The need for International public Sector Accounting Standards
Governments (USA) raise, borrow (both domestically and on international markets), control, consume and redistribute significant resources. By most financial, economic and social measures they are one of the, if not the, most significant entities within their domestic economies. Their demand for, and use of, resources can have a major influence on the immediate and long term social and economic well being of members of their community, and the success of their economies.
The resources that governments use and consume are not their own - they are the resources of their citizens. It can be argued that governments have an even greater obligation to be accountable for the resources they raise, control and use than corporations because:
· Unlike investing in corporations, citizens do not have a choice on whether to provide funds to government, and only receive a return in the form of goods and services provided by the government to the community; and
· Governments impose the financial reporting requirement on corporations ion the private sector and therefore should set the example.
However, in many jurisdictions, the quality of government financial information reported to external users and to managers is poor. Poor quality financial information is often associated with poor standards of financial management, economic decision making and accountability. Such an environment contributes to a low standard of financial discipline and often leads to corruption and mismanagement.
The relationship between good governance, fiscal transparency and better economic outcomes is increasingly being acknowledged. Holding governments and their agencies accountable is a key element of good governance in the public sector, and fiscal transparency is one (though by no means the only) necessary condition for the
discharge of accountability.
Key components of any governance system are:
· The preparation of financial statements in accordance with well understood and generally accepted accounting standards developed in the interests of the users of financial statements of public sector entities; and
· An independent audit that provides assurance that those standards have been complied with.
A major impediment to the achievement of enhanced accountability and financial transparency of governments and their agencies in many jurisdictions is the absence of generally accepted financial reporting standards for these entities. While accounting standards cannot prevent inappropriate decision making and improper actions by those that control resources, they can support more transparent, comprehensive and timely reporting of the financial consequences of decisions made and actions taken by governments.
Corporate collapses, inappropriate or efficient use of resources by governments, and unstable national economies can have deleterious consequences not only for the local economy and government itself, and the citizens and other participants dependant on the efficient operation of the government and economy, but also on a global scale for economies around the world. The support of the accounting profession in building an appropriate set of reporting standards for application in many jurisdictions is, therefore, very much in the public interest, and will benefit the national and international community.
The core issues faced by standard-setters and similar organizations in establishing financial reporting requirements for public sector entities and preparers in compiling the financial statements are not usually unique to only their own jurisdictions. Of course, there can be national, cultural and institutional differences between jurisdictions which may need to be reflected in national financial reporting requirements, and some transactions may be more prevalent in some jurisdictions than in others. However, it is difficult to contemplate circumstances in which, the information required to discharge accountability obligations owed to constituents and necessary for transparency and decision making, would differ simply by crossing from one to another jurisdiction. The issues confronting national standards setters and others concerned with increasing the transparency and quality of financial reporting are therefore likely to have common characteristics at an
international level, and there is a good case for an international response to these issues.
The International Accounting Standards Board (IASB) establishes International Financial Reporting Standards (IFRSs) for business enterprises. In late 1996, the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC) actioned a standards program directed at developing International Public
Sector Accounting Standards (IPSASs) for financial reporting by public sector entities at the local, state and national government levels. The PSC was the predecessor committee to the International Public Sector Accounting Standards Board (IPSASB).
Governments and national standards setters have the authority and right to establish standards for financial reporting in their jurisdictions. The objective of the standards program was to develop high quality international standards for financial reporting by governments and other public sector entities and promote and encourage their adoption. The IPSASs can then be used as a resource by those governments concerned to enhance the transparency, quality, consistency and usefulness of their financial statements. They are likely to have particular relevance in those jurisdictions which have not established national standards setting boards or other independent standards setting agencies charged with developing public sector accounting standards in the public interest. However, they will also be relevant in other jurisdictions as a benchmark when developing national standards on particular issues.
Application of IPSASs on an international basis will also provide for greater efficiency and effectiveness in the audit and analysis of governmental financial statements as common rules are adopted around the world for the financial reporting of similar transactions and events. A common set of international standards for
application by governments would also mean that financial reporting expertise, so often a scarce resource in the public sector, would become more mobile across national boundaries, with the expectation that, for example, developing economies will be able to access this resource at a lower cost. Given the poor quality of
financial information currently made available to public sector managers in many jurisdictions, it is likely that internal users will also benefit from the development and application of IPSASs.
