www.pwc.com Issue paper presented at the EPSAS Working Group meeting Luxembourg,
Contents Introduction 3 Available accounting and reporting guidance 5 Country analysis 11 Matters for discussion 15 2
Introduction Objectives of the issue paper Prepare the future discussion on the accounting of intangible assets with the EPSAS stakeholders. Topics currently addressed in the paper: - Main categories of intangible assets. - Accounting and reporting guidance available or under development. - Country analysis. - Main difficulties in practice. - Matters for discussion to achieve sound, efficient and harmonised accounting for intangible assets by Member States. 3
Introduction Background of the issue may not present large amounts in a government s balance sheet but represent one category of assets which bears public sector specificities (2013 Commission SWD). - Rights arising from sovereign power. 2014 study: 3 (out of 147) comments of member States related to intangible assets: 2 on the complexity of implementation and 1 on the need to better address public sector specificities. Need to address some measurement issues to address the comparability objective of EPSAS financial statements. - Cost vs fair value model. 4
Available accounting and reporting guidance IPSAS (1/4) References: - IPSASB conceptual framework, IPSAS 31, IPSAS 21 Impairment of non-cash generating assets, IPSAS 26 Impairment of cashgenerating assets, IPSAS 40 Public sector combinations. Scope, definition and recognition: - Identifiable non-monetary asset without physical substance. - Recognition criteria: Identifiability: the asset should be separable (i.e. capable of being sold, licensed, etc.) or arise from legal or contractual rights. Control over the asset, power to obtain the future economic benefits or service potential and restrict the access to them by others. Probability of future economic benefits or service potential. Reliability of measurement. 5
Available accounting and reporting guidance IPSAS (2/4) Internally generated intangible assets: - Research costs are expensed. - Development costs that meet strict recognition criteria are capitalised as intangible assets. Sovereign power (IPSASB conceptual framework): - The definition of an asset requires that a resource that an entity presently controls must have arisen from a past transaction or other past event. Examples: the power to tax, to issue licenses or to regulate the access to the benefits embodied in intangible resources (e.g. electromagnetic spectrum). - A government s inherent powers do not give rise to assets until these powers are exercised and the rights exist to receive service potential or economic benefits. 6
Available accounting and reporting guidance IPSAS (3/4) Measurement: choice between: - The cost model: assets measured at their acquisition cost less accumulated amortisation and accumulated impairment losses. - The revaluation model: assets measured at their revalued amount less accumulated amortisation. Fair value should be determined by reference to an active market (rare). An active is a market in which all the following conditions exist (a) the items traded within the market are homogeneous (b) willing buyers and sellers can normally be found at any time (c) prices are available to the public. First-time adoption of accrual basis IPSAS: - It is possible not to recognise intangible assets during a transitional relief period of 3 years if they were not recognised under previous GAAP. 7
Available accounting and reporting guidance IPSAS (4/4) IPSASB developments: - Accounting for natural resources has been identified as one of the topics to be addressed by the IPSASB during the 2019-2023 period (IPSASB draft strategy and work plan). Governments often have little idea of the value of natural resources until they are extracted. The rights to extract such resources are often granted to third parties who profit from their extraction. This is an important issue, particularly in jurisdictions with resource-based economies because the recognition and measurement of these assets impacts their management and the benefits derived by constituents from their extraction. Lack of appropriate management of natural resources is a significant issue in some jurisdictions, that international accounting standards may help alleviate. 8
Available accounting and reporting guidance IFRS and EAR IFRS: similar requirements as IPSAS (except for the concept of service potential). European Accounting Rules: based on IPSAS. 9
Available accounting and reporting guidance ESA 2010 ESA 2010 rules identify categories of assets that (may) have an intangible nature: intellectual property rights (AN 117), radio spectra (AN 2151), contracts, leases and licenses (AN 22) and purchases less sales of goodwill and marketing assets (AN 23). However, conceptual differences with IPSAS are noted: - Research and development costs are capitalised to the extent that economic benefits are expected in the future. The distinction between research and development in IPSAS is not replicated in ESA. - Expenditures in intangible assets increase government deficit/reduce government surplus. - Assets are measured at current prices as if they were acquired at balance sheet date. No amortisation or impairment as such applies. 10
Country analysis Types of intangible assets Overview of intangible assets recognised in the balance sheet of the three selected Member States (the UK, France and Sweden). Asset category United Kingdom France Sweden Amount (in billion GBP) % of balance sheet Amount (in billion EUR) % of balance sheet Amount (in billion SEK) % of balance sheet Military development costs 27.1 1.6% 15.4 1.6% (*) - Electromagnetic spectrum - 0.0% 9.7 1.0% - - Software, software development, licenses and other 5.9 0.3% 3.1 0.3% 9 0.6% Total 33.0 1.9% 28.2 2.9% 9 0.6% (*) Sweden includes military development costs within tangible fixed assets. 11
Country analysis Comparative analysis of applicable rules (1/2) Findings from country analysis (the UK, France and Sweden). UK France Sweden Applicable rules Scope and definition/ Presentation and disclosures IFRS as adapted for the public sector. Based on IAS 38. Similar to IPSAS 31. National rules based on IPSAS 31/IAS 38. - Distinction between public sector specific (military development costs, terrestrial broadcasting spectrum and greenhouse gas emission rights) and non-public sector specific (acquired software, internally developed software, etc.) intangible assets. Based on national rules for the private sector (in turn based on IFRS and similar to IPSAS). - 12
Country analysis Comparative analyses of applicable rules (2/2) Findings from country analysis (the UK, France and Sweden). UK France Sweden Recognition - - - Measurement -The cost option given in IAS 38 is not permited. The current value should be based on the market value in existing use. -Where no active market exists, entities should revalue the asset, using indices or some suitable model, to the lower of depreciated replacement cost and value in use (where the asset is income generating). -The cost model is chosen. -The cost model is chosen. 13
Country analysis Findings from country analysis Revaluation model vs cost model. - The UK government is the only country applying the revaluation model. It does it more widely than under circumstances permitted by IPSAS (when an active market exists). It has an objective to align its accounting and budgeting (based on ESA 2010) to help decision makers and parliamentarians understand and interpret the data. arising from sovereign power. - Diversity is noted in practice. - related to the electromagnetic spectrum: only France recognises assets for this. - Emission rights: Assets recognised for public sector entities acting as participants in France (inventories) and the UK (intangible assets). Only France addresses the accounting issue from the perspective of the government acting as administrator of the scheme. 14
Matters for discussion Possible way forward (1/2) Overall IPSAS 31 seems a suitable reference for developing EPSAS. - Preparation of the opening balance sheet. Possibility to use the recognition exemption during 3 years. Consider materiality when recognising assets in the opening balance sheet. Possible areas to consider for future discussion with the EPSAS stakeholders: - Need for additional guidance related to the rights arising from sovereign powers? Accounting treatment of the specific rights arising from the electromagnetic spectrum. Accounting treatment of the emission rights, both from the perspective of the government acting as administrator of the emission trading scheme and from the perspective of the government participating in the scheme. 15
Matters for discussion Possible way forward (2/2) - Accounting policy choice between the cost model and the revaluation model? Keep the accounting policy choice available for Member States or impose one model to enhance comparability? If one model is chosen: which one? Cost model: more widely used, simpler to apply. Revaluation model: partial alignment only with ESA 2010. Permited or required where an active market exists? Find out under what circumstances? - Presentation and disclosure of intangible assets? In order to enhance comparability, define a subclassification of intangible assets which reflects the major types of intangibles that governments most usually have? 16
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