With this letter you receive the Swiss comments and statements to the Exposure Drafts 25 and 26.

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1 School of Management Institute for Public Management The Technical Director International Public Sector Accounting Standards Board 545 Fifth Avenue, 14 th Floor New York, New York United States of America Winterthur, January 30, 2006 Our reference: Bgm, Brr Swiss Comments to ED 25 and ED 26 Dear Madam/Sir Robin Braun BBA Tel Fax Address Gebäude SP300 St. Georgenstrasse 70 Postfach 958 CH-8401 Winterthur Main Office Tel Fax With this letter you receive the Swiss comments and statements to the Exposure Drafts 25 and 26. We would like kindly thank you for the possibility to include our views and suggestions. You will find our inputs to both Exposure Drafts in the same document. If there are any questions please do not hesitate to contact us. Sincerely Prof. Andreas Bergmann Robin Braun Swiss Comments to ED 25 and ED 26 Member of the Zurich University of Applied Sciences

2 Swiss Comments to the Equal Authority of Paragraphs in IPSASs Improvements to International Public Sector Accounting Standards Table of Content Page Introduction 2 Comment to the Equal Authority of Paragraphs in IPSASs 3 Comment to the Improvements to International Public Sector Accounting Standards 3 Swiss Comments prepared on behalf of the Swiss Federal Office of Finance and the Conference of Cantonal Ministers of Finance, by Zurich University of Applied Sciences Institute for Public Management St. Georgenstrasse 70/P.O. Box Winterthur/Switzerland Phone Prof. Andreas Bergmann, Director Robin Braun, Researcher 1

3 Introduction The following comments have been prepared by an ad-hoc committee set up by Public Sector Accountants, Public Sector Auditors, academics and representatives of the profession, of the Confederation and the Cantons. 2

4 Equal Authority of Paragraphs in IPSASs (Exposure Draft 25) Question The IPSASB would value comment on whether you agree with the proposed amendments to the Preface to clarify that the paragraphs in bold type and plain type in IPSASs have equal authority. Yes, we do agree that the Preface should clarify that the paragraphs in bold type and plain type in IPSASs have equal authority. However, we think that making this amendment to the Preface, the IPSASB should be fully aware that this is a further restriction to the preparers of financial reports. Improvements to International Public Sectors Accounting Standards (Exposure Draft 26) IPSAS 1 Do you agree that IPSAS 1 should be revised as proposed to converge with the equivalent IAS 1 (December 2003)? We notice a certain concern both in the IPSASB and in the Swiss ad-hoc committee in respect of the size of notes and disclosures. We would like to draw the attention of the IPSASB to the increase in volume of the size, that is expected due to the changes proposed. However, this does not change our positive answer to Question 1. Question 2: The proposed IPSAS 1 does not include a definition of the term extraordinary items, and does not require nor prohibit the presentation of items of revenue and expense as extraordinary items either on the face of the statement of financial performance or in the notes. Do you agree that extraordinary items should not be defined and their presentation either on the face of the statement of financial performance or in the notes should not be explicitly required or prohibited? A majority of the Swiss constituency agrees that extraordinary items should not be defined and their presentation either on the face of the statement of financial performance or in the notes should not be explicitly required or prohibited. From an accounting point of view, reporting extraordinary items separately is in contradiction to the structure used when reporting ordinary items. It also causes difficulties when preparing the cash flow statement. However, we would like to express the usefulness of a definition of extraordinary events, because this term is frequently used in the notes. A minority would like to keep extraordinary items in IPSAS 1, because such items are more frequent and also more important in the pubic sector than in private sector entities. The public sector, unlike private enterprises, often takes an important role providing relief after natural or man-made disasters. The current IPSAS 1 provides a useful guidance when accounting for such events. 3