It is nearly ten years since IFAC’s Public Sector Committee (PSC) commenced its standards program. Since that time, 22 accrual IPSASs and a comprehensive cash basis IPSAS have been issued, a number of additional IPSASs and exposure drafts of IPSASs are being progressed and the PSC has been reconstituted as the International Public Sector Accounting Standards Board (IPSASB) with a specific mandate and focus to establish International Public Sector Accounting Standards (IPSASs). It is therefore opportune to revisit the progress that has been made on the ambitious program to develop IPSASs and have them applied by governments around the world. This Paper provides some background on IFAC and the IPSASB and outlines progress on the standards setting program and identifies opportunities and challenges to be faced in the future.
Background – IFAC and IPSASB International Federation of Accountants (IFAC)
The International Federation of Accountants (IFAC) is the global organization for the accountancy profession. It comprises 163 member organizations in 120 countries and represents approximately 2.5 million accountants employed in public practice, industry and commerce, government and academe.
IFAC's mission as set out in its constitution is to “serve the public interest, strengthen the worldwide accountancy profession, and contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession's expertise is most relevant.”
Serving the public interest encompasses the accounting profession’s role in both the public and private sectors.
The International Public Sector Accounting Standards Board
The International Public Sector Accounting Standards Board (IPSASB) was established in November 2004. Its predecessor, the Public Sector Committee (PSC) was established in late 1986 with a broad mandate to consider financial reporting, audit, governance and management accounting issues in the public sector. Consistent with its mandate, the PSC issued a number of Studies and other documents dealing with those issues.
In the early and mid 1990s, the PSC published a number of Studies which considered such matters as the likely financial information needs of users of public sector financial reports; the bases of accounting that might be adopted to satisfy those financial information needs; and the “elements” of the financial statements (for example, assets, liabilities, revenues, expenses/expenditures, cash receipts and cash payments). These are key issues which underpin and shape any standards development program.1
In late 1996, the PSC agreed to actioned a standards development program. The first phases of the standards program included the review of practices around the world and subsequently the development of IPSASs based on International Accounting Standards (IASs), issued as at August 1997 (or their subsequently revised version)
to the extent the requirements of the IASs were applicable to the public sector.2
In 2003/2004, an externally chaired review panel (the Panel) conducted a comprehensive review of the PSC. That review included consideration of the PSC’s objectives, operations, achievements and governance arrangements. The Panel made a number of recommendations, including that the PSC should focus on the development of International Public Sector Accounting Standards (IPSASs) and be renamed the IPSASB. The recommendations of the Panel were accepted by the IFAC Board and Council, and in November 2004 the PSC was reconstituted as the IPSASB to reflect its new mandate and terms of reference. Under its new terms of reference, the IPSASB will issue IPSASs under its own authority. The Terms of Reference of the IPSASB specify: “The IPSASB functions as an independent standard-setting body under the auspices of IFAC. It achieves its objectives by:
· Issuing International Public Sector Accounting Standards (IPSASs);
· Promoting their acceptance and the international convergence to these standards; and
· Publishing other documents which provide guidance on issues and experiences in financial reporting in the public sector.” [International Public Sector Accounting Standards Board, Interim Terms of Reference.
The IPSASB currently comprises 15 members drawn from IFAC member bodies (the accounting professional bodies) and three public members. Public members may be nominated by any individual or organization. All IPSASB members are appointed in their own right because of their knowledge of, and experience in,public sector financial reporting. They have an obligation to act in the public interest in developing IPSASs. IPSASB members are supported by technical advisors drawn from, for example, the national standard setter, ministry of finance or accounting profession in their own country. Members of the multilateral lending agencies and certain other regional and international organizations are observers on the IPSASB with full rights of the floor. (Starting in 2005, the IPSASB reviews the composition and role of observers annually to ensure that, as far as possible, IPSASB members and observers together comprise an appropriate mix of experience and expertise and are representative of the IPSASB’s broad constituency.)
