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# 52013SC0057

**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 /\* SWD/2013/057 final \*/**

  

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.
The Board recognises the importance of strengthening its credibility and
independence through a more appropriate system of governance, notably with
respect to external public interest oversight. Two models have been proposed in
this respect:

·
A model based on the oversight regime of the
existing Public Interest Oversight Board (PIOB, see above). This model would
require the appointment of two additional members to the PIOB in order to
better serve public sector interests. This model would require additional
resources to address the extra costs of the new public sector members as well
as increase in PIOB staff resources.

·
Oversight carried out by a dedicated body with
high public sector involvement. This model would also require additional
resources and it is likely that these would be at a significantly higher level
than the PIOB model since no such structure currently exists.

At this stage, work is oriented towards the
first model. In March 2012 the Monitoring Group launched a public consultation
aimed at enhancing the oversight and governance of IFAC, including the IPSASB.
It covered a range of topics, including organisational aspects, funding, and the
composition and roles of the monitoring group, the PIOB and the
standard-setting board. The consultation was closed on 28 June 2012 and the
results and analysis of the responses should be available before the end of
2012.

Other proposals under consideration by the
Board to strengthen its governance are the appointment of a full-time chair,
ideally by 2016 at the latest, the formation of a consultative advisory group
by 2014 to 2015, a change in composition of the Board to introduce more public
members (applicable for 2014), and greater resources[39].

2.5.4.     Latest work programme

As previously mentioned, the IPSAS Board is
developing a conceptual framework for general purpose financial reporting
(GPFR) in order to make explicit the definitions and concepts applied by the
IPSAS Board in developing IPSAS and the core principles underpinning GPFR by
public entities when they adopt accruals accounting. It features the following
issues:

·
Objectives of financial reporting;

·
Scope of financial reporting;

·
Qualitative characteristics of financial
information;

·
Characteristics of the reporting entity;

·
Definition and recognition of the elements of
financial statements;

·
Measurement;

·
Presentation.

The conceptual framework is not in itself a
new rule-creating standard. Its objective is to provide a guide to developing
and interpreting the standards.

In 2011 the IPSAS Board approved three new
projects in which the statistical community (including Eurostat) is actively
participating: first-time adoption, IPSAS and GFS, and government business
enterprises. These projects have a particular interest for the conceptual and
practical issues of IPSASs for statistical needs. They are seen by many
statisticians as opportunities to strengthen the link between public sector
accounting standards and the statistical bases of financial reporting, and
would facilitate the preparation of fiscal statistics, with significant gains
in terms of efficiency and information quality.

Other important ongoing projects in the
current IPSAS Board work programme include public sector combinations,
financial statement discussion and analysis, and reporting service performance.

In July 2012, the IPSAS Board initiated a
consultation on its work programme for 2013-14 to seek views on how it should
allocate its resources over this period. It will then undertake a broader
public consultation of its broad strategic direction in 2014.

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

Annex 2.2:
References concerning the IPSAS standards

Accounting Standards Review Board,
Suitability of IPSAS review, comparison of IPSAS with NZ IFRS as at January
2010, May 2010

Accounting Standards Review Board,
Suitability of IPSAS, Review report of the Working Group, September 2010

Australian Accounting Standards Board,
(AASB), AASB 1049 Whole of Government General Government Sector Financial
Reporting, 2007

Chan, James L., International Public
Sector Accounting Standards: Conceptual and Institutional Issues, 2008.

Deloitte, IPSAS Summary, 2012 edition,
February 2012 http://www.iasplus.com

European Central Bank, ECB/Eurostat
Workshop on Pensions, 29-30 April 2009 (Pension accounting standards), E-book
edition, 2010.

International Federation of Accountants
(IFAC — International Public Sector Accounting Standards Board (IPSASB Study 14
— Transition to the Accrual Basis of Accounting: Guidance for Governments and
Government Entities (Third Edition), January 2011

International Federation of Accountants
(IFAC) — International Public Sector Accounting Standards Board (IPSASB )
Response to Public Consultation Paper on the Suitability of the International
Public Sector Accounting Standards for EU Member States, May 2012

International Federation of Accountants
(IFAC) — International Public Sector Accounting Standards Board Draft
Consultation Paper, Alignment of IPSASs and Government Finance Statistics
Reporting Guidelines, June 2012

International Public Sector Accounting
Standards Board Guidelines for Structure and Format of IPSASs ‘- June 2010 —
www.ipsasb.org

International Public Sector Accounting
Standards Board, Process for Reviewing and Modifying IASB Documents,
October 2008

International Public Sector Accounting
Standards Board Conceptual Framework for General
Purpose Financial Reporting by Public Sector Entities: Measurement of Assets
and Liabilities in Financial Statements Phase 3: Consultation Paper,
December 2010

International Public Sector Accounting
Standards Board (IPSASB), Handbook of International Public Sector Accounting
Pronouncements 2012 Edition, Volume I and II, International Federation of
Accountants (IFAC), June 2012

Khan, A., and Mayes, S., Transition to
Accrual Accounting, Technical notes and manuals International Monetary Fund,
Fiscal Affairs Department, September 2009

Müller-Marqués Berger, T., IPSAS
Explained, A Summary of International Public Accounting Standards, second
edition, 2012

Norman, Richard, Accounting for
government: How New Zealand built an accounting system that tells the full
story about a government’s financial performance, Victoria Link Ltd, 1997

SAP for Public Sector — International
Public Sector Accounting Standards (IPSAS) Impacts and Compliance Aspects, 2011

United Nations Educational, Scientific and
Cultural Organisation (UNESCO), Policy Guidance Manual for International Public
Sector Accounting Standards, 2009 Edition

CHAPTER 3

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

3.1.        Diversity
within and across the Member States

This chapter summarises current practices
in public sector accounting and auditing in the Member States.

Eurostat asked a consultancy to collect detailed
information on public accounting and auditing practices for each Member State[40]. The study was designed as a
stocktaking exercise and focused on the systems in place in 2012, but some
additional information was collected on planned or on-going accounting and
auditing reforms, and on how close existing accounting regimes were to IPSAS.

This information was gathered with two
objectives: to provide information to support the assessment of this staff
working document and to support Eurostat’s work on the verification of debt and
deficit data reported under the Excessive Deficit Procedure.

In practice, the overview of public sector
accounting and auditing practices below shows a rather complicated, disparate
picture. Without going into full detail, it shows that current public sector
accounting and auditing practices vary widely, not just between Member States
but, in many cases, also across different levels of government within Member
States.

In the case of some countries, it may be that
the information gathered for this study is either incomplete or could benefit
from further explanation. In other cases, on-going reforms mean that
information will soon become outdated. Eurostat is making available the full
report so that it can be further developed over the coming years.

Below is a summary of the main results of
the study.

3.2.        Overview
of public sector accounting practices

Table 3.1 below gives a summary of the main
types of public sector accounting practice used in sub-sectors of general
government in the Member States.

The study shows that a majority of Member
States have public sector accounting practices that can be characterised as
accruals or modified accruals accounting across all levels of government.
Although accruals or modified accruals public accounting data is available in
these Member States, in many cases, parallel cash accounting systems are also
maintained, and with few exceptions, budgeting is conducted on a cash basis.

The countries that reported having mixed
public sector accounting systems were Austria, Cyprus, Denmark, Germany,
Hungary, Ireland, Italy, Luxembourg, Portugal, the Netherlands and Slovenia.
These Member States either use differing public sector accounting practices for
differing levels or sub-sectors of government, or, for example, in the case of
Slovenia or Hungary, different financial statements are prepared on different
accounting bases.

In Austria, the new accounting
system implements accruals accounting for the federal government, but the
states and municipalities operate cash-based systems.

In Cyprus, Ireland, Portugal and the
Netherlands, central government applies cash or modified cash accounting,
while local government uses accruals accounting. In Portugal and Ireland,
accounting reform, moving to accruals accounting, is underway for central
government, and in Cyprus, reform is in the planning phase.

In Germany, current reforms focus on
the modernisation of the cash-based system at central and state levels. A
minority of the federal states, and most of the municipalities, have introduced
accruals accounting.

In Denmark, the central government
and regional accounting systems are accruals based, whereas for the
municipalities, accounting is mainly cash based.

In Luxembourg, central and local
government entities, with the exception of public establishments (e.g. research
centres, state foundations) and public corporations follow cash accounting
principles. Similarly, social funds also use accruals accounting rules based on
the general accounting principles following the national GAAP.

In Hungary, Italy and Slovenia, a
cash/modified cash accounting system applies for all sub-sectors of government,
although accruals/modified accruals accounting is also used when financial
statements are prepared.

Table 3.1: Summary of the accounting
model applied by sub-sectors of government in the Member States

|| Central || State || Local || Social funds

Accruals || 12 || 2 || 14 || 13

Modified accruals || 5 || - || 4 || 4

Combination of accruals and cash || 5 || 1 || 7 || 4

Cash || 4 || - || - || 1

Not applicable || - || 23 || - || 1

No answer or pending reply || 1 || 1 || 2 || 4

Total || 27 || 27 || 27 || 27

The overview of Member States’ public
sector accounting practices shows that they are very heterogeneous. No two
countries have the same system or apply the same standards. Moreover, within
many Member States, different accounting regimes may apply for different types
of government entities.

Member States with a state government
sector tend to have the most complex accounting arrangements, since state
governments usually follow their own accounting standards, which may differ
from one state to another. More of the newer Member States follow an accruals
accounting model than is the case for older Member States. In particular, the
Baltic countries seem to have accruals-based standards close to IPSAS. Local
governments are more likely to have an accruals accounting model than central
governments.

Financial audits

Financial audits are performed in almost
all Member States, though the scope of these varies. The approach to financial
audit is not necessarily consistent across the EU but, overall, audit
arrangements appear to be less heterogeneous than accounting arrangements. With
a few exceptions, ISA or ISSAI standards are applied on a voluntary or
mandatory basis.

Accounting and auditing reforms

Many Member States are engaged in minor or
major reforms, depending on the current status of their accounting and auditing
arrangements. One group of countries — mainly those which have recently
implemented accruals accounting — are continuously improving and fine-tuning
their public accounting systems, while another group is still in the process of
implementation. There is also a smaller group of countries in which no reforms
are scheduled or in which reforms are at an early stage of preparation.
Finland, Poland and Luxembourg have projects underway to enhance their auditing
systems.

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

IPSAS is a relatively recent set of
accounting standards. The first core set of IPSASs was developed between 1996
and 2002, with major work to add further new standards and achieve substantial
convergence with IFRS completed in the decade since then. This means IPSAS was
a work-in-progress when many Member States last reformed their public sector
accounting systems. As a result, links between IPSAS and national public sector
accounting systems tend to be relatively recent.

Nevertheless, the study shows that IPSAS is
a point of reference or guidance for public sector accounting standards in just
over half the Member States. Table 3.2 summarises how the different accounting
standards used by Member States relate to IPSAS.

IPSAS is reported to be referred to or used
as a basis for inspiration where deemed relevant for national public sector
accounting standards in more than half the Member States (Austria, Belgium,
Bulgaria, Czech Republic, Denmark, Estonia, France, Greece, Latvia, Lithuania,
Malta, Romania, Slovakia, Spain and Sweden).

The remaining Member States do not refer to
IPSAS in their public sector accounting framework, but this does not
necessarily mean that they are not aware of it, and, indeed, some of their
national standards may nevertheless conform to IPSAS.

Table 3.2: Relationship with IPSAS of
the national public sector accounting systems of Member States

IPSAS relation || Total || Percentage

National standard based on or orientated by IPSAS || 9 || 33 %

Some IPSAS references || 5 || 19 %

IPSAS for some Local Government entities || 1 || 4 %

None || 12 || 44 %

Grand Total || 27 || 100 %

In the study, Eurostat’s consultants
developed an indicative measurement of how close each Member State’s national
public sector accounting standards were to IPSAS. Such an analysis can of
course only give an indication of this, and the main value of the results may actually
be the dispersion of the scores, rather than scores for individual countries.

To perform this analysis, four
characteristics were considered:

·
Presentation of Financial Statements. This
dimension seeks to assess whether all components of the Financial Statement
required by IPSAS (according to IPSAS 1) are published;

·
Time of recording. This dimension indicates
whether the accounting system is on a cash or an accruals basis, or modified
cash or modified accruals basis;

·
Property plant and equipment measurement and
recognition. This dimension seeks to understand whether the measurement and
recognition of plant and equipment is similar in spirit to the IPSAS principle
(in particular IPSAS 17);

·
Provision measurement and recognition. This
dimension seeks to understand whether the measurement and recognition of
provision is similar in spirit to the IPSAS principle (in particular IPSAS 19).

As the analysis only takes into account
these four dimensions, a score of 100 %, does not necessary mean that a
Member State applies IPSAS in full. Given that a system of accounting standards
involves more issues than those specified above, this scoring method does not
give a full picture of the actual heterogeneity in accounting practices across
Member States.

Figure 3.1 shows the outcome of the
analysis of the central government accounting practices. The equivalent charts
for the other sub-sectors can be found in the complete
version of the study.

Figure 3.1:
Closeness of Member States’ central government accounting practices to IPSAS

Based on this scoring system, the following
conclusions may be drawn:

There is great heterogeneity in terms of
accounting practices across Member States. Indeed, taking IPSAS as a benchmark,
public accounting standards used in Member States range from over 90%
similarity to less than 10 %.

Member States that apply cash-based accounting
standards obviously have the lowest scores for similarity with IPSAS. However,
the score is not always close to zero, for example if, despite most or all
public sector accounting being on a cash basis, sub-sectors of government
publish statements of financial position and performance.

Across the EU as a whole, local government
generally scores closer on average to IPSAS than central government.

According to the study, UK public sector
accounting standards appeared to be closest to IPSAS. Indeed, the UK public
sector accounting standards parallel IPSAS in that they are based on IFRS,
adapted to the needs of the UK public sector. This similarity in the origins of
the standards explains why UK standards are so close to IPSAS.

It appears that the more complex the national
public sector accounting requirements (in the sense that differing requirements
apply to different parts of government), the less similar that Member State’s
accounting standards are to IPSAS. Member States with the least complex
accounting arrangements seem to be closest to IPSAS. For example, the UK and Estonia
— which apply consistent standards across all sub-sectors of government —
scored more than 90 % in their similarity to IPSAS.

3.4.        Public
sector accounting and auditing in each Member State

Below is an overview of public sector
accounting and auditing in each Member State. As well as noting the different
accounting practices followed in the public sector, the links between IPSAS and
national public sector accounting standards are mentioned, as are on-going or
planned accounting reforms. There is also a brief description of the scope of
the financial audit framework applied in each Member State for general
government.

This overview is based on more detailed
information gathered within the study.

Austria

In Austria, taking into account the new
legal requirements coming into force in 2013, accounting practices are as
follows:

Federal Government accounting

Budgets and Closed Accounts Regulation

Internal accounting rules

Austrian commercial code

Accounting Regulation

The Federal Government applies the ‘Federal
Government Accounting Law’. Länder and municipalities apply the ‘Budgets and
Closed Accounts Regulation’. There are Chambers in the central and state
sub-sectors and they apply internal accounting rules. Social funds[41] follow the Accounting
Regulation, which is broadly similar to the ‘Budgets and Closed Accounts
Regulation’. Other entities and government business entities apply general
national/international rules (like the Austrian Commercial Code or IFRS).

The new accounting system takes account of
the special needs of the Federal Government and is modelled on IPSAS standards
to ensure international comparability.

Austria: Nature of accounting practices
in the sub-sectors

Financial statements || Federal government || Länder and municipalities

Statement of financial position (balance sheet) || Accruals accounting || Not applicable

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting

Statement of changes in net asset || Modified cash accounting || Not applicable

Cash flow statement || Cash accounting || Cash accounting

The Court of Auditors performs a financial
audit on all sub-sectors. The audit is mandatory and funded through the federal
budget. The auditing standards applied are the International Standards on
Auditing (ISA) and the International Standards of Supreme Audit Institutions
(ISSAI).

Belgium[42]

Belgium is a federal state in which the
regions, communities and municipalities are relatively independent, so there
are many different public sector accounting practices.

Belgium: Nature of accounting practices
in the sub-sectors

Financial statements || Central government || Flemish local government || Walloon and Brussels-Capital regions local government

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting || Accruals accounting

Statement of financial performance (In-come statement/profit and loss statement) || Accruals accounting || Accruals accounting || Accruals accounting

Statement of changes in net asset || Accruals accounting || Modified accruals accounting || Accruals accounting

Cash flow statement || N/A || Accruals accounting || N/A

At Flemish local government level, IPSAS
has provided significant inspiration and guidelines for the legislator in
developing the reformed accounting and reporting system for local governments.

The local governments of Wallonia and the
Brussels-Capital Region have been using a dual accounting system involving a
financial accounting (double entry) and a budgetary accounting system (single
entry) since 1995.

A project named FEDCOM is currently
underway to reform and implement accruals accounting for federal public
services.

The Court of Auditors’ financial audits
include the federal and state levels and the provinces at local level.
Municipalities and public corporations are not audited by the Court, but by
private audit firms.

Bulgaria

In Bulgaria, public sector accounting
practices fall within two broad categories:

Central and local government and social funds
apply the same set of rules. These are defined in the Accountancy Act, which is
closely linked to ESA and which lays down that the reporting of assets,
liabilities, income, expenses and transactions of all budget entities are to be
consolidated by the Ministry of Finance on the basis of trial balances and
other information submitted under the rules established by the Minister of
Finance;

Public hospitals, the National Railway
Infrastructure Company, and the Fund for Local Authorities and Governments
prepare financial statements under IFRS or the Bulgarian National Financial
Reporting Standards for Small and Medium-Sized Enterprises.

Bulgaria: Nature of accounting practices
in the sub-sectors

Financial statements || Central, Local government and Social Funds || Public hospitals, NRIC and FLAG

Statement of financial position (balance sheet) || Accruals accounting[43] || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || N/A || Accruals accounting

Statement of changes in net asset || N/A || Accruals accounting

Cash flow statement || Modified cash accounting || Accruals accounting

IPSAS is referred to in the Accountancy
Act. There are currently no plans for further reforms.

The Bulgarian National Audit Office
performs financial audits for central government, local government and social
funds.

Public hospitals, the National Railway
Infrastructure Company, and the Fund for Local Authorities are audited by
statutory auditors, a Bulgarian-certified public accountant or by a registered
auditing company. The National Audit Office follows the International Standards
of Supreme Audit Institutions (ISSAI), which are mandatory.

Cyprus[44]

Central government is composed of
ministries and independent authorities, special funds and other not-for-profit
organisations.

Cyprus: Nature of accounting practices
in the sub-sectors

Financial statements || Central government (Ministries, Special Funds) and Social Security Funds || Central government: Not-for-profit organisations || Local government: Municipalities

Statement of financial position (balance sheet) || Modified cash accounting || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Cash accounting. || Accruals accounting || Accruals accounting

Statement of changes in net asset || Modified cash accounting || Accruals accounting || Accruals accounting

Cash flow statement || N/A || Accruals accounting || Accruals accounting

Village authorities, which form a small
part of local government, use cash accounting.

The Treasury of Cyprus is currently
conducting a study to identify the changes that would be needed and likely
effects of a move to accruals accounting following implementation of IPSAS.

An audit by the Auditor General is
mandatory for all sub-sectors. An annual work programme covers the financial,
compliance, performance and technical audits to be performed. A small number of
special funds are also subject to a statutory audit by private audit firms. In
addition, the Auditor General may conduct further audit work (financial,
performance or other) as deemed necessary.

Czech Republic

In the Czech Republic, public sector
accounting practices fall within two broad categories:

‘Special accounting units’ are Government and
Parliament, budgetary organisations (ministries, central offices and the Land
Fund), state extra-budgetary funds, semi-budgetary organisations and local
budgetary organisations (regional offices, municipalities, etc.);

‘Non-enterprise units’ include non-profit
institutions (public universities, public research institutions, Vine-Grower
Funds, schools, associations, etc.).

The social funds are composed of health
insurance companies and non-profit institutions. The former are regulated by
the Special Accounting Decree for health insurance companies and the latter by
accounting decrees for non-profit institutions.

Czech Republic: Nature of accounting
practices in the sub-sectors

Financial statements || Special accounting units || Non-enterprise units

Statement of financial position (balance sheet) || Accruals accounting || Modified accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Modified accruals accounting

Statement of changes in net asset || Accruals accounting || N/A

Cash flow statement || Cash accounting || N/A

A reform of public sector accounting was
implemented in 2010 by central government, moving to accruals accounting. The
objective was to provide accurate, timely, complete and consolidated information
regarding the country’s public finances. This reform will affect all levels of
government and aims to implement modern accruals accounting in all sub-sectors
of government. The national public sector accounting standard is based on
IPSAS.

The Supreme Audit Office (SAO) performs
audits combining financial and performance audit elements on all central level
entities and on entities which manage the property of the State. It has no
mandate to audit regional, local entities and municipalities. Auditing standards
used by the SAO are close to ISA.

Denmark

Danish public sector accounting practices
fall within three categories:

The central government and extra-budgetary
entities apply the Government Accounting Law[45];

The regions apply the Budget, Accounting and Auditing
Order for Regions;

The municipalities apply the Budget, Accounting
and Auditing order for Municipalities.

The social funds follow private sector
standards. Financial statements for unemployment funds are prepared according
to the legislation that private companies follow if they are not using
IAS/IFRS.

The central government and regions use
accruals-based accounting, whereas the municipalities use mainly cash-based
accounting.

Denmark: Nature of accounting practices
in the sub-sectors

Financial statements || Central government || Regions || Municipalities

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting || Cash and accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting || Cash and accruals accounting

Statement of changes in net asset || N/A || N/A || N/A

Cash flow statement || N/A || Accruals accounting || Cash and accruals accounting

For the central government authorities, the
application of IPSAS is an issue that has been and continues to be under
discussion. Danish accounting standards were implemented prior to the
development of IPSAS, but when changes are considered for certain standards,
IPSAS is used as inspiration and, if considered appropriate, implemented in
line with other changes. No accounting reforms are planned in Denmark in the
near future.

It is mandatory for financial statements of
all public sector entities in Denmark to be audited. A financial audit is
performed by the National Audit Office for Central Government. Other government
institutions, such as universities, high schools, etc., are audited by
authorised public accountants, under instruction and review by the National
Audit Office. The financial audits of the regions, municipalities and other
public entities, such as private schools, public corporations, etc., are
performed by authorised public accountants. Auditors apply ISSAI and ISA
standards.

