INVITATION TO COMMENT: ACCOUNTING FOR SOCIAL POLICIES OF GOVERNMENT

Size: px

Start display at page:

Download "INVITATION TO COMMENT: ACCOUNTING FOR SOCIAL POLICIES OF GOVERNMENT"

Phoebe Glenn
6 years ago
Views:

~ The Technical Director Public Sector Committee 545 Fifth Avenue, 14d1 Floor New York New York 10017 United States of America Dear Sir, 30 June 2004 INVITATION TO COMMENT: ACCOUNTING

If you would like to discuss any aspect of our response further, please do not hesitate to contact me. Yours sincerely, ~~CA.

1 ~ The Technical Director Public Sector Committee 545 Fifth Avenue, 14d1 Floor New York New York United States of America Dear Sir, 30 June 2004 INVITATION TO COMMENT: ACCOUNTING FOR SOCIAL POLICIES OF GOVERNMENT Please find attached a Technical Response from the Audit Commission to your invitation to comment. If you would like to discuss any aspect of our response further, please do not hesitate to contact me. Yours sincerely, ~~CA.oI'A Mike Barnes Head of Technical Development Audit Policy and Appointments Directorate Telephone: m-bames@audit-commission.gov.uk Audit Commission, First Floor, Millbank Tower, Millbank, London SW1 p 4HQ T F TEXTPHONE ~ds

$,"".1\.$

2 ~ ~t:~tr fti:ttjc~j (!'~ ~~.,."".!ft",~ ~.,"".1\...",t"i~~~ INVITATION i'/c;",,1-""f 1;$"',"f,"' TO COMMENT ~f%i!ii :ir:}~)mn'1 i:;)t~f';;' ACCOUNTING FOR SOCIAL " POLICIES OF GOVERNMENTS r Audit Commission response to the IFAC Public Sector Committee

Public audit is an essential element in the process of accountability for public money and makes an important contribution to the stewardship of public resources and the corporate governance of

appointing auditors to local government, criminal justice and NHS bodies that spend some 120 billion of public money annually;.

3 Public audit is an essential element in the process of accountability for public money and makes an important contribution to the stewardship of public resources and the corporate governance of public services. The Audit Commission ('the Commission') was established as an independent body in 1983 and has statutory responsibilities, amongst other things, for:.appointing auditors to local government, criminal justice and NHS bodies that spend some 120 billion of public money annually;.setting the required standards for its appointed auditors, and regulating the quality of audits;.making arrangements for certifying government grant claims and returns;.undertaking or promoting comparative and other studies to promote the economy, efficiency and effectiveness of local government and NHS services;.defining local government performance indicators;.receiving and, where appropriate, following up information received from 'whistleblowers' in local government and NHS bodies under the Public Interest Disclosure Act 1998; and.carrying out best value inspections of certain local government services and functions. The Commission appoints auditors to local government and NHS bodies from within the Commission and from private firms of auditors. Once appointed, auditors carry out their statutory and other responsibilities, and exercise their professional judgement, independently of the Commission. Any comments on the issues raised by this response should be addressed to: Mike Barnes Head of Technical Development Audit Policy and Appointments Directorate The Audit Commission lst Floor Millbank Tower Millbank London SWlP4HQ Tel

1. INTRODUCTION 1 The Audit Commission ('the Commission') welcomes the opportunity to comment on the IFAC Public Sector Committee's (PSC) consultation on accounting for social policies of governments.

Public sector accounting has been developed in recent years with the intention that it should be consistent with UK generally accepted accounting practice ('GMP') except where the nature of the

3 Whilst International Public Sector Accounting Standards are not directly applicable in the UK public sector, the existence of definitive international guidance on accounting for social policies of

4 We have a number of general comments to make on the ITC and then we set out our responses to the individual issues on which the Committee has invited comments. 2.