The IPSASB currently comprises the following countries and organizations:
IPSASB MEMBERS 2006
Appointed by IFAC member bodies France (Chair), United Kingdom (Deputy Chair), Argentina, Australia, Canada, India, Israel, Japan, Malaysia, Netherlands, Mexico, New Zealand, Norway, South Africa, and United States of America.
Three public members from: Italy, Switzerland and the United States of America.
IPSASB OBSERVERS 2006
Asian Development Bank (ADB), European Commission (EC), International Accounting Standards Board (IASB), International Monetary Fund (IMF), International Organisation of Supreme Audit Institutions (INTOSAI), Organisation for Economic Co-operation and Development (OECD), World Bank, the United Nations Group (UN).
Due process and operating procedures
The IPSASB adopts a formal and transparent due process for the development of Standards which provides stakeholders with the opportunity to contribute to the development process. Key features of its operating processes are:
· The IPSASB meets three times each year. IPSASB meetings are held in public. While interested members of the public are able to observe IPSASB meetings they are not allowed to participate in the discussion. In conjunction with each meeting, the IPSASB participates in seminars and round table discussions with key members of the local area financial reporting community.
· Exposure Drafts (EDs) of each proposed IPSAS are published on the IPSASB web page and are widely distributed free of charge. The exposure period of each proposed IPSAS is usually at least four months. The IPSASB also issues discussion, consultation and research papers on specific topics. All IPSASB discussion papers and other publications are also freely available on the IPSASB web page.
· Steering Committees, Project Advisory Panels and/or Task Forces are established at the project development stage. They include non-IPSASB members, to ensure broad input into the development process. These Steering Committees and Project Advisory Panels provide a mechanism for the IPSASB to broaden its experience and expertise and involve key constituents at an earlier stage of the IPSAS development process.
· The IPSASB has developed a global Consultative Group which encompasses a wide range of parties with interests in financial reporting by public sector entities. The IPSASB meets with regional members of its Consultative Group in conjunction with each meeting and consults electronically with all members on particular issues that emerge in the ED or standard development process.
· final IPSASs are translated into Spanish and French and interested organizations are also encouraged to initiate their own translation program.
It is also proposed that the IPSASB be brought within the scope of the Public Interest Oversight Board (PIOB) of IFAC in the future, when the composition of the PIOB has been modified to include members with expertise in public sector financial reporting.
In the following sections, the term IPSASB is used to encompass decisions and output of the IPSASB and the PSC. The term should be read as referring to the PSC in respect of matters prior to November 2004, and the IPSASB in respect to matters after November 2004.
Progress to Date and the Future Work Program
The standards development program The standards program includes the development of IPSASs for financial reporting under both the cash basis of accounting and the accrual basis of accounting. Initially, the Program also encompassed the development of Standards for the modified cash and modified accrual basis. However, in response to the first raft of IPSAS exposure drafts, many constituents argued strongly and convincingly that it was not appropriate to develop Standards for the modified cash and modified accrual bases – rather the IPSASB should establish standards for the cash and accrual basis and encourage, allow, and support entities to move from the cash to the accrual basis. After issuing an Invitation to Comment (ITC) on this matter in
1999 and receiving an overwhelming response in support of developing IPSASs for only the cash and accrual bases, the Program was refocused on developing Standards for only these (the cash and accrual) bases.
After completion of the first stage of the IPSAS development program in 2002, the IPSASB has focussed on the following work program priorities:
· 1st priority: Addressing public sector specific financial reporting issues, such as accounting for taxation revenue, accounting for social policies of governments, budget reporting and accounting for heritage assets;
· 2nd priority: Convergence of IPSASs with the International Financial Reporting Standards (IFRSs) issued by the IASB; and
· 3rd priority: Convergence of IPSASs with the statistical models of reporting financial information about governments.
The IPSASB has successfully progressed its technical program - as at September 2006:
· Twenty-two accrual basis IPSASs and a comprehensive Cash Basis IPSAS have been issued.
· An additional IPSAS on budget reporting and updated versions of 11 existing IPSASs to better reflect the IASs/IFRSs impacted by the IASB’s General Improvements Project are being finalised for approval by the end of 2006. It is also anticipated that an IPSAS on accounting for non-exchange transactions including taxes and other transfers will be close to approval by the end of 2006.
