INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS - INTRODUCTION

Transcription

1 INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS - INTRODUCTION

2 IPSAS OBJECTIVES Comparability with other international organisations and national governments Enhanced governance and internal financial management Enhanced accountability, transparency and harmonization Improved consistency, quality and credibility of financial reports

3 WHY IPSAS? Responding to a more connected world Allows comparisons between countries Public sector mainly used cash based accounting Primitive accounting mechanisms Need to distinguish between capital and revenue spending Encourages cross-border investment Introduction of International Financial Reporting Standards (IFRS) Recognition that IFRS is designed for the private sector Though UK and US public sector both using amended IFRS Need for standards that reflect the different needs of the public sector Standards amended IPSAs that have no IFRS equivalent Based on accrual accounting concepts though also Cash IPSAS

4 IPSAS GOALS Standards set out requirements on recognition, measurement and disclosure for transactions and events Goals: to have uniform standards for accounting at public sector organisations around the world To enable comparison of data across organisations To improve financial accounting transparency

5 Cash basis IPSAS Cash-based accounting statements Encourages voluntary statements on an accrual basis Transitional arrangements THREE SETS OF STANDARDS Accruals IPSAS Convergent with IFRSs Adapted to public sector context where there is a significant issue Deals with public sector issues not dealt with by IFRSs IFRS Government Business Entities You need awareness of the issues arising in IFRS IFRS 9 affecting Financial Services including central banks

6 FEATURES OF CASH AND ACCRUAL IPSAS Modified Cash Accounting Transactions recognised only when cash is received/paid Revenue recognised when cash is actually received Expenses recognised when disbursement is made to supplier/vendor irrespective of when goods or services received Accrual Accounting Transactions recognised when they occur (not when cash or equivalent paid) in the period to which they relate Revenue recognised when contributions are confirmed Expenses recognised upon delivery of goods or services

7 ACCRUALS : A REFRESHER Definition All income and charges relating to the financial year shall be taken into account without regard to the date of receipt or payment This means that expenditure is recorded as it is incurred and income as soon as it is earned during an accounting period, even if cash is not paid or received in that period Major differences in treatment of capital expenditure (on fixed assets) and introducing debtors and creditors

8 WHY ACCRUALS ACCOUNTING? Increasing realisation of the limitations of cash accounting, especially in relation to capital Increasing dissatisfaction in the financial and management information available through cash accounting Accruals accounting demands greater accountability Accruals accounting is already applied elsewhere : in private sector, rest of public sector, and overseas Severe limitations of cash-based information in relation to decision-making The need to make comparisons over time

9 AUTHORITY OF IPSAS STANDARDS (1) International Public Sector Accounting Standards Board (IPSASB) Under the auspices of the International Federation of Accountants (IAFC) Private independent standard setting body There is no power to compel countries to comply Sovereign governments and national standard setters have that authority However most countries are adopting the standards Most western governments practice been close to the Standards Some Governments implementing Whole of Government Accounts and require consistency of approach across the public sector to achieve accurate consolidation

10 AUTHORITY OF IPSAS STANDARDS (2) Free trade/market areas (e.g. European Union and ECOWAS) recognising the advantages of consistent financial reporting across the public as well as the private sector (important for state aid to industry and commerce discussions) Pan-national bodies such as the UN, WHO, NATO need mechanisms to compare the contributions of different countries to agreed collective objectives International trade and product organisations (e.g. OPEC) recognising benefits of consistency in reporting output and financial performance International organisations, such as banks, donors, Aid organisations, investment bodies, charities need consistency of approach and will require performance reports and accounting officer returns to adhere to international accounting standards

11 COMPLIANCE Requires adherence to all applicable standards Compliance certified on organisation's general- purpose financial statements Auditors must determine that accounting and reporting are in accordance with all relevant standards The majority of the standards are accrual based

12 IPSAS 1 Presentation of Financial Statements IPSAS 2 Cash Flow Statements IPSAS 3 Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS 4 The Effects of Changes in Foreign Exchange Rates IPSAS 5 Borrowing Costs THE STANDARDS (1) IPSAS 6 Consolidated and Separate Financial Statements IPSAS 7 Investments in Associates IPSAS 8 Interests in Joint Ventures IPSAS 9 Revenue from Exchange Transactions IPSAS 10 Financial Reporting in Hyperinflationary Economies IPSAS 11 Construction Contracts IPSAS 12 Inventories IPSAS 13 Leases IPSAS 14 Events After the Reporting Date IPSAS 15 Financial Instruments: Disclosure and Presentation

