PARIS, 4 August 2008 Original: English

Transcription

1 Executive Board Hundred and eightieth session 180 EX/34 PARIS, 4 August 2008 Original: English Item 34 of the provisional agenda REPORT BY THE DIRECTOR-GENERAL ON THE IMPLEMENTATION OF THE INTERNATIONAL PUBLIC SECTOR ACOUNTING STANDARDS (IPSAS) AND THE LIKELY IMPLICATIONS THEREOF ON CHANGES TO THE FINANCIAL REGULATIONS SUMMARY The General Conference at its 34th session approved the adoption of IPSAS by the Organization effective January This document contains the information requested by the General Conference and provides updates on the status of implementation. It includes three annexes which cover respectively: I. Accounting policy and guidance papers; II. Recommendations and list of guidance; and III. Identified gaps between UNSAS and IPSAS. This document contains financial and administrative implications: see paragraphs Action expected of the Executive Board: proposed decision in paragraph 32.

2 INTRODUCTION 1. The adoption of the International Public Sector Accounting Standards (IPSAS) by the United Nations system is an integral part of its administrative and financial reform process designed to bring financial accounting and reporting standards up to a recognized international level on a par with best practice in the public and not-for-profit sectors. 2. The IPSAS standards require accounting on a full accruals basis. Accrual accounting is a method of recording financial transactions where the full characteristics of those transactions are recorded in the period to which they relate. It provides a more realistic picture of performance and financial position. Cash accounting, on the other hand, simply records the cash effect of transactions in a given period and, although the monitoring of cash is extremely important, this method of accounting is not as complete as full accruals accounting. The use of UNSAS by the United Nations system has taken into consideration some aspects of accrual accounting but is now considered to fall significantly short of full accruals accounting. 3. The IPSAS Board which represents 163 professional accounting institutions from 120 countries is responsible for preparing accounting standards. The development of these standards requires a significant investment in manpower and time. The IPSAS Board is a dedicated independent international standard-setting body which uses strong due process including public consultation and meetings. The OECD, EC and NATO have already adopted IPSAS for their financial reporting while the World Bank, the Asian Development Bank and IFAD have chosen to adopt full accruals accounting under IAS/IFRS (international standards used by the private sector). In addition more than 30 countries have either already adopted or are in the process of adopting IPSAS for financial reporting in their public sectors. 4. The aim of IPSAS adoption therefore is to improve comparability, harmonization, transparency and accountability across the United Nations system. 5. The Executive Board was first introduced to International Public Sector Accounting Standards (IPSAS) in the autumn of 2006 by document 175 EX/INF.7 (175 EX/Decision 33). At its 176th session in the spring of 2007 it was provided with a first progress report (176 EX/40) on the implementation of IPSAS further to which 176 EX/Decision 40 recommended that the next General Conference approve the adoption of IPSAS for the Organization. 6. At its 34th session (34 C/Resolution 71), the General Conference: approved the adoption of International Public Sector Accounting Standards as the accounting standard of UNESCO with effect from 1 January 2010; and requested the Director-General to submit to the Executive Board at its 180th session a preliminary proposal on the possible amendments to the Financial Regulations as well as an Action Plan with a timetable in order to reflect the requisite changes brought about by the adoption of International Public Sector Accounting Standards (IPSAS), and to submit a final proposal of amendments to the Financial Regulations for consideration and approval by the General Conference at its 35th session (2009). Actions taken by the United Nations system 7. In November 2005 the High-Level Committee of Management (HLCM), a subsidiary body of the Chief Executives Board, chaired by the Secretary-General recommended the adoption of IPSAS by United Nations organizations effective no later than In July 2006 the General Assembly in resolution 60/283 approved the adoption of IPSAS by the United Nations.

3 page 2 8. Under the auspices of the HLCM and the Finance and Budget Network (the FB Network), the United Nations Task Force on Accounting Standards is the forum where United Nations organizations discuss and decide on matters relating to IPSAS adoption. The United Nations Accounting Standards Project has been established under the Task Force; its work is overseen by an IPSAS Adoption Steering Committee which deliberates on policy and guidance issues. 9. The primary objectives of the system-wide IPSAS project are (a) developing accounting policies and guidance notes, (b) providing advice and support, (c) developing system-wide training materials, and (d) coordinating communication with internal and external stakeholders of the United Nations system, in particular with the Panel of External Auditors. 10. The system-wide IPSAS Project Team, based in New York, currently consists of a team leader and three professionals. To date the main achievements are the production of numerous papers and briefing notes, the development of a web page, the formulation of a process to monitor and report on the progress of individual organizations and the development of a common systemwide approach to training. Regional Focus Groups in New York, Geneva, Vienna and Rome have been established to review the papers issued by the Project Team and to exchange views on issues of common concern. UNESCO actively participates in the Task Force and in the Regional Focus Group. 11. The Task Force was mindful that early adopters having chosen to become IPSAS compliant as of 1 January 2008 would require the maximum amount of guidance by that date or soon after. In order to meet this deadline, the accounting policy and guidance papers included in Annex I, resulting from an ambitious work plan, were submitted to the Task Force for consideration at meetings held over the period between August 2006 and February The resulting recommendations and list of guidance approved by the FB Network are included in Annex II. 12. There are three other important areas where further work has yet to be done by the IPSAS Project Team and which will have a system-wide impact. The first is consolidation where it will be necessary to define those entities which are controlled (IPSAS definition) by an organization in order to decide what should be included in the financial statements of each organization. The second area is the important subject of budgetary practices where, for the moment, it is agreed that, in accordance with IPSAS requirements, a reconciliation will be included in the notes to financial statements explaining the differences between the audited financial statements and approved budgets. Finally, work is under way by the United Nations Secretariat together with the United Nations funding organizations to produce revised draft Financial Regulations which takes into account IPSAS requirements and which could be a reference for the specialized agencies when reviewing their own financial regulations. Actions taken by UNESCO 13. The Secretariat, through the Bureau of the Comptroller (BOC), has been involved with the developments undertaken by the United Nations IPSAS Project Team described above since the second half of The Organization, through its membership of the Rome Focus Group, led by WFP, an early IPSAS adopter, as well as being represented on the Accounting Standards Task Force, has contributed and kept abreast of the overall change process of the United Nations system as it moves towards IPSAS adoption. 14. In the final quarter of 2007 the Organization contracted one of the leading firms of chartered accountants, PriceWaterhouseCoopers, to provide assistance in setting up the IPSAS implementation phase within UNESCO. The scope of this work and expected outputs included (a) confirming known gaps and identifying others between current UNSAS practice and future practice under IPSAS, (b) developing a comprehensive milestone action plan for the implementation of IPSAS, and (c) initiating a communication plan.