· Exposure drafts of three additional proposed standards dealing with public sector specific issues and the IFRS convergence program have been approved for issue, and additional exposure drafts are nearing approval
identifies the Exposure Drafts and IPSASs for issue in late 2006 or early 2007.
· A number of Studies and Information and Research Papers have been issued, including a Consultation Paper dealing with heritage assets (which are excludedfrom the recognition and measurement requirements of IPSAS 17 “Property, Plant and Equipment”), a Research Report dealing with convergence of IPSASs and statistical financial reporting bases and a Study providing guidance to assist a government or other public sector entity in transitioning from the basis of accounting the entity currently adopts (whether cash,modified cash or modified accrual) to the accrual basis.
In addition, the IPSASB has strengthened its relationship with national accountants responsible for the development and implementation of statistical basis of financial reporting. The IPSASB played a significant role in the establishment of the international Task Force on Harmonization of Public Sector Accounting(TFHPSA) and chaired Working Group 1 of that Task Force. The objective of the TFHPSA was to explore the potential for convergence between accounting and statistical bases of financial reporting for the public sector and to make recommendations for updating the next version of the System of National Accounts, due to be finalised in 2008. The TFHPSA completed its task during 2006. It made a significant contribution to the convergence of accounting and statistical bases where appropriate.
Increasing influence of IPSASs
The development of high quality financial reporting standards for public sector entities, while necessary, is not of itself sufficient to achieve the objectives of the IPSASB and of IFAC. To ensure that the quality of financial reporting by governments and other public sector reporting entities meets internationally acceptable standards, the IPSASs must be adopted (or must be used as benchmarks in developing/assessing the suitability of national requirements) and must be complied with in the preparation of financial statements of these entities.
While a substantial study of the adoption and influence of IPSASs by governments has not yet been undertaken, it is clear that the IPSASs influence on the development of national standards is growing with countries increasingly using IPSASs as a resource as they develop and strengthen their own national/regional
requirements, including some countries which issue IPSAS EDs and Consultation Papers for comment by their national constituents.
Significant progress is also being made on adoption of IPSASs by national and international reporting entities. A number of international organizations including the OECD, NATO (which comprises approximately 21 separate agencies), IFAC,EC, INTERPOL and the UN System (comprising approximately 28 separate agencies) have adopted or are moving to adopt IPSASs. In addition, a number of countries already apply the cash or accrual basis IPSASs, or national standards that are aligned with those IPSASs, and many more countries have declared their intent to adopt IPSASs and established processes to that end. (The IPSASB webpage includes a listing of the known IPSASB adopters.) This is very encouraging, particularly when it is considered that the first stage of the IPSAS development program to develop a core set of accrual IPSASs and a comprehensive cash basis IPSAS was only completed in 2002.
Other indicators of the growing influence of IPSASs and the increasing potential for convergence of financial reporting requirements around IPSASs include:
· The World Bank includes IPSASs among the accounting standards acceptable to it for financial reporting by borrowers; and
· A high level conference in September 2004, organized jointly by the European Commission and the Fédération des Experts Comptables Européens (FEE), issued a press release advocating the adoption of IPSASs as essential to the development and strengthening of financial reporting by governments was issued; and IPSASs being;
· At a meeting hosted by IFAC in February 2006, chief executives of 35 national and regional accountancy organizations worldwide noted the need for improvements in the quality of governmental financial reporting and financial management and recognized the benefits this would generate for all taxpayers in all countries. Participants agreed that the international profession must take a strong role in advocating that governments should follow standards in line with those to which they expect companies in the private sector to adhere and, in particular, to promote the use of IFAC's International Public Sector Accounting Standards as a means to strengthen governmental financial accountability.
