The Standards Programme of IFAC’s Public Sector Committee
This article explains the standard-setting programme of the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC). It outlines the objectives of the Public Sector Standards Program and describes the due process adopted by the PSC. It also identifies achievements to date and examines major features of the PSC’s current and future work programme.
IFAC and its Public Sector Committee
The Public Sector Committee (PSC) is a standing committee of the Council of the International Federation of Accountants (IFAC), itself a nonprofit, non-governmental, non-political, international organization of accountancy bodies. At present, IFAC has representation from 156 member bodies in 114 countries. IFAC’s mission is the development and enhancement of the accounting profession to enable it to provide services of consistently high quality in the public interest. The PSC was established in late 1986 to address, on a co-ordinated worldwide basis, the needs of those involved in public sector financial management, reporting, accounting and auditing. The PSC comprises 12 members drawn from IFAC member bodies. They are appointed
because of their knowledge of, and experience in, public sector financial reporting, financial management or audit. PSC members are supported by technical advisers drawn from the accounting profession in their own countries. Members of the multilateral lending agencies and certain other regional and international organizations are observers on the PSC. The PSC’s current activities are focused on the development of International Public Sector. Accounting Standards (IPSASs) for financial reporting by governments and other public sector entities. This programme was established in late 1996 in response to concerns about the quality of financial reporting by many governments and their agencies. The first stage of the program, from late 1996 to the end of 2001, was funded by IFAC, the World Bank, the Asian Development Bank, the United Nations Development Program and the International Monetary Fund (IMF). These organizations are also providing some of the funding for the ongoing standard-setting programme from 2002 to 2005.
The Standards Program
Governments 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 most significant entities within their domestic economies. Their demand for, and use of, resources can have a major influence on the social and economic well-being of members of their community and the success of their economies. However, the quality of government financial information reported to external users and to managers in many jurisdictions 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 also increasingly being acknowledged. For example, it has been argued that there is a ‘strong causal relationship from good governance to better development outcomes such as higher per capita incomes, lower infant mortality, and higher literacy’ (Kaufmann et al., 1999). In addition, the IMF Manual on Fiscal Transparency (2000) stated that there is ‘a clear consensus thatgood governance is of central importance to achieving macro-economic stability and highquality growth and that fiscal transparency is a key aspect of good governance’ and Camdessus (1998) noted that ‘the Asian crisis has demonstrated in a very dramatic way how the lack of transparency about underlying economic and financial conditions can feed market uncertainty and trigger large capital outflows that can, in turn, threaten macroeconomic stability. Conversely, progress toward greater transparency can radically alter the very terms of the public debate’. Holding governments and their agencies accountable is a key element to good governance in the public sector, and transparency in financial reporting (financial transparency) is one (though by no means the only) necessary condition for the discharge of accountability. The PSC is of the view that key components of any governance system are: the preparation of financial reports in accordance with well-understood and generally accepted accounting standards developed in the interests of the users of the financial statements of public sector entities; and an 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. In these circumstances, the development and promotion of IPSASs will provide a well-understood and appropriate minimum benchmark for the quality of financial reporting by governments and other public sector entities. For users of the financial statements of governments and their agencies,
and those concerned about financial transparency, the benefits flowing from the development and maintenance of IPSASs will include: the establishment of appropriate financial reporting practices; consistency in application of those practices, both within a country/jurisdiction from period to period and between countries for the same period; and the potential harmonization of financial reporting between economic and accounting bases. Given the poor quality of financial information currently available to public sector managers in many jurisdictions, it is likely that internal users will also benefit from the development and application of IPSASs. The adoption of IPSASs will also provide for greater efficiency and effectiveness in the audit and analysis of governmental financial reports as common rules are adopted around the world for the financial reporting of similar transactions and events. In addition, financial reporting expertise, so often a scarce resource in the public sector, will 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.