Estonia

All sub-sectors of the general government
apply the Estonian Generally Accepted Accounting Principles (GAAP), which are
based on the Accounting Act, General Rules for State Accounting (based on
IPSAS) and Guidelines of the Accounting Standards Board (based on IFRS).

Estonia: Nature of accounting practices
in the sub-sectors

Financial statements || All sub-sectors

Statement of financial position (balance sheet) || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting

Statement of changes in net asset || Accruals accounting

Cash flow statement || Accruals accounting

Profit-oriented corporations can choose to
use IFRS. The differences between IFRS and the Estonian GAAP are eliminated in
the consolidation process.

There are currently no plans to reform
auditing and accounting in Estonia.

For the central government, the National
Audit Office performs the financial audit. Local government, the social funds
and public corporations are audited by private auditors. The National Audit
Office follows ISSAI standards, while private auditors follow ISA.

Finland

The accounting framework for the public
sector consists of two separate standards:

The Law on the State Budget for the Central
Government (except universities and the limited company Solidium, fully owned
by the State of Finland);

The Accounting Act for all other public sector
entities. The Accounting Act is the financial framework covering the private
sector and complies with the EU Fourth and Seventh Company Law Directives
regarding the preparation and presentation of financial statements.

Social security services also belong to this
group.

Finland: Nature of accounting practices
in the sub-sectors

Financial statements || Central government || Other public entities

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting

Statement of changes in net asset || Accruals accounting || Accruals accounting

Cash flow statement || Accruals accounting || Accruals accounting

The accounting principles are based on
Generally Accepted Accounting Principles and do not refer to IPSAS. There are
no current plans to implement IPSAS in Finland.

One current reform initiative in Finland
relates to auditing, and it concerns the planned consolidation of public sector
auditors (chartered public finance auditor) and private sector auditors
(authorised public accountants).

It is mandatory for the financial
statements of all public sector entities in Finland to be audited annually. For
central government entities, in most cases, a financial audit is performed by
the National Audit Office. Municipalities and related entities are audited by
chartered public finance auditors. All other public sector entities, such as
social funds and public corporations, are audited by private sector auditors
(authorised public accountants). The auditors of central government entities
follow guidelines based on ISSAI and ISA standards. The auditing guidelines are
set out in national manuals for local government and the private sector.

France

Public sector accounting practices fall
within four broad categories:

The central government, where the Central
Government Accounting Standards apply. These accounting standards comprise a
set of Orders following the Constitutional By-law on Budget Acts 2001-692 of 1
August 2001. This text refers to the French Private Sector Standards (Plan
Comptable General — PCG), IFRS, IPSAS and other specific standards applied to
specific issues such as social benefits, tax revenues and heritage assets;

National public establishments — in general[46] — apply the M9 Order in terms
of general accounting and budget. This order was legislated by the
Directorate-General for Public Finances (last updated on December 2011) and
also refers to the French Private Sector Accounting Standard;

Local government entities follow the M Orders
(M14, M52, M71 …). These accounting standards are enacted by the relevant ministries.
The main accounting rules refer to the French Private Sector Accounting Standards;

All systems and entities in the social funds,
including social security statutory schemes, apply accounting rules embedded in
the French Private Sector Accounting Standards — PCG — (reference applicable to
entities in the competitive sector) and are on the whole similar. Concerning
social security schemes, there is only one type of accounting (accruals
accounting; no budget accounting) and the specific accounting standards derived
from the private sector accounting standards (Plan comptable unique des
organismes de sécurité sociale — PCUOSS) was adopted in 2001

France: Nature of accounting practices
in the sub-sectors

Financial statements || Central government || National public establishments || Local government || Social security funds

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting || Modified accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting || Modified accruals accounting || Accruals accounting

Statement of changes in net asset || Accruals accounting || Accruals accounting. || N/A || Accruals accounting

Cash flow statement || Accruals accounting || Accruals accounting || N/A || Accruals accounting

While the accounting arrangement may seem
complex in terms of the number of accounting laws, French private sector
standards are the current root of these, except when the specific
characteristics of the public sector require the standards to be adapted. Even
if all the orders and accounting laws stem from the Chart of Accounts and could be considered as similar, there are key differences between them on some essential issues.

The French Public Sector Accounting
Standards Board (CNoCP: Conseil de normalisation des comptes publics)
continuously works to improve the accounting standards of central government,
public establishments, regional and local authorities, and social security.

The Court of Auditors performs an annual
financial audit on the central government and the most important compulsory health
care and pension schemes (General system). Local government accounts are not
subject to a financial audit, but a legal audit is performed by the Regional
Court of Auditors every four to five years (indicative). The Court of Auditors
seeks to follow ISA standards of auditing as closely as possible.

Germany

In Germany, the Haushaltsgrundsätzegesetz,
which applies to the central and the state sub-sectors, allows either a
cash-based or an accruals-based accounting approach. The Federal Government and
the 16 federal states are autonomous and mutually independent in their budget
management.

The central government and the majority of
the federal states use cash-based accounting and only a minority of states
(Hamburg, Hessen, Bremen and Nordrhein-Westfalen) use or have started to
implement a full accruals-based approach.

Each federal state has the power to
regulate the accounting system for the municipalities located on its territory.
In three states, the municipalities may choose a cash-based accounting system.
However, most municipalities have introduced accruals accounting. Even if the
accounting standards differ between individual states, local governments that
prepare accruals-based financial statements follow the German Commercial Code
(HGB) to a large extent.

The social funds are composed of statutory
pension insurance funds, statutory accident insurance funds, statutory health
insurance funds, nursing care insurance funds and statutory unemployment
insurance funds:

Pension insurance uses modified cash accounting.
The guidance is designed specifically for this entity.

Accident insurance (about 13 entities for
private sector employees and about 27 entities for public sector employees)
also uses a modified cash basis of accounting (with slightly different guidance
for the two sectors).

The health insurance funds (more than 150
entities) and the nursing care insurance funds prepare accruals-based financial
statements. The regulations are inspired by the German Commercial Code and
therefore show major similarities with this private-law standard.

Unemployment insurance uses cash accounting.
The standard is inspired by the Federal Government`s accounting law.

The situation of government accounting
reforms in Germany is rather diverse. Whereas at local level, accruals
accounting has recently been implemented or reforms are ongoing, at federal
level, there is commitment to reforming the accounting system within the cash
basis of accounting.

Germany: Nature of accounting practices
in the sub-sectors

Financial statements || Central government/ majority of State govern­ment (cash based) || Minority of State govern­ments (accruals based)/local governments

Statement of financial position (balance sheet) || N/A[47] || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Cash accounting || Accruals accounting

Statement of changes in net asset || N/A || N/A

Cash flow statement || N/A || Cash accounting

Financial audits are performed by the
Federal Court of Auditors for the central government, by state courts of
auditors for state governments, and by regional and local audit offices for
local government. The guidelines developed by the International Organisation of
Supreme Audit Institutions (INTOSAI) are not mandatory, but accepted as best
practice.

Greece[48]

The modernisation of public accounting in
central government is under way, but for the time being, modified cash
accounting is in place.

All sub-sectors of government are audited
by the Hellenic Court of Auditors. The Court is responsible for conducting
ex-ante and ex-post audits. The former involves the audit of state and public
corporation expenditure under specifically-issued laws. The second type of
audit concerns the accounts of public accounting officers and the statements of
public bodies and local administration agencies.

Hungary

Accounting is uniform for all reporting
units within the perimeter of government defined by law and called the ‘Legal
Government Sector’. Public sector accounting practices fall within two
categories:

Public accounting: Public accounting rules for
all units that are part of the Legal Government Sector and that follow a
government decree with crucial departures from general business accounting.
Social funds follow the same accounting principles;

Accounting law: The institutional coverage of
the ‘Accounting law’ corresponds to units following the general accounting
principles either directly in Act C 2000 on Accounting, or in Government Decree
224/2000 (XII. 19.) on the special provisions for book-keeping and preparation
of financial statements of other entities.

Hungary: Nature of accounting practices
in the sub-sectors

Financial statements || Public accounting || Accounting law

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Cash accounting || Accruals accounting

Statement of changes in net asset || N/A || Accruals accounting

Cash flow statement || Cash accounting || Accruals accounting

In Hungary, there are neither any references
to IPSAS, nor any plans to further implement accruals accounting practices.

Financial audit is performed by the State
Audit Office for central government, the social funds and local government.
Certain types of local government, local government entities[49] and public corporations[50] above a certain threshold are
audited by private audit firms. The work of the State Audit Office is based on
INTOSAI standards.

Ireland

Public sector accounting arrangements fall
within two categories:

Central government, which includes the
departments of State, extra-budgetary funds, other non-market agencies, other
voted expenditure and voluntary and joint board hospitals. Social funds in
Ireland are part of central government and are subject to the same accounting
law;

Local government, which comprises city councils
and educational entities.

Ireland: Nature of accounting practices
in the sub-sectors

Financial statements || Central Government || Local Government

Statement of financial position (balance sheet) || Cash accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Cash accounting || Accruals accounting

Statement of changes in net asset || N/A || N/A

Cash flow statement || N/A || N/A

At central government level, there is a
reform agenda to move departments from cash accounting to accruals-based
accounting. By the end of 2005, all departments had installed new (separate)
information systems. The IPSAS standards are not well known in Ireland, but there
are plans to research their applicability as an element of phase two of the
accruals implementation reform.

The Comptroller and Auditor General perform
financial audits on central government. For local government audits, the Local
Government Audit Service provides independent scrutiny of the financial
stewardship of local authorities and other local bodies. Auditors apply ISA
standards.

Italy[51]

Central government uses a modified
cash-based accounting system called the ‘legal accruals’ system, which assigns
resources in the budget when the obligations with third parties arise. Accruals
accounting is also used, but not as the primary accounting system for some
components of the financial statement.

According to two recent legislative decrees,
the principle for the cash-based ‘legal accruals’ has been modified for local
government and a few other kinds of entities into the so-called ‘enhanced legal
accruals’. Under this principle, obligations are still recorded when the
obligation arises, but the amount is imputed only in the year when payments are
due. This innovation has been authorised for three years on an experimental
basis. After this, a decision will be made concerning the basis on which harmonisation
in public accounting will proceed.

Italy Nature of accounting practices in
the sub-sectors

Financial statements || Central Government || Local Government

Statement of financial position (balance sheet) || Modified accruals/modified cash accounting || Modified accruals/modified cash accounting

Statement of financial performance (Income statement/profit and loss statement) || Modified accruals/modified cash accounting || Modified accruals/modified cash accounting

Statement of changes in net asset || N/A || N/A

Cash flow statement[52] || Cash accounting || Cash accounting

Major reforms are planned over the coming
year that will significantly change the accounting and auditing framework. The
fundamental aspect of the current reform is the provision for an enabling act
to harmonise the accounting systems and budget formats of general government
bodies; therefore a single, consistent normative framework is laid down for all
entities forming part of general government. The reform of the general
accounting framework does not currently contain any reference to IPSAS
principles.

The Court of Auditors is responsible for
the a priori audit of the legality of Government acts, and also for the a
posteriori audit of the State Budget’s management. Ultimately, all state
spending falls within its remit. Audit work is carried out by the Court`s
central and regional chambers, with specific audit offices examining, at
central level, each ministry. On a voluntary basis, the Court of Auditors seeks
to follow European Standard of Auditing standards as closely as possible.

Latvia

All general government entities, except
public corporations and units, reclassified by the Central Statistical Bureau
from the non-financial corporation sector to the general government sector,
apply the same Government Regulation on Budgetary Institutions Accounting,
which refers to IPSAS, and the general principles of the national law on
accounting. Public corporations and reclassified units apply the national law
on accounting and national accounting rules.

Latvia: Nature of accounting practices
in the sub-sectors

Financial statements || All sub-sectors of government

Statement of financial position (balance sheet) || Accruals accounting, cash accounting for recoverable, modified accruals accounting for taxes and transfers payable

Statement of financial performance (Income statement/profit and loss statement) || Modified accruals accounting

Statement of changes in net asset || Modified accruals accounting

Cash flow statement || Accruals accounting and cash accounting

To ensure the further development of
national legal bases for accruals accounting, a project to develop national
IPSAS-based accruals accounting standards is expected to take place within the
next three to five years, with possible further reconciliation with ESA and EDP
statistics requirements.

The institution in charge of the financial
audit at both central and local government level is the State Audit Office. For
government and municipal entities, there is also a financial audit, which is
carried out by private firms. Auditors apply ISA standards.

Lithuania

There is a single accounting principle,
defined by law, which is accruals accounting for all levels of government. In
addition to accruals accounting, all entities have to prepare budget execution
reports, which are based on cash. The accounts are kept according to national
requirements of public sector financial reporting and accounting standards,
which are based on IPSAS.

Lithuania: Nature of accounting
practices in the sub-sectors

Financial statements || All sub-sectors of government

Statement of financial position (balance sheet) || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting

Statement of changes in net asset || Accruals accounting

Cash flow statement || Accruals accounting

The National Audit Office is responsible
for performing financial and performance audits on central government, social
and health funds. Local governments are audited by local government controllers
that are subordinate to the Council of local government and apply the
methodology of the National Audit Office. Public audit requirements have been
established by the Law on State Control and approved by the Order of the Auditor
General and were replaced by direct application of ISA and ISSAI for financial
audits from 1 June 2012.

Luxembourg

Public sector accounting practices fall into
five categories:

Entities following the ‘Law of 8 June 1999 on
government accounting’: The financial reporting of the Head of State,
Parliament, Government, ministries, special funds and state services (such as
high schools and museums) is cash based;

Public establishments (such as research centres
and state foundations) have used a standard Chart of Accounts PCN since 2011.
The generally accepted accounting principle is based on the national LUX GAAP[53];

Public corporations follow private sector
accounting standards;

Municipalities and cooperations of
municipalities use the ‘modified local accounting law’;

Social funds use uniform social security
accounting rules based on LUX GAAP, the generally accepted accounting
principles.

Luxembourg: Nature of accounting
practices in the sub-sectors

Financial statements || Entities following the government accounting law || Public establishments || Public corporations || Municipalities, cooperations of municipalities || Social funds

Statement of financial position (balance sheet) || N/A || Accruals accounting || Accruals accounting || N/A || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || N/A || Accruals accounting || Accruals accounting || N/A || Accruals accounting

Statement of changes in net asset || N/A || || || N/A ||

Cash flow statement || N/A || || || N/A ||

Luxembourg applies a uniform presentation
of the annual accounts for each sector. It does not comply with IPSAS. A reform
introducing a new standardised Chart of Accounts for the budget is underway,
concerning municipalities and cooperations of municipalities.

The accounting of central government
entities is subject to legal, financial and performance compliance audits from
the Court of Auditors. Some are also subject to financial audit from private
audit companies. Local government entities are subject to legal and financial
audit performed by the Ministry of the Interior and some are also subject to
financial audit from private audit companies. The social security funds are
subject to legal and financial audit from the General Inspection of Social
Security. The approach of the Court of Auditors does not currently follow
international audit standards. A project is underway to develop auditing
practices for public entities.

Malta

Public sector accounting practices fall
within the following categories:

Central government. Social security forms also
part of central government;

Extra-budgetary units (EBUs) and public
corporations applying IFRS;

Smaller extra-budgetary units applying General
Accounting Principles for Smaller Entities;

Local councils.

Malta’s central government
(Government/ministries and departments) reporting is laid down in the Financial
Administration and Audit Act (Chapter 174), where, under Article 67, one finds
the reporting requirements that the Accountant General has to present for each
financial year. Such information as required by law is presented in the
Financial Report published annually and presented to Parliament no later than
six months after the close of the fiscal year. This Financial Report includes a
detailed analysis of the financial transactions on a cash accounting basis.

Malta: Nature of accounting practices in
the sub-sectors

Financial statements || Government / ministries and departments || EBUs and public corporations || Smaller EBUs || Local councils

Statement of financial position (balance sheet) || Modified accruals accounting || Accruals accounting || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting || Accruals accounting || Accruals accounting

Statement of changes in net asset || N/A || Accruals accounting || Accruals accounting || Accruals accounting

Cash flow statement || Accruals accounting || Accruals accounting || Accruals accounting || Accruals accounting

In 2002, the Treasury Department started
preparing accruals-based Financial Statements. To date, these have only been
used for reporting purposes and have never been published. Currently, such
Statements are not statutory. Thus it follows that they are neither presented
to the Parliament nor comprehensively audited.

While ministries and departments use the
Central Government Chart of Accounts, extra-budgetary units, public
corporations and local councils use their own Chart of Accounts.

Some IPSAS standards are partially
implemented. There are plans to implement IPSAS as the accounting standards to
be used by central government, although the plan is still in the initial stages
and no timescale is yet available.

The National Audit Office performs the
financial audit of the government, ministries and departments and
extra-budgetary units. Extra-budgetary units, public corporations and local
councils are subject to a private financial audit. The auditing standards used
are ISA and ISSAI.

Netherlands

Accounting standards differ between central
government, local government and social funds:

Central government applies the standards in the
‘Comptabiliteitswet’; the law which sets the rules for budgeting and reporting.
The more detailed outlines and models are written down in the ‘Rijksbegrotingsvoorschriften’,
a regulation from the Finance Minister.

Local government uses an accounting standard
for local governments (‘Besluit Begroting en Verantwoording’), which refers to
the Dutch private sector accounting standards laid down in the Dutch Civil Code
Book 2, part 9;

Social funds include only social security
services, which apply the national GAAP (the ‘RJ’) and Dutch Civil Code Book 2,
part 9.

Netherlands: Nature of accounting
practices in the sub-sectors

Financial statements || Central government || Local government || Social funds

Statement of financial position (balance sheet) || Cash accounting[54] || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || The income statement is a mix of cash accounting (receipts and expenditures) and an oversight of liabilities || Accruals accounting || Accruals accounting

Statement of changes in net asset || N/A[55] || Accruals accounting || Accruals accounting

Cash flow statement || Cash accounting || N/A || Accruals accounting

Central government applies a cash
accounting system, while local government and social funds use accruals
accounting. However, local government is not fully on an accruals basis, as
some items are on a cash basis, or not recorded. There are currently no plans
for accounting reform or for implementing IPSAS.

The Court of Auditors performs financial
audits for central government. The financial audit of local government and
social funds is performed by private accounting firms, except for the
municipalities of The Hague and Amsterdam. These two cities have their own
audit service. The auditing standards are based on, and in line with, ISA as
far as possible.

Poland

Public sector accounting practices fall
within two categories:

Public entities with legal personality
(including social funds) — applying the Accounting Act;

Budgetary units — applying the Accounting Act
and Minister of Finance Regulation

In Poland, all entities, whether public or
private, apply the Accounting Act. The budgetary units also apply the
Accounting Act provisions. However, in addition, they also follow the special
provisions of the Regulation of the Minister of Finance of 5 July 2010 on
special accounting rules and charts of accounts for the state budget, and for
some other units of the public sector. These provisions help the budgetary
units to issue the (cash-based) statements on budget execution. They also
provide for a special Chart of Accounts and a template of the financial
statement adjusted to the specific character of the public sector.

Poland: Nature of accounting practices
in the sub-sectors

Financial statements || Entities applying the Accounting Act || Entities applying the Accounting Act and Minister of Finance Regulation (Budgetary units)

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting

Statement of changes in net assets || Accruals accounting || Accruals accounting

Cash flow statement || Cash method || N/A

IPSAS is neither applied nor referred to in
Poland.

The Supreme Audit Office audits budget
execution for central government, the National Bank of Poland, state legal
entities, and other state organisations. The Office does not audit financial
statements. It applies national audit standards. Currently, there is a reform
of audit procedures underway in accordance with the amendment to the Act on the
Supreme Audit Office of 22 January 2010.The objective is to streamline and
legally consolidate the audit process.

Portugal

While the government accounting arrangement
may seem very complex in terms of number of accounting laws, the current root
of all of these laws is the Official Plan of Public Accounting (POCP). This is an
accruals-based accounting system, and integrates three interconnected
subsystems in one accounting system:

Budgetary accounting (modified cash basis) —
linked to patrimonial accounting by accounts 251 and 252 — debtors and
creditors

Patrimonial[56] accounting — accruals basis

Analytical accounting — costing by functions
and by product/area — accruals basis

Some specific sub-sectors, such as
education, social security, local government and the health sector, also use a
system similar to POPC, the philosophy, principles and rules of which are
almost identical (sectoral plans).

We can, however, distinguish two accounting
practices:

Entities of the State, non-profit institutions
of central government and regional government only use budget execution
accounting (cash basis), although this will change over the next few years. For
these entities, statements of financial position and performance are not
applicable;

Other entities applying the POCP, and therefore
using accruals accounting, integrating accruals and budget execution accounting
operations.

Most of the public corporations at
different levels of government apply private sector standards greatly inspired
by IFRS.

Portugal: Nature of accounting practices
in the sub-sectors

Financial statements || Entities on cash basis || Other entities

Statement of financial position (balance sheet) || N/A || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || N/A || Accruals accounting

Statement of changes in net asset || N/A || N/A

Cash flow statement || Cash accounting || Cash accounting

The POCP was approved by the Decree-Law
232/97 of 3 September and was a major step in the reform of the public
accounting and financial administration in Portugal. The starting point for reflection
on the need for accounting reform was the objective of modernising public
accounting and providing essential tools to support management of public
entities and performance evaluation. The reform is still in progress and
changes are to be expected in standard-setting accounting, namely, IPSAS
adoption. However, no timeline has been set.

The ‘Inspecção-Geral de Finanças’ (IGF)
performs the financial audit for the central and local government, social
services and public corporations. But it is the ‘Tribunal de Contas’, the Supreme
Audit Office, which is the independent body with a nationwide audit remit and
with the most substantial area of work in ex-post audits, including performance
audits. It is mandatory to apply the Audit and Procedures Manual. ISSAI is
followed on a voluntary basis.

Romania

All general government entities apply the
same accounting standards.

Romania: Nature of accounting practices
in the sub-sectors

Financial statements || All sub-sectors

Statement of financial position (balance sheet)[57] || Modified accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Modified accruals accounting

Statement of changes in net asset || Modified accruals accounting

Cash flow statement[58] || Cash accounting

At the time of writing, only certain
provisions of some IPSASs have been implemented. Over the next three years,
national norms will be improved with other provisions. Beyond that period,
additional provisions from IPSAS will be implemented if they are deemed
necessary. Although certain regulations are inspired by IPSAS principles, no
explicit reference is made to IPSAS as such.