· National standards setters and other organizations with responsibility for developing authoritative requirements for financial reporting by public sector entities in a number of countries are working with the IPSASB on collaborative projects, such as those dealing with a public sector conceptual framework and public private partnerships;
· IPSASs have been translated from English into French and Spanish in collaboration of IPSASB and the International Accounting Standards Committee Foundation (IASCF). IPSASs have also been, or are being, translated into many other languages by national accounting bodies and international organizations, including: Arabic, Chinese, Czech, Indonesian, Italian, Japanese, Macedonian, Mongolian, Portuguese, and Russian. These developments augers well for an ongoing build in the adoption of IPSASs.
Challenges and Opportunities
During the course of its July 2006 meeting the IPSASB undertook a broad review of its current work program and longer term strategy. It proposed refinements to its work program priorities to reflect progress already made on certain projects and to respond to emerging issues and priorities. The next phase of the IPSASB program presents a new range of opportunities and challenges for the IPSASB and the broader financial reporting community. These opportunities and challenges are explored in the following sections of this paper under the broad heads of:
(a) Resourcing for the IPSASB;
(b) Care and Maintenance of IPSASs;
(c) Adoption of IPSASs
(d) The IPSAS communication and education program; and
(e) The technical work program:
(a) Resourcing the IPSASB
From late 1996 to the end of 2001, the standards program was funded by IFAC, the World Bank, the ADB, the UNDP and the IMF. The second stage of the Program from 2001 through 2006 has been funded by IFAC, the World Bank and ADB, together with some project specific funding4.
Over 85% of the respondents to a survey conducted by the Panel reviewing the PSC in 2003 – 2004 supported the continuing existence of an independent financial reporting standard setter for the public sector, over 72% supported the PSC’s focus on standards setting (rather than other functions such as audit, education or governance), and over 85% supported the PSC’s consultation process and arrangements for approving exposure drafts and final IPSASs. However, this support for the IPSASB’s standards program has not been translated into funding commitments from many who have a stake in ensuring good financial reporting by public sector entities, including national and state governments and many international agencies. The IPSASB’s modest budget has limited the staff and other resources available to it and, consequently, its ability to pursue its technical and promotion program as vigorously as it would otherwise have wished. As an illustration, in 2005, the IPSASB issued its policy on IFRS convergence which confirmed the IPSASB’s commitment to its IFRS convergence objective where appropriate but noted: “The International Public Sector Accounting Standards Board (IPSASB) remains committed to the objective of converging International Public Sector Accounting Standards (IPSASs) with International Financial Reporting Standards (IFRSs)5 unless there is a public sector specific reason for a departure. However, the IPSASB is currently facing resource constraints, and needs to balance the use of its resources across its work program. This means that certain components of the IFRS convergence program have been deferred until additional resources can be allocated to them.”
In mid 2006, Canada and the Canadian Institute of Chartered Accountants confirmed the provision of additional resources to the IPSASB to supplement the support already committed by the World Bank, ADB and IFAC. A staff member will also be seconded to the IPSASB from the Ministry of Finance of the People’s republic of China in late 2006 for a twelve month period, and project specific funding is also anticipated from the European Commission, the United Nations and the New Zealand Government. This will provide a much needed boost to the IPSASB’s resources, whose staff complement in 2007 will double from the 2006 level. However, even with the additional support, the IPSASB’s resources are still not sufficient to sustain a full standards setting development and promotion program over the long term - additional ongoing funding sources must be found for 2007 and beyond to support the IPSASB’s standard-setting activities.
Adoption of IPSASs will increase the transparency and credibility of the financial statements of governments and their entities. Governments are increasingly acknowledging this and are adopting IPSASs or using them as a reference point in developing national requirements. While governments are the major beneficiaries of the work of the IPSASB, to date they have made little direct financial contribution to support the work of the IPSASB. Canada has provided a significant lead in this respect - now is the time for other governments to follow that lead and also provide resources to the IPSASB. Establishment of an appropriate long term resource base, will enable the IPSASB to accelerate its work program, to undertake much needed maintenance and upgrading of its existing IPSASs, and to provide some support to jurisdictions on the IPSAS implementation path. It will also ensure that the time and expertise of the IPSASB and its staff are focussed on the technical and communications program, rather than on fund raising.