4 page With a steering committee dealing with policy issues already in place since mid-2007, it was decided to set up a more structured organization in order to facilitate the day-to-day running of the project. This involved the creation of a Project Management Team, the key role being to manage the project on a regular and day-to-day basis, and the creation of Gap Teams tasked to analyse subjects in detail and provide solutions in order for the Organization to be IPSAS compliant by The structure of the project as from the first quarter of 2008 is as follows: UNESCO Project Structure and Responsibilities UNESCO Steering Committee (BOC, BB, ED, DIT/MIS, ERC) UNESCO-wide policy decisions UN IPSAS Team UN-wide policy decisions IPSAS Consultants (PWC) Technical advice Policy guidance 1 2 Project Management Team (BOC, DIT/MIS, AO/ODG, BB UNESCO Institute) 3 4 Gap Management Teams 5... Policy recommendations to Steering Committee Representation at the UN IPSAS Team Project Monitoring and Reporting Gap-Team Coordination IPSAS internal and external Communication Development of policies to be IPSAS compliant Analysis of implications on manual items and identification of training needs Identification of adjustments to accounting procedures and UNESCO IT-Systems (e.g. FABS) 16. To date, a great deal of work has been done both by the Organization s own staff and the consultant in identifying the main areas of difference (gaps) between the current practice and IPSAS requirements. Without going into too much detail in this document, Annex III has been appended and provides a list of the gaps identified together with a brief explanation of each in order to give some insights into the issues that the Project Team and Gap Managers will be working on. Those gaps which have been given first priority, due to the importance of the subject and also due to the implications that they might have on the Organization at large, are (a) financial statements and disclosure of notes to the accounts, (b) foreign currency, (c) revenue recognition, (d) tangible and intangible assets, (e) expenditure recognition/commitments, and (f) employee benefits. 17. Attention has also been given to training and, to date, five workshops have been held for staff members considered important in assisting in the early phases of the change management process. A little under 100 individuals have attended these workshops which, depending on the audiences (BOC, BB, ERC, Administrative Officers, Executive Officers), have covered generalities and, in some sessions, specific subjects of particular interest to attendees. Further workshops are to be planned in 2008 and 2009 for field offices and other interested parties. Towards the end of 2008 and in 2009 the Organization will benefit from the detailed training material which is currently being put together by the United Nations IPSAS Project Team. This package will include