5 IPSAS 3 Do you agree that IPSAS 3 should be revised as proposed to converge with the equivalent IAS 8 (December 2003)? But we would like to confirm, that we understand the second to last bullet point on page 62 just as information for readers of the ED 26 and not as a contradiction to ED 25. If that is not meant in this way, we do not agree with the point above. IPSAS 4 Do you agree that IPSAS 4 should be revised as proposed to converge with the equivalent IAS 21 (December 2003)? Question 2: Currently, IPSAS 4 does not deal with hedge accounting for foreign currency items other than the classification of certain exchange differences accounted for as a hedge of net investment in a foreign entity. It also notes that guidance on such types of transactions can be found in IAS 39, Financial Instruments: Recognition and Measurement. Do you agree that the proposed IPSAS 4 should not apply to derivative transactions and balances that are within the scope of the relevant international or national accounting standard dealing with the recognition and measurement of financial instruments (see paragraph 3(a))? IPSAS 6 Do you agree that IPSAS 6 should be revised as proposed to converge with the equivalent IAS 27 (December 2003)? Yes, we generally agree, except for the change discussed in Question 2. 4

6 Question 2: Do you agree that in the investor s separate financial statements, investments in controlled entities, jointly controlled entities and associates should be accounted for either: (a) at cost, or (b) as financial instruments in accordance with the relevant international or national accounting standard dealing with the recognition and measurement of financial instruments? Alternatively, do you agree that these investments should be accounted for as investments as specified in the existing IPSAS 6 (see paragraphs 58 and 61 in the proposed IPSAS 6 and paragraph 53 in the existing IPSAS 6)? No, we do not agree. We recommend that controlled entities, jointly controlled entities and associates should be accounted for by using equity-method. We think that the Equity-Method, unlike the accounting principles for financial instruments, is useful for entities which are neither traded on stock exchanges, nor involved in commercial activities. The proposed change to IPSAS 6 would therefore reduce the options to (a) at cost. We do not see any disadvantage of using the equity method instead. Question 3: Do you agree that a list of significant controlled entities should be disclosed in the controlling entity s consolidated financial statements (see paragraph 62)? Yes, we think this is an important disclosure. IPSAS 7 Do you agree that IPSAS 7 should be revised as proposed to converge with the equivalent IAS 28 (December 2003)? Question 2: Do you agree that the scope of this proposed IPSAS 7 should not apply to certain investments that otherwise would be associates held by venture capital organizations, mutual funds, unit trusts and similar entities if these investments are measured at fair value in accordance with the relevant international or national accounting standard dealing with financial instruments (see paragraph 1)? Question 3: Do you agree that an investor need not equity account its investment if all the criteria in paragraph 19 are met? 5

7 IPSAS 8 Do you agree that IPSAS 8 should be revised as proposed to converge with the equivalent IAS 31 (December 2003)? Question 2: Do you agree that the scope of this proposed IPSAS 8 should not apply to certain investments that otherwise would be joint ventures held by venture capital organizations, mutual funds, unit trusts and similar entities if these investments are measured at fair value in accordance with the relevant international or national accounting standard dealing with financial instruments (see paragraph 1)? IPSAS 12 Do you agree that IPSAS 12 should be revised as proposed to converge with the equivalent IAS 2 (December 2003)? Question 2: It is proposed that biological assets related to agricultural activity and agricultural produce at the point of harvest that are accounted for in accordance with the relevant international or national accounting standard dealing with agriculture are excluded from the scope of the proposed IPSAS 12. Do you agree with this exclusion (see paragraph 2(c))? IPSAS 13 Do you agree that IPSAS 13 should be revised as proposed to converge with the equivalent IAS 17 (December 2003)? We agree to all changes proposed except to the Classification of Leases of Land and Building. It is very difficult to separate lease of land and buildings in the Swiss jurisdiction, because lease contracts do not make this distinction. Contract information is therefore unavailable and all the necessary information would have to be based on special estimates. The additional cost would by far exceed the additional benefit. 6

