INTERNATIONAL PUBLIC SECTOR

ACCOUNTING STANDARDS

TRAINING NOTES FOR

SHIFTING FROM IFRS TO THE
ACCRUAL BASED IPSAS
Part 1 ..
By Sako Mayrick EMAC

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 International Standards
Governments have diverse financial reporting
practices
Difficult on making international comparison
At central government two main accounting systems
Micro Level Government Accounting
Individual governments organizations draw up budgets and financial
reports for managing organizations
Macro Level National Accounting
National accounts, statistical, macroeconomic financial data of the
national economy

Public Sector Accounting Standard complements

INTOSAI Standards
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International Accounting Standards
Developed by International Federation of Accountants
(IFAC) through Public Sector Committee (PSC) now known
as International Public Sector Standards Board ( IPSASB)
IFAC develops International Public Sector Accounting
Standards (IPSAS) that are based on International
Accounting Standards (IAS).
IPSAS are authoritative requirements established by IPSASB
Help to improve quality of financial reporting in the public
sector around the world.
IPSAS only pertain to financial accounts
IPSASB is more broad and intends to address
Budgeting

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 International Standards
Basis of Accounting
International Organization of Supreme Audit Institutions
(INTOSAI) Accounting Standards Framework has four
financial reporting systems
Fully Cash Accounting
Records transactions when funds are paid out of an appropriation
authority or when funds are received
Modified Cash Accounting
Recognizes transactions of cash basis during the year and the setup of
unpaid accounts and/or receivables at years end
Modified Accrual Accounting
Records expenditure when resources are received and revenues when
they are measurable and available within the accounting period or
shortly afterward
Full Accrual Accounting
Recognizes expenses as incurred, records revenues as earned, and
capitalizes fixed assets
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 Cash Vs Accrual
Represents two end on a spectrum of possible
accounting and financial reporting bases
INTOSAI requires the performance reports and
departmental reports should be based on full accrual.
The general purpose financial statements should be
based on either full accrual or modified accrual
depending on a particular governments circumstances.
The INTOSAI Accounting Standards and IPSAS are largely
comparable; both are based on the IAS

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 Need for IPSAS
Stands for International Public Sector Accounting
Standards
Accounting standards are rules and disclosure
requirements for the preparation and presentation
of financial statements
Given the increasing importance of international
harmonization of financial reporting, it seems
reasonable to expect that the role of the IPSAS will
gain significance in budgeting and financial reporting
in the public sector

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 BUDGETING AND FINANCIAL
REPORTING
Budgets are future oriented financial plans for
allocating resources among alternative uses
Financial reports retrospectively describe the results
of an organization's financial transactions and events
in terms of its financial position and performance.
In the private sector, budgets are targets rather than
plans, while budgets reflect what the organization
hopes to achieve rather than what it actually brings
about.

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 Budgets and Financial Reporting
Companies and other private organizations
are not obliged to draw up a budget even they
usually do. However, they rarely publish their
budgets
For governments, it is not only mandatory to
draw the budgets but also to publish them
Governments must allocate resources both
within the public sector and between the
public sector and the rest of the economy.
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 Accrual Based budgets
Types of appropriations system
Cash based appropriations gives the government rights to make cash payments over a
limited period of time
Commitment based appropriations gives the government authority to make commitments
and make cash payments according to these commitments without predetermined time
limits
Accrual based appropriations gives the government rights to make cash
payments over a limited period of time.
Commitment based appropriations giver the government authority to make
commitments and make cash payments according to the these commitments
without predetermined time limit.
Accrual based appropriations cover the full costs of the operations of the
government and increases in liabilities or decreases in assets. This kind of
appropriations requires special mechanism of controlling cash.
The accrual accounting does not abolish the cash based appropriations.