(b) Care and maintenance of IPSASs
To be effective over the long term, accounting standards cannot be static documents – they need to respond to the changes in economic, institutional and management environments within which governments, whether at the local, state or national level, and other public sector entities operate. Frequently, as members of the financial reporting community gain experience with the application/operation of any Standard, areas for modification or improvement are identified. In addition, circumstances and transactions not contemplated by the existing body of Standards often arise. The IPSASB long term work program therefore needs to have sufficient flexibility to accommodate the “care and maintenance” of the existing body of Standards and to respond to deal with emerging issues not addressed by the existing body of authoritative literature.
(d) Adoption of IPSASs
While progress in adopting IPSASs is encouraging, the momentum needs to be maintained and the take up accelerated. The IPSASB has a significant role to play in this – to develop and promote IPSASs that support high quality financial reporting in the public sector. However, the accounting profession and wider financial community has an equal, if not more significant role to play – to encourage and support those governments to enhance the transparency their financial reporting and better discharge their obligation to be accountable to their citizens.
In recent articles and speeches, Dr. Ian Ball, the IFAC Chief Executive, has noted the difference in response to scandals and failures in financial reporting by private sector entities and governments: failures in corporate reporting around the globe,including Enron, Global Crossing, Royal Ahold, HIH Ltd, WorldCom and Parmalat have resulted in a raft of regulatory and professional reforms designed to protect investors from financial reporting and audit failure, and from other forms of corporate malfeasance. “By contrast with many governments, Enron would be a model of transparency.” However, a similar response has not followed failures in financial reporting by governments such as those in:
· Argentina, which in December 2001 declared the largest sovereign debt default
in contemporary history;
· Greece, which was subject to legal action by the European Commission in 2005
for drastically under-reporting its deficit; and
· Italy, which was investigated by the European Commission in 2005 – subsequently, its 2003 and 2004 deficit figures were revised by Eurostat and showed a breach of the 3 per cent limit on budget deficits imposed by European Union rules.
(“The Need for Transparent Reporting in Government”, Capital Magazine, May 2006, and “Achieving Greater Accountability in Government through Improved Public Sector Financial Reporting”, Association Of Government Accountants- 54th Annual Professional Development Conference & Exposition, July 10 -13, 2005, Orlando, Florida)
(d) The IPSAS communication and education program
With increasing interest in, and adoption of, IPSASs so has the demand for information about IPSASs, and assistance in resolving technical implementation issues, increased. These requests cover the gamut from broad educational packages, through implementation support to detailed technical interpretations on specific issues. However, the IPSASB is not resourced to deliver such support. It has initiated certain, largely informal, activities to respond to this interest and to further promote IPSASs – for example, seminars and round table discussions in conjunction with each meeting and preparation and circulation of the IPSASB Update following each meeting. In addition, members and staff make many presentations andparticipate in many seminars in support of IPSASs. However, this is unlikely to deliver the level of support required by those adopting IPSASs.
It is then appropriate for the IPSASB to explore with other IFAC committees, member bodies, international development agencies, the academe and educational institutions and the financial reporting community at large, mechanisms to increase the broad IPSAS knowledge base and to support jurisdictions adopting IPSASs.
(e) The Technical Program
The initial stage of the standards program was established with specific limited objectives to be achieved within a short period of time. As intended, during the first stage of the standards program, a number of specific public sector issues not addressed, or not adequately addressed, by the IASs/IFRSs were identified. The IPSASB has actioned projects to respond to many of these issues - for example, exposure drafts, Invitations to Comment and Research Reports have been issued on non-exchange revenue including, taxes and transfers); accounting for the social policies of government; budget reporting; heritage assets, and disclosure of external assistance by entities which adopt the cash basis IPSAS.
However, while the IPSASs are being updated to better converge with the December 2003 versions of the equivalent IAS/IFRS, those IASs/IFRSs have themselves been further revised. The IASB has also made additional revisions to other IASs/IFRSs (not included in the IPSASB’s improvements project) and issued a number of IASs/IFRSs for which there is no IPSAS.
A number of countries and international organizations adopting accrual accounting for financial reporting by public sector entities adopt an approach which includes basing public sector requirements on private sector standards to the extent that they are appropriate for the public sector. This reflects the philosophy underpinning the IPSASB’s approach: – to review the IFRSs and adopt their requirements where they are relevant and appropriate to public sector entities and to developing standards for public sector specific issues that are not adequately or appropriately dealt with in the IFRSs.