International Public Sector Standards
In the private sector, the International Accounting Standards Board (IASB) issues international accounting standards for application by business enterprises. These standards support the efficiency of both international and domestic capital markets. They are a necessary component of recent initiatives to strengthen financial transparency and enhance corporate governance. (The IASB was established in 2001 and replaces the former International Accounting Standards Committee [IASC]. It issues International Financial Reporting
Standards [IFRSs]. The International Accounting Standards [IASs] issued by the IASC continue in force until they are amended or withdrawn by the IASB. At the time of writing, no IFRSs have been issued.) International Public Sector Accounting Standards (IPSASs) issued by the PSC explain that government business enterprises should apply the same international accounting standards as private sector business enterprises. The development and maintenance of standards that reflect internationally-agreed minimum benchmarks of best practice in financial reporting by governments and nonbusiness public sector entities can also support
governments concerned with enhancing the quality and consistency of financial reporting by public sector entities within their jurisdiction. Such standards will provide governments with a cost-effective means of ensuring that the financial reports of public sector entities within their jurisdiction include financial information of sufficient quality to discharge accountability obligations to users and to support informed
decision-making by a wide range of external users. In this context, international public sector accounting standards are equally as important a component of initiatives to strengthen government financial transparency and governance as their private sector counterparts are to the private economy. The PSC is well credentialled to perform the role of international public sector standard-setter. This is because it has been established to operate in the public interest, comprises a membership mix which possesses appropriate technical
expertise and reflects a broad geographical spread, and adopts a formal due process whichPUBLIC MONEY & MANAGEMENT JANUARY 2003 31 © CIPFA, 2003 provides stakeholders with the opportunity to contribute to the IPSAS development process. Exposure Drafts of each proposed IPSAS are published and widely distributed free of charge. They can also be downloaded from the IFAC website at www.ifac.org. The PSC process also provides the opportunity for national standardssetters, government agencies, and other key stakeholders to be directly involved in the IPSAS development process prior to the exposure draft stage. As a Committee of IFAC with the
involvement of observers from international organizations such as the Asian Development Bank, European Commission, IASB, IMF, INTOSAI, OECD, UN Development Program and World Bank, the PSC possess sufficient
authority for the development and implementation of pronouncements.
Approach and Strategy
The PSC is of the view that disclosure of financial information about assets, liabilities (including non-debt liabilities), costs of services, taxation and other revenues and cost recoveries is necessary to adequately discharge accountability obligations and meet higher levels of transparency in financial reporting. It is also of the view that the development of accrual-based external financial reports often means that managers are
provided with better information about the resources they control, changes in those resources and the costs and cost recoveries related to the provision of particular services. This supports the more efficient and effective management of resources, and is consistent with objectives of promoting and protecting social and economic development. The establishment and enforcement of international accrual-based financial reporting standards will enhance the quality and comparability of financial reports of governments and their agencies.
The PSC decided that the most effective manner of putting in place an appropriate core set of international public sector accounting standards for application when the accrual basis was adopted was to use IASs as the basis for the development of those standards. The IASs deal with many issues that arise in financial reporting
by governments and their agencies, and this approach enables the PSC to draw on and, where appropriate, to be consistent with existing authoritative international guidance that is already in place and applied by many entities in many economies.
Alternative approaches, including starting from first principles or adopting the requirements of one country (or a mix of national requirements), were unlikely to deliver as internally consistent and credible a set of standards within reasonable time and cost parameters. This approach allows the PSC to build on the work of the IASC/IASB and represents an efficient use of the PSC’s resources. It avoids the need to ‘reinvent the wheel’ for the public sector, and results in the same accounting for the same transactions and events in the public and private sectors, where appropriate. Governments often compete with each other and with private sector entities when they raise debt funds in the capital market. In some cases,
central borrowing authorities and individual government business and non-business agencies also raise debt funds in the market. The Bank for International Settlements (BIS) Quarterly Review (February 2000) calculated the level of public sector debt in the international debt securities markets as at the end of December 1999 as 27.3% (US $1,428.0 billion) of the total net issuance of international debt securities. The adoption of
the same underlying principles of financial reporting for public and private sector entities that compete for scarce capital is an attractive notion. It facilitates more efficient analysis as the same accounting rules are applied for the same transactions, enables the markets to better understand and compare the relative financial positions and strengths of the different entities, and leads to more accurate pricing of debt on
national and international markets. However, caution is necessary in contemplating the adoption of IASs for
governments and other public sector entities. The IASs are developed for business enterprises and the operating environments and objectives of public and private sector entities differ in many respects—for example, private sector entities operate in a commercial environment with, in most cases, the objective of generating a profit for owners. The commercial ‘bottom-line’ profit focus of private sector financial reports is not appropriate for the non-trading government sector. However, there are many similarities in the broad characteristics of the operation of entities in the public and private sectors—for example, in both sectors entities raise funds to acquire resources which are then distributed or consumed in the provision of goods and services, and managers are expected to operate efficiently and effectively in the achievement of the entity’s
objectives. The broad objectives of financial reporting are also similar in each sector: namely, to provide information which discharges accountability obligations and meets users’ information needs.