We note that the Public Sector and Not-for-Profit Committee of the UK Accounting Standards Board has been working to develop a Statement of Principles for Financial Reporting for Public Benefit

4 1. INTRODUCTION 1 The Audit Commission ('the Commission') welcomes the opportunity to comment on the IFAC Public Sector Committee's (PSC) consultation on accounting for social policies of governments. This is a an issue of considerable importance to public sector bodies across the United Kingdom. 2 Accounting requirements for the public sector in the UK are a matter for the government to determine. Public sector accounting has been developed in recent years with the intention that it should be consistent with UK generally accepted accounting practice ('GMP') except where the nature of the public sector requires a different accounting treatment. In practice, this means that public sector accounting standards adhere closely to the promulgations of the UK Accounting Standards Board. 3 Whilst International Public Sector Accounting Standards are not directly applicable in the UK public sector, the existence of definitive international guidance on accounting for social policies of governments will be of substantial assistance to preparers and auditors of financial statements in the public sector. 4 We have a number of general comments to make on the ITC and then we set out our responses to the individual issues on which the Committee has invited comments. 2. GENERAL COMMENTS 5 We welcome the work of the Committee in this area. We note that the Public Sector and Not-for-Profit Committee of the UK Accounting Standards Board has been working to develop a Statement of Principles for Financial Reporting for Public Benefit Entities, which includes public sector bodies and government. We have provided support to the project team working in this area. One of the most complex issues has been establishing the appropriate definition of a liability. 6 The Public Sector and Not-for-Profit Committee of the UK Accounting Standards Board's work in this area, which we support, has indicated that a common set of principles should underlie financial reporting by all entities. This means that the definition of a liability should apply equally to public and private sector entities. We do not consider that this is inconsistent with providing an interpretation of this definition in the specific area of social obligations. Therefore, we support the development of an IPSAS in this area. 7 In addition, the Public Sector and Not-for-Profit Committee of the UK Accounting Standards Board has tentatively concluded that general commitments to provide public benefits would not create a liability for the reporting entity because they do not create an expectation such that the entity cannot withdraw from it, or amend the terms. However, specific commitments to provide public benefits would be likely to result in the recognition of a liability in certain circumstances. These proposals are broadly comparable with the proposals made by the Committee and, for this reason, we welcome the proposals of the Committee. 3 <:;\~h

3. RESPONSES TO SPECIFIC QUESTIONS (a). Do you consider that separate Exposure Drafts and IPSASs should be prepared for: (i) (ii) old age and similar pensions; and other social policy obligations?

Do you consider that unfunded pension plans to provide government employees with benefits as a consequence of their employment, where the pensions are to be paid from government revenues, should be

5 3. RESPONSES TO SPECIFIC QUESTIONS (a). Do you consider that separate Exposure Drafts and IPSASs should be prepared for: (i) (ii) old age and similar pensions; and other social policy obligations? We consider that the same accounting principles should apply to both (i) and (ii). Therefore, a single Exposure Draft and IPSAS should be prepared to cover both subject areas. (b). Do you consider that unfunded pension plans to provide government employees with benefits as a consequence of their employment, where the pensions are to be paid from government revenues, should be included or excluded from the scope of any forthcoming IPSAS on social policy obligations? We consider that unfunded pension plans to provide government employees with benefits as a consequence of their employment, where the pensions are to be paid from government revenues, should be excluded from the scope of any forthcoming IPSAS on social policy obligations. We consider that, in this case, the obligation position as an employer and the appropriate requirements of IAS 19. arises from the government's accounting approach should echo the ( c) Do you agree that notions of social benefits are well understood and need not be defined in an IPSAS? If you are of the view that it is necessary to define social benefits for inclusion in an International Public Sector Accounting Standard (IPSAS), please outline the reasons for this view and your proposed definition. We agree with the Committee. Notions of social benefits are generally well understood and need not be defined in an IPSAS and it would be difficult to provide a generic definition for all jurisdictions. (d). Do you agree that the definition ofa liability and the related concepts ofa legal and constructive obligation in IPSAS 19 should be applied to non-exchange transactions in the public sector (see Chapter 3)? If you disagree, please outline the concept of a liability that you believe is appropriate for non-exchange transactions in the public sector. We agree with the Committee. We see no reason why a different approach should be applied to non-exchange transactions. (e). Do you agree with the Steering Committee's conclusions about the alternate approaches to determining when a constructive obligation arises in Chapter 4? Are you of the view that there are other circumstances in which a constructive obligation may arise? If so, please describe those circumstances. We agree with the Committee's conclusions about the alternate approaches to determining when a constructive obligation arises. ~ '""Q-\ 4

(f). Do you agree with the Steering Committee View in Chapter 5 that a present obligation for the provision of goods and services to constituents does not arise prior to the provision of those goods

Do you agree that any costs incurred in acquiring goods and services for delivery in the future should be recognized in accordance with IPSASs or, in the absence of such, other generally accepted

We agree with the Committee -a present obligation for the provision of goods and services does not arise prior to the provision of those goods and services.