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 Accrual based critics
An accrual budgeting system cannot be the system for
a government the two reasons
Budgetary laws often requires the legislature to authorize
the cash payments
Accrual system is tailored to income formation: It match
revenue and costs. In public sector, however, it is
impossible to match tax revenues with production costs.
It implies that the governments have to value their assets
at market value and include them in their balance sheets.
Local authorities, for example will have to value their
roads, bridges, tunnels at market value, even though
market values for these assets do not exist. Making an
inventory of these assets as well as the valuation is a costly
process.
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 Accrual basis - issues
There is a wide spectrum of possible accounting bases ranging from
cash to full accrual.
Cash based accounting measures the flow of cash resources and
recognizes transactions and events only when cash is received or
paid.
Accrual accounting recognizes stocks and flows. Stocks refer to the
holding of assets and liabilities. Assets can be financial ( such as
cash), physical (such as property), or intangible ( such as copyrights).
The difference between the total assets and total value of liabilities
is the net worth
Flow reflect the creation, transformation, exchange, or transfer of
economic value and , thus, either an increase or decrease in net -
worth. Revenues increase net-worth whereas expenses decreases
net-worth.
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 Accrual basis - issues
In practice, most countries system are mixture of both extremes.
Insofar as accrual accounting system are used, they differ across
countries.
A cash based system recognizes investment at the date of spending
whereas an accrual based system spreads the costs of investment
over time ( in the form of depreciation of assets)
The fact that a growing part of public sector applied a
cash/commitment system. And the central government applied two
different accounting system was confusing and therefore, it has
been criticized.
The IPSAS requires items to be valued at historic cost ( the cost as at
the date an item is acquired). However, where an asset is acquired
at no or nominal cost, the IPSAS determine its cost as its fair value (
the amount for which an asset could be exchanged or a liability
settled) Sako Mayrick 12
 Goals of shifting to IPSAS
Complementing performance management
Facilitating better financial management;
Improving understanding of program costs;
Expanding and improving information for
resource allocation;
Improving financial reporting;
Facilitating improved asset and cash
management.
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 Main statements
Operating statement reflecting revenues and
expenses;
A statement of assets and liabilities of the
entity;
A cash flow statement related to operating,
investment, and financing activities
A statement presenting additional information
of a disaggregated basis

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 Variation in implementation
Some countries have designed and implemented the
accrual system.
Some countries have valued assets at their historic costs
Some countries have valued them at historic cost less
accumulated depreciation
Other countries have revalued their fixed assets periodically.
The other category apply a charge for the use of
capital, whereas other countries do NOT apply any capital
charge
The last category account differently for the consumption
of fixed assets by applying a liner depreciation method or
a free one.
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 ACCOUNTING BASICS

What is accounting?
A system of recording and summarizing business
and financial transactions, and
Analyzing, verifying, and reporting the results
BUSINESS AND FINANCIAL TRANSACTIONS
(ECONOMIC EVENT)

RECORD THAT EVENT

(RECOGNITION AND MEASUREMENT)

REPORT THE EVENT

(DISCLOSURE)

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 OUTLINE OF IPSAS
OBJECTIVE
BUSINESS AND
FINANCIAL SCOPE
TRANSACTIONS
(ECONOMIC EVENT) DEFINITIONS

RECOGNITION
RECORD THAT MEASUREMENT
EVENT
(RECOGNITION AND DERECOGNITION
MEASUREMENT)

REPORT THAT EVENT PRESENTATION AND DISCLOSURE

(DISCLOSURE)

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 BASIS OF IPSAS
Frameworks for IPSAS
Key IPSAS
Practice Statement

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 IPSAS OUTLINE
Qualitative characteristics of financial
information
Fundamental
Relevant
Faithfull representation
Enhancing
Comparability
Verifiability
Timelines
Understandability
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 Structure of IPSAS
Rules/application guidance
IPSAS Rules (Exceptions) Rules (interpretation)