8 Question 2: The proposed IPSAS 13 should not be applied as the basis of measurement for biological assets held by lessees under finance leases and biological assets provided by lessors under operating leases that are accounted for in accordance with the relevant international or national accounting standard dealing with agriculture. Do you agree with these exclusions (see paragraph 2(c) and (d))? IPSAS 14 Do you agree that IPSAS 14 should be revised as proposed to converge with the equivalent IAS 10 (December 2003)? IPSAS 16: Do you agree that IPSAS 16 should be revised as proposed to converge with the equivalent IAS 40 (December 2003)? Yes, in general we do agree to the proposal for IPSAS 16. However, some members of the Swiss ad-hoc committee would like to point out that in the Swiss jurisdiction the economic concept of accounting property interest held by a lessee for as investment property is in clear contradiction to the legal concept, which makes a difference between possession and ownership. We would like to invite the IPSASB to take this difference, which is more important in countries with a jurisdiction based on ancient Roman law, into consideration. IPSAS 17: Do you agree that IPSAS 17 should be revised as proposed to converge with the equivalent IAS 16 (December 2003)? Yes, in general we do agree. But we have further comments: Accounting for removal costs (new paragraph 32) is less clear than before (Paragraph 31). We think that the requirement to make a provision should be kept. We suggest to keep the difference made in IPSAS 17 between a benchmark and an alternative treatment. We think the cost method is clearly more feasible for property, plant and equipment. It s therefore the benchmark treatment. Some members of the Swiss ad-hoc committee doubt whether it is always possible to clearly identify and derecognize an item, for instance in general improvement or refurbishing programs. 7

9 Question 2: Do you agree with the inclusion of Implementation Guidance 1 on the frequency of revaluation of property, plant and equipment in the proposed IPSAS 17 (see paragraph 49 and Implementation Guidance 1)? Question 3: Do you agree that it is appropriate to require public sector entities to depreciate separately each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item (see paragraphs 59-61)? No, we do not think that it is appropriate to require separate depreciation for each part of an item of property, plant and equipment, because in some cases, the identification of separate components is not possible, at least not at reasonable cost. We do recommend that public sector entities should rather be encouraged to depreciate separately each part of an item. Further comments to ED 26 Our agreement to the changes proposed in ED 26 to IPSAS 6 to 8 does not reflect our general concern in respect of IPSAS 6 to 8. We do recommend that IPSAS 6 to 8 should be reviewed by the IPSAS-Board. The concept of control in IPSAS 6 leads to rather unexpected results in the Swiss jurisdiction. While the benefit criterion leads to an enormous list of potentially controlled entities, the power criterion leaves almost no entities on the list. The power criterion does, for example, not account for the special position of parliaments. Unlike shareholder meetings of private sector firm, they exercise immediate influence, if not power, to many public sector entities. The immediate influence of parliaments is strongly limiting the power of governments. Hence, there are only very few entities controlled by the government, which is reporting entity. However, the operational and financial risk of those entities is in most cases born the reporting entity. Other difficulties include the difference to government financial statistics which requires consolidation following different principles. We think that the difficulties experienced by the Swiss jurisdiction could be similar to those in other jurisdictions, because many of them are due to instruments of democratic control. 8

10 School of Management Institute for Public Management The Technical Director International Public Sector Accounting Standards Board 545 Fifth Avenue, 14 th Floor New York, New York United States of America Winterthur, February 09, 2006 Our reference: Bgm, Brr Swiss Comments to ED 27 and ED 28 Dear Madam/Sir Robin Braun BBA Tel Fax Address Gebäude SP300 St. Georgenstrasse 70 Postfach 958 CH-8401 Winterthur Main Office Tel Fax With this letter you receive the Swiss comments and statements to the Exposure Drafts 27 and 28. We would like kindly thank you for the possibility to include our views and suggestions. You will find our inputs to both Exposure Drafts in the same document. If there are any questions please do not hesitate to contact us. Sincerely Prof. Andreas Bergmann Robin Braun Swiss Comments to ED 27 and ED 28 Member of the Zurich University of Applied Sciences

11 Swiss Comments to the Presentation of Budget Information in Financial Statements Disclosure of Financial Information about the General Government Sector Table of Content Introduction 2 Comment to the Presentation of Budget Information in Financial Statements 3 Comment to the Disclosure of Financial Information about the General Government Sector 5 Page Swiss Comments prepared on behalf of the Swiss Federal Office of Finance and the Conference of Cantonal Ministers of Finance, by Zurich University of Applied Sciences Institute for Public Management St. Georgenstrasse 70/P.O. Box Winterthur/Switzerland Phone Prof. Andreas Bergmann, Director Robin Braun, Researcher 1