The Romanian Court of Auditors performs
financial audits on central government, local government and social services.
The Court has developed its own standards in accordance with generally-accepted
international audit standards. The standards are close to ISA.

Slovakia

A single accounting law applies to all
sub-sectors of government, i.e. central government, local level government and
social funds.

The Ministry of Finance has adopted
accruals-based accounting principles, based on, but not fully compliant with,
IPSAS principles. The Ministry of Finance intends to apply all IPSAS principles
in the near future, as there are still some differences between current public sector
standards and IPSAS.

Slovakia: Nature of accounting practices
in the sub-sectors

Financial statements || All levels of government

Statement of financial position (balance sheet) || Modified accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Modified accruals accounting

Statement of changes in net asset || N/A

Cash flow statement || N/A

There is a project intended to implement a
single state reporting and accruals accounting system. This project, initiated
by the Ministry of Finance, will affect central and local government. The
objective is to improve the accounting and reporting system in the public
sector to enhance macroeconomic performance and fiscal transparency of public
finances.

The Supreme Audit Office is responsible for
legal audits. Internal financial audits are conducted by the Ministry of
Finance in compliance with the Act on accounting rules. Audit reports will
start to be publicly available from 2013. The SAO complies with auditing
standards issued by INTOSAI.

Slovenia

The Law on Accounting provides accounting
rules for any entity that uses public funds from the State Budget. It does not
make a distinction between central government and local government
(municipality) entities[59].

Slovenia: Nature of accounting practices
in the sub-sectors

Financial statements || All levels of government

Statement of financial position (balance sheet) || Modified accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Modified accruals accounting/ cash accounting

Statement of changes in net asset || Modified accruals accounting

Cash flow statement || Cash accounting

None of the financial statements are purely
accruals based, contrary to IPSAS, but a modified accruals accounting is generally
used. Cash flow statements are drawn up on a cash accounting basis. No changes
are planned and no reform is currently underway.

The Court of Auditors performs an annual legal
and financial audit of the final account of the central government budget and
social security funds. The final reports of other general government units
(municipalities, public extra-budgetary funds, public agencies and public
institutions of the central and local governments) are occasionally subject to
legal, financial, performance compliance and IT audits by the Court of
Auditors. The implementation of ISSAI standards is mandatory for the Court of
Auditors.

Spain[60]

Public sector accounting practices fall
within the following categories, representative of the heterogeneity of
accounting practices in Spain:

Entities applying the Public Accounting General
Plan and Accounting Rules, including the State, autonomous bodies, public
entities and social security funds;

Public corporations (financial and
non-financial) following the Accounting General Plan, including non-profit
institutions;

Autonomous communities applying the Regional
Financial Laws and their own regional public accounting plans;

Local government applying the Local Financial
Law and Public Accounting Plan for Local Bodies;

The Central Bank applies the Eurosystem
standards.

Spain: Nature of accounting practices in
the sub-sectors

Financial statements || Entities following Public Accounting General Plan and accounting practices || Public corporations

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting

Statement of changes in net asset || Accruals accounting || N/A

Cash flow statement || Cash accounting || Accruals accounting

In 2010, the Spanish administration adopted
a new, IPSAS-based Accounting General Plan and Accounting Rules, and is
currently working on adapting the public consolidation regulation to IPSAS principles.
The nature and scope of the existing plan for reform is the consolidation
process; to define the framework applicable to the State, the autonomous and
local public sector; and to adapt the Spanish public accounting regulation to
IPSAS.

The Court of Auditors and the regional
courts of auditors perform a financial audit on all sub-sectors (ex-post
control). On a voluntary basis, the Court of Auditors seeks to follow ISA
standards of auditing as closely as possible. The General Control and Audit
Office (IGAE) and the General Control delegations at agencies level play the
role of internal controllers.

Sweden

Public sector accounting practices fall
within four broad categories:

Central government authorities;

Other central government entities;

Local government (municipalities, municipal
associations and county councils);

Social security funds.

Sweden: Nature of accounting practices
in the sub-sectors

Financial statements || Central government authorities || Other central government entities || Local government || Social security funds

Statement of financial position (balance sheet) || Accruals accounting || Accruals accounting || Accruals accounting || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting || Accruals accounting || Accruals accounting || Accruals accounting

Statement of changes in net asset || N/A || N/A || N/A || N/A

Cash flow statement || Accruals accounting || Accruals accounting || Accruals accounting || N/A

The Swedish accounting system is accruals based.
On a basic level, there are strong similarities between the State’s accounting
principles and IPSAS definitions and principles, as national standards are
influenced by IPSAS and other standards. At present, no major accounting or
audit reforms are being considered.

Central government authorities, including
the Swedish Pension Agency, come under the scope of the financial audit of the
Swedish National Audit Office. Municipalities, municipal associations and
county councils are audited by auditors appointed by the municipal or county
council. Other central government entities and the Swedish National Pension
Insurance Funds are audited by private audit firms. The auditors aim to follow
ISA standards of auditing as closely as possible.

UK

Accruals accounting was introduced for
central government departments and other entities in 2000 (local government
entities have accounted on an accruals basis since the 19th century). Initially,
UK GAAP was applied, but since 2009, accounting has been on the basis of IFRS,
adapted as necessary for the public sector. Budgeting rules are also on an
accruals basis, aligned as far as possible with IFRS, but with some differences
to reflect ESA 95 statistical accounting standards. Technical accounting
standards are provided through financial reporting manuals issued by the
relevant authorities. These manuals are prepared with advice given by the
Financial Reporting Advisory Board, an independent body of experts whose role
is to promote the highest possible standard in financial reporting by
government and to help ensure that any adaptations of, or departures from,
EU-adopted IFRS are justified and properly explained.

UK: Nature of accounting practices in
the sub-sectors

Financial statements || All sub-sectors of government

Statement of financial position (balance sheet) || Accruals accounting

Statement of financial performance (Income statement/profit and loss statement) || Accruals accounting

Statement of changes in net asset || Accruals accounting

Cash flow statement || Accruals accounting

Public sector entities in the United Kingdom
apply EU-adopted IFRS, adapted for the public sector. Overall, the system is
similar to IPSAS principles. Where EU-adopted IFRS is adapted and interpreted
for the public sector, IPSAS is among the standards that can be used as a
reference in developing these interpretations and other adaptations.

The National Audit Office performs
financial audits of UK-wide central government departments and a wide range of
other public bodies. The devolved governments are audited by Audit Scotland,
the Wales Audit Office and the Northern Ireland Audit Office respectively. At
present, the institution in charge of commissioning audits for English local
government is the Audit Commission, with private sector firms undertaking the
audit work. Audit Scotland, the Wales Audit Office and the Northern Ireland
Audit Office either audit or commission audits of local government within their
remit. Public corporations are audited by private auditors. All financial
audits are conducted according to national auditing standards issued by the
Financial Reporting Council, which comply with EU requirements and with the
standards of the International Federation of Accountants.

CHAPTER 4

4.           The
relationship between Government Finance Statistics and IPSAS

4.1.        Introduction

EU governments produce two main types of
financial data on their activities — Government finance statistics for fiscal
policy purposes (including statistics for the Excessive Deficit Procedure), and
accounting and budgeting reports for accountability and decision-making
purposes relating to individual entities or groups of entities.

The relationship between the two types of
report is important, in respect of both transparency (explaining to users the
differences between the data in the respective reports) and efficiency, since
public accounting systems are generally the fundamental source of data for compiling
government finance statistics (GFS). This chapter analyses the relationship
between EU GFS and IPSAS.

EU Government finance statistics are based
on the methodological rules of the European System of Accounts (ESA 95), set
out in Council Regulation (EC) No 2223/96. The ESA 95 is based on the worldwide
System of National Accounts (SNA 1993), and is supplemented by further Eurostat
decisions and guidance, most notably the ESA 95 Manual on Government Deficit
and Debt.

The European System of Accounts is
currently being revised to bring it into line with the SNA 2008, and the ‘ESA
2010’ is expected to come into force in 2014. Given that few fundamental
changes are being made with respect to GFS, the analysis in this chapter is
largely unaffected by the revision; however, it anticipates ESA 2010 changes in
some places.

It is also important to note that EU Member
States also prepare government finance statistics for reporting to the
International Monetary Fund (IMF)[61].
Given that the IMF’s Government Finance Statistics Manual is based on the SNA,
the conceptual differences between the IMF and EU GFS data are minimal; however,
there are some presentational differences. This chapter focuses on the
relationship between EU GFS and IPSAS.

4.2.        Background

Statisticians and accountants have a long
tradition of cooperation over the years, and it is noticeable that the
development of the SNA has drawn heavily on the principles and presentation of
business accounting. Statisticians recognise that their data sources are often
based on financial reports. Nevertheless the SNA recognises that there are some
fundamental differences in approach:

The design and structure of the SNA draws
heavily on economic theory and principles as well as business accounting
practices. Basic concepts such as production, consumption and capital formation
are meant to be rooted in economic theory. When business accounting practices
conflict with economic principles, priority is given to the latter, as the SNA
is designed primarily for purposes of economic analysis and policymaking.

In the case of government financial data,
Eurostat and IMF statisticians have been observers at the IPSAS Board for a
number of years, and have worked with IPSAS Board staff on projects to explore
the relationship between GFS and IPSAS.

A Task Force on Harmonization of Public
Sector Accounting (TFHPSA) was created in 2003. The TFHPSA’s major areas of
work were to develop proposals for changes to government finance statistics
and/or to IPSASs in the context of the 2008 update of the SNA, and in doing so
to document the similarities and differences between the two reporting systems.
The Task Force published a detailed report in 2005[62] and an active work programme
was initiated, which notably led into the preparation of a new IPSAS 22
(Disclosure of Financial Information about the General Government Sector) in
2006 and to input for the preparation of SNA 2008.

4.3.        Conceptual
differences between IPSASs and statistical guidelines

There are many similarities between IPSAS
(based on business accounting approaches) and GFS (based on national accounting
approaches). Both systems seek to prepare an integrated and consistent dataset
(with data on both stocks and flows), with accruals as a guiding reporting
principle.

However, as mentioned above, the systems
have different objectives, and this leads to certain differences of both
substance and presentation. Financial statements based on IPSASs are predominantly
intended to meet the need for management accountability, providing an evaluation
of financial performance and position, and thereby aiding decision-making. GFS
are intended to be used in a macroeconomic analysis context, with an emphasis
on international comparability of aggregate data on government finances.

This difference in objectives is most
evident in the entity on which the dataset reports (the so-called ‘reporting
entity’).

·
In the European System of Accounts,
institutional units are aggregated (generally on a consolidated basis) into
sectors and subsectors. Each individual entity in the economy is analysed with
respect to its autonomy of decision making, to determine if it can be
considered to be an institutional unit. Those government-controlled units that
are primarily engaged in non-market (including redistributive) activities are
included within the ‘general government sector’, which is the headline
reporting entity used for Excessive Deficit Procedure purposes[63].

·
Under IPSAS the ‘reporting entity’ is a
government or other public sector organisation, programme or identifiable
activity that prepares general purpose financial reports (GPFRs). A key
characteristic of a reporting entity is that there are ‘users’ who depend on
these reports for information about the entity. The financial information of
any bodies controlled by the reporting entity is wholly consolidated in its
financial statements. Whilst it is possible to compile a set of IPSAS-based
statements for an aggregate of entities, including across government, this is
rarely done in practice[64].

There is, however a standard which covers ‘Disclosure
of financial information about the General Government Sector’ (IPSAS 22). This standard
specifically sets aside the application of the usual IPSAS consolidation rules
(IPSAS 6), thereby allowing presentation of a general government set of
IPSAS-based accounts which can be used to reconcile the statistical reporting
boundary for the general government sector with the IPSAS reporting boundary[65].

It is conceivable that statistical
boundaries can form a basis for drawing a reporting boundary in public
accounting, without (as in IPSAS 22) being the precise boundary. This kind of
approach can bring the two systems closer together, whilst leaving some flexibility
for reflecting specific national circumstances, though at the cost of
introducing a possible lack of harmonisation between jurisdictions.

Whilst there are many further differences in
detail between IPSAS and GFS[66],
three major groups of conceptual differences can be found in the recording of
stocks and flows.

(3)
Treatment of revaluations

GFS record all holding gains and losses
(revaluations) in a separate account for ‘other economic flows’, and therefore
they are not included in recorded revenues, expenditures, or the net
lending/net borrowing of government. This approach reflects the view that
revaluations can be considered as not being under government control and are
therefore not relevant to fiscal policy analysis.

IPSAS requires the majority of revaluations
and changes in value to be recorded in the Statement of Financial Performance
(and therefore in the ‘bottom line’) as they are perceived to be relevant to a
measurement of government’s activities. The main exceptions to this are foreign
exchange gains and losses related to foreign subsidiaries and revaluations of
property, plant, and equipment. These value changes are included in a separate
financial statement, the Statement of Changes in Net Assets/Equity.

(4)
Recognition criteria for assets, liabilities,
revenue and expenses

GFS and IPSAS are both based on the
principle of accruals and therefore seek to record economic transactions in the
period in which they occur, with a notable caution in anticipating future
events. Nevertheless GFS treat uncertainty about future economic outflows
differently from IPSAS, recognising fewer liabilities than IPSAS. This may be
seen in the following areas:

·
Guarantees, and related contingent liabilities,
are generally not recognised in GFS until they are called[67]. IPSAS requires that where
there is a present obligation and an outflow will probably occur, a reliable
estimate of the amount involved should be recognised as a liability.

·
IPSAS provides for the recording of provisions
defined to be liabilities of uncertain timing or amount (IPSAS 19, paragraph
18). Provisions include obligations for which there is no counterparty, for
example provisions for restructuring and environmental restoration. They also
include such issues as non-performing loans. GFS do not record provisions
because the national accounts system is necessarily symmetric and the values of
assets and related liabilities must match.

Differences in the recognition of
liabilities will lead to differences in the recording of revenues and
expenditures under the two systems (for example, in general, expenditure
relating to guarantees will tend to be recorded earlier under IPSAS than under
GFS).

(5)
Valuation

GFS adopts a general philosophy of using
current market prices as the valuation basis for assets and liabilities[68]. IPSAS requires the use of
current market prices for many classes of assets and liabilities. However, for
some classes, for example property, plant and equipment, IPSAS allows the use
of either current market prices or historic cost. For a small group of assets,
most notably inventories, IPSAS requires a valuation basis other than current
market prices. Both systems allow for proxies to current market prices.

It should nevertheless be noted that IPSAS
requires the valuation basis for all assets and liabilities to be disclosed
and, where reporting is at historic cost, IPSAS often encourages or requires
disclosure of fair value, if there is a material difference between the
historic cost and fair value.

Finally, the use of historic cost in the valuation
of non-financial assets in IPSAS-based accounts will also lead to differences
between the measure of depreciation in these accounts and the measure of
consumption of fixed capital in GFS (which is a current prices-based concept).
In general, during periods when asset prices rise, measures of depreciation are
lower than measures of consumption of fixed capital. It should also be noted that
whilst IPSAS treats depreciation as a cost in the Statement of Financial
Performance, GFS includes gross fixed capital formation as expenditure when
calculating the surplus/deficit.

(6)
Application of the accruals principle

Whilst the accruals principle is shared by
GFS and IPSAS, there are some operational areas of application of the principle
which can be identified as potentially leading to differences in recording. One
significant area for Europe is the time of recording of tax and social security
contribution revenue: where GFS allows the possibility for Member States to
record them on a ‘time-adjusted cash’ basis, as an alternative option to an
assessment basis (which is consistent with the approach in IPSAS for
non-exchange revenue under IPSAS 23). A large majority of EU Member States now
use the time-adjusted cash approach for most of their recording of taxes and
social contributions. Whilst the overall amount of revenue recorded on
aggregate over time should be equal under the two approaches, the distribution
of that recorded revenue across time is likely to be different.

4.4.        Presentational
differences

In addition to conceptual differences
between IPSAS and GFS, the way in which the information is presented and the
terms that are used (for the same or similar concepts) are often different. It
can therefore be difficult to compare GFS data and IPSAS financial statements
and disclosures, even if the underlying information is consistent.

Differences in presentation may be found at
three levels:

(a)
The titles and purpose of statements

The ESA system has a standard presentation
of non-financial and financial sector accounts, which is used for both general
government and other sector accounts of the economy and rest of the world[69]. In addition, the EU has
adopted a specific approach[70]
to presenting the following statistics:

·
Government Revenue

·
Government expenditure

·
Government Deficit/Surplus

·
Transactions in Assets

·
Transactions in Liabilities

·
Other Economic Flows

·
Balance Sheets

IPSAS-based statements are described in IPSAS
1, and as a minimum include:

·
Statements of Financial Position or Statements
of Assets and Liabilities (both equivalent to balance sheets),

·
A Statement of Financial Performance (also
called Income Statement), Statement of Revenues and Expenses, Operating
Statement, or Profit and Loss Statement — which captures the type of
transactions which fall into GFS government expenditure, revenue and
deficit/surplus[71],
and

·
A Statement of Changes in Net Assets, which
includes some elements which GFS records as other economic flows.

(b)
The breakdowns provided

GFS, like most statistical datasets, use a
highly standardised set of economic and functional classifications to ensure
comparability. For example, GFS relies rely on a standardised functional
breakdown (health, education, etc.) to present government expenditure. These
detailed classifications are very useful for the analysis of the financial
aspects of government policies by specific domain. Whilst there are certain
fixed line items and breakdowns in IPSAS-based financial reports — for example
a distinction between current and non-current assets and liabilities — there is
also some greater flexibility in presentation, for example reporting on ‘segments’
to fulfil the requirements of IPSAS 18 (segment reporting).

(c)
Additional information provided

GFS statisticians are encouraged (and in
some cases obliged) to publish their data alongside supporting information on
the sources, methods and information on significant transactions or
developments as metadata or footnotes to statistical reports. In addition to
legally required data (in the European Union, under the EDP reporting procedure
and ESA transmission programme), GFS statisticians may also report memorandum
series on a voluntary basis. But it must be said that the volume of detailed
information which is required and published in the EU is very significant.

IPSAS-based statements have far fewer lines
of information and breakdowns than GFS. However, the notes to the financial
statements can be particularly detailed since they must include a summary of
significant accounting policies, further detailed information about individual
items reported on the face of a statement (for example, a break-down of
property, plant and equipment into classes), information about items that are
not recognised but nonetheless important (for example, contingencies) and risk
information related to financial instruments.

GFS, like other main statistical series,
serve users by presenting (often long) time-series of comparable data, which
means that new source data, methodological changes and errors identified lead
to revision of past data. In the case of EU GFS statistics, data are compiled
and published both annually and quarterly. IPSAS only requires annual
reporting, but allows for the possibility of more frequent reporting. Financial
statements presented according to IPSAS require comparative information about
only one previous year, adjustments to prior years can be made (the number of
prior years is not specified).

4.5.        Latest
initiatives

In 2011 the IPSAS Board approved a new
project, the Alignment of IPSASs and Public Sector Statistical Reporting
Guidance project, to further enhance and promote the reconciliation and
harmonisation of IPSAS and public sector statistical reporting guidance.
Eurostat and IMF statisticians are actively participating in the project.

The project has a broad approach, dealing
with both conceptual issues and practical issues, such as guidance on
developing an integrated Chart of Accounts designed to encompass both IPSAS and
statistical needs.

A Consultation Paper relating to the
project was published on 17 October 2012, seeking comments from constituents by
31 March 2013[72].

The main points raised in the Consultation
Paper — in addition to a detailed description of work undertaken to date and
the main methodological comparisons between the systems — are as follows:

(7)
The IPSAS Board notes that in some areas — due
to different user requirements and therefore conceptual approach — certain
differences will remain between IPSAS and GFS, and will therefore need to be managed.
The strategy for managing them rests on three possible (and complementary) approaches,
which may be applied according to the type of difference to be managed:

(a)
Choice of IPSAS accounting policy options. The
IPSAS Board notes that where IPSASs offer options to preparers, one option may
be aligned or close to the GFS approach. It has proposed that these options be
highlighted in documents providing guidance for the adoption of accruals
accounting, so that preparers are aware of this when choosing between possible
options.

(b)
Chart of accounts design. The IPSAS Board notes
that chart of accounts design can address several types of difference, in
particular presentation differences. The IPSAS Board proposes guidance on the
development of integrated charts of account.

(c)
Production of additional data. The IPSAS Board
acknowledges that some additional information may need to be prepared for GFS
compilers, if it is not built into the chart of accounts.

(8)
The IPSAS Board identifies certain initiatives
as possibilities with respect to IPSAS. In addition to general approaches which
would raise the profile of GFS issues when standards are developed and
discussed, there are also some specific proposals which may relate to ongoing
or future projects. For example, one involves — with the cooperation of GFS
compilers and the International Valuation Standards Council — analysing the
basis for valuation of assets between the two systems. The IPSAS Board also identifies
that the current IPSAS 22 (reporting on the general government sector) has not been
taken up by preparers, and considers a number of options to address this. The
IPSAS Board asks for comments on its proposals and any further suggestions for
opportunities to improve alignment.

(9)
There are also certain initiatives mentioned
which GFS compilers could take with respect to alignment. In addition to possible
joint work on valuation, specific issues mentioned include extractive
industries, service concessions, research and development, and low interest
rate loans. The Board asks if any further issues can be identified.

The IPSAS Board has requested comments on
the consultation paper by 31 March 2013 and will then analyse responses and pursue
the project. In the consultation on its 2013/2014 work programme[73], the IPSAS Board set out plans
to agree an exposure draft in September 2013 and to conclude the project in
September 2014[74].

4.6.        Commission
considerations

In contrast to many other regions of the
world, the public profile of GFS is very high in the EU because they are
directly used in European policy making and fiscal control, and — in the
absence of harmonised public accounting standards — have become, de facto,
a common public accounting standard.

Many Member States take great account of
statistical considerations when designing and implementing budgetary policy and
in their national budgeting and accounting systems. Data users are particularly
interested in the reconciliation between public accounting data published at
national level and government finance statistics, and sometimes argue that
differences between the two raise quality concerns on the data, even when such
differences are purely conceptual in nature.

The underlying prerequisite for compiling
high quality government finance statistics is a robust accruals-based public
accounting system that is subject to strong internal controls and independent audit.
This has become increasingly apparent in Europe, and Eurostat has taken
concrete steps in developing its role in this area.

This context explains the importance of the
interaction between possible implementation of micro-accounting standards, such
as IPSAS, in Europe and the existing GFS-based structure. The two would need to
exist side by side in the future.