Principles
Framework
Concepts

IPSAS
Application guidance to give effect to the principle

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GENERAL IMPLICATION OF IPSAS
ADOPTION
Currently the organization is using IFRSs;
Does not take into account all elements of IPSAS
basis
It shifts from being a Government Business
Enterprise
Difficult for comparison purposes
The entire government (s) are adopting accrual based
IPSAS
Prevent consolidation

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 Are we GBE?
IPSASs are high quality global financial reporting
standards for application by public sector entities other
than Government Business Enterprises (GBEs)
The IPSASs are designed to apply to the general purpose
financial statements of all public sector entities. Public
sector entities include national governments, regional
governments (for
example, state, provincial, territorial), local governments
(for example, city, town) and their component entities
(for
example, departments, agencies, boards, commissions),
unless otherwise stated.
The Standards do not apply to GBEs. GBEs apply
International Financial Reporting Standards (IFRSs) which
are issued by the International
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Accounting Standards 22
Board (IASB).
 Are we GBE?
The IPSASB develops IPSASs which apply to the
accrual basis of accounting and IPSASs which
apply to the cash basis of accounting.
IPSASs set out recognition, measurement,
presentation and disclosure requirements
dealing with transactions and events in general
purpose financial statements.

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 Are we GBE?
GBEs include both trading enterprises, such as utilities, and
financial enterprises, such as financial institutions. GBEs are, in
substance, no different from entities conducting similar activities in
the private sector.
GBEs generally operate to make a profit, although some may have
limited community service obligations under which they are required
to provide some individuals and organizations in the community with
goods and services at either no charge or a significantly reduced
charge.
IPSAS 6 provides guidance on determining whether control exists
for financial reporting purposes, and should be referred to in
determining whether a GBE is controlled by another public sector
entity

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 Are we GBE?
Government Business Enterprise means an entity that has
all the following characteristics:
(a) Is an entity with the power to contract in its own
name;
(b) Has been assigned the financial and operational
authority to carry on a business;
(c) Sells goods and services, in the normal course of its
business, to other entities at a profit or full cost recovery;
(d) Is not reliant on continuing government funding to be
a going concern (other than purchases of outputs at arms
length); and
(e) Is controlled by a public sector entity.
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What is our answer?

Yes

No

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 Benefits of adopting IPSAS
It standardize the definitions, measurement criteria and
reporting requirements towards providing more meaningful
information for decision-makers
MTEF and reports become more meaningful as increased
transparency provided a basis for assessment of whether
resources are being used effectively and efficiently
It supports efficient internal controls and result based
management
Helps to benchmark with similar institutions and
forecasting future flow of resources in the organization
Assets and liabilities that were previously un-quantified or
under-reported will now be reflected in the financial
statements

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 Benefits of adopting IPSAS

Accrual accounting means that the Organization for the first time will recognize
past, present and future obligations of Organizational resources. There is
nothing new here. These are not new obligations but under the IFRSs they were
largely quantified, rendering them invisible and or under reported
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 What and why IPSAS
IPSAS are set of independently developed, high
quality, global accounting standards that requires
accounting on full accruals basis (i.e. all assets and
liabilities are recorded
IPSAS are issued by international Standards Board of
the International Federation of Accountants (IFAC)
IPSAS are tailored for the public sector and its use is
considered best practice for the public sector entities
(governments, governmental business entities, non-
governmental organizations, and international
organizations)

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Modified Cash vs. Accrual Accounting
Example: Expense recognition Contracting services
At time of signing
a contract
Modified Cash (Current) Y1 Y2 Y3 Y4 Y5 Y6
Obligation/Expense Shs. 12,000 0.00 0.00 0.00 0.00 0.00

Period of Performance

Economic events being recognized is the signing of contract not the performance

Accrual Basis (IPSAS) Y1 Y2 Y3 Y4 Y5 Y6

Obligation/Expense Shs. 2,000 2,000 2,000 2,000 2,000 2,000

Period of Performance

Costs are matched to the period of the performance

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 Modified Cash vs. Accrual Accounting
Liability Recognition: Employee Termination Benefits