The approach adopted by the PSC is to develop IPSASs based on the requirements of IASs to the extent that they are applicable to, and appropriate for, the public sector. Where necessary, the IASs are adapted to recognize that there are differences in the operating environments of public and private sector entities and that public sector entities do not operate primarily to generate profits or positive cash flows. In addition, as part of this first stage of the programme, the PSC has identified public sector-specific issues that are not dealt with by the IASs.
Standards Program Achievements: 1996–2002
The objectives of the initial stage of the PSC’s programme were to develop, by the end of 2001, a Background Paper providing guidance on issues to be confronted in financial reporting by public sector entities and approaches to their resolution; and a set of IPSASs based on IASs promulgated by the IASC and on issue at August 1997.
The Background Paper
Study 11 Governmental Financial Reporting: Accounting Issues and Practices, was issued in May 2000. The study builds on the work previously undertaken by the PSC on the information needs of users and the objectives of financial reporting. It outlines common bases of accounting currently used by governments:
cash accounting (including modified cash accounting) and accrual accounting (including modified accrual accounting). In addition, it identifies issues to be resolved in preparing financial reports under differing bases of accounting, and considers the extent to which financial reports prepared under each basis satisfy the objectives of financial reporting. The study also considers the objectives of the System of National Accounts (SNA) and the IMF’s Government Finance Statistics (GFS). It notes that while the frameworks adopted for SNA, GFS and financial reporting are similar, they focus on different reporting entities and their objectives differ.
Development of IPSASs
This stage of the standards programme includes the development of IPSASs for financial reporting under both the cash basis of accounting and the accrual basis of accounting. Initially, the programme also encompassed the development of standards for the modified cash and modified accrual bases. However, many PSC constituents argued strongly and convincingly that it was not appropriate to develop standards for the modified cash and modified accrual bases. They noted that the nature of the ‘modifications’ differed from jurisdiction to jurisdiction and a general conceptual basis for the modified cash or the modified accrual basis did not exist. They argued that the PSC should establish standards for the cash and accrual basis and acknowledge that jurisdictions may take differing ‘paths’ in migrating from the cash to the accrual basis. After issuing an Invitation to Comment on this matter in 1999, and receiving an overwhelming response in support of developing IPSASs for only the cash and accrual bases, the PSC refocused the programme on developing standards for only these (the cash and accrual) bases. As the work on the standards programme has developed, it has become
increasingly clearer that the PSC has two broad constituencies that it needs to respond to:
- Countries that currently report on the cash, or a near-cash, basis and are concerned that their cash basis financial reports are currently not prepared on an appropriate or consistent basis. This group of constituents emphasizes that it is important that the PSC develop and promote a robust cash basis IPSAS. In many cases, they also encouraged the PSC to develop guidance on the transition to the accrual basis.
- Countries that currently report on the accrual or modified accrual basis, or are currently committed to (or are intending to) implement an accrual basis of financial reporting. This group of constituents has encouraged the PSC to continue with its accrual IPSAS programme and deal with the public sectorspecific issues that are not dealt with by the IASs/IFRSs.