The IPSAS Board’s ongoing project on
IPSAS/GFS makes practical suggestions for further convergence between IPSAS and
statistical reporting, whilst recognising that some conceptual differences will
continue to need to be managed.

It is nevertheless important to underline
that implementation of accruals-based public accounting systems (whether
IPSAS-based or not) should involve statistical considerations from the start.
For example, the IPSAS/GFS study component on designing charts of account is
expected to contribute to this convergence, and could potentially be broadened
to efficient external access to, and processing of, information[75]. Furthermore, incorporating
statistical classifications into EU public accounting standards would also
improve the link between micro and macro data.

It should also be noted that public
accounting standard setting in Europe is much more closely associated with
statistical guidelines than elsewhere in the world, and any future governance
arrangements must take this into account.

CHAPTER 5

5.           IPSAS
and accruals implementation processes

5.1.        Introduction

This chapter focuses on the two related
issues of implementation processes and timetables.

Firstly it summarises the main issues
identified in the guidance for governments and government entities on the
transition to accruals accounting provided in Study 14 — Transition to the
Accrual Basis of Accounting: Guidance for Governments and Government Entities[76], a study issued by the IPSAS
Board itself. It then describes the related work currently being carried out by
the IPSAS Board in the context of its first-time adoption project. An overview
is then given of views expressed on implementation processes and timetables in
the context of the public consultation carried out by Eurostat for assessing
IPSAS.

Short overviews are then provided
concerning the recent implementation experiences of four countries: Austria,
France, Switzerland and the United Kingdom.

Finally, since the cost of the transition
from cash to accruals or from non-harmonised accruals to harmonised accruals
would be substantial, Eurostat presents information that it has collected on
the actual and estimated costs experienced by some Member States and other
countries, as well as international organisations.

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

Study 14 is intended to assist public sector
entities in the process of adopting or considering the adoption of accruals
basis IPSASs. The study is primarily intended to assist public sector entities
make the transition from the cash to the accruals basis but it may also be
useful for entities currently reporting on an accruals basis or considering the
adoption of IPSAS.

Part I of the study addresses general
issues associated with the transition to accruals accounting, including factors
influencing the nature and speed of the transition, options in respect of the
transition paths, and the management of the transition process. It also
considers issues associated with the identification, design, and delivery of
training.

The following texts are closely based on
the explanations provided in Part I of Study 14.

5.2.1.     Transition paths

The style and speed of the transition to
accruals accounting may vary greatly between entities. A wide range of
approaches and combinations of approaches are possible. Before considering
alternative transition paths it is necessary to have a clear understanding of
the gap between the current system of financial reporting and the desired
system of financial reporting.

The factors that may influence the nature
and speed of the transition to accruals accounting include:

·
The system of government and the political
environment. Transition times can be significantly different in a developed,
transitional or developing country and also in countries with a presidential or
parliamentary system.

·
Whether the reforms are focused solely on accounting
change or whether they encompass other wider scale reforms.

·
Whether the changes are being driven from the
top down, or bottom up.

·
The current basis of accounting used by the
entity, the capability of existing information systems, and the completeness
and accuracy of existing information, particularly in relation to assets and
liabilities.

·
Any change to the basis of accounting for
budgeting.

·
The level of political commitment to the
adoption of accruals accounting or harmonised accruals accounting.

·
The capacity and skills of the people and
organisations responsible for implementing the changes.

The reforms may be applied to all public
sector entities within a government, or they may be restricted to certain types
of entities. For example, the implementation of accruals accounting may occur
on a sector-by-sector basis. It may begin with autonomous and semi-autonomous
government entities which already have some responsibility for managing the
resources under their control and which are outside the centralised accounting
system. Alternatively, the changes may focus first on budget sector entities
because such entities make up the core of government activities.

It is possible to design different
transition paths for different types or sizes of entities. For example, large
entities may be delegated authority to design and oversee the development of
their financial information systems, whereas smaller entities may be required
to follow a centrally determined transition path, including the implementation
of specific financial information systems. For example, many government
business enterprises (GBEs) will already use the accruals basis of accounting.
The transition path for such GBEs would therefore focus on ensuring consistency
of accounting policies and other consolidation issues[77].

Where a government decides to implement
whole-of-government reporting, there are a number of paths it can take. The
first accruals whole-of-government reports can be required at the same time as
the first accruals reports from individual entities or they may be delayed for
a period to allow more time to focus on the transition by individual entities,
the boundaries of the reporting entity and other consolidation issues.
Consolidated accruals reports for various sub-sectors of the whole-of-government
reporting entity could be produced as an interim step, followed by complete
whole-government reports. Another option would be to prepare a consolidated
cash flow statement as an interim step.

Accruals accounting requires the
recognition of all assets and liabilities which meet the definition of assets
and liabilities and satisfy the criteria for recognition of assets and
liabilities. However, this does not preclude an entity from choosing to move to
the full accruals basis by recognising assets and liabilities in stages. For
example, it is possible to focus first on the recognition of short-term assets
and liabilities such as debtors and creditors. Recognition of property, plant
and equipment would often occur next, although recognition of property, plant
and equipment may occur in stages with those assets that are readily identified
and measured being recognised first. Similarly, the recognition of liabilities
can occur in a step-by-step manner. Public debt is often recognised first because
an entity usually has reasonably accurate records of existing borrowings.
Pension and other long-term obligations may be recognised in stages.

5.2.2.     Transition period

Usually, the resources available or the
extent of political commitment will determine the period over which reforms
occur. The length of this period may differ from jurisdiction to jurisdiction.
Reform periods may be short (roughly one to three years), medium (roughly four
to six years) or long (over six years).

A short reform period may be appropriate
where there is strong political support and a limited number of entities.
Medium reform periods provide more time for the preparation of detailed
implementation plans, the development of accounting policies, and
implementation and testing of new systems. They also provide a reasonably long
time for the education of groups such as government employees and politicians
regarding the changes. In selecting a time frame for the transition, a
government may also establish target dates or stages (milestones) for the
achievement of various aspects of the reforms. Entities may be required to meet
certain criteria by certain dates in order to progress to the next stage of
implementation.

5.2.3.     Implementation plan

The transition to accruals accounting is a
major project for most governments. Like any large-scale project, it requires
careful planning and management. Transition is likely to be smoother and faster
when the following features are present:

·
A clear mandate from the appropriate level of
the government stating what the reforms will encompass, the expected timing and
the authority of various government bodies to initiate the changes required.
Political commitment from both the governing body and the opposing party: because
transition may occur over a period of years there may be a change of government
or changes within a government during the transition period.

·
The commitment of central entities and key
officials.

·
Adequate resources (human and financial).

·
An effective project management structure.

·
Adequate technological capacity and information
systems.

·
The use of legislation to provide formal
authority for the changes and demonstrate the strength of the government’s
commitment to the changes.

The entity in transition needs to develop
an implementation plan to enable it to achieve its goals. The key headings for
a generic implementation plan that indicates many of the issues that need to be
considered and illustrate the size of the project are:

Project initiation

·
Document project and obtain project approval

·
Establish the steering committee

·
Prepare detailed project plan(s)

·
Establish project team

·
Project sponsor

·
Project manager

·
Project team (team leader/director and other
staff)

·
Identify required resources

·
Obtain required resources

Detailed scoping and planning

·
Document existing processes, procedures, and
legislative requirements (including existing accounting policies and systems)

·
Identify proposed changes or areas of change
(including proposed accounting policies and systems)

·
Systems planning

·
Identify structure/ownership of proposed systems

·
Identify system requirements (existing and new
systems)

·
Identify control requirements

·
Identify interfaces required

·
Develop the chart of accounts

·
Develop interfaces (if applicable)

·
Reporting

·
Develop new reporting requirements

·
Audit

·
Liaise with external auditor to assess impact of
changes on audit process

·
Identify role of internal audit during the
change process

·
Develop communications plan

·
Prepare training strategies (for example,
project team, accruals accounting, and computer literacy)

·
Develop change management strategy

Implementation phase

·
Initiate project management responsibilities and
reporting structures

·
Implement new systems/system changes

·
Implement interfaces

·
Develop detailed accounting policies

·
Develop/amend supporting financial management
policies and procedures

·
Implement roles and responsibilities

·
Deliver training

·
Obtain approval to switch to new systems

·
Implement other phased projects (for example,
the recognition of specific categories of assets or liabilities may be phased)

Reporting

·
Develop improved external and internal reporting

·
Develop financial and non-financial performance
measures

·
Review controls and procedures that support the
integrity of financial and non-financial information

5.2.4.     Chart of accounts

The development of a new chart of accounts
is a key step in the adoption of accruals accounting. A well-planned chart of
accounts can assist in the efficient generation of financial information for a
variety of purposes.

A chart of accounts is a systematic coding
system for the classification and coding of transactions and events within the
accounting system. It defines the organisation of ledgers used within the
accounting system. The types of classifications provided for by a chart of
accounts may include economic, functional, administrative, and regional
classifications as well as more detailed classifications for cost centres,
programmes, projects, outputs, and outcomes.

The chart of accounts is not used solely in
the preparation of external financial statements. It may also be used to
support the preparation of internal management reports, the preparation of
regulatory information and the tracking of expenditure against budgets and the
preparation of fiscal reports for the European System of Accounts (ESA) 1995.
In order to eliminate the unnecessary reclassification of financial data or
duplicating the entry of data, it is helpful if the chart of accounts can
support a range of governmental reporting requirements.

Once established, the chart of accounts
becomes a fundamental component of the processing of financial information from
simple tasks like paying bills to complex activities such as financial
reporting. Because it is embedded in the processing activities of the entity,
it becomes costly to change. It is therefore essential that the chart of
accounts is carefully designed to allow for change and growth and to meet the
various reporting needs of the entity.

In a well-designed system, the chart of
accounts should incorporate the budget accounts specified in the budget
classification. If a government elects to report on the accruals basis of
accounting, but budget on a cash (or modified cash) basis, a combined chart of
accounts will be more complicated as it will need to be able to generate both
reports on both the accruals basis and cash basis of accounting.

Where a number of individual entities are
required to provide information to a central entity for the preparation of
consolidated financial statements or for other reporting purposes, it is advised
to have a central chart of accounts. Especially in a federal setting, where
there is no such reporting requirement, a unified chart of accounts can prove
helpful in enabling GFS data to be generated in a cost-efficient manner.

Following the development of a new chart of
accounts, it is necessary to assign responsibilities for the day-to-day
management of the chart of accounts and prevent unauthorised changes.
Supporting guidance and monitoring may also be required to ensure consistent
use of codes.

5.2.5.     Staff resources and
training

Besides the chart of account, another key
element of successful implementation is the adequacy of staff resource levels:

·
All personnel — including management — involved
in the transition to accruals accounting or harmonised accruals accounting
should understand the reasons for the change, be capable of implementing the
changes they have responsibility for, operate the new systems and procedures,
and understand the information produced.

·
Entities need to assess the impact of the changes
on the competencies required in relevant positions, and develop a strategy
which includes, but is not confined to, training for upgrading skills.

·
Options for addressing gaps in competency
include recruitment, engagement of consultants, development of external
courses, and training for existing staff.

·
Separate outreach activities and information
materials are required for educating and creating awareness in groups such as
politicians and the media.

5.2.6.     Audit requirements

The accruals-based accounts will also have
an impact on public sector audit. The audit of accruals-based financial
statements is more complex and causes more judgments to be made by the auditor
than the audit of cash-based financial statements. The auditor (whether a
private or public sector auditor) should have the relevant public sector and
audit knowledge. The application of generally accepted auditing standards is
necessary to assure a uniform audit quality. The International Organisation of
Supreme Audit Institutions (INTOSAI) provides professional standards and best
practice guidelines for supreme audit institutions and quality control
procedures in audit bodies may need to be enhanced with the introduction of
accruals-based financial statements, as audit judgments become more significant.

5.3.        First-time
adoption project of IPSAS Board

In 2011-2012 the IPSAS Board began
developing a further project related to the first-time adoption of accruals
IPSASs. The background to the project was that there is no standard that
addresses the range of issues arising from first-time adoption of IPSASs, and
it was considered that the development of a standard in this area would help in
the implementation of accruals IPSASs. In June 2011, the IPSAS Board approved
the project brief on the First-Time Adoption of IPSASs.

The scope of this project is to consider
issues related to public sector entities that are moving to accruals IPSASs not
only from an accruals basis of accounting, but from a cash basis, modified cash
basis or partial accruals basis of accounting.

In particular, several IPSASs contain
transitional provisions for when they are applied for the first time.
Typically, these transitional provisions allow an entity additional time to
meet the full requirements of a specific accruals-based IPSAS or provide relief
from certain requirements when initially applying an IPSAS. The transitional
provisions govern the length of time available to make the transition and also
indicate whether the IPSAS should be applied prospectively or retrospectively.
These transitional provisions are the main focus of the project on first-time
adoption.

The aim of the IPSAS Board is to approve an
Exposure Draft of the new standard for first-time adoption by March 2013.

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

Taking into account the importance of this
subject and the potential interest of a wide range of stakeholders, and given
the potential resource implications of any recommendations on future IPSAS
implementation, Eurostat launched a public consultation from 17 February to 11
May 2012. The consultation asked seven questions. All citizens and
organisations were welcome to contribute to this consultation.

From the 68 contributions received, 59
respondents expressed views concerning the process and timetable for a possible
future implementation of IPSAS in EU Member States.

Overall, the respondents considered that
implementing IPSAS would be a medium-term or long-term project, taking into
account the scale and the costs.

The majority of responses — especially from the
German regional courts of auditors — expected that more than 10 years would be
needed for implementation. Another significant portion of respondents thought
that it would take 5 to 10 years, of which 3 to 4 years would be spent on
legislation and 5 years on technical implementation. A smaller number of
respondents considered that 3 to 5 years could or should be enough.

One issue mentioned by several respondents was
the need to establish the starting point of each EU Member State. Based on
their preparedness, the timescales may differ from Member State to Member
State. As probably no ‘one size fits for all’ model for implementation exists,
individual implementation plans with milestones need to be developed which
would allow progress to be monitored at both national and EU levels. In this
context a ‘phased’ approach was proposed whereby standards could be
implemented, for example, either sector by sector or beginning with recognition
of financial assets and liabilities and covering non-financial later so as to
mitigate the impact of implementation.

Several respondents were of the opinion that a
Regulation would be more appropriate than a Directive, in order to ensure the
timely and consistent implementation of the accounting principles. However, a
few respondents would prefer a Directive with a flexible approach and with scope
for derogations.

Some of the contributors also emphasised that
IPSAS implementation will require substantial staffing resources, new IT
infrastructure and educational changes, which would make up the bulk of the
expected expenditure.

5.5.        Implementation
experiences

5.5.1.     Country experience —
Accounting reform in Austria

Aim of reform

–
Strengthen accountability

–
Improve budgetary decision making (more and better
information)

–
Address weaknesses of current system (input
focus, no binding medium term perspective, dominance of annual cash flows)

Austria already had a very developed and
comprehensive accounting system. Some accruals elements were already in place
(a kind of asset accounting), mainly due to the widespread cost accounting
systems of several entities.

The timeline and the process of
implementing accruals budgeting and accounting in Austria are illustrated in
Figure 5.1.

Figure 5.1: Implementation timeline for
Austria

This comprehensive reform is taking place
only at federal level, although one state has already decided to implement a
very similar reform, and other states are still considering it.

The Austrian budget reform is a very
comprehensive approach including a medium-term fiscal framework, new budget
structures (lump sum budgets), performance budgeting (with a special focus on
gender budgeting), result-oriented management of state bodies and modernisation
of the budgeting and accounting system (accruals budgeting and accounting
system oriented towards IPSAS).

IPSAS was used as a reference for designing
the Austrian federal accounting standards. 87.5 % of IPSASs were
implemented or would be implemented if applicable (Hyperinflation, Agriculture,
Service Concessions, etc.). The area of controlled/owned entities was not
implemented in line with IPSAS (no consolidation).

Benefits expected and achieved, costs

Although the first budget compiled and
created under the accruals accounting system is currently being discussed in
Parliament, several benefits have already become apparent:

–
More and better information in the budgeting
process (for example depreciation, provisions, etc.) leading to a different
discussion in Parliament.

–
The view, from start to finish, of the necessary
future tasks of certain ministries.

–
Accruals accounting supports the identification
of future/past spending (back payments and advance payments).

The cost of the overall reform currently
amounts to roughly EUR 23 million, because all of the development and
implementation tasks, as well as training, were performed by current staff
members.

Another aim of the reform was to reduce the
efforts needed to transform the data onto an ESA basis. How successfully this
aim will be achieved depends on the further development of ESA.

Concerning the implementation of an
accruals budgeting and accounting system, two crucial difficulties were
encountered: compensating for the lack of accounting know-how in the public
sector and ensuring the development of the necessary IT solutions for the
reform elements. From the Austrian experience a comprehensive approach uniting
all reform forces from all entities under one strategy seems to be the most
promising.

5.5.2.     Country experience —
Accounting reform in France

During the first decade of the 21st
century, France implemented a comprehensive budgeting and accounting reform.
The primary goal for the modernisation of the central government’s financial
information system was to make government transactions and financial
information more transparent, presenting true and fair government accounts to
the Parliament and to citizens.

The driver for the French public accounting
reform was the Parliament, with the approval of a constitutional by-law known
as the LOLF[78]
— the Constitutional By-law of 1 August 2001 on Budget Acts.

With this reform the previous budgetary
structure of the central government based on budget chapters was reformed to a
structure of missions, programmes and actions[79]
and broken down into public policy objectives and output measures. Greater
autonomy and responsibility was given to departments but programme managers,
too, became more accountable regarding the use of their appropriations. Continuous
accruals-based accounting was introduced. Moreover, the annual set of
accruals-based accounts for the central government is audited by the Supreme
Court of Auditors.

Concerning the history of public sector
accruals accounting development, there are three major milestone periods:

·
In the first period, until 1962, modified cash
basis accounting with a single entry system was applied by the whole public
sector.

·
From 1962 to 2005, central government (and,
since 1962 with major improvements in the 1990s, for public agencies, local
government and social security funds) used modified accruals-based accounting,
with double-entry accounting and a chart of accounts (which was different for
each of those entities).

·
Since 2006, for the central government[80], accruals-based accounting
referring to domestic public accounting standards, with double-entry accounting
and a chart of accounts.

In 2001, the LOLF provided for the
introduction of accruals-based general government accounts on 1 January 2005,
while maintaining the conventional budget presentation in terms of receipts and
payments (cash basis which remains the main reference of annual budget acts).
The LOLF required the keeping of three independent accounting systems, which
should be interconnected: budgetary (cash basis) accounting, financial
(accruals basis) accounting and management or costs accounting.

According to Article 27 of the LOLF, the
central government must keep accounts of budgetary receipts and expenditures
and general purpose accounts for all of its transactions. In addition, it must
implement an accounting system designed to analyse the cost of the various
actions undertaken as part of its programmes.

Moreover, Article 30 stipulates that these
financial statements are based on the accruals accounting principle.
Transactions are recognised in the financial year to which they are related,
independently of the date of payment or receipt. The same principle is found in
the legislation governing business financial statements. Consequently, the
constitutional by-law stipulates that the accounting rules for the central
government are the same as those for business, except when differences are
warranted by the specific nature of the central government’s activity[81].

Road map for implementation

For the implementation of the central
government[82]
accruals accounting reform, a detailed road map was put in place, with
implementation phased over three stages:

–
Stage 1 — Building the foundations (Q1 2003)

Structuring the missions, programmes and
sub-programmes; Definition of the accounting reference framework — standards
and new chart of accounts; Communication plans;

–
Stage 2 — Prefiguration (Q3 2003)

Adaptation of the information system;
Presentation of appropriations in LOLF format; Definition of performance goals
and indicators; Assessment and development of the experiments; Definition of
accounting procedures; Planning of training programmes;

–
Stage 3 — Implementation (Q3 2004)

Organisational changes and development of
internal control; Training; Preparation of the opening balance.

The challenge was overcome in less than
five years.

By the end of 2002 the ‘Accounting
Normalisation Committee’ was put in place to organise the continuous building
of public accounting standards and a public accounting reference framework. A
conceptual public accounting framework and 13 state accounting standards were
published in 2004.

The framework and standards are based on
private accounting practices — French chart of accounts and accounting rules as
primary reference, and IFRS to a lesser extent — but reflect public sector
specificities. The framework also refers to IPSAS and entails the development
of specific standards and accounting treatments where necessary, for example
for taxes and social benefits and recognition, issues that are not addressed by
IPSAS.

As a result of the successful implementation
plan, the new accounting system was introduced on 1 January 2006 and the
accounts for 2006 were provided to the Parliament and certified by the Supreme
Court of Audit (Cour des Comptes) with some qualifications.

Since 2004 three additional standards have
been published and several modifications or additions to the standards
(opinions issued by the CNoCP since 2009) have been issued.

Public sector accounting standards

Public sector accounting standards are
enacted by the ministry in charge of public accounts (Ministère de
l’économie et des finances) and other ministries if relevant after
receiving an opinion from the Public Sector Accounting Standards Council (Conseil
de normalisation des comptes publics — CNoCP).

The CNoCP was created in 2008 with the responsibility
for expressing an opinion prior to the legal adoption of general accounting
rules applicable to central government, local government, social security
agencies and private entities financed mainly by public funds and in particular
by compulsory levies. The CNOCP is composed of a board, three permanent
commissions and an advisory committee for general guidance.

The board is made up of the president of
the Council and 18 members (9 ex officio members and 9 technical experts), with
representatives from both the public and private sector. The board adopts
opinions and recommendations by a majority of members present (providing at
least 10 members are present), based on the proposals made by permanent
commissions. The three permanent commissions cover: central government and
government-controlled organisations; local government and local public
agencies, and social security agencies and similar organisations. The permanent
commissions are provided with proposals for opinions and recommendations prepared
by working groups.

Working groups are set up on each topic to
be examined by the board, based on its annual work plan. Each working group is
presided over by a technical expert from public or private background and open
to all participants. The activity reports and work plan of the CNoCP are
available to the public on its internet site[83].

5.5.3.     Country experience —
Accounting reform in Switzerland

The Swiss Confederation is a federal republic
consisting of 26 cantons and some 2 500 municipalities in addition to the
federal authorities. Switzerland has a strong tradition of decentralised
government and autonomy.

In Switzerland, the cantons and local
governments have been using a modified accruals accounting model for more than
20 years. The first reforms in the 1970s introduced the Harmonised Accounting
Model (HAM), but the first version from 1977 was used by only a few pilot
cantons.