13 IPSAS 16 Investment Property IPSAS 17 Property, Plant and Equipment IPSAS 18 Segment Reporting IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets THE STANDARDS (2) IPSAS 20 Related Party Disclosures IPSAS 21 Impairment of Non Cash Generating Assets IPSAS 22 Disclosure of Information about the General Government Sector IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) IPSAS 24 Presentation of Budget Information in Financial Statements IPSAS 25 Employee Benefits IPSAS 26 Impairment of Cash-Generating Assets IPSAS 27 Agriculture IPSAS 28 Financial Instruments Presentation

14 IPSAS 29 Financial Instruments Recognition and Measurement IPSAS 30 - Financial Instruments Disclosure IPSAS 31 Intangible Assets IPSAS 32 Service Concession Arrangements Grantor THE STANDARDS (3) IPSAS 33 First Time Adoption of Accrual Basis IPSAS IPSAS 34 Separate Financial Statements IPSAS 35 Consolidated Financial Statements IPSAS 36 Investments in Associates and Joint Ventures IPSAS 37 Joint Arrangements IPSAS 38 Disclosure of Interests in Other Entities The above are new and will replace IPSAS 6, 7 and 8 Cash Basis IPSAS Financial Reporting Under the Cash Basis of Accounting

15 EXERCISE - BIKEAGOGO

16 APPLICATION General purpose financial statements All public sector entities National Regional (e.g. state, provincial or territorial) Local government (e.g. city towns) And their departments, agencies, boards, commissions Do not apply to Government Business Entities Is an entity with the power to contract in its own name Financial and operational authority to carry on a business Sells goods and services at a profit or full cost recovery Is not reliant on continuing government funding to be a going concern Is controlled by a public sector entity

17 SOME PRACTICAL POINTS How does the World Bank and other donors determine which projects to support across over 100 countries (with different currencies, languages, religions, culture and relative need)? How is success measured? How does the UN or NATO determine relative contributions of nation states to international initiatives (the cost of maintaining troops and equipment in a foreign country, where several currencies and accounting practices may be involved)? How does a free trade area decide if the State Aid regulations have been breached and by how much? How does a free trade area fix trade limits for non-participating countries and how is it monitored? Values and measuring systems vary across the world, making comparisons difficult

18 INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS FINANCIAL STATEMENTS GENERAL

19 FINANCIAL STATEMENTS The components of financial statements are: A statement of financial position (balance sheet) A statement of financial performance (revenue account) A statement of changes in net assets/equity A cash flow statement When the entity makes publicly available its budget, a comparison of budget and actual amounts Notes, comprising a summary of significant accounting policies and other explanatory notes The principal requirements are set out in IPSAS 1

20 WHAT ARE FINANCIAL STATEMENTS FOR? Reporting performance to shareholders and stakeholders Providing information about the sources, allocation and uses of financial resources Providing information about how the entity financed its activities and met its cash requirements Providing information that is useful in evaluating the entity s ability to finance its activities and to meet its liabilities and commitments Providing information about the financial condition of the entity and changes within it Providing aggregate information useful in evaluating the entity s performance in terms of service costs, efficiency and accomplishments Providing information for potential investors

21 FINANCIAL STATEMENTS Financial reporting may also provide users with information: Indicating whether resources were obtained and used in accordance with the legally adopted budget Financial statements can also have a predictive or prospective role, providing information useful in: Predicting the level of resources required for continued operations The resources that may be generated by continued operations The associated risks and uncertainties Indicating whether resources were obtained and used in accordance with legal and contractual requirements, including financial limits established by appropriate legislative authorities

22 FINANCIAL STATEMENTS IN THE PUBLIC SECTOR There are additional reasons for public service organisations to report: Accountability to the public Stewardship Corporate governance Reporting on the financial mandate Reporting on performance Reporting on the financial health of the Government and the nation Part of the basis for financial planning in future Promoting debate and discussion on the level of public expenditure Basis for scrutiny and audit

23 FINANCIAL STATEMENTS Financial statements provide information about an entity s: Assets Liabilities Net assets/equity Revenue Expenses Other changes in net assets/equity Cash flows

24 ADDITIONALLY The face of the statement of financial performance or in the notes A sub-classification of total revenue, classified in a manner appropriate to the entity s operations An analysis of expenses using a classification based on either the nature of expenses or their function, whichever provides information that is reliable and more relevant Can be by function (supported by notes) or subjective

25 Going concern basis other than when being liquidated or ceasing operation GENERAL Consistency in presentation unless: Significant change in operations demands changes Financial statements have been reviewed Changes in an IPSAS Materiality and Aggregation Each material class presented separately Offsetting assets and liabilities and revenue and expenses not to be offset (unless so specified by IPSAS) Include comparative information for previous year