The Cash Basis
Many governments and other public sector entities issue financial reports prepared under the cash basis of accounting. However, the basis of preparation of such reports, the activities encompassed by them and information disclosed can vary from one entity/jurisdiction to another and within the same jurisdiction from one reporting period to the next. A single comprehensive IPSAS Financial Reporting under the Cash Basis of Accounting was approved by the PSC at its meeting in November of 2002. The IPSAS is based on Exposure Draft 9 (ED 9) issued in late 2000, but has been amended to respond to issues raised by respondents to the Exposure Draft and in the extended consultation the PSC undertook during 2001. In particular, it responds to concerns that ED 9 included excessive detailed requirements, proposed a different reporting structure than was currently adopted and understood by most countries that reported on a cash or modified cash basis, and did not provide sufficient encouragement to those governments that supplemented their cash basis financial statements with the disclosure of information about borrowings and other liabilities, and somenon-cash assets. The cash basis IPSAS requires the preparation of a statement of cash receipts and payments which recognizes all cash receipts, payments and balances that the entity controls (including amounts controlled indirectly through ‘off-budget’ controlled entities). It also requires the disclosure of information about amounts settled on the government’s behalf by third parties. It adopts a principal based approach, which allows more flexibility in the reporting format than was proposed in ED 9. This will enable entities to report cash receipts, sbursements and balances in a format that is relevant to, and readily understood by, their constituents. The IPSAS also includes a section which identifies additional accounting policies and disclosures that the entity is encouraged (but not required) to adopt. In particular, it encourages note disclosure of additional information about such matters as non-cash assets, liabilities and whether or not budgeted amounts have been exceeded.
Compliance with this IPSAS will ensure that cash basis financial reports are prepared on a consistent, appropriate and well-understood basis. This will facilitate a better understanding of the cash position of governments and changes in that position. Compliance with this IPSAS will also enhance comparability with the entity’s own financial statements of previous periods and with the financial statements of other entities. The Accrual Basis The first stage of the standards programme is now substantially complete. Twenty IPSASs dealing with financial reporting on the accrual basis of accounting have been published and the PSC is currently reparing an exposure draft on Impairment of Assets for issue in 2003. A full listing of the IPSASs appears
in the bibliography at the end of this article. In August 1997, when the standards development stage of the standards programme became active, 22 IASs had been issued. IASs dealing with business combinations and employee entitlements are the subject of ongoing review by the IASB. The PSC will consider their relevance and priority to the public sector when the IASB’s review is completed. Transitional Guidance—Moving from the Cash Basis to the Accrual Basis Many of the PSC’s constituents, including some currently reporting on a cash basis, have expressed support for the application of the accrual basis of accounting to governmental financial reporting. This support is based on the view that accrual information includes, supplements and enhances the cash information currently provided, and benefits both internal and external users. Many of those constituents also sought guidance from the PSC on the process of transition from the cash to accrual basis. Study 14, Transition to the Accrual Basis of Accounting—Guidance for Public Sector Entities was issued in April 2002. The study identifies key issues to be addressed and alternative approaches that can be adopted in implementing the accrual basis of accounting in an efficient and effective manner in the public sector. This is a ‘living document’ and will be updated periodically as further IPSASs are issued and additional implementation issues and experiences are identified.
The Standard-Setting Work Programme: 2002–2005
During the first stage of the standards programme, the PSC identified a number of public sector specific issues not addressed, or not adequately addressed, by IASs. These issues are identified below. They, together with completion of outstanding projects from the first stage of the standards programme and communication and promotion of the availability of IPSASs, will form the basis of the PSC’s work programme for the period 2002 to 2005.
To be effective over the long term, accounting standards cannot be static documents—they need to respond to the 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 and 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 ‘care and maintenance’ of the existing body of standards, and the need to develop new standards to deal with additional issues not addressed by the existing body of authoritative literature, will shape the long-term standard-setting work programme of the PSC.