The implementation of accruals accounting
across all cantons occurred in the 1980s with the Harmonised Accounting Model
1981, following a recommendation by the Cantonal Ministers of Finance. The municipalities
followed the cantons, usually with a delay of a few years. The Federal
Government considered the Harmonised Accounting Model but, in the 1980s,
rejected reforms and stayed on modified cash accounting, with a balance sheet
compiled for statistical purposes. HAM 1981 covered both accruals accounting
and accruals budgeting. Its key feature was to bring a fully harmonised chart
of accounts, but its weakness was that detailed accounting practices were not
harmonised. For example, some issues like recognition, measurement and
disclosure were not treated.

In the early 2000s, in the light of the
growing demands on financial management, the federal level and the cantons of
Geneva and Zurich decided to overhaul the Swiss Confederation’s accounting
system and to introduce the New Accounting Model (NAM) at federal level and
HAM2 for the states/cantons. In this new model, the accounting is based on
IPSAS and there is an alignment with IPSAS wherever it is considered feasible.

At federal level IPSAS has been directly
adopted through references in legislation and the accounting policy and manual
are defined by the Federal Finance Administration (FFA). The aim is to
eliminate departures from IPSAS over time. The Swiss Federal Finance
Administration considers that while some IPSAS standards are more challenging
to implement, none is impossible and issues often prove to be non-permanent or
organisation-specific. Reasons for departures from IPSAS must be disclosed in
financial statements. The new federal accounting model — NAM[84] was used for the first time
for the 2007 budget and the 2008–2010 financial plan.

At cantonal level, projects are most
advanced in the cantons of Zurich, Geneva, Basel Stadt, Luzern, Solothurn and
Bern. Although these cantons are very much geared to IPSAS they have opted for
differing approaches in the development of accounting and statistical systems.
At canton and municipality level, HAM2 was drawn up on the instructions of the
Conference of the Cantonal Directors of Finance by the Technical Committee for
Cantonal Financial Questions (FkF), as a further development of HAM1. Based on
IPSAS, and in coordination with the new accounting model of the Confederation,
the FkF drew up 20 HAM2 standards, which were approved in January 2008, and the
related manual was published with a recommendation to the cantons and
municipalities to implement the standards as quickly as possible, i.e. within
the next 10 years. Although Swiss cantons and local governments have been using
accruals accounting for many years, IPSAS still brings some innovations and is
challenging for their accounting systems. The main differences lie in the
valuation of assets and liabilities, the consolidation of controlled entities,
and disclosures.

The new accounting model is viewed as bringing
transparency and comparability, facilitating the job of financial management
and helping to generate public confidence. It also brings the accounting
standards of public authorities and the private sector closer together, thereby
improving comparability. The accounting structure is very close to the model
used in the private sector, comprising the Profit and Loss Statement, the
Balance Sheet, and the Statement of Investments or Capital Expenditure.

Switzerland’s financial statistics system
is designed to ensure that government units’ data are comparable at national
level. One of the main tasks of financial statistics is to disclose the
revenue, finance and asset situation of the government units and the structure
of their expenditure on a comparable basis. Only by ensuring national
comparability is it possible to aggregate the individual federal levels into
the general government sector. And only after such aggregation into the general
government sector is it possible to view the financial situation of the
government units from a macroeconomic perspective. In essence, the statistical
system is based on HAM2, and allows analysis of remaining differing accounting
practices at the level of individual government units. The resulting statistics
are compiled according to the IMF model and then adapted to the European System
of Accounts (ESA 95).

In terms of the basis of consolidation of
the federal accounts, the consolidated financial statements include all
entities within the group (excluding significant interests[85]) on a full consolidation
basis. Assets and liabilities, as well as expenses and revenue are therefore
recognised in full.

In the view of the Federal Ministry of
Finance, the potential benefit foreseen for Switzerland of implementing a set
of harmonised accruals accounting standards in the EU would be to reduce
uncertainty, particularly in the financial markets, by means of improved
transparency, reliability and comparability of the financial reporting of
general government units.

5.5.4.     Country experience —
Accounting reform in United Kingdom[86]

The United Kingdom of Great Britain and
Northern Ireland is a unitary state made up of four countries: England, Wales,
Scotland and Northern Ireland. The United Kingdom is governed by the UK
Parliament and Wales, Scotland and Northern Ireland each have devolved
autonomous powers.

Accruals accounting has a long history in
some parts of general government in the UK, with the notable exception of
central government. Major city councils (e.g. Birmingham, Manchester, Bradford,
Cardiff, and Bristol) started to adopt accruals-based accounting from the
mid-19th century onwards. Moreover, many of the industries nationalised in the
period between 1946 and the early 1950s used accruals and this practice was
continued after nationalisation. Accruals became compulsory for all but the
smallest local entities under the reorganisation of local government in 1974.
In the early 1990s the introduction of an internal market in health led to
accruals being adopted by hospitals.

The Public Accounts Committee of the UK
Parliament first proposed a system of consolidated accounts for central
government in 1990, with the aim of improving accountability and simplifying
the government accounts. In 1993 it was announced that resource accounting would
be introduced across central government, and a Treasury Green Paper of 1994 on
resource accounting proposed moving from cash-based accounts and adopting
output and performance indicators. This was followed, in 1995, by a White Paper
‘Better Accounting for the Taxpayers’ Money’. The White Paper also
proposed the establishment of a Financial Reporting Advisory Board to ensure a
high standard of government financial reporting and close compliance with
Generally Accepted Accounting Practice (GAAP). Reform was considered necessary
in order to achieve comparability across the government sector and with the
private sector, and increased transparency and accountability.

The government’s 1998 Economic and
Fiscal Strategy Report also proposed replacing cash-based accounts with
accruals for the whole of government. It argued that this would provide better
information, consistent across government departments, and would assist macro
decision-making and capital planning, as well as providing Parliament with an
audited picture of performance and of the financial position.

Legal effect was given to the proposals by
the Government Resources and Accounts Act 2000. The introduction of Resource
Accounting and Budgeting (RAB) was accomplished in a number of stages,
beginning with implementation in all departments in April 1998. Audited
resource accounts were published for the financial year 1999/2000, and a public
spending review conducted on a resource basis was carried out in 2000. The
first full set of resource-based budgets was presented to Parliament for the
financial year 2001/02. RAB is an accruals-based accounting framework which
aims to convert the Government’s policy priorities into departmental strategies
and budgets, so that the efficiency and effectiveness of services provided can
be reported to Parliament.

A scoping study, ‘Whole of Government
Accounts’, was published in 1998 and examined the feasibility of developing
a full set of audited accounts covering the whole public sector based on UK
GAAP. The study proposed an incremental approach, beginning with a set of
consolidated financial statements for central government, and then
consolidating other parts of the public sector before deciding whether to move
immediately to a consolidation of the whole of the public sector. After several
dry run sets of accounts, the first Whole of Government Accounts were published
for 2009-2010 in 2011, covering the whole of the UK public sector. WGA
consolidate the financial statements of about 1 500 entities from central
government (including the devolved governments of Wales, Scotland and Northern
Ireland), local government, public health services and public corporations.

The National Audit Office, together with
the Audit Commission, Audit Scotland, Wales Audit Office, Northern Ireland
Audit Office, and private sector firms, have established audit programmes for
WGA, covering the consolidation submitted by each entity. The audit opinion on
the first 2009/10 WGA was qualified and the auditor’s report highlighted
several limitations of the published accounts. These included the lateness of
publication and the understatement of public assets and liabilities because publicly
owned banks, the Bank of England and Network Rail were excluded, and because
local government was still on a UK GAAP basis. The Comptroller and Auditor
General therefore qualified the audit opinion.

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

One of the main obstacles to the future
implementation of IPSASs or other harmonised accruals accounting standards is
the high expected cost of implementation. Moreover it can be argued that the
ongoing cost of running an accruals-based accounting system would be higher
than that of maintaining only a cash-based accounting system.

Costs are strongly influenced by the scale
and pace of accruals implementation, the size and complexity of the government
sector, and the sophistication of existing systems. Costs will be lower where
the extent of the changes required is smaller, and they can be integrated with
systems replacement cycles. In practice, the implementation of accruals
accounting is often only part of a wider project to modernise government
financial and management information systems, making the separation of costs
directly linked only to accruals accounting difficult or impossible.

Eurostat has nevertheless collected
information on actual and estimated costs experienced by Member States and some
other countries and international organisations, which is annexed to this
chapter.

In the Czech Republic, the cost of CZK 2 558.4
million (around EUR 100 million) covers the implementation of the four
functional phases of the Integrated Information System. The yearly licence fee
for the accountancy IT system is CZK 60 million (around EUR 2.5 million).

In France, the Court of Auditors has
estimated the direct and indirect costs of transition to accruals accounting ‘solely’
for the French State (not all French public administrations) to be around EUR 1 500
million over 10 years. This cost covers expenses incurred by the producer of
the accounts (in this case the Ministry for the Budget and Public Accounts),
information systems (investment and maintenance), training, etc.

In Slovakia, the cost of EUR 21.6 million includes
the software, hardware and training of the public employees.

In Denmark, a new ERP system and a
reconciliation system were introduced shortly before the decision to move
central government accounting to accruals. A few large central government
agencies had already moved their accounting to a SAP system. For this reason
the move to accruals did not include IT costs. The table below shows both
system implementation costs (implementation of the ERP system and the
reconciliation system, but not of the SAP implementation) and the costs of introducing
accruals accounting. The total cost came to DKK 455 million (around EUR 60
million).

Table 5.1: Breakdown of implementation
costs for Danish Central Government (provided by Danish participant of the
IPSAS Task Force)[87]

Million DKK || Costs || Total

ERP-system (Navision Stat) || || 245

|| Preparation in Ministry of Finance (including software license) || 25 ||

|| Implementation costs within Ministry of Finance || 110 ||

|| Implementation costs in Line Ministries || 60 ||

|| Implementation costs within Ministry of Finance (Upgrade 2004) || 10 ||

|| Implementation costs in Line Ministries (Upgrade 2004) || 40 ||

Central reconciliation system (SKS) || || 40

Implementation of Accruals Accounting || || 170

|| Preparation and project management within Ministry of Finance || 30 ||

|| Implementation in Line Ministries || 140 ||

Total || || || 455

The cost of EUR 240 million indicated for
Hessen in the annex below only relates to the set-up of the IT system. Other
costs, such as training, external consultation fees, the valuation of assets
and labour costs are not included.

In 2010,
in the Netherlands following a request made in Parliament, the government produced
an analysis which includes an estimation of the cost of introducing accruals
accounting across the government.

In Switzerland, for the Federal Government,
the cost of implementing the accruals IPSASs was estimated at CHF 65 million (around
EUR 38 million) which included the replacement of the Enterprise Resource
Planning (ERP) IT system. For larger states/cantons, e.g. Zurich, the cost was
approximately CHF 3 million (around EUR 1.75 million) excluding the IT system,
which did not need to be replaced. Smaller states/cantons actually made savings
as the State of Zurich made its documents available to them.

In conclusion therefore, and as an order of
magnitude, and based on the experience of those countries for which data is
available, the possible cost for a medium-sized EU country of moving from a
cash-based accounting system to an accruals-based accounting system could be up
to EUR 50 million, for central government but no other layers of government.
This amount would include for example the cost of putting in place new
standards and the associated central IT accounting tools, but not costs entailed
in a complete reform of the system of financial reporting. For larger Member
States, and, for example, for those with autonomous systems of regional
government, those with more complex government systems, and those which have
made least progress on accruals accounting, the costs could be much higher,
especially if the transition to a harmonised accruals system is combined with
wider reforms of accounting and financial reporting practices. For example, the
cost of the accruals and budgeting reforms in France was very much higher. For
a smaller Member State, which already has national systems of accruals
accounting in place, the costs might be lower than EUR 50 million. Taking the
estimated costs as a percentage of GDP, all of the cost estimates collected and
summarised here fall within the range of 0.02 to 0.1 % of GDP.

Annex 5.1: Cost
of accruals implementation

Body || Year || Costs || Information source || Comments

Czech Republic || 2009 || CZK 2 558.4 million || http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/tiskove\_zpravy\_49192.html?year=2009 || CZK 60 million yearly IT licence

Denmark || 2003-2005 || DKK 455 million || Document provided for IPSAS TF meeting 5/6.07.2012 by the representative from the Danish Agency for Modernisation of Public Administration ||

France || 2006-2015 || EUR 1 500 million || http://www.ccomptes.fr/fr/content/download/1548/15346/version/2/file/P\_chorus.pdf || Costs only for the French State budgeting and accruals reform

Slovakia || 2005-2008 || SKK 651.6 million (EUR 21.6 million) || http://www.nku.gov.sk/documents/10157/22308/456-Sprava+o+vysledku+kontroly+postupov+a+financneho+plnenia+Ministerstva+financii+SR+pri+realizacii+projektu+zavedenia+jednotneho+statneho+uctovnictva+a+vykaznictva+.html.pdf ||

Hessen || 2000-2004 || EUR 240 million || http://www.hessen.de/irj/hessen\_Internet?rid=HStK\_15/hessen\_Internet/nav/dea/dea5072f-a961-6401-e76c-d1505eb31b65,e9d70a4e-3db0-4ef0-b529-618fc951cbc4,,,11111111-2222-3333-4444-100000005004%26\_ic\_uCon\_zentral=e9d70a4e-3db0-4ef0-b529-618fc951cbc4%26overview=true.htm&uid=dea5072f-a961-6401-e76c-d1505eb31b65 || Set-up of IT system

Hamburg || 2003-2007 || EUR 4.6 million || http://www.haushaltssteuerung.de/interview-modernisierung-des-haushalts-und-rechnungswesens-in-hamburg-michael-freytag.html ||

Netherlands || Analysis 2010 || EUR 129-261 million || http://blog-pfm.imf.org/files/netherlands.pdf || Yearly EUR 13-28 million

Switzerland || 2001-2008 || EUR 71 million || Visit of Eurostat delegation to Switzerland (9 July 2012) || Only federal government

New Zealand || 1987-1992 || NZD 170 million || New Zealand Audit Office report, ‘Central government management: A new approach’, 1989 || All public sector entities, including whole of Government.

Canada || 1997-2001 || CAD 635 million || http://www.oag-bvg.gc.ca/internet/docs/0101ce.pdf ||

Pan American Health Organisation || 2006-2010 || USD 3.98 million || http://www.paho.org/english/gov/csp/csp27-17-e.pdf || Move from UNSAS to IPSAS

WIPO || 2007-2010 || SWF 2.02 million || www.wipo.int/edocs/mdocs/govbody/en/a\_43/a\_43\_5.doc ||

UNICEF || 2008-2013 || USD 10.8 million + amount XXX for 2012/2013 || http://www.unicef.org/about/execboard/files/IPSAS\_for\_internet-3Sept.pdf || IPSAS, High Level Project approach

UNFPA || 2006-2012 || USD 7 million || http://www.unicef.org/about/execboard/files/IPSAS\_for\_internet-3Sept.pdf ||

CHAPTER 6

6.           The
need for harmonised standards and suitability of IPSAS

As explained in Chapter 1, the present
staff working document’s starting assumption is that the principle of accruals
accounting is an indisputable objective for EU public finance accounts. The
principle of accruals is already implemented at macro level (ESA 95 is accruals
based), and increasingly so at micro level. Chapter 1 extended this objective
to harmonised accruals-based public finance standards. This chapter confirms the
appropriateness of harmonised accruals-based accounts in the EU and discusses whether
IPSASs are suitable to be applied directly as these standards.

6.1.        Advantages
of harmonised accruals-based public accounting standards

As stated in Chapter 1, what is true for
private sector accounting standards, which are harmonised within the EU for
listed companies, should be true for government entities. Harmonised
accruals-based public sector accounting would provide a firmer basis for
understanding the economic position and performance of governments and
government entities at all levels. Harmonised standards for public sector
accounting would enhance transparency, comparability and cost efficiency and
provide the basis for improved governance in the public sector of the EU. It
would boost the quality of the macro-accounts. With reference to Article 114 of
the Treaty, it would provide the transparency needed for the proper functioning
of the internal market in financial services, without which there is a danger that
owners of government securities would be entering into transactions without a
proper understanding of the level of associated risk.

6.1.1.     Policy coordination, advice
and surveillance in the EU

The Van
Rompuy/Barroso/Juncker/Draghi report Towards a Genuine Economic and Monetary
Union stresses the need for integrated budgetary and economic policy
frameworks and for example states that:

‘Sound
national budgetary policies are the EMU's cornerstone

The near term
priority is to complete and implement the new steps for stronger economic
governance. In the past few years, significant improvements to the rules-based
framework for fiscal policies in the EMU have been enacted ('Six-Pack') or
agreed (Treaty on Stability, Coordination and Governance), with greater focus
on prevention of budgetary imbalances, on debt developments, on better
enforcement mechanisms, and on national ownership of EU rules. The other
elements related to strengthening fiscal governance in the euro area
('Two-Pack'), which are still in the legislative process, should be finalised
urgently and be implemented thoroughly. This new governance framework will
provide for ample ex ante coordination of annual budgets of euro area Member
States and enhance the surveillance of those experiencing financial
difficulties. ’.

Many of the principle objectives advocated
in Council Directive 2011/85/EU, such as the greater transparency and
accountability of the public sector, as well as more reliable, timely and more
comparable fiscal statistics, necessitate a common, harmonised and detailed
accounting and reporting tool.

It is moreover fully supportive of the
Communication from the Commission A blueprint for a deep and genuine
economic and monetary union — Launching a European Debate[88]. Using a common accounting
tool, the European Parliament and the Council would be in a better position to
assess the relationship between the outcome of national budgets and of the
budget of the EU.

As seen in Chapter 3, in some Member
States, ESA reporting for the government sector depends on basic data taken
from cash-based accounts, but, whether the basic data are cash based or
accruals based, the accounting standards used are neither harmonised nor
comparable across, or within, Member States. For the
compilation of macroeconomic statistics on government and with reference to
Article 338 of the Treaty, ESA 95 accounts must use
sets of estimates and adjustments to approximate accruals, for example for EDP and for the macroeconomic imbalances procedure
scoreboard and where entity-level accruals data are not
available. The availability of harmonised entity-level audited financial
reporting data on an accruals basis would substantially reduce the risk of
systematic errors in the data used for the preparation of government finance
statistics and therefore in the data used for policymaking. The statistical
data needed would be considerably improved if all government entities used
harmonised accounting standards. It would allow the use of common bridge tables
to compile the entity accounts to produce ESA accounts, which would greatly
facilitate the statistical verification processes.

In the longer term, harmonised standards
might enable the main EDP indicators to be refined because macro public
accounting (deficit/debt) results could be derived from much more direct
consolidation of consistent and exhaustive micro accounts. The adoption of an
integrated accounting and reporting framework with some adaptations to ESA 95
concepts would make it possible to derive the debt and deficit directly from
those systems. They could be based on genuine and harmonised public sector
accounting data, which had been subject to control and audit, either directly
on the key indicators or indirectly through the financial statements. This could
also help reduce the time taken to report the deficit and debt.

At entity level, there would be benefits in
terms of transparency and accountability from harmonised accruals accounts, and
for the quality of decision-making, which should take into account the full
future costs and benefits of decisions on a comparable basis. Moreover, further
EU fiscal and budgetary integration highlights the need for harmonised public
accounting standards to enable real budgetary decisions applicable at national
level to be assessed at EU level. For the purposes of accountability,
government entities should report in a complete and comparable manner on their
use of public resources and their performance.

There are common benefits

The benefits of having strong and reliable harmonised accruals accounting
systems implemented in fellow Member States — for the transparency and
functioning of the markets, and for surveillance and policy advice — would therefore
be shared by all EU countries. The adoption of harmonised accruals accounting
systems in any Member State should be of indirect value to its fellow Member
States.

The present financial crisis has demonstrated that the need to
assure financial stability is common to all EU countries. Government
intervention in response to the crisis places a new importance on assessing
long-term effects, including the effects on financial stability, and requires
more transparency, improved reporting and stronger accountability.

Introducing common accounting standards, and high-quality financial
reporting and transparency, would contribute to ensuring the financial
stability of the Member States by providing assurance that the accounts present
a complete and comparable view of the financial position and performance of
national governments — improving international acceptance and legitimacy.
Harmonised and widely used international accounting standards can reinforce
confidence.

The need for harmonisation is supported by
many stakeholders.

6.1.2.     Views on harmonised public
accounting standards

International Monetary Fund (IMF)

The IMF is of the opinion that fiscal
transparency[89]
is instrumental for the achievement of macroeconomic stability, and it
encourages countries to adhere to high standards[90]. The IMF supports developments
that may lead to improvements in the accuracy of timely fiscal reports prepared
in accordance with internationally accepted standards. Such improvements
facilitate work on surveillance and policy advice. Once IPSASs fully become a
stable platform for public sector accounting, the implementation of their
principles will enhance transparency, comparability, cost efficiency and
provide a basis for improved governance in the public sector.

Directorate-General for Economic and
Financial Affairs of the European Commission

The Economic and Financial Affairs DG fully
shares the views of the IMF that an internationally accepted accruals-based
accounting standard would significantly improve the transparency of fiscal
policy, whether this was IPSAS or any other ‘emerging’ international standard
such as EPSAS.

European Central Bank (ECB)

The ECB fully agrees with the IMF on the
importance of implementing internationally accepted public accounting standards
with a view to increased fiscal transparency. In this respect the ECB has
stated that:

‘The Directive [2011/85/EU] may contribute
to simultaneous enhancement of the timeliness and reliability of general
government accounts by supporting the implementation of public accounting
systems on an accruals basis that are interconnected with ESA 95 based national
accounts. The accounting systems should be based on internationally accepted
public sector accounting standards to ensure the harmonised recognition and
measurement of government transactions.’[91]

European Security and Markets
Authority (ESMA)[92]

The financial crisis underlines the
importance of timely and reliable financial and fiscal data and evidences the
consequences of insufficient financial reporting in the public sector. Some
governments were forced over the last years to play an important role in the
efforts to restore stability in the financial sector through bailouts,
takeovers and guarantees which are likely to result in new liabilities and
other obligations. To allow investors in sovereign debt to understand these new
liabilities and obligations, they need to be properly reflected in governments'
financial reports.