5 page 4 classroom-type training and web-based programmes varying in content which should be available for a wide range of interested parties ranging from accounting and administrative staff through to senior management. Training is essential in order to inform and teach those directly concerned on how to do things differently in the future. It is also a means of gaining buy in to the project from those less directly concerned but who need to be involved in this important period of change as well as being a very effective tool for communication. 18. A sound communication strategy is necessary to build strong commitment for IPSAS from all stakeholders. Given that the move to IPSAS is a United Nations-wide process the Organization automatically benefits from system-wide communication on the subject. Clear and complete information via progress reports and verbal information exchange during sessions is also a key part of the communication to governing bodies and the wider audience of the Secretariat. An information paper posted on the intranet, the first of which was produced in May 2008, providing general information as the project progresses, will be issued approximately every four months. Finally, as mentioned above, training will also be an important means for underscoring the significance of IPSAS across the Secretariat. 19. It is important to maintain contact with the External Auditors throughout this project, informing them of the decisions being made and, if necessary, bringing to their attention the issues which might become critical for them at the time of their work on the certification of the financial statements. A special United Nations IPSAS website exists to which the auditors have access thereby enabling them to follow the guidance given and policies being made. In addition, discussions have taken place and there have been written exchanges between BOC and representatives of the French Cours des Comptes on specific issues within the UNESCO context. During the audit of the financial statements, which remain UNSAS-based, a great deal of reflection was given by the External Auditor to the changes which the Organization will undergo with the adoption of IPSAS, and this has been commented on extensively in their written report. Action Plan (timing, budget and funding) 20. Work on the implementation of IPSAS at UNESCO started in the first quarter of 2008 following the closure of the biennium accounts. It is estimated that over the three-year period from 2008 to 2010 approximately 900 man days (corresponding to 1.1 full-time staff members) will be required at Headquarters and 1,400 man days in institutes and field offices. Ideally much of the work should be done in 2008 and 2009 but some work may be finalized in 2010 prior to the preparation of the financial statements for that year which will be completed in early If the adoption of IPSAS is to be a success and if the Organization is to gain maximum benefit from the improvements during the subsequent period of consolidation, it is important that a significant part of the work should be taken on by UNESCO staff. In addition, the experience will be rewarding to those who participate and should provide an important learning opportunity, which could subsequently prove beneficial to them as individuals as well as to the United Nations system at large. Back-up staff and support from consultants will be required to assist in covering the additional workload and to provide technical expertise. 22. The General Conference was informed at its last session that the total cost estimated for would be US $1.87 million (34 C/42). At the same session the General Conference approved a total budget of $1.246 million ($1 million of the regular programme in document 34 C/5 and the use of the Singapore contribution of $0.246 million in document 34 C/45). A further $0.15 million have been made available from the HRM budget to allow for special IPSAS training activities. All these funds accumulate to $1.369 million. At the end of the last biennium BOC hired consultants to evaluate the situation of UNESCO and the required work that has to be done to implement IPSAS by The revised cost estimate for is $2.080 million.

6 page The budgetary situation for the current biennium is therefore as follows: Items Requested in 34 C/42 Available from 34 C/5, 34 C/42 Revised estimate Funding gap Staff costs Consultants Travel Training , IT-systems , Communication material Admin. Manual Contribution to United Nations Project Team Total Implications of IPSAS on budgetary practices 24. While the accounting practice and the financial statements will be largely impacted by the introduction of IPSAS, in particular by the transition from the essentially cash-based accounting to full accrual-based accounting, it is considered that the budgeting practices in general and budget implementation reporting will remain mostly unchanged under the IPSAS environment. International organizations such as OECD that have adopted IPSAS prior to UNESCO have maintained their budgeting methods and their way of managing budget implementation. Other public entities, though non-international, including the French Government, which have already transformed their accounting system from cash basis to accrual basis, are also maintaining their method of budget monitoring and reporting. The same is therefore considered to be applicable to UNESCO. 25. For example, under IPSAS where the accounting will be based on the accrual method, the financial statements will present only the expenses which relate to goods and services that were already delivered or rendered within the financial period, thus excluding a certain portion of unliquidated obligations (ULOs) which were earmarked within the budget but which relate to uncompleted works. On the other hand, the budget implementation report which will be presented to Member States separately from the financial statement, will continue to show all the expenses that are legitimately charged to the budget of the financial period, including those ULOs corresponding to the goods and services not yet rendered, since those ULOs are related to the programmes and activities approved by Member States within the budget of that financial period. Therefore, the expenses and the surplus or deficit, if any, for a given financial period presented by the budget implementation report will not coincide with those shown under the financial statements, but it is important to note that the budgetary surplus or deficit will be determined by the budget implementation report. There are other factors that lead to different expense figures between the financial statements and budget implementation report, such as amortization and depreciation of assets which will be accounted for as expense in the financial statements but not so in the budget implementation report. These factors that give rise to differences in expense figures between the two reports will be fully reconciled and explained in the financial statements.

7 page 6 Financial Regulations 26. The Financial Regulations devote a portion of their content to matters which are predominantly budget related (Articles 3, 4 and 5). Other subjects dealt with (Articles 1, 2, 6, 7, 10, 12 and 13) may be considered both budget and finance by nature and others (Articles 8 and 9) are pure finance (treasury). Only Article 11 deals specifically with the accounts, and the requirements specified therein are quite general in nature. The remaining Articles, 14 and 15, cover general and special provisions requiring no changes under IPSAS. 27. The following changes (in italics) to the Financial Regulations should be envisaged based on current knowledge of IPSAS requirements. These prospective changes are only indicative and a more detailed proposal with appropriate levels of explanations will be provided to the governing bodies once the work in this area is completed within the United Nations system as a whole. Article 1.1 to be expanded to read as follows These Regulations together with and subject to Internal Public Sector Accounting Standards (IPSAS) shall govern the financial administration of UNESCO. Article 2 to read The financial period shall be two consecutive calendar years beginning with an even numbered year, with annual audited financial statements prepared in accordance with IPSAS. Article 5.5 add at the end an additional sentence stating Instalments of contributions shall be recorded as income as of 1 January of the year to which they relate. Article 11.1 to read The Director-General shall maintain such accounting records as are necessary and shall submit final accounts in accordance with IPSAS showing for the year to which they relate: (a). Article 11.2 to be deleted on the grounds that annual audited accounts will be prepared in future. Article 11.5 (new 11.4) to read The accounts shall be submitted by the Director-General to the External Auditor no later than 31 March following the end of the year to which they relate. Article 12.1 due to annual audits line four to be modified An External Auditor shall be appointed for the purposes of auditing the accounts of the six years following his appointment. At. Article to read The External Auditor s report together with the annual audited accounts shall be transmitted through the Executive Board, with such comments as it deems necessary, to the General Conference in accordance with directions given by the General Conference. 28. In addition to the above proposed changes to the Financial Regulations, which should be incorporated in time for the preparation of the 2010 financial statements, other more basic principles might also need to be reconsidered, longer term, in the light of possible future changes in budgetary practices. The adoption of IPSAS and full accruals accounting, as opposed to modified cash accounting, is an ideal opportunity to modernize and improve the way the Organization works. Some examples of changes for consideration are: (a) the introduction of a capital expenditure budget item to facilitate reconciliation with fixed assets and depreciation in the financial statements;