The PSC and many of its constituents have recognized the need to develop a conceptual framework for financial reporting by public sector entities to explicitly identify the underlying concepts adopted in the undardsetting process. Such a framework will assist the standard-setter in developing consistent and relevant standards and provide broad guidance to preparers and auditors on the resolution of specific issues not yet the subject of specific standards. Given its immediate heavy work programme, the PSC will need to deal with conceptual issues on a case-by-case basis as they relate to specific issues and projects on that programme. It is also exploring whether it can play a useful role as a conduit to coordinate work already being undertaken by governments and government agencies.
Public Sector-Specific Issues not Dealt with in IASs
Taxes and other non-reciprocal (non-exchange) revenue:
IPSAS 9 Revenue from Exchange Transactions is based on IAS 18 Revenue. Like IAS 18, IPSAS 9 is restricted in scope to revenue generated through exchange transactions. However, taxes and other forms of non-reciprocal (nonexchange) revenue represent the major form of revenues for most governments. The PSC has identified the development of guidance on the accounting treatments for tax revenues and other non-reciprocal (non-exchange) revenues as a priority issue and has established a steering committee to work on this project. The steering committee has met twice and it is anticipated that the PSC will issue an Invitation to Comment in 2003 and an exposure draft and IPSAS in 2004 and 2005.
Provisions Arising from Social Policy Initiatives
IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets was issued in 2002. It is based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37 was developed in an exchange environment and does not address issues related to whether a government’s commitment to social policy programmes, such as health, education and welfare, gives rise to obligations that should be recognized in financial statements, and if so, at what point should they be recognized and how should they be measured. IPSAS 19 excludes provisions that arise from social policy initiatives where the government receives no, or only nominal, consideration directly in return from the recipient. The PSC has established a steering committee to work on this project. The steering committee has also met twice and the PSC is working to a timetable that will see an Invitation to Comment in mid 2003 and an exposure draft and IPSAS in 2004 and 2005.
Most, but not all, governments issue financial budgets at least annually: usually, but not exclusively, prepared on a cash or near-cash basis. The budget documents are widely distributed, and are used for analysis of the government’s plans and their consequences for the economy. In many respects, and for many users, they are the most important financial statements issued by governments. They are central to ensuring transparency of the government’s financial intentions.
The core IPSASs, including those released to date, are concerned with the presentation of general-purpose financial information. However, they do not address the presentation of budgetary/ forecast financial information, nor do they require the disclosure of information that enables users to determine whether actual financial results are broadly consistent with previously issued budgets or forecasts. Given the widespread practice in the public sector of reporting budgetary information, a strong case can be made that there is a need for standards on at least minimum requirements for budget reporting. Such requirements could be directed at enhancing the comparability of budget reports over time and between governments (or in enabling users to identify the major sources and effects of differences) and in comparing the budget with historical financial reports encompassing the budget period. The PSC is aware that there is a wide range of quite different views on the range and type of issues that should be addressed by an IPSAS on budget reporting—from budget presentation, through budget execution to budget formulation. In 2003, the PSC will consider a research report which makes recommendations on the budget reporting issues that should be addressed by an IPSAS.
Harmonization of IPSASs with GFS and System of National Accounts
The IMF published the second edition of its Government Finance Statistics Manual to harmonize with the 1993 System of National Accounts in 2001. While the revised GFS adopts an accrual approach, there are differences between the treatment of certain transactions and events in the GFS and in IPSASs. These two systems of reporting support different uses, and while much of the information required for their different uses is the same, some of their information needs may differ. In 2003, the PSC plans to action a project to examine whether differences in the data generated by each system are justified by the different objectives of those systems, and identify a process to eliminate or reduce any unnecessary or unintended divergences. It is anticipated that the IMF will participate strongly in this project.
Non-Financial Performance Reporting
IPSAS 1 Presentation of Financial Statements, IPSAS 2 Cash Flow Statements, and Exposure Draft 9 Financial Reporting Under the Cash Basis of Accounting contain requirements (or proposed requirements) for the presentation of financial information under the cash and accrual bases of accounting. However, there is little coverage inthe standards of semi-financial or non-financial performance reporting.