With the increasing convergence of national private sector standards to IFRSs issued by the IASB, it is critical that the IPSASB move ahead with its IFRS convergence program as well as dealing with other public sector specific issues. This will broaden the coverage of IPSASs, provide needed guidance to many jurisdictions already implementing IPSASs, and is likely to add further impetus to the uptake of IPSASs in many jurisdictions. However, the review of IFRSs for their applicability to the public sector is a resource intensive process involving significant staff and IPSASB meeting time. While the IFRS convergence program will be of a very high priority for some IPSASB constituents, others may have a different set of priorities. Therefore, the IPSASB will need to balance the resources allocated to this program with other priorities on its work program. Conceptual framework for financial reporting by public sector entities
When first actioned, the standards setting program focussed on developing a credible core set of IPSASs. This reflects the approach of many standards setters - that is, to develop knowledge of concepts in conjunction with the development of standards before formally developing and publishing a conceptual framework.
As the IPSASs gain more prominence and influence, and as the IPSASB deals with more public sector specific issues, so the need for the IPSASB’s own explicit conceptual framework has increased. A conceptual framework is an important component in the literature of standards setters around the world, will support efficient and consistent decision making by the IPSASB and will reinforce the ongoing credibility of the IPSASB. In addition, the IPSASB has now had experience in working with the concepts already embedded in IPSASs. Therefore, work on the IPSASB framework project will be informed by, and benefit from, work on public sector specific projects.
The current IPSASs draw on concepts and definitions in the IASB framework with modifications where necessary to address public sector circumstances. The IASB is proposing changes to the concepts and definitions in its framework as part of a joint project with the FASB. The initiation of a public sector framework project is then timely. Particularly, given that many of the changes being proposed at this stage in the IASB-FASB joint project do not appear to fit well with public sector needs.
At a recent meeting,it was agreed that the IPSASB will lead a collaborative project in conjunction with a number of national standards setters and similar organizations (NSS) on the development of a conceptual framework for public sector financial reporting. A collaborative project presents the opportunity to develop a framework that is harmonized across a number of jurisdictions. It also provides the opportunity for the IPSASB to be informed by the work already undertaken at the national level in many jurisdictions and to seek resources from those national bodies to support the IPSASB project. This has favourable resource implications for the IPSASB, and the NSS themselves who might otherwise be faced with the prospect of developing conceptual frameworks in each jurisdiction which may involve duplication of effort and unnecessary and unintended differences in the national requirements.
However, collaborative projects also present significant challenges in drawing together the views of a diverse group of standard setters, in co-ordinating the work of staff of different standards setters in different parts of the world, and in establishing working procedures that ensure the project develops efficiently. These
challenges are magnified in a long term project, such as the conceptual framework, during which staff and board members are likely to change. While challenging, the prospect of an internationally harmonized onceptual framework for the public sector is a prospect that no standard setter can ignore.
Conceptual frameworks have been developed or are being developed by many national standards setters with responsibilities for the private and public sectors. These frameworks generally focus on the accrual basis of accounting and deal with: objectives of financial reporting, qualitative characteristics of financial information, elements of financial statements (assets, liabilities, revenue, expenses, and equity/net assets), recognition criteria, measurement bases, and presentation and disclosure. Some frameworks also deal with concepts of the reporting entity and the scope of financial reporting, and clarify the purpose and authority of the framework itself.
While there may be a consensus forming about the core elements of a conceptual framework for financial statements, there is a case that for public sector entities a focus on only the financial consequences of transactions and events as reflected in financial statements is insufficient. As the IPSASB develops its objectives of financial reporting for public sector entities, it will be useful to consider whether,
for example, the following are within the scope of financial reporting in the public sector, and therefore are potentially the subject of accounting standards:
· presentation of budget data as financial statements: Most governments prepare and issue as public documents, or otherwise make publicly available, their annual financial budgets. The budget documents are widely distributed and promoted. They reflect the financial characteristics of the government’s plans for the forthcoming period and form the basis of financial data used to compile the national accounts of most countries. Monitoring and reporting on budget execution is a key component of oversight of the financial dimensions of operations. Some would argue that for many external users, the budget documents are the most important financial statements issued by governments and should conform to generally accepted presentation standards.