8 page 7 (b) (c) the introduction of reserve accounting whereby unspent budget is carried forward and tracked separately and its use decided by the governing bodies; either retained within the Organization as general reserves or used to finance long-term liabilities (e.g. ASHI), or used to fund specific programmes in future years; likewise, miscellaneous income, automatically returning to Member States, could alternatively be put to other uses within the Organization in accordance with the governing bodies wishes. CONCLUSION 29. Given the global trend for public institutions to adhere to best management and accountability frameworks, aimed towards a more efficient use of resources, IPSAS helps to provide organizations with new policies and processes designed to provide timely, useful and relevant information. In this reforming trend, accounting is both the point of convergence of all the operating transformations as well as the linchpin of the reform. 30. The main risks which present a challenge for IPSAS implementation at UNESCO are: (a) (b) (c) the decentralized nature of the Organization requiring considerable outreach to field offices and institutes if harmonized implementation is to be achieved; the increased level of financial awareness and accounting knowledge required by a larger population in order to facilitate implementation, consolidate procedures thereafter and maintain adequate financial controls in the future; difficulties at the operational level (insufficient resources, lack of knowledge, nonacceptance of change, etc.) to commit to a new way of operating. Adequate training and communication should help to deal with these risks. 31. The success in implementing IPSAS, which will be measured by the completion of IPSAS compliant financial statements for 2010 and a clean audit opinion thereon, is dependent on: continued commitment and support from governing bodies and senior management; improved knowledge and acceptance of accrual accounting concepts across the Secretariat; a robust SAP/FABS information system, accessible to all and recording transactions in an IPSAS compliant manner on a daily basis; appropriate level of modifications to the Financial Regulations and rules to make it consistent with IPSAS requirements. Action expected of the Executive Board 32. In view of the foregoing, the Executive Board may wish to adopt a decision along the following lines: The Executive Board, 1. Recalling 34 C/Resolution 71 whereby approval was given to officially adopt the International Public Sector Accounting Standards (IPSAS) as the accounting standards for UNESCO with effect from 1 January 2010 and further requiring the Director-General to submit to the Executive Board at its 180th session a preliminary proposal of an

9 page 8 Action Plan including a timetable for implementation of IPSAS and possible amendments required to the Financial Regulations (2008 edition), 2. Having examined document 180 EX/34, 3. Takes note of the work already performed by the United Nations system and UNESCO (Annexes I, II and III to this document), in particular with regard to the substantive technical review of the accounting standards which were conducted in a harmonized United Nations system-wide approach by UNESCO s dedicated project team; 4. Further takes note of the shortfall of $0.684 million in the budget for the IPSAS project and of the Director-General s intention to either obtain additional funds from extrabudgetary sources or find economies in the current biennium budget to finance the IPSAS project; 5. Requests the Director-General to submit to it at its 181st session a progress report on the implementation of the Action Plan including any proposed amendments to the Financial Regulations.

10 Annex I ANNEX I System-wide IPSAS Project Team ACCOUNTING POLICY AND GUIDANCE PAPERS As of 31 March 2008 Submitted to Task Force (TF) or Focus Group (FG) Submitted to August 2006 TF meeting Submitted to December 2006 TF meeting (Previously reviewed by Focus Groups) Revised and resubmitted to April 2007 TF meeting (With further review by Focus Groups) Papers 1. IPSAS 17: PPE background paper 2. ED 29: Revenue from non-exchange transactions background paper 3-9. Accounting policy papers 1.06 to IPSAS 23 (ED 29): Applied to revenue from voluntary contributions 11. Expense recognition (General guidance) 12. Model financial statements Task Force decisions Further guidance and recommended accounting practices requested. Further guidance and recommended accounting practices requested. Policies 1-06/1, 1-06/2, 2-06/1, 2-06/2, 3-06/1, 4-06/1, 6-06/1, 7-06/1 and 7-06/2 were approved. Policy 5-06/1 was amended and approved. Policies 1-06/3 and 1-06/4 were not approved, but the issues therein have subsequently been addressed. Minor amendments and further guidance requested. This paper was revised and resubmitted to the April 2007 TF meeting, at which the TF requested a further paper providing examples to support a decision at its June meeting. Unresolved issue: Guidance accepted issues resolved. Minor amendments and further guidance requested. This paper was revised and resubmitted to the April 2007 TF meeting, at which it was approved. TF support for the model statements. Minor amendments and further guidance requested. (Policy 1-06/3 addressed.) This paper was revised and resubmitted to the April 2007 TF meeting, at which it was approved as a work-in-progress. 13. IPSAS 17: PPE This paper was submitted to the December TF meeting, then revised and resubmitted to the April 2007 TF meeting, at which the revised recommendations were approved.

