latter the European Commission also provided financing in the form of grants (EUR 12.75 million in the 2010-2013 period)[36].

Recent work planning has acknowledged the relatively limited resources available to the IPSAS Board at both Board and staff levels, particularly compared with some other standard setting boards (for example the IASB) and there have been calls for a larger and broader funding base.

2.5.3. IPSAS Board oversight

At present the IPSAS Board is not overseen by an external body, unlike other IFAC standard setters. Within the IFAC structure, the Public Interest Oversight Board (PIOB) and the Monitoring Group (MG) play a role in oversight of international standard setting in the public interest, specifically for the International Auditing and Assurance Standards Board (IAASB), the International Ethics Standards Board for Accountants (IESBA), the International Accounting Education Board (IAESB), and the Compliance Advisory Panel (CAP)[37]. Two of the ten members of the PIOB are nominated by the European Commission which is also a member of the Monitoring Group.

In those cases, even if the PIOB does not oversee the technical content of the standard-setting process[38] it does provide public interest oversight of due process. As such, it reviews and approves the composition and the roles of the Board, evaluates the procedures, oversees the organisational aspects and suggests projects to be added to the Board’s work programmes.

The current funding of the PIOB scheme is extremely dependent on IFAC. The European Commission also contributes up to a maximum of EUR 300 000 per year, which represents around 22 % of total PIOB eligible expenses.

The IPSAS Board has been discussing its structure and governance arrangements over recent months. Many stakeholders perceive these arrangements as inadequate to safeguard the public interest and unresponsive to the independence of the standard-setting process. IFAC has consulted with some governments and other stakeholders and has confirmed this perception.