ESMA supports a single set of high-quality
and up-to-date public sector accounting standards for EU Member States and the
European Institutions. In particular, it believes that accruals-based public
accounting would provide a firmer base to understand the economic position and
performance of governments at all levels. There is an increasing demand and
need for public accountability and transparency on the financial position and
performance of governments and ESMA considers that introducing a single set of
public sector accounting standards would contribute to a better functioning of
the internal market by ensuring a high level of transparency and comparability
of government financial reporting which is a necessary condition for building
an integrated capital market which operates effectively, smoothly and
efficiently. Investors in government securities can currently not rely on a
comparable level of transparency as provided by IFRS for listed companies.
Introducing a single set of public accounting standards would reinforce the
freedom of movement of capital in the internal market and help investors to
compare the financial activities of governments and by consequence permit
Member States to compete on an equal footing for financial resources available
in the Union markets, as well as in the world capital markets.

European Court of Auditors (ECA)[93]

As a matter of principle, the Court is in
favour of the preparation of public accounts (of government and other public
entities) according to commonly acceptable and harmonised accrual-based
accounting standards throughout the EU, including the EU accounts, as this
provides much needed comparability of public accounts within the EU.

IPSAS provide that financial reporting is
primarily based on accrual-based accounting1. In its Annual Report 2005 the
Court mentioned that the principal significance of accrual based accounting is
that it shifts the focus of the accounts from the recording of cash
transactions to the recognition of the 'rights and obligations' as soon as
these are acknowledged.

The principal benefit of harmonised
accrual-based accounting is that it provides a fuller and more accurate
reflection of the financial status and performance of the entity. Cash based
accounting systems in the public sector do not give an insight into the current
state of assets, finances and revenue (true and fair view). This makes it
difficult for the users of the information to assess the financial position.

The auditing perspective

Article 3 of Council Directive 2011/85/EU states
that:

‘As concerns national systems of public
accounting, Member States shall have in place public accounting systems
comprehensively and consistently covering all sub-sectors of general government
and containing the information needed to generate accruals data with a view to
preparing data based on the ESA 95 standard. Those public accounting systems
shall be subject to internal control and independent audits.’

The use of a harmonised accruals accounting
system across all Member States would offer the potential for more efficient
and effective auditing. For example, shared audit strategies, procedures and
techniques could be developed, and knowledge and experience shared.

The value gained from harmonised
accruals-based financial statements is increased when these are subject to
independent audit, which adds to transparency and public trust in government.
Independent audits help identify instances of poor financial reporting, and
thereby contribute to increasing the quality of publicly available information.

From the perspective of government finance
statistics and EDP, the knowledge that the accounting systems for all public
sector entities in all EU Member States have been subject to external audit,
based on common audit strategies, procedures and techniques, would go far to
provide the necessary assurance that these data were of the required quality.

6.2.        Advantages
and disadvantages of IPSASs as the harmonised standards

In order to gather information for this
staff working document, Eurostat launched a public consultation in the first
half of 2012 to seek the opinion of the widest range of stakeholders, and
established a Task Force comprising experts and practitioners from the Member
States to share their views and experience.

The following provides a non-exhaustive
summary of many of the views provided within the public consultation as regards
the appropriateness of harmonised public sector accounting standards such as
IPSASs[94].
All of the replies to the public consultation, and a summary report, can be
found at: http://epp.eurostat.ec.europa.eu/portal/page/portal/public\_consultations/consultations/ipsas.

6.2.1.     Advantages of harmonised
standards such as IPSAS

·
The evolving sovereign debt crisis has
demonstrated that there is an urgent need for change in the way public sector
financial information is collected and presented in Europe. For the monetary
union to function properly it is necessary to have high quality and comparable
information about balance sheet items (especially liabilities) and the true
annual costs for items that do not currently require cash resources (such as
public sector pension obligations) for all Member States. The costs of not
acting and thus not having reliable financial information available for
internal decision-making and the potentially protracted loss of the markets’
and investors’ trust as a result could be very large. The benefits would still
outweigh costs in the medium and long term.

·
Implementation of IPSAS in EU Member States
would provide a uniform accounting framework and accounting standards for
determining deficit and debt levels that would enhance the consistency,
transparency and comparability of public sector financial statements. This
would help to prevent a situation where negative performance, in breach of the
Stability and Growth Pact, was concealed in order to avoid an excessive deficit
procedure. Whether full implementation of IPSAS is necessary to achieve this
remains unclear.

·
An accruals basis such as that of IPSAS would
provide a more meaningful picture of a government’s financial position and
performance, thus reducing uncertainty for ratings agencies and other users of
financial statements. The room for misrepresentation of financial positions and
performance (i.e. by making payments in subsequent years) becomes narrower. It
would enhance stewardship and financial management by identifying entities’
assets and liabilities, facilitating a long-term perspective in financial
management by identifying current liabilities that will need to be met in
future (e.g. borrowings, guarantees, pension liabilities, social contribution,
etc.), and better facilitate inter-generational fairness by identifying assets
and liabilities. The recognition, measurement and reporting of liabilities,
especially those of a long-term and uncertain nature, would be the main
advantage of any future implementation of IPSAS in the EU Member States.

·
Financial accounting and statistical accounting
should be aligned (common chart of accounts, elimination of differences in
terms of recognition, valuation, presentation, consolidation, etc.). Data
generated by government accruals accounting systems such as IPSAS can be used
as a basis for the preparation of GFS, which are crucial to fiscal and spending
decisions in most jurisdictions. The European System of Accounts (ESA 95), as a
statistical framework using the accruals basis, requires the systematic
gathering and processing of accruals-based data. The availability of audited
financial reporting data on an accruals basis would substantially reduce the
risk of systematic errors in the data used for the preparation of GFS and
therefore in data used for policy making.

·
The transparency provided by high-quality
accruals standards such as IPSASs also provides for better-informed capital
markets, in which government financial activity plays a much greater role than
is often acknowledged. Better-informed markets are less likely to experience
major fluctuations because more reliable information is available.

·
Experience with IPSAS would increase know-how
and provide the incentive to modernise internal control systems and external
audits. Accounting officers will have a source to which they can refer for
detailed information on correct accounting treatment. The use of IPSAS would
provide a solid foundation and suitable criteria upon which auditors could base
their work.

·
Although the adoption of IPSAS should not drive
the implementation of better financial management, it is a necessary condition
for it. This would be an indirect, but important, benefit of the adoption of
IPSAS.

·
The EU-wide application of IPSAS would foster
mobility of accounting expertise and resources across the EU, since, over time,
the transfer of personnel and expertise between Member States for both public
sector accounting and auditing would be enhanced if common standards were
applicable throughout the EU.

·
A single set of public accounting standards such
as IPSAS would reinforce the free movement of capital in the internal market
and help investors to compare the financial activities of governments and consequently
permit Member States to compete on an equal footing for financial resources
available both in EU markets and in world capital markets.

6.2.2.     Specificities of IPSAS

While these points show the importance of
harmonised accruals-based standards in the EU, the question is then: which
harmonised standards?

IPSAS is currently the only internationally
recognised set of public sector accounting standards. The standards are founded
on the international financial reporting standards (IFRS), which are widely
applied by the private sector. The main advantage of the current set of IPSASs,
as described in Chapter 2, is that it constitutes a formidable body of existing,
harmonised, accruals-based standards for implementation by the public sector.

The 32 existing accruals IPSASs represent more
than 15 years’ collective work. Each one of them has been drafted and adopted
through a well-established process, by a board of well-qualified and
independent experts with a wide range of expertise from a variety of
institutional and geographical backgrounds. An important advantage is that
IPSAS is conceived as a world standard, and not limited to one specific
geographic zone.

Indeed, a significant number of responses
and exchanges showed support for IPSAS as the candidate for harmonised
standards in the EU. However, some difficulties with the current state of IPSAS
development and with specific IPSASs emerged during both the public
consultation and the meetings of the Eurostat Task Force. Overall, one can
conclude that, although there is general support for the use of IPSAS as a
reference for EU harmonised public sector accounting standards, there is a need
to adapt them if they are to be used on a compulsory basis in the EU.

The following section summarises the issues
seen as difficult or problematic with IPSAS. It is based on the Commission
interpretation of the contributions of a group of experts and practitioners
from the Member States in a dedicated Eurostat Task Force.

The Task Force was set up to share
experiences and analyses and discuss perspectives regarding the current state
of play of public sector accounting and auditing practices in Member States,
and the adoption and implementation of IPSAS or accruals-based public sector
accounting standards. The Task Force comprised experts from more than half of
the Member States, from national statistical institutes, ministries of finance,
national accountancy bodies, and courts of audit, and from several Commission DGs
(the Economic and Financial Affairs, Internal Market and Services, and Budget
DGs), and observers from the IPSAS Board and IMF.

The main issues which emerged from the
discussions in the Task Force are listed below. Participants expressed their
views in the Task Force as independent experts, rather than as representatives
of their governments[95].
It should also be noted that an issue may have been included in this list
because one or more experts expressed a concern about a particular aspect of
the standard, and it does not necessarily mean that other experts agreed. The
concerns presented below should therefore not lead one to conclude that there
was a general rejection of IPSAS. On the contrary, during the discussions in
the Task Force, many experts expressed the view that the current IPSAS set of
standards remains an irreplaceable reference for harmonised public sector
accounting in the Member States (see box). The key word is therefore ‘adaptation’
and not ‘rejection’. It should also be noted that some concerns are already
being addressed by the IPSAS Board and therefore what is the case now may not
be so in a few years’ time.

Concerns
can be classified into: (a) concerns regarding the standard themselves, (b)
concerns regarding the governance of the standards.

(a)
Concerns regarding the standard themselves, as
discussed in the Task Force:

·
There is a need for an agreed and complete
conceptual framework for IPSAS. Such a conceptual framework, setting out the
core principles for the accounting system, is needed to underpin the design of
standards reflecting the specific characteristics of the public sector,
including the volume and financial significance of non-exchange transactions,
the importance of the budget, the nature of plant, property and equipment, and the
longevity and regulatory role of governments. The IPSAS Board began a project
to develop such a framework in 2008, and the project is due for completion in
2014.

·
At the time of writing, it can be argued that
the process of translating IFRS principles into IPSASs, and the reference to
the IASB framework in the absence of a complete and specific IPSAS conceptual
framework, does not take sufficient account of the specific needs and interests
of public sector reporting, such as those related to the specific
characteristics underlined in the above point. IPSAS is a principles-based set
of standards. To apply the standards in practice, more detailed and specific
harmonised interpretations are needed, as is the case for IFRSs, for which
IFRIC is the system established to provide ‘Interpretations’ and implementation
guidance. Presently, in IPSAS, although ‘Application Guidance’ is normally
included in the standard to show how the core principles of a standard are to
be applied in dealing with specific items and transactions, this may not always
be sufficiently detailed. There is currently no interpretation function for
IPSAS.

·
The set of IPSASs could be regarded as
incomplete, in that for some standards that have been adopted for private
sector accounting (e.g. exploration for and evaluation of mineral resources,
accounting and reporting by retirement benefit plans) no counterpart IPSAS has
been developed. Furthermore, in the case of financial instruments it may be
argued that the IPSAS standard due to enter into force in 2013 is in practice
already obsolete, in that the equivalent IFRS rules applicable in the EU have
been adapted since the standards were first formulated but the IPSAS standards
have not.

·
Some existing IPSAS standards, at their current
stage of development, are viewed as incomplete, in particular concerning the
recognition, measurement and disclosure of specific transactions such as social
benefits and taxes and the accounting and measurement of specific items such as
public debt (obligations) and heritage assets. For example, under IPSAS the
notion of accruals is perceived as insufficiently developed for taxation, which
is a key obstacle to the comparable application of IPSAS. For social benefits
there is a need for a specific IPSAS standard, for which there would be no IFRS
equivalent, and this has not been developed.

·
The scope of consolidation and the criteria for
control under IPSAS lead to the inclusion of the results of all the controlled
entities in reporting entity statements, which would imply the consolidation of
public corporations. This would require a potentially large number of
government-controlled entities to provide timely and accurate financial data in
a suitable format for consolidation, when they may use IFRS as in the case of
some government business enterprises (GBEs). GBEs’ financial statements
prepared under IFRS might use, for example, accounting policies that differ
from those applied by the controlling government and that do not include the
necessary disclosures.

·
IPSAS standards are applicable to all types and
sizes of government entities, and this may be excessively burdensome for small
and less complex entities. If the costs of applying IPSAS for small government
entities are too high in relation to the expected benefits it could lead to
unharmonised or lower quality compilation approaches, and at this stage there
is no relief for those entities in IPSAS from the application of certain or all
the requirements envisaged.

·
Some IPSAS standards offer options, which may
lead to a lack of comparability. In such cases it would be necessary to remove
these options (i.e. for the valuation of assets, the recognition of interests, and
the presentation of income statement[96]).

·
In some circumstances, IPSASs allow entities to
choose between fair value and historic cost as the measurement basis for
non-financial assets, notably for the valuation of property, plant and
equipment[97].
As already mentioned, offering options reduces comparability between entities;
although preparers of GPFS may voluntarily achieve the necessary harmonisation by
consistently choosing the same accounting policy. On the other hand, where the ‘fair
value’ measurement basis forms part of the IPSAS standards, this is considered
less suitable for public sector financial statements by some experts;
particularly regarding the annual impairment of non-financial assets. Moreover,
it can be argued that the fair value basis is not applicable for those
government assets that are not marketable. The initial recognition at fair
value of financial instruments acquired by government requires comparable
judgments in practice, to ensure comparability and avoid any scope for accounting
misstatements or manipulation.

·
The rules on disclosure required under several
IPSASs are perceived as too demanding (such as for financial instruments),
although the concept of materiality also applies to specific disclosure
requirements in an IPSAS[98].

·
Although IPSAS has a specific standard on the
presentation of budgetary comparisons, for entities which make public their
budget, some experts nevertheless consider that IPSAS is not sufficiently
developed concerning the specific presentation requirements of the
relationships between budget and financial reporting. This is especially the
case where the budget and financial statement are not prepared on a comparable
basis and the entity elects to include a comparison of actual and budget amount
in its financial statement.

·
There is a risk of producing too much
information which could make it harder for users to locate relevant
information. There should be better linkage between IPSAS and the production of
statistical (ESA) data. Requiring governments to prepare both statistical
information in accordance with ESA and financial statements in accordance with
IPSAS potentially involves duplication. Despite attempts at convergence some
differences remain. It is therefore important that any unnecessary differences
between IPSAS and ESA be eliminated.

(b)
Concerns regarding the governance of the
standards

·
IPSAS standards are issued by a private sector
entity. For the most part, EU government organisations are engaged neither in
the standard-setting process nor in the oversight of the IPSAS Board. By making
IPSAS mandatory for all EU Member States, standard-setting powers would be
delegated from Member States to the IPSAS Board. It would be essential for
public authorities to be involved in the process of drafting and issuing such
standards and the governance structure of the IPSAS Board would therefore need
to be adapted and/or a specific new structure be created.

·
There would need to be a thorough assessment of
the quality and applicability of the standards. Such assessment requires
experts in the field of public sector accounting. Consequently there would be a
need to set up a separate institution whose primary tasks would be to carry out
such technical assessment and advice on the possible adoption of particular
IPSASs. It would be necessary to provide sufficient financial support for such
an institution to carry out its tasks properly.

·
It would not be advisable to decide on IPSAS
implementation before the process of developing a full set of consistent
standards based on the conceptual framework is finalised. The conceptual
framework is due for completion in 2014 and there is a high probability that,
following its completion, existing standards will need to be modified.

·
The IPSAS Board has relatively limited resources
which may limit its capacity for dealing with multiple developments
simultaneously. This could be a risk to the implementation of IPSAS should gaps
in the IPSAS framework be identified which cannot be quickly dealt with.

Many of these concerns about the suitability
of IPSAS for implementation in the EU Member States were also echoed within
individual contributions provided to the public consultation.

Annex 6.1 summarises the detailed specific
issues mentioned by some Member States, IPSAS by IPSAS. Furthermore, Annex 7.1
classifies IPSASs into three categories, taking into account the views of
Member State experts: (1) standards that could be adapted with minor or no
adaptation; (2) standards that need adaptation or for which a selective
approach would be needed; (3) standards seen as needing to be amended for
implementation.

6.2.3.     IPSAS governance and
resources

It is clear from the public consultation
and the discussions held with the Task Force that the expertise and skills of
the IPSAS Board and staff are widely respected. There are, however, concerns
that IPSAS governance arrangements are not currently adequate and that the
resources available for developing IPSASs are not sufficient. Chapter 2
described IPSAS Board processes, membership, staffing and funding levels, and
the EU governance process for adopting IFRS standards are described in the
annex to this chapter. As described above some contributors express strong
concerns with IPSAS governance.

The IPSAS governance arrangements are under
the authority of the International Federation of Accountants (IFAC). IFAC
appoints the members of the IPSAS Board. IPSAS is therefore not fully within
the institutional control of government authorities; in 2013 half of the board
members will be from government authorities and the remainder from other
institutions[99].
Moreover in practice the IPSAS Board can be seen as operating without
sufficient organised involvement from EU public authorities. For example,
responses to IPSAS Board consultations from EU public authorities are in
practice infrequent, with a few exceptions, and most Member States do not
contribute. In contrast to the position with respect to private sector
accounting standards, there is at present no IPSAS oversight body.

During 2012 the governance framework of
IPSAS was placed under review, with a view to ensuring that the independence of
the standard-setting process is strengthened, while public-sector-specific
needs are effectively addressed. The IFAC Monitoring Group has launched a
public consultation on whether the existing Public Interest Oversight Board
should act as the supervisory body. However, this, if implemented, is not seen
as sufficient in itself to overcome the concerns expressed by Member States.

IPSAS does not have sufficient resources at
present to ensure that it can meet with the necessary speed and flexibility the
demand for new standards and guidance on issues emerging in response to the
evolving fiscal climate, particularly in the wake of the crisis. For example,
the staffing level available for developing IPSASs is around 10 % of that
in place for work on developing and maintaining IFRS standards. The IPSAS Board
recognises the resource issue and has been actively seeking additional sources
of funding. It also recognises the constraints on its activities, as explained
in its recent Consultation Paper on the Board’s 2013/14 work programme.

This situation highlights the need for the
creation of an EU governance structure, with strong representation of EU public
accounting authorities.

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

6.3.1.     Benefits of modernising
financial information and accounting systems

It should be borne in mind that, despite
the fact that accruals accounting is a more elaborated system than pure cash
accounting, the multitude of different accounting standards, charts of
accounts, booking processes, and IT systems, as well as auditing standards and
practices that often co-exist, even within one sub-sector of general government
of a single Member State, suggests that harmonisation will achieve a degree of
reduction in bureaucracy and costs which in the medium to long term may offset
or outweigh the expected investment. Furthermore, the real and important
expected financial costs may be balanced against the potential benefits.

In practice, quantifying and valuing the
potential benefits from future implementation of IPSAS seems to be impossible.
The implementation of harmonised accruals accounting standards by entities at
present accounting on a cash basis, or the transition from national accruals
standards to harmonised standards, may often require the modernisation of
financial information and accounting systems across large parts of government,
providing an opportunity to build a more effective administration and reduce
ongoing costs.

The occasional paper[100] of the Public Sector
Committee of IFAC relating to the New Zealand experience on accruals accounting
implementation confirms that:

‘Indeed, one of the advantages of accruals
accounting systems is that activities such as commitments or purchase order
systems, payroll, fixed assets, creditors and debtors are able to be integrated
into one system, thereby reducing double processing and reconciliation problems
associated with disparate systems. The time savings this brings about can be
major.

Despite these changes few government
department finance functions grew in terms of total staff complements. There
was, however, a significant upgrading in financial expertise as compliance
officers were replaced with professional staff capable of negotiating budgets
and marketing financial information. The Treasury was able to make reductions
in staff responsible for routine accounting functions, from six large regional
Treasury offices to a complement of just six staff.

An implication of the new environment has
been that the central accounting system was modularised into individual
accounting systems. This has greatly assisted departmental flexibility as it
ensures not only that accounting systems do not fall behind leading technology
but that they can continue to meet changing needs as departmental activities
change. One department can now take advantage of new system features of
particular value to its organisation without reference to the rest of the
bureaucracy. Where a new system requires a capital injection by the owner (most
in fact are funded from within the departments’ own balance sheets) then the
owner will seek to ensure that the development aligns with its and the
department’s objectives, and that the investment is appropriately managed to
ensure cost effectiveness in the long run.’

One of the expected benefits might also be
felt in financial (value) terms — that of providing the transparency needed for
the proper functioning of markets. It might be expected that there would be a
lower yield (risk premium) on Member States’ government securities if
internationally harmonised accruals accounting standards were applied. The
savings in interest payable could then be considered against the costs of
implementation. In practice, however, it does not seem possible to measure the
effect separately from the many other factors which may influence interest
rates.

6.3.2.     Costs of modernising
financial information and accounting systems

Against the potential benefits must be set
the expected costs of implementing IPSAS or EPSAS in the EU Member States. As
shown in Chapter 5, the costs of implementing accruals-based accounting
standards are very significant, based on the information made available by
countries which have moved to accruals accounting. Taking the estimated costs
as a percentage of GDP, all of the cost estimates collected fall within the
range of 0.02 %-0.1 % of GDP. Ongoing costs of running an IPSAS
accounting system could also be significant. Moreover, the implementation of
harmonised accruals accounting for the Member States would also have
significant resource implications for the European Commission.

6.4.        Conclusions
concerning the IPSAS standards, governance and resources

6.4.1.     The IPSAS standards

IPSAS is currently the only internationally
recognised set of public sector accounting standards. IPSAS stems from the idea
that modern public sector management, in line with the principles of economy,
effectiveness and efficiency, depends on management information systems that
provide timely, accurate and reliable information of the financial and economic
position and performance of a government, as would be the case with any other
type of economic entity. At present, 15 Member States have some links to IPSAS
in their national government accounting standards. Of these, nine have national
standards based on or orientated by IPSAS, and five make some reference to
IPSAS. However, even when recognising the value of the IPSAS standards, no EU
Member State has implemented them in full.

Taking into account the views of Member
States’ authorities, and others put forward in the IPSAS public consultation
and the Eurostat Task Force, the global conclusion is twofold.

On the one hand, it seems that, at its current
stage of development, IPSAS could not be simply and directly implemented in all
Member States. More specifically, from the perspective of the Member States,
there are concerns that currently the IPSAS standards do not describe the
accounting practices to be followed with sufficient precision; the suite of
standards is not complete — either in terms of coverage or practical
applicability to some types of government flows, such as taxes and social
benefits — even if ongoing work should lead to significant improvements.
Furthermore, some IPSAS standards offer the possibility of choosing between a
set of alternative accounting treatments, which would limit harmonisation in
practice. Some standards are either considered to be unnecessary or not
applicable for EU purposes, and IPSAS is viewed as unstable, in the sense that
once ongoing work on the IPSAS conceptual framework is completed it can be
expected that some standards will need to be revised.