11 Annex I page 2 Submitted to Task Force (TF) or Focus Group (FG) Submitted to April 2007 TF meeting (Previously reviewed by Focus Groups) Submitted to June 2007 TF meeting (Reviewed by Focus Groups) Papers 14. Expenses arising from funding agreements with implementing partners 15. ED 31: Employee benefits Task Force decisions TF requested a further paper with examples to support a decision at its June meeting. Unresolved issue: Guidance accepted issues resolved, recommended accounting policy referred to June 2008 TF meeting. All recommendations approved. 16. IPSAS 12: Inventories All recommendations approved. 17. IAS 31: Intangibles All recommendations approved. (Approval gained via and will be confirmed at June 2007 TF meeting.) 18. Transitional provisions 19. Valuation of PPE on first time recognition 20. Financial instruments Approved. All recommendations approved. A revision made at the April TF meeting and all recommendations approved. 21. Foreign exchange Further guidance requested and revisions to the paper. 22. Leases Approved conditional on amendments being made to the appendices. 23. Guidance on first time recognition of PPE 24. Revenue recognition funding agreement examples Briefing note: Revenue issues raised by ILO 25. Expenses funding agreement examples Noted. The paper was noted as useful guidance. Further guidance identified as needed. Unresolved issue: Guidance accepted issue resolved. Gain further advice and provide additional guidance on identified issues. Minor edits to paper, review for any consequential amendments after advice has been received on revenue recognition, and address identified issues. Unresolved issue: Guidance accepted issue resolved. Refer back to June meeting to address the recommended policy. 26. Segment reporting Redraft paper to address further issues and include any issues arising from the consolidation study or funding paper. 27. Revenue from assessed contributions Approved.

12 Annex I page 3 Submitted to Task Force (TF) or Focus Group (FG) Submitted to Task Force for discussion at February 2008 Task Force meeting. Papers 28. Revenue from pledges Approved. Task Force decisions 29. Fund accounting Update paper to take into account issues or advice arising from the consolidation study. 30. Control over assets Briefing note: Project assets 31. Budget-Actuals Information 32. Financial statements: Note disclosures Briefing note: Annual audits 33. Transitional provisions 34. IPSAS 17: Property plant and equipment classification 35. IPSAS 4: Foreign exchange specific issues 36. Employee benefits (pensions and United Nations case study) 37. IPSAS 20: Related party disclosures 38. First-time recognition of intangibles 39. Intangible assets accounting for software and ERP systems 40. External Review of 3 unresolved issues Revise paper addressing issues discussed and provide further guidance. Unresolved issue: Guidance accepted issue resolved. Approved. (Minor edits and further guidance required.) The two recommendations were revised and approved. A further recommendation was approved to the effect that budgetactual comparisons be to the final budget. Noted. The paper was noted as a work-inprogress with requirement to update to reflect TF meeting decisions and continue with further work required. Approved. Recommendation to have annual audits amended to emphasize that this requires governing body approval, then approved. Acknowledged as useful guidance. Acknowledged as useful guidance. Acknowledged as useful guidance. Acknowledged as useful guidance. Acknowledged as useful guidance. Acknowledged as useful guidance. Acknowledged as useful guidance. External view accepted issues resolved.

13 Annex II ANNEX II RECOMMENDATIONS AND LIST OF GUIDANCE Recommended policies and practices agreed by the Task Force Topic Recommendations Task Force meeting at which agreed IPSAS 1, and IPSAS 2: Financial statements presentation IPSAS 12: Inventories (i) Breakdown revenue and expenses on the face of the statement. [AP 1 ] (ii) Use current/non-current classifications for assets and liabilities and use a 12-month period for this determination. [AP] (iii) Adopt the names for the components as used in IPSAS, which are: (a) statement of financial position; (b) statement of financial performance; (c) statement of changes in net assets/equity; (d) cash flow statement; and (e) accounting policies and notes to the financial statements. [AP] (iv) Report cash flows from operating activities using either the direct or the indirect method. [AP] (v) Comparative figures will not be provided in first year of adoption. [AP] (vi) Report expenses by nature in financial statements. [AP] Transportation, storage and other costs subsequent to purchase or production: Transportation costs for aid delivered globally to be capitalized up to entry into the recipient country, and then transportation costs in country would be expensed, in cases where the United Nations system organization maintains control and is required to deliver the aid to the country where it will be distributed. [RAP] Cost formulas: Use either FIFO or weighted average for those inventories that are interchangeable. [RAP] Classification of inventories: Use classifications that best reflect the type of inventories held by each United Nations system organization. [RAP] August 2006 and April 2007 April RAP = recommended accounting practice. AP = accounting policy.