12 Introduction The following comments have been prepared by an ad-hoc committee set up by Public Sector Accountants, Public Sector Auditors, academics and representatives of the profession, of the Confederation and the Cantons. 2

13 Presentation of Budget Information in Financial Statements (Exposure Drafts 27) In general the Swiss ad-hoc committee would like to emphasize that general purpose financial statements should give an overview over the financial situation of the reporting entity. Budget statements and comparisons are highly important to this end, however, they should not be treated more prominently than other highly relevant information. The Swiss adhoc committee is slightly concerned that budget information, if not treated adequately, might obstruct the more general purpose of GPFS. Furthermore the Swiss ad-hoc committee expects some difficulties in respect of consolidation as Government Business Entities (GBEs) will not present budgets because of their competitive environment. This certainly limits the immediate use of budget information in consolidated financial statements. In respect of the specific matters for comment, the Swiss ad-hoc committee would like the answer as follows: 1. To require a comparison of actual amounts with amounts in the original and final budget as part of the general purpose financial statements (GPFSs) (paragraph 12). Yes, we do agree with the exigency to require a comparison of actual amounts with amounts in the original and final budgets. This budget comparison should be issued as a separate component of the financial statements, in order to avoid any obstruction of the purpose of the other components. We would suggest adding the budget comparison component to the list of components in IPSAS To require disclosure of the reasons for material differences between budget and actual amounts unless such explanation is included in other public documents issued at the same time as, or in conjunction with, the financial statements (paragraph 12). The IPSASB would welcome views on whether such disclosure should be required or encouraged. Yes, it should be required to present disclosures of the reasons for material differences between budget and actual amounts. 3. That an entity shall present a comparison of budget and actual amounts in the GPFSs as additional budget columns in the primary financial statements only where the GPFSs and the budget are on the same basis of accounting and adopt the same classification structure (paragraph 15). The IPSASB would also welcome views on whether the budget figures should be required to be presented on the face of the primary financial statements when the budget amounts and the actual amounts in the GPFSs are prepared on a comparable basis. No, we do not think it should be required that budget figures have to be presented on the face of the primary financial statements. We recommend it should be a separate component as part of the financial statements. 3

14 4. To require that disclosure of an explanation of the following be made in a report issued in conjunction with, or at the same time as, the financial statements: whether differences between the original and final budget arise from reallocations within the budget or other factors such as policy shifts, natural disasters, or other unforeseen events (paragraphs 25-26). Yes, we agree that there should be a requirement to explain the differences. However, the Swiss ad-hoc committee has some doubts about the materiality of the categories or factors purposed in the ED. We would rather prefer to have no specified factors or categories. 5. To require the comparison of actual and budget amounts to be made on the same basis of accounting as adopted for the budget, even if that basis is different from the basis adopted for the GPFSs (paragraph 27). Yes, we agree on that point. But we recommend that the comparison should be presented in a separate component of the financial statement. 6. To require a reconciliation of actual amounts on a budget basis with actual amounts presented in the GPFSs (paragraph 44). The IPSASB would also welcome views on whether: separate IPSASs specifying requirements for the comparison of budget and actual amounts should be issued for application when the accrual basis is adopted and when the cash basis is adopted; or the requirements proposed in this ED should be included in IPSAS 1 for those entities adopting the accrual basis of accounting, and in the Cash Basis IPSAS for those adopting the cash basis of accounting. A separate standard should be issued, rather than the requirements to be included in IPSAS 1. However, IPSAS 1.19 would have to be amended if the IPSASB follows our proposal to require a separate component. 4