Financial information is only a subset of the information necessary to allow an adequate assessment of the performance of most public sector entities. Governments and their agencies are required to achieve service-delivery and social and economic policy objectives. The performance of governments, and the financial information reported about that performance, needs to be assessed in the context of the achievement of those service-delivery and policy objectives. As such, the disclosure of semi-financial or nonfinancial information, as well as information about the financial characteristics of performance, will be necessary for accountability and decisionmaking purposes. In some jurisdictions, requirements/guidance on non-financial performance indicators is in place—for example, disclosures about ‘service efforts and accomplishments’ are encouraged by the Governmental Accounting Standards Board’s standards in the USA and ‘statements of service performance’ are published by public sector organizations in New Zealand. At the international level, there is a need to develop guidance to ensure that the linkages between financial information (for example costs of services) and non-financial information (for example nature, volume and quality of services) are recognized.
Public/Private Sector Arrangements
Accounting for asset construction and financing arrangements between the private and public sectors has raised a number of controversial accounting issues in countries such as Australia, Canada and the UK. The PSC could usefully draw on the experiences in these jurisdictions and develop requirements for the accounting treatment of these arrangements. While this project would draw heavily on a number of existing Standards such as IPSAS 13 Leases and IPSAS 8 Financial Reporting of Interests in Joint Ventures, it is likely to be of sufficient importance to warrant its own standard.
Measurement of Heritage Assets
In the process of developing IPSAS 17 Property, Plant and Equipment, the PSC acknowledged the difficulty that public sector entities would face in reliably measuring certain types of heritage assets.
Respondents to the ED that dealt with this issue (ED 14 Property, Plant and Equipment) also emphasized the practical difficulties inherent in recognizing and reliably measuring heritage assets. IPSAS 17 neither requires nor precludes the recognition of heritage assets. While the PSC is of the view that, in principle, all assets, including heritage assets, should be recognized in the financial statements, it acknowledges that more work needs to be undertaken in determining the measurement basis and recognition criteria that should be applied to heritage assets.
Accounting for Development Assistance
Constituents from the donor community, and the multilateral development banks, have expressed to the PSC their concern that recipients of donor funds were often subject to a wide range of quite different reporting requirements in discharging their accountability obligations to the providers of those funds. They requested that the PSC explore the potential for harmonization of financial reporting in this area. The PSC intends to develop this project in two phases. The first, dealing with the disclosures necessary when the cash basis of accounting is adopted, will be actioned early in 2003. It will link to the IPSAS on financial reporting under the cash basis agreed by the PSC in November 2002. The second phase will deal with accounting under the accrual basis, and will be developed at a later stage to take account of the work currently being undertaken by the steering committee on non-reciprocal (non-exchange) revenues.
IASs Developed Since 31 August 1997
The objective established for the first stage of the standards programme included the preparation of IPSASs based on IASs on issue at 31 August 1997, to the extent that the requirements of those IASs were appropriate for the public sector. However, there are a number of IASs that have been developed since August 1997 and which the PSC is not currently dealing with.
The PSC has determined that, while monitoring the activities of the IASB remains a high priority, developing IPSASs based on these IASs should have a lesser priority than dealing with public sector-specific issues. In making this assessment, the PSC noted that its constituents have identified several urgent public sector specific issues that need to be addressed, and the new IASB may seek to review at least some of these standards in the short term.
Future Operating Processes of the PSC
To strengthen its due process, to provide greater opportunity for key constituents to be directly involved in the development of Exposure Drafts and in other key stages of the IPSAS development process, and to increase the transparency of its decision-making process, the PSC has made, or is in the process of making, the following changes to its operating processes:
•Reinvigorating the Consultative Group. The Consultative Group will conduct its business primarily by electronic means, but the PSC will meet with it if the Group wishes.
•Using steering committees which may comprise non-PSC members to assist in the development stage of certain projects. The steering committees provide a mechanism for the PSC to broaden its experience and expertise and
involve key constituents at an early stage of the IPSAS development process.
•Holding its meetings in public (interested members of the public will be able to observe PSC meetings, but they will not be allowed to participate, unless specifically invited to do so).
•Translating final IPSASs into a number of key languages.
by Paul Sutcliffe