14 Annex II page 2 Topic Recommendations Task Force meeting at which agreed IPSAS 5: Borrowing costs IPSAS 17: Property, plant and equipment ED 31: Employee benefits All IPSAS: Transitional provisions Capitalize borrowing costs as part of the cost of an asset constructed or produced. [AP] Capitalization threshold: Up to a maximum of US $5,000 (or equivalent in currency other than US dollars). After two years, each organization reviews and adjusts as necessary. [RAP] Classes and useful lives: PP&E class Useful Life Communications and IT equipment 3-7 years Vehicles 3-10 years Furniture and fixtures 5-12 years Leasehold improvements Shorter of lease term and useful life Buildings 5-50 years Land No depreciation Further classes should be added when further significant material groups of assets exist, for example, infrastructure assets, work-in-progress, specialized vehicles, machinery. An organization may need to amalgamate recommended classes, if a class is not material. [RAP] Depreciation method: straight line. [RAP] Residual value: zero (unless at the end of the asset s usefulness to the Organization the residual value is likely to be significant). [RAP] Recognize items of property, plant and equipment at cost less any accumulated depreciation and amortization. [AP] Do not recognize heritage assets, but reconsider the policy when the IPSAS has done further work on requirements for reporting heritage assets. [AP] First time recognition of PP&E: Recognize at either cost or fair value. [AP] The corridor method to be used when accounting for defined benefit plans. [RAP] Organizations use transition periods only to the extent necessary to ease the difficulty of compliance with that particular IPSAS and thereby make compliance practically speaking more achievable. If deferral of full implementation is not necessary in order to achieve that aim, an organization should not use a transition period in order to unnecessarily defer full implementation of an IPSAS. [Financial reporting policy] August 2006 April 2007 April 2007 April 2007

15 Annex II page 3 Topic Recommendations Task Force meeting at which agreed IAS 38: Intangibles Annual audits IPSAS 24: Budget-actual information No revaluation after initial recognition (i.e. subsequent measurement at cost less accumulated amortization and impairment). [AP] Amortization method: straight line. [RAP] Residual value: zero (unless entity expects to dispose of the asset before the end of the economic life and there is a market for the asset or a commitment from a third party to buy it). [RAP] Classes of intangible assets for disclosure in the notes: (if applicable) (a) Software acquired separately (required) (b) Software internally developed (required) (c) Intangible assets under development (d) Licences and rights (e) Copyrights (f) Other intangible assets. [RAP] Useful lives Software acquired separately: 3 to 10 years (g) Software internally developed: 3 to 10 years (h) Intangible assets under development: not amortized (i) Licences and rights: shorter of the licence or rights period and useful life of 2 to 6 years (j) Copyrights: shorter of the copyright period and useful life of 3 to 10 years (k) Other intangible assets. [RAP] Acknowledging that the frequency of audit is determined by the governing body, it is recommended that organizations have their annual financial statements audited each year, when they begin presenting IPSAS compliant annual financial statements. [Financial reporting policy] 1. All organizations include the actual differences (variances) between actual amounts and budget amounts in their comparison of budget and actual amounts. [RAP] 2. Those organizations that budget on a biennial/multiyear basis provide, at the end of the period, a budgetactual comparison for the biennial/multi-year period as a whole. [RAP] 3. All organizations budget-actual comparisons be to their final budget. [AP] April 2007 June 2007 June 2007

16 Annex III ANNEX III UNESCO IDENTIFIED GAPS BETWEEN UNSAS AND IPSAS Component Scope of consolidation Financial statements and notes disclosure Gap analysis Gap analysis 1: Entities within the scope of consolidation have to apply the same accounting rules based on IPSAS In order to produce IPSAS compliant financial statements, all entities within the consolidation scope of UNESCO should apply the same accounting standards based on IPSAS. The financial reporting date of these entities should also be similar or at maximum three months difference. In this latter case, some adjustments should be made. Gap analysis 2: The elimination of inter-entities balances and transactions Balances and transactions between entities within the economic entity, including sales, transfers and revenues recognized consequent to an appropriation or other budgetary authority, expenses and dividends, are eliminated in full. Gap analysis 3: The accounting treatment of the Staff Savings and Loan Services IPSAS do not deal with the specific topic of funds accounting. According to our analysis, two issues are to be raised to establish the compliant accounting treatment: the existence of a legal entity for the trust and the existence of control (as defined by IPSAS 6 on controlled entities). The first condition is not met and the second is met only partially as only one (power) out of the two control conditions (power and benefit) is fulfilled. As a conclusion, the accounting treatment can be analysed regarding other organizations options adopted to face similar issue. The conclusions of the United Nations IPSAS team who work on the topic should also be followed. Gap analysis 1: New components of financial statements and a defined structure to be followed New required components are the statement of changes in capital, the table of reconciliation between the accounting and budget results and segment reporting. Assets and liabilities shown on the statement of financial position have to be classified according to their current/non-current nature. Revenues and expenditures are to be broken down on the face of the statement of financial performance. The amounts of assets that are restricted and the nature of those restrictions shall also be disclosed either on the face of, or in the notes to, the general purpose financial statements. Gap analysis 2: Disclosures to be made in the notes These disclosures can relate to the different statements but also to off-balance sheet information (contingent assets, liabilities, events after the reporting period). UNESCO has to identify the new disclosures and if required complete the current ones. Gap analysis 3: Related party disclosure Disclosure of certain related party relationships, related party transactions and the relationship underlying those transactions as well as information on key management (remuneration, compensation, loans, etc.) is compulsory. Gap analysis 4: Cash flow statement At present time, only the general fund and the other proprietary funds are included within the current cash flow statement. All funds should be included within the cash flow statement of UNESCO. Gap analysis 5: Budget information To be IPSAS compliant, UNESCO has to publish a comparison between the budget and actual amount on a yearly basis and give explanations on the differences.