15 Disclosure of Financial Information about the General Government Sector (Exposure Drafts 28) The Swiss ad-hoc committee would like to answer the specific matters for comment: 1. Whether requirements for the disclosure of financial information about the GGS should be included in GPFSs prepared in accordance with IPSASs, and if yes, whether such disclosures should be allowed, encouraged or required. The proposed Standard prescribes the basis on which the disclosure of information about the GGS is to be made by those entities which elect to make such disclosures. It does not require, encourage or prohibit such disclosures (see paragraph 2). A majority of the ad-hoc committee does agree that such disclosures should be allowed. But it would be excessive to encourage or require such a disclosure. However, for the preparer of the Government Finance Statistics and a minority of the ad-hoc committee it is essential that such a disclosure is required. From the point of view of Government Finance Statistics, a disclosure of information on the GGS, based on a recognised statistical reporting base as a complement to a whole-of-government general purpose financial statement (GFPS), is welcomed. In Switzerland, in view of the absence of a legal basis for harmonising financial reporting between the federation, the cantons, the municipalities and public social security schemes, a statistical reporting disclosure should not just be permitted or encouraged but required. 2. Whether the proposed definition of the GGS in paragraph 14 is appropriate. Yes, it is appropriate. The preparer of the Government Finance Statistics wishes an explicit reference to the Government Finance Statistical Manual (GFSM2001). The taxonomy of GFSM2001 should be fully adopted if GFS are presented as a part of the GPFS. Below are a few examples of definitions used in ED28 which are at least unclear in a GFS context: Expenses: In the ED28 tables, expenses are broken down following the classification of the functions of government (COFOG). Internationally this mode of presentation is unusual in the opinion of the Swiss preparer of GFS. What is particularly irritating is that the definition of expenses used in ED28 does not correspond to GFS conventions. Expenses are usually broken down using the economic classification of expense (compensation of employees, use of goods and services, interest, subsidies, grants, consumption of fixed capital, etc.). Furthermore, expenses should not contain any acquisition of non-financial assets. In the Government Financial Statistics, the total made up of expenses and acquisition of non-financial assets together constitute total outlays (or total expenditures) and are split up according to function. In the total consumption of fixed capital can be included or is eliminated, depending of the definition used. Deficit: The ambiguities detected in the term expenditure are reflected in the tables on page 24 (Statement of Financial Performance for the GGS) and in the term "operating activities". The "operating deficit / surplus" in the ED28 report presumably covers the net acquisition of non-financial assets whereas the "operating balance", in accordance 5

16 with GFSM2001, only covers revenue and expenditure in the narrow sense (not including net acquisition of non-financial assets). In contrast, it seems that "net deficit / surplus for the period" correlates with "net borrowing / lending" as described in GFSM2001. Further irritation in the GFS context is caused by some explanations used in BC 7a and 7c. Although the basis of conclusion has not same authority like the standard itself, definitions used should still be based on GFSM Whether the proposed treatment of investments in public corporations in the GGS disclosure is appropriate. The proposed Standard requires that the investment be presented as an asset at the carrying amount of the net assets of its investees (see paragraph 24). Yes, we agree with the proposed measurement of investments. However, we suggest to review the term of investment because there is a difference between the definition of the term used in the Government Finance Statistics and the IPSASs. 4. Whether a government which elects to disclose information about the GGS should be required or encouraged to separately disclose information about the GGS of each level of government consolidated in its whole-of-government GPFSs (see paragraph 32). Yes, we agree. However, such a statement is not relevant in Switzerland because different levels of government are not consolidated in a GPFS. This is due to the autonomy of the State and Local Governments which have their financial sovereignty and are not controlled by superior levels. Consolidation over all levels of Government is only done in the Government Finance Statistics. 5. Whether a reconciliation to the statistical reporting basis should be required. The proposed Standard notes that such a reconciliation may be presented, but does not require it (see paragraph 45). Yes, we do agree that such a reconciliation may be presented, but should not be required. 6. Whether there should be a separate IPSAS on disclosure of information about the GGS, or whether the requirements proposed in this Standard should be included as an addition to IPSAS 1, Presentation of Financial Statements for governments which elect to disclose information about the GGS. We suggest that a separate IPSAS is issued. We do not recommend that the requirements proposed should be included as an addition to IPSAS Whether requirements for disclosure of the GGS under a cash basis IPSAS should also be developed. Yes, we agree, although the relevance of the cash basis IPSAS seems to be limited, even in developing countries. 6