26 QUALITIES Understandable with reasonable knowledge Relevant and material Reliable Faithful representation substance over legal form Neutral in presentation Prudence conservative but not excessively so (for instance excessive provisions or reserves) Completeness Or the truth the whole truth and nothing but the truth! Comparability and consistency Between entities Over time

27 TRUE AND FAIR VIEW True and Fair View concept has been at the heart of UK accounting practice for over 40 years The Financial Statements should show a true and fair view of the financial position of the entity This is checked and affirmed by the External Auditor BUT never defined in UK law Gaining in international importance in recent years (Austria, Finland, Sweden.12 states of the EU) Adopted by the European Union (4 th Directive on company law) Ambiguous and not easily exported across the world May be inappropriate for IFRS Concept of fair value

28 FAIR PRESENTATION The Standard clarifies that fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, revenue and expenses set out in the IPSASs. Previously, fair presentation was not defined.

29 FAIR VALUE Not easy to define Originally, public service organisations used historical cost Fair value introduces the concept of regular revaluations Harder on plant and equipment Market value often used as best reflection of fair value But which market?

30 THE MAJOR ISSUES The major areas that will affect many organisations include: Accruals Asset and capital accounting Treatment of PPPs Leasing Financial Instruments Pensions Others may have major impacts on your organisation but the above are the main ones Identify: potential impacts on your accounts Actions to implement compliant accounting treatments

31 ACCRUALS Considerable transactional task Changes the nature of budgetary control (controlling the cash works much less well) Needs to be understood by managers not just finance The use of P2P system functionality can help considerably The heart of the standards

32 ASSET & CAPITAL ACCOUNTING Capitalisation of expenditure on assets with a life of over a year Application of depreciation and amortisation Difficult for many managers to understand Impact of impairment on the accounts if you think managers find depreciation difficult! Decisions on accounting treatment Depreciated historic cost Revalued (but sill depreciated) More assets being brought into capitalisation

33 PPP AND LEASING Many PPPs involve the provision of assets to the public sector by the private sector The majority of these assets are likely to form part of the public sector organisation s assets Under Service Concession Grantor standard fixed asset and depreciation recognised Effect of changes has to be understood Complicated accounting rules Leasing standards changing All leases operational and finance leases need to be treated as assets of the lessor Previously only Finance Leases had to be recognised as assets Cause of major fallout with the USA

34 Very complex area FINANCIAL INSTRUMENTS Introduces the need to account for a range of instruments or account differently: Concessionary loans Financial Guarantees The concept of Effective Interest Rate applied to public sector bonds Even more complex and demanding in the private sector Reaction to the banking crisis

35 Governments usually have huge occupational pension liabilities Under cash accounting they do not appear in the accounts PENSIONS With IPSAS, pension liabilities and assets appear in the accounts If unfunded or if there is a shortfall it can make the balance sheet appear very unhealthy The accounting arrangements are complex and can require system changes and actuarial input

36 RATIOS THAT CAN BE APPLIED Profitability Ratio Profit after Tax/Capital and Reserves Debtor Days Trade Debtors/Sales Creditor Days Trade Creditors/Purchases Current Ratio Current Assets/Current Liabilities Acid Test Current Assets Stock/Current Liabilities Rate of Return on Capital Employed (ROCE) How do these apply to public sector organisations?

37 SUITABILITY FOR DEVELOPING COUNTRIES (1) Does government accounting reform assist development? Accounting reform expensive The benefits are indirect compared to capital infrastructure investment But institutional rather than bureaucratic infrastructure Better management of resources? More accountability? Track money against results Pressure from donors

38 In democracies SUITABILITY FOR DEVELOPING COUNTRIES (2) Increasing demands for open Government and access to information Greater demand for meaningful information Willingness to implement so financial and technical assistance is available from other countries In non-democratic countries Still pressure for information from international media Pressure from free-trade partners or trade/product organisations Pressure from donors Improved information of value in Government decision-making

39 DEVELOPING COUNTRIES For the public sector, the shift towards sovereign debt being financed through bond issues will have an impact Private sector lenders will expect understandable (compliant) accounts Capital markets will need to be developed further Credit ratings will be closely scrutinised

40 CONCLUDING REMARKS International Accounting Standards being widely adopted across the world Stimulus is from the accounting profession rather than Governments Clear need for commercial organisations to report performance on a consistent and reliable basis in a world market Differences between private sector and public sector financial reporting are much fewer than originally believed Move from cash accounting has financial reporting and planning benefits Greater accountability and stewardship is expected across the world This may be a club it is wise to be a member of It doesn t feel like a movement to impose standards from the developed world on the developing world but