17 Annex III page 2 Foreign currency Revenue recognition Cash and cash equivalent Gap analysis 1: Exchange rate for transactions in foreign currency Gaps or potential gaps identified regarding the exchange rate used at UNESCO to recognize transactions in foreign currency are as follows: - United Nations operational rate of exchange versus spot exchange rate at date of transaction for initial recognition of transaction in foreign currency (except for income and expenditure of the general fund). To be noted: If the United Nations operational rate is close to the spot exchange rate then there is no gap. - UNESCO constant exchange rate versus spot exchange rate at date of transaction for initial recognition of income and expenditure in foreign currency for the general fund. To be noted: The constant exchange rate does not correspond to a week or a month average therefore the use of this rate qualifies for a gap. Gap analysis 2 (potential): Recognition of exchange differences A possible gap is identified regarding exchange differences that may arise related to gain or loss of non-monetary items recorded directly in net assets/equity: future IPSAS adjustments to follow up for the accounting of related exchange differences (e.g. PP&E, inventories). Gap analysis 3: Points to follow up in connection with the consolidation of the institutes UNESCO has also to apply rules on IPSAS 2 for integrating cash flows from its institutes (using euros) into the consolidated cash flow statement. Those cash flows are currently not integrated in the cash flow statement. If UNESCO and its institutes have interoperations regarding monetary assets then the exchange difference has to be recognized in the UNESCO surplus or deficit. Gap analysis 1: Timing of assessed contributions recognition Under IPSAS, UNESCO will not be able to recognize the full amount of assessed contribution at the beginning of the biennium but rather to record the assessed contribution to which they relate. The difficulty lies in estimating this amount. One possible option could be to recognize revenue on a pro rata basis based on the budgeted expenses that are shown yearly in the biennium budget. Gap analysis 2: Initial recognition of voluntary contributions (including funds received under inter-organization arrangements) Under IPSAS, UNESCO shall recognize its voluntary contributions on an accrual basis rather than on a cash basis. At year end, revenue estimation could be done on a pro rata basis. Gap analysis 3: Accounting for voluntary contributions with conditions (including funds received under inter-organization arrangements) A related liability shall be recognized only when a condition exists within the agreement. Revenue is recognized for the increase in net assets (assets minus related liabilities). This gap analysis requires full review of each of the agreements signed in the frame of voluntary contributions. Gap analysis 4: Accounting for prize award programmes Only the benefits less the possible liability due to the agreement shall be recognized as revenues according to IPSAS 23. One gap has been identified concerning the obligation to disclose the amount of restricted cash either on the face of the statement of financial position or in the notes to the financial statements.

18 Annex III page 3 Investments Accounts receivable Gap analysis 1: Classification of financial instruments UNESCO needs to perform a full review of its portfolio to ensure compliant classification of its financial instruments to IAS 39. Gap analysis 2: Change in FV of assets UNESCO needs to comply with measurements prescribed by IAS 39 following its classification of financial instruments. Gap analysis 3: Hedging UNESCO must perform its formal designation and documentation regarding hedge strategy undertaken. UNESCO must then comply with IPSAS requirement (initial recognition and measurement, subsequent measurement) and follow up the effectiveness of the hedging strategy. Gap analysis 4: Embedded derivatives UNESCO currently measures the two lines of investments with possible derivatives embedded therein at fair value with changes in fair value through equity for unrealized gains and through P&L for unrealized losses. UNESCO must review the full investment portfolios in order to identify potential embedded derivatives and, depending on the measurement adopted for the host contract and the results of the analysis performed, to determine whether it is closely related or not, comply with IAS 39 requirement as for the measurement of the related derivative (full changes in fair value through P&L). Gap analysis 5: Impairment Depending on the classification of financial assets under IAS 39, UNESCO will have to review its portfolios of investment for impairment purposes. At present time, no impairment is needed as all unrealized losses are expensed. Gap analysis 1: Revenue recognition for assessed and voluntary contributions (see component on revenue recognition) Gap analysis 2: Provision for bad debts (depreciation) For assessed contributions, no allowance for doubtful accounts is recorded at the end of the financial year to recognize the risk of non-receipt of certain amounts. IPSAS requires the performance of an analysis of UNESCO aged receivable balance to identify the potential risks of not collecting those receivables relating to assessed contributions. Based on this risk analysis, a provision for bad debts is to be recognized in the accounts. Gap analysis 3: Disclosure of gross and net receivables IPSAS require showing receivables for their gross and net value. The amount of provision for depreciation is compulsory information.