On the other hand, most stakeholders agree
that IPSAS would be suitable as a reference framework for the future
development of a set of European public sector accounting standards, referred
to in the following discussion as ‘EPSAS’.

6.4.2.     IPSAS governance and
resources

Even if there is an undeniable need for
harmonised public accounting standards, IPSAS is, at its present state of
development, not governed in an appropriate manner to make it suitable for
direct adoption throughout the EU. IPSAS should therefore be a strong support,
but not a constraint, for future European public sector accounting standards.

The reference framework for EPSAS should
also seek to use the experience and expertise of national public sector
accounting governance structures where possible.

Annex 6.1:
Detailed comments on the substance of certain IPSASs

The main issues which emerged from the
discussions in the Eurostat Task Force are listed below. Task Force participants
expressed their views as independent experts, rather than as representatives of
their governments. Note, too, an issue may be included in this list only
because one expert expressed a concern about some aspect of the standard. This
does not necessarily mean that other experts agreed with that concern.

IPSAS 1 (Presentation of financial statements) —
Issues are associated with the requirement for the comparison of budget and
actual amounts the entity makes publicly available its approved budget. A
disclosure issue is associated with the inclusion in minimum line items of
information on minority and residual interests.

IPSAS 2 (Cash flow statement) — The issue relates
to the options offered by this standard: it allows entities to use either a
direct or an indirect method of determining cash flow from operating
activities, although it encourages use of the direct method; this may result in
variations in reporting by entities.

IPSAS 3 (Accounting policies, changes in
accounting estimates and errors) — The date of reporting and retrospective
correction for fundamental errors could be unsuitable for some
countries/entities. IPSAS 3 requires judgment to be used when determining an
accounting policy for a transaction to which no specific IPSAS applies. There
is as yet no public sector conceptual framework to guide this judgment.

IPSAS 5 (Borrowing costs) — A transitional
issue for cash-based systems occurs if the option to capitalise the cost of
borrowing as part of the cost of qualifying assets is taken and retrospective
application is required in First Time Adoption.

IPSAS 6 (Consolidated and separate financial
statements) — The scope of consolidation and the control criteria under IPSAS
lead to the inclusion of the results of all controlled entities in reporting
entity statements, which would entail the consolidation of public corporations.
This would require a potentially large number of government-controlled entities
to provide timely and accurate financial data in a suitable format for
consolidation, when they may use IFRS (as GBEs do).

IPSAS 8 (Interests in joint ventures) — Some
experts considered that it would be appropriate to modify the equity approach
to use the book value of equity/net assets rather than applying the fair value
model. In addition, an option issue was highlighted for this standard: it
allows both proportional and equity consolidation methods, although IPSAS 8 does
not recommend using equity accounting for joint ventures.

IPSAS 11 (Construction contracts) — This
standard refers to the case of a public sector entity performing construction
work under a binding arrangement; for that reason the standard was considered
not material for some countries. Under the standard construction contract, work
in progress is accounted for using the ‘percentage of completion’ method. The
method is seen as problematic because it involves:

(a)
Estimating the outcome of the contract reliably;

(b)
Determining the revenue and costs attributable
to the stage of completion of the contract; and

(c)
Determining the profit attributable to the stage
of completion.

These estimates involve a high degree of
judgment and in most cases require a cost analysis which may need a dedicated
system to track costs.

IPSAS 12 (Inventories) — The application of the
standard requiring inventories to be measured at the lower of cost and net
realisable value on an item-by-item or group basis, and the recognition of any
losses incurred, could be problematic for some items, for example in accounting
for strategic stockpiles.

IPSAS 13 (Leases) — Leases are classified as
either finance leases or operating leases. Some participants believe that this
assessment is difficult to undertake. Transitional issues for cash-based
systems arise for financial leases where the lessee is required to recognise a
liability (and an asset) in respect of the leased asset. The IASB currently
proposes to revise the treatment of leasing in IFRS, with potential
consequences for the standard.

IPSAS 16 (Investment property) — The standard
is seen as not material for some countries. Separation of investment properties
from other long-term assets is perceived as subjective. Transitional issues
arise for cash-based systems.

IPSAS 17 (Property, plant and equipment) — The
recognition and measurement of assets (notably for military or heritage assets)
may require a substantial amount of work, depending on the extent to which an
entity already has information available on them. This standard allows two
methods: the cost method or the revaluation method; irrespective of the method,
the asset should be depreciated. Recognition and accounting of heritage assets
is only optional. The recognition and valuation of immovable property would be
a long and difficult process. It requires consumption of economic benefit to be
estimated against impairment loss. On that basis IPSAS 17 is seen as
problematic for the accounting and measurement of public infrastructure.
Specific issues arise for accounting of impairment and for use of the component
method for measurement.

IPSAS 18 (Segment reporting) — Geographical
segment reporting could be problematic for some countries, if the standard is
interpreted in this way. Allocating assets and liabilities to various segments
is seen as too complicated. Segment reporting is not based on market/non-market
activities. The standard does not mention the segmentation of government
revenue or central government debt.

IPSAS 19 (Provisions, contingent liabilities
and contingent assets) — For provisions which do not become payable for a
significant length of time, the effect of the time value of money may be
material. In that case, the amount of the provision recorded in the statement
of financial position should be the present value of the expenditure expected
to be required to settle the obligation. A discount (market) rate will need to
be determined, which may be difficult in particular for long-lived provisions
such as nuclear decommissioning. The choice of the discount rate can have a
significant impact on the amount of the reported provision. The standard’s
requirement to also include provisions (net of recoveries) for onerous
contracts is seen as problematic.

IPSAS 20 (Related party disclosures) — The
required disclosures are perceived as too demanding: for some countries,
implementation of this standard would require reporting tools and a time-consuming
detailed analysis of the disclosures involved.

IPSAS 21 (Impairment of non-cash-generating assets)
— The systematic classification of cash/non-cash generating assets required by
the standard is perceived as subjective; in addition, the related assets could
be used by public entities for both market and non-market activities, and the
standard is therefore difficult to implement. The standard requires impairment to
be determined on an annual basis, which is seen as problematic. There is a
transitional issue for cash-based systems.

IPSAS 22 (Disclosure of financial information
about the general government sector) — The disclosure requirement is perceived
as too demanding. The standard applies only if a General Government entity
elects to provide information at a consolidated level. The standard provides an
exception to IPSAS 6: the requirements of IPSAS 6 are not applied in respect of
the relationships of GGS with entities in the public corporation sectors. The
standard is currently not applied in any jurisdiction.

IPSAS 23 (Revenue from non-exchange
transactions) — Issues relating to accounting for non-exchange revenues include
classification, determining recognition points, measurement at initial
recognition, and determining the appropriate treatment of conditions attached
to grants. This standard is seen as problematic with regard to the definition of
the accruals basis for initial points of recognition of revenue related to
taxes. In particular, the definition of the accruals criteria as proposed (when
the taxable event occurs and the asset recognition criteria are met) is seen as
problematic with regard in particular those entities using the time-adjusted
cash method for taxes in government finance statistics. Additional difficulties
to those highlighted in the discussion above arise for some countries because
the criteria for recognition of taxes are defined for the statement of
financial position and not the statement of financial performance. Furthermore,
the term ‘asset’ is used instead of ‘tax revenues’ when discussing the
recognition of non-exchange transactions involving taxes. IT implementation
issues are perceived as relevant due to the greater complexity of record
keeping. The distinction criteria for conditions and restrictions for
accounting of grants are also perceived as difficult.

IPSAS 24 (Presentation of budget information in
financial statements) — The standard requires comparison with the approved
budget and with actual amounts. However, the budget framework is usually
different and this may pose implementation difficulties. In particular, some
entities adopt the accruals basis of accounting for financial statements but draft
the budget under a cash basis.

IPSAS 25 (Employee benefits) — The difficult
areas are pensions and, to a lesser extent, other long-term benefits such as
long-service leave. Accounting for short-term employee benefits is not
generally problematic. This standard is seen as incomplete because it does not
cover the accounting and recognition of employee retirement benefit plans.
Moreover, the standard does not deal with accounting and recognition of private
sector post-employment benefits managed by the general social security system.
The standard requires calculation of the amount of long-term post-employment
benefits (unfunded liability for defined contribution plans and the total
liability for defined benefit plans). In that case, the entity should use an
actuarial assessment to discount the value of the future amount. In particular,
actuarial assumptions to determine the cost of providing post-employment
benefits include an assumption on the discount rate that is seen as a difficult
issue. However, although IPSAS 25 requires the use of (complicated) actuarial
techniques (and data collection), it does not require that a qualified actuary
be used. It also requires accounting for any constructive obligation that
arises from the entity’s informal practices of paying employee benefits, and that
is seen difficult. The standard is seen as problematic to apply, in view of the
current common country practice of accounting for such commitments as
off-balance sheet liabilities (at best, disclosed in the notes to the financial
statements).

IPSAS 26 (Impairment of cash-generating assets)
— The standard is seen as difficult because it requires calculation of
impairment on an annual basis. There is a transitional issue for cash-based systems.

IPSAS 27 (Agriculture) — This standard is seen
as difficult to implement because of a lack of systems to record this activity.
The standard is not seen as material for some countries. It does not deal with
the accounting treatment of land or intangible assets related to agricultural
activity.

IPSAS 28 to 30 (Financial instruments) — These
standards are seen as not sufficiently adapted to public sector
characteristics. In particular, the classification of financial assets required
by this standard is seen as not suitable for some countries. The standard is
seen as problematic for some countries which currently use a nominal value
basis, whereas the standard calls for measurement after initial recognition at
amortised cost using the effective interest method for loans and receivables
and held-to-maturity investments. Accounting for financial instruments on a
fair value basis on initial recognition is also considered complex because
entities need to apply judgment in determining the market value of similar
instruments with the same term, currency and risk profile, on the transaction
date. Accounting for financial derivatives is also seen problematic because
IPSASs 28 to 30 call for recognition at fair value. Hedge accounting as
proposed by the standard is seen as problematic not only in terms of the
complexity of accounting treatment, but also in terms of its impact on the
statement of financial position and the statement of financial performance. In
addition, macro hedging is not recognised by the standard. Transitional issues
are highlighted for cash-based systems. Accounting treatment is seen as relying
too much on management intention.

Annex 6.2:
Experience of adopting IFRS in the EU

Where
governments decide to adopt accruals accounting, a crucial decision has to be
made about how the accounting standards should be developed and their
application monitored. In addition to Member States’ governments, there would
be value in giving a significant role to the accounting profession as
‘independent experts’ on accounting standards.

The Commission already has experience with
governance structures linked to the adoption of International Financial
Reporting Standards (IFRSs) in the EU. Regulation (EC) No 1606/2002 of the
European Parliament and of the Council of 19 July 2002 on the application of
international accounting standards (the ‘IAS Regulation’) requires publicly
traded companies to present their consolidated accounts in conformity with
international accounting standards.

The history of IFRS in the EU

Prior to the adoption of the IAS Regulation,
the EU examined the possibilities of improving the financial reporting
framework for EU companies for several years. In 1995, the Commission adopted a
new strategy: in a communication on accounting harmonisation,[101] it proposed to associate the
EU with the efforts made by the IASC (International Accounting Standards
Committee) and IOSCO (International Organisation of Securities Commissions)
towards a broader international harmonisation of accounting standards.

Based on that strategy, seven Member States
(Austria, Belgium, Germany, France, Finland, Italy, and Luxembourg) allowed
listed companies to prepare their consolidated financial statements in
accordance with either IAS (International Accounting Standards) or US GAAP
(Generally Agreed Accounting Principles). The strategy was updated in 2000: it
was necessary to move towards a single set of accounting standards in order to
build a unified capital and financial services market by 2005.

Subsequently in 2000, the Commission
introduced a legislative proposal requiring all listed EU companies to prepare
their consolidated financial statements in accordance with IAS at the latest in
2005. This resulted in the adoption of the IAS Regulation in 2002.

Ten years have passed since then. Considering
the time elapsed and the international context of accounting convergence, it is
time to assess the functioning of the current system of IFRS in the EU.
Therefore, in 2012 a debate was initiated at political level (ECOFIN) in order
to identify potential improvements to the current system and the related
governance arrangements. An evaluation of the IAS Regulation is to be launched in
2013.

The current governance related to the
adoption of IFRSs

The objective is to adopt and use international
accounting standards in the EU with a view to harmonising the financial
information presented by companies so as to ensure a high degree of
transparency and comparability of financial statements and hence ensure that
the EU’s capital market and the single market work efficiently. This entails
greater convergence of the accounting standards currently used internationally,
with the ultimate objective of achieving a single set of global accounting
standards.

Any IFRS to be adopted in the EU must be
consistent with the true and fair view set out in the Accounting Directive, be conducive
to the European public good and meet basic criteria as to the quality of
information required for financial statements to serve users.

The EU’s IFRS endorsement process

In brief, the procedure for adopting EU
standards is the following:

(10)
International Accounting Standards Board (IASB)
issues a standard

(11)
European Financial Reporting Advisory Group
(EFRAG) holds consultations

(12)
EFRAG gives endorsement advice and an effects
study

(13)
Commission drafts endorsement regulation

(14)
Accounting Regulatory Committee (ARC) votes and
gives an opinion

(15)
European Parliament and Council scrutiny period

(16)
Commission adopts and publishes the standard in
the Official Journal

This process typically takes approximately eight
months.

The International Financial Reporting
Standards (IFRS) are developed by the International Accounting Standards Board
(IASB). The IASB is more and more regularly conducting ex-ante field-testing
and post-implementation reviews. Interpretations of IFRSs are issued by
the IFRS Interpretations Committee (IFRIC), another body under the IFRS
Foundation’s umbrella. The Commission participates in the IASB agenda
consultation and provides funding (an operating grant) to the International
Financial Reporting Standards Foundation (IFRS Foundation) to guarantee stable
funding and to increase its actual and perceived independence.

The Commission also supported the
establishment of the Monitoring Board to enhance the accountability of the IFRS
Foundation and one of the Commissioners is a member of this Board[102]. The Monitoring Board is an
independent body, with no legal personality, separate from the IFRS Foundation
and governed by its own Charter. Its relationship with the IFRS Foundation is
set out in a bilateral Memorandum of Understanding. The Monitoring Board’s aim
is to ensure that the IFRS Foundation is accountable to public authorities
responsible for setting statutory accounting standards. Its principal powers
and responsibilities are:

·
to participate in the nomination of Trustees and
to approve their appointment;

·
to review the Trustees’ oversight of the IASB’s
work; and

·
to assess the adequacy of the IFRS Foundation’s
funding arrangements with a view to promoting a non-voluntary, transparent and
stable funding platform.

The Monitoring Board may also refer matters
of broad public interest to the IASB for consideration on a ‘comply or explain’
basis.

The Monitoring Board meets two or three
times a year.

The European Financial Reporting Advisory
Group (EFRAG) is a private sector body. Its core decision-making body on
technical matters (the Technical Expert Group, TEG) consists of experts from
issuers, accounting professionals, academics and investors. It assists the
European Commission with the endorsement of IFRSs and IFRS interpretations by
providing endorsement advice and effects studies on technical quality. National
standard setting bodies contribute to EFRAG’s work and resources. EFRAG attends
various IASB Working Group meetings as an observer. EFRAG delivers the input on
behalf of the EU to the IASB. The European Commission also supports EFRAG financially
and is represented as an observer in EFRAG TEG meetings.

The Accounting Regulatory Committee (ARC)
is composed of representatives from each Member State and chaired by the
European Commission. The Committee was set up by the Commission as a regulatory
comitology committee providing opinions on Commission proposals to adopt an
international accounting standard. EFRAG is usually invited as an observer to
the Committee’s meetings.

There is also a role in this process for
the European Securities and Markets Authority (ESMA). ESMA is an independent EU
authority that contributes to safeguarding the stability of the European Union’s
financial system by ensuring the integrity, transparency, efficiency and
orderly functioning of securities markets, and enhancing investor protection.
In this context ESMA — together with the national supervisory authorities — is
responsible for the enforcement of IFRSs.

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

The accounting rules applicable to
the EU Institutions and bodies are based on IPSAS. The legal basis is Article
143 of EU Financial Regulation stipulating that the accounting officer of the
Commission shall adopt rules based on internationally accepted accounting
standards for the public sector. The adoption process is as follows:

Elaboration
of the draft accounting rules

The draft accounting rules are elaborated
by the Commission's accounting officer's services, considering the existing
accounting transactions of the Commission, institutions or agencies. The
accounting rules applicable to the EU institutions and bodies are drafted based
on existing IPSAS and where necessary adjusted to the specific environment of
the EU.

In case there are no existing IPSAS
standards for specific and important accounting transactions, the Commission
may develop its own accounting rules. This is the case for example for the
accounting rule for pre-financing without having a counterpart in the IPSAS
standards.

Advisory
group on accounting rules

Article 152 of the EU Financial Regulation
states that the Commission’s accounting officer adopts the accounting rules to
be applied by all the institutions and EU bodies. The Commission's accounting
officer should have a major role in the development of accounting rules.
However, other users of the accounts should also play a part in the setting of
these requirements.

To this end, an advisory group on
accounting rules has been set up. Its role is to:

deliver an independent professional
judgement on the accounting standards and rules proposed by the Commission’s
accounting officer; and

advise the accounting officer on the
application of financial reporting principles and standards.

Inter-service
consultation of the other EU institutions and bodies

They may give comments on the proposed
rules, eventually also highlighting specificities relevant for their accounting
environment.

Adoption
of the accounting rules applicable for the EU Institutions and bodies,

The adoption of accounting rules applicable
for the EU Institutions and bodies is stipulated in Article 152 of the EU
Financial Regulation: The accounting officer shall, after consulting the
accounting officers of the other institutions and bodies, adopt the accounting
rules. When adopting these rules the Commission's accounting officer shall be
guided by the internationally accepted accounting standards for the public
sector but may diverge from them in order to give a true and fair view of the
assets and liabilities, charges, income and cash flow.

The current
set of accounting rules applicable for the EU Institutions and bodies with
links to IPSAS standards, as at August 2012, is annexed to this chapter. Beside
these rules there are two additional accounting rules which do not have an
IPSAS counterpart:

accounting rule 3: Expenses and payables

accounting rule 5: Pre-financing

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

IPSAS No || Title || EU equivalent rule

1 || Presentation of Financial Statements || 2

2 || Cash Flow Statements || 2

3 || Accounting Policies, Changes in Accounting Estimates and Errors || 14

4 || The Effects of Changes in Foreign Exchange Rates || 13

5 || Borrowing Costs || N/A

6 || Consolidated Financial Statements and Accounting for Controlled Entities || 1

7 || Accounting for Investments in Associates || 1

8 || Financial Reporting of Interests in Joint Ventures || 1

9 || Revenue from Exchange Transactions || 4

10 || Financial Reporting in Hyperinflationary Economies || N/A

11 || Construction Contracts || N/A

12 || Inventories || 9

13 || Leases || 8

14 || Events After the Reporting Date || Not yet developed

16 || Investment Property || N/A

17 || Property, Plant and Equipment || 7

18 || Segment Reporting || 2

19 || Provisions, Contingent Liabilities and Contingent Assets || 10

20 || Related Party Disclosures || 15

21 || Impairment of Non-Cash generating Assets || 18

22 || Disclosure of Financial Information About the General Government Sector || Not yet developed

23 || Revenue from Non-Exchange Transactions (Taxes and Transfers) || 17

24 || Presentation of Budget Information in Financial Statements || 16

25 || Employee Benefits || 12

26 || Impairment of Cash-Generating Assets || 18

27 || Agriculture || N/A

28 || Financial Instruments: Presentation || 11

29 || Financial Instruments: Recognition and Measurement || 11

30 || Financial Instruments: Disclosures || 11

31 || Intangible Assets || 6

32 || Service concession arrangements: Grantor || N/A

CHAPTER 7

7.           How
to move towards implementing EPSAS?

7.1.        European
Public Sector Accounting Standards — EPSAS

If IPSAS, as it currently stands, is not
considered suitable for full and direct adoption throughout the EU, the need to
harmonise government accounting standards in the EU calls for the development
of a set of European Public Sector Accounting Standards — EPSAS.

EPSAS would give the EU the capacity to
develop its own standards to meet its own requirements and with the rapidity
required. It would consist of a set of harmonised accruals-based public sector
accounting standards adapted to the specific requirements of EU Member States.
Standards that could be implemented in practice, and should focus on where they
are most needed. The implementation of EU-wide EPSAS would also dramatically
reduce the complexity of statistical compilation processes used to transform
these data onto a quasi-harmonised basis and minimise risks with regard to the
reliability of the data notified by Member States.

As seen with the example of New Zealand’s
experience described in Chapter 6, the harmonisation of diverse accounting
practices which currently co-exist within many of the Member States may even
produce cost reductions deriving from the reduced bureaucracy to offset or
outweigh the cost of the investment.

7.2.        Governance
of a future EPSAS

There would need to be strong EU governance
for the development and adoption of the EPSAS standards. The system to develop
and govern EPSAS would define the agenda for the development of each standard and
there would need to be well-defined endorsement procedures. The EPSAS
governance structure would need to cover the necessary tasks: legislation,
standard setting, and providing technical and accounting advice.

The EPSAS governance structure would not follow
the same model used by the Commission for EU governance of IFRS because of the particularities
of the public sector and the emphasis on intra-EU comparability. Wherever
possible, it should seek to use the experience and expertise of national public
sector accounting governance structures in the Member States.

EPSAS would need to establish and maintain
close links to the IPSAS Board in order to inform its agenda and
decision-making and because EPSAS standards may need to differ in some cases
from IPSAS standards.

7.3.        A
process and a timetable towards EPSAS

The first version of EPSAS could be based
on the adoption of a subset of IPSASs consisting of those standards commonly
agreed by EU Member States, subject to any necessary adaptations.

However, it should be noted that the
definition of a set of EPSASs would not in itself guarantee timely and high
quality public accounting data. The benefits require additional conditions to
be met, such as:

·
Strong political support and joint ownership of
the project;

·
Public administrations capable of running a more
complex accounting system in each individual public entity;

·
Integrated IT systems for budget, payment,
contract management, double-entry bookkeeping, invoice management, and
statistical reporting;

·
Timely reporting of all economic events in the
integrated accounting system of the public entities (e.g. monthly);

·
Availability of human resources and modern IT;

·
Effective internal control and external
financial audit of public accounting.