Do you agree that the financial reporting consequences of cash advances provided by a government to allow individuals to purchase specified goods and services as discussed in Chapter 5 differ from

If you disagree with this view, please outline your views on how an entity should account for cash advances discussed in Chapter 5 and Chapter 6. We agree with the Committee. (h).

which government will satisfy in the future?

6 (f). Do you agree with the Steering Committee View in Chapter 5 that a present obligation for the provision of goods and services to constituents does not arise prior to the provision of those goods and services? Do you agree that any costs incurred in acquiring goods and services for delivery in the future should be recognized in accordance with IPSASs or, in the absence of such, other generally accepted accounting practices for dealing with such exchange transactions? We agree with the Committee -a present obligation for the provision of goods and services does not arise prior to the provision of those goods and services. We also agree with the Committee that any costs incurred in acquiring goods and services for delivery in the future should be recognised in accordance with IPSASs. (g). Do you agree that the financial reporting consequences of cash advances provided by a government to allow individuals to purchase specified goods and services as discussed in Chapter 5 differ from cash advances discussed in Chapter 6 which are provided for use at the discretion of the recipient? If you disagree with this view, please outline your views on how an entity should account for cash advances discussed in Chapter 5 and Chapter 6. We agree with the Committee. (h). Do you agree with the Steering Committee View in Chapter 7, that the principles developed in Chapters 5 and 6 also apply to specific events, such as disaster relief, which give rise to obligations which government will satisfy in the future? If you disagree with this view please identify the factor(s) that make disaster relief and similar specific events different from other benefits as considered in Chapters 5 and 6. We agree with the Committee. Do you agree with the majority view of the Steering Committee regarding old age pension obligations, the minority view or do you have another view (see Chapter 8)? There is an argument that there may be a constructive obligation on governments to provide an old age pension, which would support the case for recognition of this liability. This view has been put to us on the basis that current spending decisions made by individuals are made on the assumption that they will receive an old age pension provided by the State and we consider it to have some merit. However, this argument could be extended to a number of social obligations and we consider that a more pragmatic approach (and one which might encourage a greater degree of compliance by public bodies) is to encourage sustainability reporting and to ensure that this addresses clearly the issue of pensions 'liabilities' likely to arise in the future. We discuss this issue in more detail in our response to question (k). (1) Do you agree with the Steering Committee View in Chapter 9 that the disclosure requirements in IPSAS 1 Presentation of Financial Statements and IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets should apply in respect of social benefits and that additional detailed disclosures of individual social benefits should not generally be required? 5 cla-i

including the assumption that higher level disclosures are more likely to meet users needs?

7 We agree with the Committee. (k) Do you agree with the Steering Committee view in Chapter 9 that the PSC should explore the possibility of requiring disclosures about the overall sustainability of a government's social benefits including the assumption that higher level disclosures are more likely to meet users needs? We agree that the Committee should consider or explore the possibility of requiring disclosures about the overall sustainability of a government's social benefits. As far as we are aware, the UK government does provide disclosures of this type within a number of published reports. We agree that it will be important to avoid information overload and therefore the Committee is correct to propose that disclosures should encompass all social benefits collectively. Care will be needed in any specification of disclosure requirements to avoid an inappropriate level of detail. (I) Do you foresee any audit issues that might arise if "sustainability disclosures" were included in the financial statements? If so, please describe those issues. We consider that a number of audit difficulties would arise if such disclosures are included in the financial statements subject to an auditor's opinion. It is likely that these will take the form of forecasts which will be difficult, if not impossible, to audit. There may be scope for an audit assertion about the way in which these forecasts have been developed and in relation to assumptions used and the qualifications of the forecasters. This would provide less assurance than the traditional 'true and fair' view provided in relation to the audit of the financial statements, but could provide a degree of assurance to the users of the financial statements. 6

Comments on ITC. Accounting for Social Policies of Governments issued by IFAC-PSC

Comments on ITC. Accounting for Social Policies of Governments issued by IFAC-PSC To The Technical Dircetor, Public Sector Committee, International Federation of Accountants, 545 Fifth Avenue, 14th Floor New York, New York 10017 USA Subject: Comments on the ITC -Accounting for Social