19 Annex III page 4 Other assets Intangible assets Gap analysis 1: Gaps linked to tangible fixed assets These gaps are described in the component evaluation tangible fixed asset. One gap can still be mentioned: the presentation of the financial statements under IPSAS requires a presentation of item according to their nature. Therefore, all items related to fixed assets have to be classified under the fixed assets line and cannot be spread out into different lines of the balance sheet. Gap analysis 2: Operations between entities consolidated into UNESCO financial statements have to be eliminated (see consolidation component) Gap analysis 3: Prepaid expenses are not recognized (expenses invoiced but with no total/partial delivery) Under accrual-based accounting, transactions or events are recognized when they occur (which is not necessarily when cash or its equivalent is received or paid). Revenue should be accounted for in the period to which it relates (IPSAS 9). Therefore, revenue is to be recognized at the delivery of the goods and the receiving of the service. IPSAS 9 gives implicitly the rules for time recognition for expenses since it gives the rules for income recognition, being the reflect of expenses. If the delivery or the rendering of services is partial at the end of the reporting period, it induces to compute under a pro rata basis the amount of expenditure directly linked to the reporting period and to record prepaid expenses. Prepaid expenses are recorded as assets on the balance sheet with a decrease of expenditures in the profit and loss statement as counterpart. Gap analysis 4: Stocks distributed at no cost are not valued at replacement cost IPSAS 12 requires that stocks distributed at no cost should be valued at replacement cost. The current treatment based on a valuation of 0 in the balance sheet does not allow to recognize the expenditure on the period it incurs. After discussion with UNESCO, these stocks should not be significant. Gap analysis 5: The cost method is based on a modified FIFO Under IPSAS 12, two methods of cost valuation are authorized: the FIFO and the WAC method. The current method used should be modified in order to be fully FIFO compliant. Gap analysis 6 (potential): The accounting treatment of the Brazilian suspense accounts related to other assets The other assets include assets from the UNESCO Brasilia Office. They refer to suspense accounts which stand for assets related to expenses from which the contract has not been signed yet, expenses engage without corresponding income received yet and expenses for project overwhelming the project. The asset recognition criteria do not seem to be met under IPSAS. However, a deeper analysis would be required to confirm that gap. Gap analysis 1: Recognition of intangible assets According to IPSAS, all intangible assets (currently not recognized) complying with the following conditions should be recorded in the financial statements: 1. The assets are identifiable, i.e.: - capable of being separated from the entity and either sold, transferred, licenced, rented or exchanged, either individually or together with a related contract, asset or liability; or - arising from contractual or other legal rights, regardless of whether those rights are transferable or separate from the entity or from other rights or obligations. 2. Their costs can be measured reliably and the future economic benefits are probable.

20 Annex III page 5 Tangible fixed assets including renovation work in progress Gap analysis 1: Recognition of tangible fixed assets IPSAS 17 prescribes that an item of property, plant and equipment should be recognized as an asset when it complies with defined conditions. UNESCO is not IPSAS compliant concerning the recognition of tangible fixed assets as acquired fixed assets are recorded as expenses. Inventories on fixed assets currently held under FA module or Excel spreadsheets should be reviewed to ensure completeness and correct valuation. The recognition of the project asset is under review by the United Nations IPSAS team. Gap analysis 2: Accruals on fixed assets deliveries IPSAS 17 prescribes that all fixed assets: (a) delivered but not billed at year-end should be reliably assessed and accrued in the financial statements; (b) billed but not delivered at year-end should not be accounted for fixed assets. Accruals are not taken into consideration for UNESCO fixed assets. Gap analysis 3: Accounting treatment of fixed assets acquired at no cost IPSAS 17 ( 23) prescribes that such fixed assets be recorded for their fair value at the date of acquisition. Gap analysis 4: Accounting treatment of subsequent expenditures IPSAS prescribe that all repairs, renovation and maintenance made to restore or maintain the future economic benefits have to be recorded as expenses (and not added to the value of the building). Subsequent expenditure on property, plant and equipment is only recognized as an asset when the expenditure improves the condition of the asset, measured over its total life, beyond its most recently assessed standard of performance. The nature of the renovation costs of phase I should be analysed carefully in order to conclude whether they improve the condition of the building. Gap analysis 5: Depreciation of fixed assets IPSAS 17 ( 2) prescribes that a depreciation should be calculated on fixed assets over its useful life to reflect the pattern in which the asset s economic benefits or service potential is consumed by the entity ( 54). No depreciation has been recorded by UNESCO at 2006 year-end. Gap analysis 6: Performance of Impairment tests IPSAS 21 ( 22) mentions that an annual review of fixed assets must be made to determine any possible impairment losses, particularly if some indicators suggest that the carrying amount of the asset is likely to be higher than the recoverable service amount. At this stage, UNESCO does not perform impairment tests. Gap analysis 7: Disclosures IPSAS 17 ( 73) requires extensive and detailed disclosure in the financial statements of each class of property, plant and equipment (PP&E), one of them being the reconciliation of carrying amounts at the beginning and at the end of the period, which has not been disclosed by UNESCO at year-end. Please note that IPSAS also requires extensive and detailed disclosures in the financial statements for each class of PP&E. Gap analysis 8. Recognition of lease relating to land in the financial statements IPSAS 13 requires that a lease on a land should be considered as an operating lease unless land ownership passes to the lessee at the end of the lease term. The lease agreement for the land of Fontenoy mentions that UNESCO has the possibility: - to renew the lease for another period of 99 years; - to purchase the land at the end of the lease period for the fair market value at date of acquisition. Consequently, these rents are likely to be treated as financial leases and each land should be accounted in the balance sheet for the lower of: - the fair value of the leased assets; - the present value of the minimum lease payments. However, the yearly rent for each land is not significant ( 15 per year roughly), bringing the net present value close to 0 (well below the fair value of lands). Therefore, the land would be recorded for a not significant value in the financial statements.