For all Member States, but especially for
those that currently use only cash accounting, the implementation of EPSAS
accruals accounting would be a major reform. Some of the issues that would
arise are:

·
Conceptual and technical accounting issues;

·
Staff and consultant expertise, training skills;

·
Communicating with and educating managers and
decision-makers;

·
Liaison with, and training of, auditors;

·
Adjustment or modernisation of IT systems;

·
Adapting the existing national regulatory
frameworks.

The development, endorsement and implementation
of EPSAS would have to be a gradual process, which would take place over a
medium-term perspective, by first focusing on the accounting issues which are
most important for harmonisation, such as revenue and expenditure — taxes and
social benefits — , liabilities and financial assets, and at a later stage
considering non-financial assets, etc. For example, as long as cultural
heritage assets are not used in production processes, or are not purchased for
resale, it may be considered that they do not need to be recognised and valued.

The way forward should take a selective
approach, taking into account in particular the perspective of small and
medium-sized entities and the issue of materiality. The strategy would need to
define priorities, set key deadlines and thus put forward a concrete road map
and describe milestones for the EPSAS project, taking into account impact
assessment considerations.

The Commission, in cooperation with Member
States, would draft an agreed core of basic European Public Sector Accounting
Principles and specify the EPSAS governance system and the procedure for
developing specific standards.

The first step could be a proposal for a
Framework Regulation, requiring the application of the accruals principle in
public accounting.

The EPSAS standard setting body could then
classify the 32 accruals IPSAS standards into three categories:

·
standards that might be implemented with minor
or no adaptation;

·
standards that need adaptation, or for which a
selective approach is needed;

·
standards that are seen as needing to be amended
for implementation.

This categorisation is further elaborated
in the Annex to this Chapter, ‘Possible classification of the IPSAS standards’.

Based on the experience of countries which
have implemented accruals-based public sector accounting systems in recent
years, the process of implementation should be sequenced. The process should be
determined by carefully considering the starting position of each Member State,
for example the state of development of their existing national accounting
standards and the availability of balance sheet data. In some Member States it
might be most appropriate to begin implementation at national level and then
follow this at regional and local levels. It should also be envisaged to limit the
extent of implementation for smaller entities, or at least prioritise the more
important entities, taking into account their materiality.

The process could take place in three
distinct stages:

(17)
A preparatory stage to gather further
information and to develop a roadmap based on further consultations, and to
prepare detailed proposals.

(18)
A stage to develop and put in place the
practical arrangements, addressing issues such as finance, governance, possible
synergies, and the concerns of smaller government entities. This stage would
include the development of the Framework Regulation.

(19)
The implementation stage.

Annex 7.1: A
possible classification of the IPSAS standards

Taking into account that a number of
accounting-related technical issues are seen as problematic in the IPSAS
standards, as described in Chapter 6, the IPSAS standards might be grouped as
follows:

Standards that might be implemented with minor
or no adaptation;

Standards that need adaptation, or for which a
selective approach is needed;

Standards that are seen as needing to be
amended for implementation.

Eurostat drafted the proposed groups taking
into account the views of Member State experts in the Task Force on IPSAS. Note
that experts’ views on the suitability of some IPSAS standards may differ and
therefore this proposal is preliminary and that needs further technical
discussion with accounting experts. Note, too, that these proposals refer to
the applicability of the standards themselves, and not their consistency with ESA.

Standards that might be implemented with minor or no adaptation || Standards that need adaptation, or for which a selective approach is needed || Standards that are seen as needing to be amended for implementation

IPSAS 1 — Presentation FS[103] IPSAS 2 — Cash flow IPSAS 3 — Fundamental errors and changes in accounting policies[104] IPSAS 4 — Changes in foreign exchange rates IPSAS 5 — Borrowing costs IPSAS 9 — Revenue from exchange transactions IPSAS 10 — Hyperinflation­ary economies[105] IPSAS 11 — Construction contracts IPSAS 12 — Inventories IPSAS 14 — Events after the reporting date IPSAS 16 — Investment property IPSAS 19 — Provisions, con­tingent liabilities, contingent assets[106] IPSAS 27 — Agriculture[107] IPSAS 32 — Service concessions || IPSAS 7 — Investments in associates IPSAS 8 — Interests in joint ventures IPSAS 13 — Leases IPSAS 15 — Financial instruments: Presentation[108] IPSAS 17 — Property, plant and equipment IPSAS 18 — Segment report­ing IPSAS 20 — Related party disclosures IPSAS 21 — Impairment of non-cash-generating assets IPSAS 22 — Disclosure general government sector IPSAS 23 — Revenue from non-exchange transactions[109] IPSAS 24 — Presentation of budget information IPSAS 25 — Employee benefits[110] IPSAS 26 — Impairment of cash-generating assets IPSAS 31 — Intangible assets || IPSAS 6 — Consolidated financial statements IPSAS 28 — Financial instruments: Presentation[111] IPSAS 29 — Financial instruments: Recognition and measurement[112] IPSAS 30 — Financial instruments: Disclosure[113]

[1]               Council
Directive 2011/85/EU on requirements for budgetary frameworks of the Member
States.

[2]               http://ec.europa.eu/economy\_finance/articles/governance/2012-03-14\_six\_pack\_en.htm.

[3]               ESA accounts are produced in a many EU countries from
cash-based public accounting systems, to which a series of ‘accruals
adjustments’ are made. These adjustments are estimated on a macro basis, and as
a consequence they are approximations. Where there are no accruals accounts at
the micro level, financial transactions and balance sheets have to be derived
from a mix of different sources, leading to a ‘statistical discrepancy’ between
the deficit compiled via non-financial accounts and the deficit compiled via
financial accounts.

[4]               System of
National Accounts, 2008, page 10, chapter 1.F. ‘Links with business
accounting’.

[5]               System of
National Accounts, 2008, page 11, chapter 1.F.1. ‘International
accounting standards’.

[6]               Proposal for a Regulation on the European system of
national and regional accounts in the European Union, COM(2010) 774 , §21.04.

[7]               See http://epp.eurostat.ec.europa.eu/portal/page/portal/public\_consultations/consultations/ipsas.

[8]               The process used to set the accounting standards for
the EU Institutions and bodies and its relationship with IPSAS is described in
Annexes 6.2, 6.3 and 6.4.

[9]               http://www.ifac.org/public-sector/about-ipsasb.

[10]             Much of this chapter is focused
on the accruals standards; however a description of the cash basis standard is
also given at the end of section 2.3.

[11]             See Conceptual Framework ED 1 Par.1.3.

[12]             The
IPSAS Board has issued recommended practice guidelines that are not part of
IPSAS (e.g. reporting on the long-term sustainability of an entity’s finances).
Moreover, the IPSAS Board has issued 14 studies on issues related to public
sector financial reports, as well as a number of occasional papers.

[13]             A government business enterprise, that is a financial
and non-financial public corporation, is defined as a public sector entity that
(a) has the power to contract in its own name, (b) has been assigned the
financial and operational authority to carry on a business, (c) sells goods and
services in the normal course of its business to other entities at a profit or
full cost recovery, and (d) is not reliant on continuing government funding to
be a going concern. The standards applied by GBEs are the International
Financial Reporting Standards (IFRS) or the private sector accounting standards
under their national jurisdiction.

[14]             In the
private sector the development of IFRS started with GAAP (generally accepted
accounting principles) addressing the need to agree common generally accepted
principles underpinning financial reporting. IAS (International Accounting
Standards) were developed between 1973 and 2001 by the Board of the
International Accounting Standards Committee (IASC). In 2001, the newly created
International Accounting Standards Board (IASB) took over responsibility for
setting International Financial Reporting Standards from the IASC.

[15]             IFRS 13, applicable from 1 January 2013, defines fair
value as ‘the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date’.

[16]             For financial assets or financial liabilities not ‘at
fair value through surplus or deficit’ transaction costs that are directly
attributable to the acquisition or issue of the financial asset or liability
are added.

[17]             Discussions held so far on the
IPSAS Board’s conceptual framework project (see section 2.5.4) have suggested
that it will be inappropriate to adopt one single measurement basis for all the
elements of financial reporting.

[18]             Current replacement cost is only used in IPSAS 12, Inventories,
in the current suite of IPSASs. A number of features of replacement cost
are under discussion in the conceptual framework.

[19]             Conceptual Framework Exposure Draft 3, Measurement of
Assets and Liabilities in Financial Statements, published in November 2012.

[20]             The entity on which the
set of IPSAS reports (the ‘reporting entity’) is defined as a government or
other public sector organisation, programme, or identifiable activity that
prepares GPFRs. A reporting entity may be a ‘group reporting entity’.

[21]             Qualitative characteristics are under discussion as
part of the conceptual framework project.

[22]             IPSASs set out minimum
requirements and specified statements, but without a mandatory format.

[23]             The
development of IPSAS was an initiative of the International Federation of
Accountants (IFAC) creating (and funding) a ‘Public Sector Committee’ (1997).
The PSC has been dealing with public sector accounting since 1987 with
guidelines, studies and research report, but only in 1996 was a project
launched that was a turning point, with the PSC starting to formulate IPSAS
with the aim of improving and harmonising the accounting of public authorities.
In 2004 the name of PSC was changed to the IPSASB. The IPSAS Board also issued
guidance on the implementation of accruals accounting (‘Study 14’, now in its
third edition, dated January 2011).

[24]             So far,
but the results of the current public consultations run by the IPSAS Board, on
the work plan and reform of governance of the Board itself, may lead to a
revision of the procedure.

[25]             A
Consultative Advisory Group is planned to be created to provide a forum in
which the IPSAS Board can consult with representatives of different groups of
constituents.

[26]             In
certain cases, there will not be an IPSAS, but some other form of document, for
example a ‘reporting practice guideline’ or other ‘non-binding’ document.
IPSASs are sometimes published in languages other than English; however the
English language version is authoritative.

[27]             The IFRS Interpretations
Committee is the interpretative body of the IASB. It has 14 voting members
appointed by the trustees and drawn from a variety of countries and
professional backgrounds. The mandate of the Committee is to review on a timely
basis widespread accounting issues that have arisen within the context of
current IFRSs and to provide authoritative guidance (IFRICs) on those
issues. Cf. http://www.ifrs.org/The-organisation/Pages/IASCF-and-IASB.aspx.

[28]             For
more details see ‘International Public Sector Accounting Standards Board
Guidelines for Structure and Format of IPSASs ‘- June 2010 - www.ipsasb.org.

[29]             http://www.ifac.org/about-ifac/membership.

[30]             IPSAS Board members may be
accompanied at meetings by a technical adviser possessing the technical skills
to participate in the debate, and who has the privilege of the floor and may
participate in projects. The IPSAS Board may grant observer status to
representatives of appropriate organisations that have an interest in financial
reporting in the public sector and in endorsing and supporting IPSASs, and that
possess the technical skills to participate in the debate and provide ongoing
input to the work of the IPSAS Board. Observers may attend IPSAS Board
meetings, have the privilege of the floor, and may participate in projects. See
www.ipsasb.org.

[31]             Members contribute about 500 hours per year, whereas
the chair contributes about 1 500 hours per year. Cf. response of IPSAS
Board to Eurostat public consultation on IPSAS, May 2012.

[32]             The International Accounting Standards Board (IASB) is
an independent group of 15 experts with an appropriate mix of recent practical
experience in setting accounting standards, in preparing, auditing, or using
financial reports, and in accounting education. Broad geographical diversity is
also required. The Board is assisted by a staff of more than 100 professionals,
who work with the Board and project teams, conduct research, participate in
roundtable meetings, analyse oral and written comments received from the public,
and prepare recommendations and drafts of documents for consideration by the
Board.

[33]             http://viewer.zmags.com/publication/ed4395af#/ed4395af/90.

[34]             https://www.ifac.org/about-ifac/forum-firms.

[35]             http://www.ifrs.org/The-organisation/Governance-and-accountability/Annual-reports/Documents/AR\_2011.pdf.

[36]             http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:253:0008:01:EN:HTML.

[37]             The three boards set international standards in their
respective areas.

[38]             See www.ipiob.org for more information.

[39]             Further discussion on
governance and resources issues in Chapters 5 and 6.

[40]             Contract reference 20405.2011.001-2011.219: An
overview and comparison of public accounting and auditing practices in the 27
Member States.

[41]             Detailed information has not been provided on social
funds.

[42]             Information for state governments and social security
funds is not provided.

[43]             In fact, the budget entities apply accruals accounting.
The only exceptions in the consistency of applying the accruals basis are: in
budget entities, depreciation is not accrued at the moment and taxes and social
contributions are reported on a cash basis (for notification purposes the
time-adjustment approach is applied).

[44]             Detailed information is provided only for the central
government.

[45]             Some deviations from the
Government Accounting Law exist for different institutions. For instance, the
National Bank accounts for financial assets and debt based on fair value,
market value, discounted cash flows, etc. Infrastructure assets and palaces and
other cultural properties, for instance, are not accounted for under the
accruals-based method. All investments and maintenance are listed and the state
of plant and buildings are evaluated.

[46]             Some national public agencies such as the City of
Architecture and National Heritage apply the French private accounting
standards.

[47]             Only a few, incomplete
accruals-based statements of financial position (balance sheet) are available.

[48]             Due to the current Greek crisis, government
representatives were for the most part unavailable to contribute to the study.
Information on the nature of accounting practices in the sub-sectors is not
provided.

[49]             Counties, towns with rights of counties, capital, and
capital districts, local governments with annual budgets over HUF 300 million
(≈ EUR 1 million) and having debt liabilities or with intention of borrowing
are audited by private audit firms.

[50]             This concerns all public corporations, public trust
funds, and enterprises that maintain a double-entry bookkeeping system and
simultaneously fulfil two criteria: average net sales revenue is higher than
HUF 200 million (≈ EUR 0.667 million) and average number of employees is higher
than 50 in two preceding years.

[51]             Information for social security funds has not been
provided.

[52]             Cash flows are recorded for GFS purposes only as
neither central government nor local government prepare a cash flow statement.

[53]             Although a Chart of Accounts can also be tailored to an
organisation’s specific needs, e.g. Law 28 February1994.

[54]             The state balance is in
accordance with ESA standards. The ESA standards are accruals based.

[55]             The statement of changes in net
assets is included in the disclosure of the state balance.

[56]             Business accounting.

[57]             As regards the system used for
the financial position time of recording, according to the applicable
legislation no obligations are provided for pensions, impairment is optional,
depreciation is partially provided for.

[58]             Concerning the cash flow
statement, the direct method — receipts and payments — is used. The cash flow includes flows from
operational, investment and financing activities, for each evidencing receipts,
payments and net cash. Details are presented in the implementation account.

[59]             The difference in accounting arises between entities
that use public funds but are not registered corporations and those that are
normal registered corporations but are owned effectively by central government
or local government. The entities that use public funds but which are not
registered corporations follow more of a cash-based accounting system. The
registered corporations that are effectively owned or controlled by central
government or local government need to follow the same accounting rules
(Slovenian Accounting Standards, which are similar to IFRS in most cases) as
all registered corporations (publicly or privately owned).

[60]             Information for autonomous
communities, local governments and the central bank has not been provided.

[61]             Nearly two-thirds of EU Member States cooperate with
Eurostat, so that Eurostat prepares their GFS reporting to the IMF from data
reported to Eurostat.

[62]             Available at http://www.ifac.org/sites/default/files/publications/files/international-public-sector.pdf.

[63]             One might nevertheless note the growing interest in
data on the activities of public corporations in the context of EU economic
governance reforms.

[64]             A notable exception, though on an IFRS and not IPSAS
basis, is the Whole of Government Accounts project implemented in the United
Kingdom.

[65]             In practice IPSAS 22 has not been fully applied in any
country. The closest one may find internationally is probably the presentation
by the Australian government of its financial statements, which are closely
reconciled with government finance statistics. This is summarised on the
Consultation Paper issued under the IPSAS/GFS project (see section 4.5).

[66]             These differences are not covered here, but are
described in the ISPAS Board’s Consultation Paper mentioned in section 4.5.
Examples include recording of research and development, licences and service
concessions.

[67]             ESA 2010 will introduce a concept of ‘standardised
guarantees’ which will lead to the recording of liabilities.

[68]             Note, however, that Maastricht debt measures, relevant to
the EDP, are based on nominal valuation.

[69]             This is described in more detail on the dedicated
Eurostat web pages for sector accounts, to be found at http://epp.eurostat.ec.europa.eu/portal/page/portal/sector\_accounts/introduction/.

[70]             See Eurostat’s GFS website, under the link to summary
tables:  
 http://epp.eurostat.ec.europa.eu/portal/page/portal/government\_finance\_statistics/introduction.

[71]             A major difference is in the treatment of holding gains
and losses, which are included in a Statement of Financial Performance but are
not treated in GFS as expenditures and revenues.

[72]             http://www.ifac.org/publications-resources/ipsass-and-government-finance-statistics-reporting-guidelines.

[73]             See http://www.ifac.org/publications-resources/ipsasb-consultation-paper-2013-2014-work-program.

[74]             Some of these initiatives could be taken earlier as
they do not require changes in standards.

[75]             For example by drawing on experience of implementation
of XBRL-based reporting in the private sector.

[76]             http://www.ifac.org/publications-resources/study-14-transition-accrual-basis-accounting-guidance-governments-and-governm.

[77]             Under IPSAS GBEs would adopt IFRS requirements.

[78]             Loi
organique nº 2001-692 du 1er août 2001 relative aux lois de finances.

[79]             Each mission comprises a set of programmes to which
appropriations are allocated and broken down into sub-programmes (actions).

[80]             Local government, social security authorities and
public agencies draw up their accounts on an accruals basis using, when it is
relevant, rules originating from the standards applicable to the individual
financial statements of business undertakings, namely the plan comptable
general, or general chart of accounts (PCG).

[81]             Central Government Accounting Standards in France (RNCE
— recueil des normes comptables de l’Etat) — the conceptual framework
for central government accounting.

[82]             Central
government accounts do not currently include government-owned public agencies.

[83]             http://www.economie.gouv.fr/cnocp.

[84]             http://www.efv.admin.ch/e/downloads/finanzpolitik\_grundlagen/rechnungsmodell/NAM\_brochure\_e.pdf.

[85]             An extension of the scope for consolidation, including
all significant interests, is currently being considered.

[86]             The case of the UK is all the more interesting as it is
the only Member State having developed the consolidation of accruals accounts
to the level of the whole of government.

[87]             During
2000-2002 and with a major upgrade in 2004 a new ERP-system was introduced.
This was in place before the introduction of accruals accounting. Also in 2004
a new reconciliation system was introduced collecting accounting information
from all central government entities. The implementation of accruals accounting
was carried out during 2003-2005. The table does not include the costs of
implementing a SAP based system in five large central government entities.

[88]             COM(2012) 777 final.

[89]             IMF Policy Paper — ‘Fiscal
Transparency, Accountability, and Risk’, 7 August 2012. It is argued that
fiscal transparency is a critical element of effective fiscal policymaking and
the management of fiscal risks. The authors observe that understanding of the
underlying fiscal position of a government and the risks to that position
remains inadequate. Fiscal transparency is needed to address the shortcomings
in standards and practices revealed by the crisis and to guard against a
resurgence of fiscal opacity in the face of growing pressures on government
finances.

[90]             Code of Good Practices
on Fiscal Transparency (2007).

[91]             Opinion of
the European Central Bank of 16 February 2011 on economic governance reform in
the European Union (CON/2011/13).

[92]             Reply
by ESMA to the public consultation on the suitability of IPSAS.

[93]             It is important to recall that the Court is charged
with examining the accounts of all revenue and expenditure of the Union's
budget. While the Court has an interest in the accounting standards that will
apply to the financial statements of EU Member States and the policy governing
the public finances of the EU, the audit of the accounts of Member States is,
outside the field of competence of the Court and, as such, it would be
inappropriate for the Court to comment with authority on these issues.

[94]             The views of those who remain
unpersuaded by the case for the principle of accruals accounting in the
public sector, whether harmonised or not, have already been covered in Chapter
1, and are not repeated here.

[95]             Meetings were held on: 27 February, 26 April, 5-6 July
and 7 November 2012.

[96]             For example, for the valuation of assets both
historical cost and fair value are allowed; for income statement presentation a
choice is allowed between two forms of analysis: nature of expense or function
of expense; for borrowing costs two methods are also allowed: recognition as
expense in the period in which they are incurred, or capitalisation as part of
the cost of the asset (if eligible under the standard conditions).

[97]             For statistical reporting, note that the value of an
asset is its current market value. See Chapter 4.

[98]             See IPSAS 1.47.

[99]             Note, however, that from 2014 the nomination process
for the IPSAS Board will be more open, so that members may be nominated by a
wider range of bodies, for example governments and international organisations.

[100]            http://www.ifac.org/sites/default/files/publications/files/no-1-implementation-accr.pdf.

[101]            Communication
from the Commission, Accounting harmonisation: A new strategy vis-à-vis
international harmonisation, COM(95) 508 final.

[102]            Currently represented on the
Monitoring Board are the Emerging Markets and Technical Committees of the
International Organisation of Securities Commissions (IOSCO), the European
Commission, the Financial Services Agency of Japan (JFSA), and US Securities
and Exchange Commission (SEC). The Basel Committee on Banking Supervision attends
Monitoring Board meetings as an observer. The membership is under review with a
view to expanding it.

[103]            Although experts perceive some disclosure issues as
relevant.

[104]            Experts point to a lack of guidance on determining accounting
policy in the absence of a specific IPSAS.

[105]            Not relevant in the EU context.

[106]            Determining a discount (market) rate to apply in calculating
the present value of the provision is perceived as difficult, notably with
regard to long-lived provisions (e.g. nuclear decommissioning).

[107]            Not seen as material for some
countries. There is a lack of guidance on the accounting treatment of land or
other intangible assets related to the activity.

[108]            To be withdrawn — see Chapter 2.

[109]            Recognition of revenue related to taxes, accounting for
grants according to distinction criteria for conditions and restrictions and IT
issues are all perceived as relevant by some countries.

[110]            The difficult areas are pensions, and to a lesser
extent, other long-term benefits such as long-service leave, which represent a
large problematic part of the standard.

[111]            However, since IPSAS 28 deals with presentation it may
be seen as less problematic than IPSASs 29 and 30.

[112]            Accounting for financial instruments on a fair value
basis on initial recognition is considered to be complex and problematic for
some countries which currently use a nominal value basis even for measurement
after initial recognition; specific areas considered problematic are hedge
accounting, macro hedging and recognition at fair value for financial
derivatives.

[113]            Disclosure issue is considered relevant by some countries.

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