· Presentation and explanation of non-financial performance indicators: While not capturing the full range of performance criteria relevant for profit seeking entities, a bottom line profit and loss (surplus/deficit) figure can draw together a range of important performance outcomes central to any assessment of the extent to which the entity achieved its short term objectives. However, for governments and public sector entities the achievement of service delivery and social policy objectives are equally as, if not more, important than the
achievement of financial objectives. Therefore, financial information reported about their performance, needs to be assessed in the context of the achievement of service delivery and social policy objectives. As such, it may be argued that the disclosure and explanation in financial reports of semi-financial and/or nonfinancial
information, as well as information about the financial characteristics of performance will be necessary for accountability and decision making purposes and should be considered in any public sector conceptual framework.
· reporting on long term fiscal sustainability. Many social benefit programs provide benefits to constituents over the long term. These programs are funded by revenues raised from current and future citizens in the form of taxes and government charges, and/or by transfers from other levels of government. The financial consequences of these programs and the resources to be generated in the future to fund them, are unlikely to be captured by concepts of assets, liabilities, revenues and expenses which are constructed to ensure that the
economic consequences of past transactions and events can be reported on a reliable and consistent basis in financial statements. Consequently, it can be argued that disclosure of prospective financial information is necessary to supplement the information recognized in the financial statements. Governments in some jurisdictions are already responding to this potential information need of users – accordingly whether such disclosure has a place in a public sector conceptual framework could usefully be considered by standards setters in the framework development process7.
The “Preface to International Public Sector Accounting Standards”, GBEs apply IFRSs issued by the International Accounting Standards Board (IASB) and are therefore subject to the IASB’s “Framework for Preparation and Presentation of Financial Statements” (the IASB framework). The operating/performance objectives of profit seeking entities in the private sector focus on sustainable long run profit maximization – in most cases, within operating parameters established by legislation and legal and social norms and objectives of being good corporate citizens. However, the performance objectives of GBE’s often include the
achievement of certain non-profit/social policy objectives imposed on them by governments, and their perations are subject to, and conditioned by, certain service delivery objectives. Arguably these factors may impact components of the financial reporting framework that applies to them. It will be important that the IPSASB and the IASB ensure that in the development of the Public Sector conceptual framework and the revised IASB framework there is specific consideration of whether the social policy objectives that GBE’s may be subject to will influence the objectives of financial reporting by GBE’s and/or other components of the conceptual framework that applies to them.
Standards setting is a long and slow process, especially if the standard setter adopts a transparent due process which provides the opportunity for interested parties to comment on proposed requirements during the development stage. The IPSASB
adopts such a due process, and has been well served by it – there was strong support for the due process adopted in developing exposure drafts and final IPSASs. That due process will be further strengthened and the prospects for convergence of public
sector financial reporting requirements further enhanced with the initiation of collaborative projects with a number of national standards setters and similar organizations around the world.
The IPSASB has been productive in dealing with a wide range of technical issues across all aspects of its work program priorities. However, many challenging projects remain to be completed, progressed and initiated - not least amongst them being projects on accounting for social policies of government, the public sector conceptual framework and the IFRS convergence program.
As the influence of IPSASs increases, and more countries and international organizations move to adopt IPSASs, so the demand for additional knowledge of IPSASs and guidance on specific implementation and technical issues increases. Realistically, the IPSASB’s ability to respond to this demand is limited – it was established to develop IPSASs and already faces a significant work program on that front. Developing and implementing education packages to support and promote the adoption of IPSASs, and responding to specific implementation and technical issues of IPSAS adopters presents an opportunity and challenge for the broader financial reporting community, including the accounting profession, the academe and financial reporting educators in general.
The projected strengthening of the IPSASB’s funding base in late 2007/2007 is most welcome and most encouraging. However, additional funding support is needed to sustain a full standards setting development and promotion program.
Paul Sutcliffe , August 2006