Modified Cash (Current) Y1 Y2 Y3 Y4 Y5 Y6

Employee hired for 6 years 0.00 0.00 0.00 0.00 0.00 12,000.00

Period of Performance

Cost is recognized upon separation, not as the employee earns the benefit

Accrual Basis (IPSAS) Y1 Y2 Y3 Y4 Y5 Y6

Employee is hired for 6 years 2,000 2,000 2,000 2,000 2,000 2,000
Period of Performance

Costs is matched to employee services

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 The way forward
Conduct the GAP analysis between the IFRS standard and IPSAS
Preparing opening statement of Financial position
Preparing the comparative financial information for the last year
Preparing baseline accounting policies
Valuation of current years financial transactions for significant
changes( Recommended for valuation model or cost model)
Proper definition of controlled entities and non controlled entities
for consolidation purposes (General review of each entity)
Detailed schedule for employee benefits
Schedules for first time adoption line by line
Rehearsing on format of FS

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 Gap Analysis
Areas with impact
Employee
Benefits
(termination,
annual leave)

Expense Plant, Property

and Equipment
Recognition (Capitalization/D
(Obligations) epreciation)

Unexpended
IPSAS Revenue
Advances (Quotas/Pledge
(travel/account s/specific
able advances) agreements)

Financial
Statements
Investment
(Cash flow,
disclosures, (Fair Value)
budget reports)
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 KEY IPSAS

IPSAS 1/ IAS 1 Presentation of Financial Statements

IPSAS 2/IAS 7 - Cash Flow Statements
IPSAS 3/IAS 3 - Accounting Policies, Changes in Accounting Estimates and Errors
IPSAS 4/IAS 21 The Effects of Changes in Foreign Exchange Rates
IPSAS 5/IAS 23 Borrowing Costs
IPSAS 6/IAS 27 Consolidated and Separate Financial Statements
IPSAS 7/IAS 28 Investments in Associates
IPSAS 8/IAS 31 Interest in Joint Ventures
IPSAS 9/IAS 18 Revenue from Exchange Transactions
IPSAS 10/IAS 29 Financial Reporting in Hyperinflationary Economies
IPSAS 11/IAS 11 - Construction Contracts
IPSAS 12/IAS 2 Inventories
IPSAS 13/IAS 17 Leases
IPSAS 14/IAS 10 Events After the Reporting Date
IPSAS 15/ - Financial Instruments Disclosure and Presentation, superseded by IPSAS 28 IPSAS 30
IPSAS 16 /IAS 40 Investment Property
IPSAS 17 /IAS 16 - Property, Plant and Equipment

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 KEY IPSAS
IPSAS 17 /IAS 16 - Property, Plant and Equipment
IPSAS 18/IAS 14 Segment Reporting
IPSAS 19 / IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IPSAS 20/ IAS 24 Related Party Disclosures
IPSAS 21 / IAS 36 Impairment of Non Cash Generating Assets
IPSAS 22 / IAS NA - Disclosure of Financial Information about the General
Government Sector
IPSAS 23/IAS NA - Revenue from Non Exchange Transactions (Taxes and Transfers)
IPSAS 24 / IAS NA - Presentation of Budget Information in Financial Statements
IPSAS 25 / IAS 19 - Employee Benefits
IPSAS 26/ IAS 36 - Impairment of Cash Generating Assets
IPSAS 27/IAS 41 Agriculture
IPSAS 28/ IAS 32 Financial Instruments: Presentation
IPSAS 29/ IAS 39 Financial Instruments: Recognition and Measurement
IPSAS 30 / IFRS 7 Financial Instruments : Disclosures
IPSAS 31/ IAS 38 -- Intangible Assets
IPSAS 32 /IFRIC 12 Service Concession Arrangement: Grantor
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