1: The external reporting framework

PUBLIC SECTOR FINANCIAL REPORTING

THE EXTERNAL REPORTING FRAMEWORK

SOLUTIONS 1

Updated December 2022

Valid for exams from June 2023 to March 2024

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 Public Sector Financial Reporting

First published 2016

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 1: The external reporting framework

Table of contents
Exercise Solution 1.1 ................................................................. 4
Exercise Solution 1.2 ................................................................. 5
Exercise Solution 1.3 ................................................................. 6
Exercise Solution 1.4 ................................................................. 8
Exercise Solution 1.5 ............................................................... 10
Exercise Solution 1.6 ............................................................... 11
Exercise Solution 1.7 ............................................................... 12
Exercise Solution 1.8 ............................................................... 13
Exercise Solution 1.9 ............................................................... 14
Exercise Solution 1.10 ............................................................. 15

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 Public Sector Financial Reporting

Exercise Solution 1.1

Identifying public sector organisations
Your answer will vary depending on what country you live in.
Possible sectors might include:

 Local government (e.g. municipal councils)

 Health (e.g. hospitals and clinics)
 Central government (Departments/ministries and agencies)
 Education (Nurseries, schools, colleges and universities)
 Emergency services (Police and fire authorities).

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 1: The external reporting framework

Exercise Solution 1.2

Defining a public sector organisation

Note that answers to this question will vary depending on the
countries/organisations selected in Exercise 1.1. Possible answers
include the following:
(a) Public sector organisations tend to share these common
characteristics:

 Non-profit making.

 Provide services under statute (i.e. law) and may provide

other services that are non-statutory as well.

 Exist for the common wealth – i.e. the common good of the
citizens that it serves.

 Funded at least in part from taxation.

 Where charging for services occurs, this may only be done

to recover costs or to ensure a minimum level is reserved
for investment.

 Work co-operatively with each other to deliver services for

a locality. Public sector organisations may work together to
deliver services.
(b) Financial reporting tends to focus on:

 Demonstrating that public money has been spent wisely and in

accordance with the law and the objectives for that entity.

 Reporting financial performance on services delivered.

 Showing separately income and expenditure and activity

associated with different services. This could include
breaking down services by those covered under statute and
those that are non-statutory.

 Grant funded activities which may have additional reporting

requirements beyond those needed for the annual accounts
(often imposed by the grant giving body).

 Partnership working will require specific financial reporting

requirements. Partners will want to know their comparative
share of funding and expenditure and what the results of
their work have achieved. Establishing partnership
arrangements may also lead to specific reporting
requirements.

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 Public Sector Financial Reporting

Exercise Solution 1.3

Objectives of the public and private sectors

Private sector organisations
Private sector organisations are ultimately concerned with
generating a return to shareholders through increasing profit and net
worth.
Although the private sector may opt to operate at a loss for a period
of time, this is normally part of a longer term plan to increase
market share and therefore ultimately increase the return that
shareholders receive.
The objectives of private sector organisations influence the form and
content of the financial statements. Revenue, gross profit, net profit
before and after tax are key lines in the income statement.
Additionally, earnings per share, a key performance indicator for
private sector companies is shown on the face of the income
statement so that shareholders can see how the organisation is
performing.
Public sector organisations
Public sector organisations in contrast do not operate to generate
profit. In some instances a surplus may be returned on some
activities but this is usually used to invest further in service delivery
or to subsidise other activities. Public sector organisations may have
objectives imposed upon them through statute (e.g. housing the
homeless or working in partnership).
The objectives of a public sector organisation will determine in part
the way in which it reports its financial performance. The lack of a
profit motive in the public services means that financial reporting
often focuses on using monies wisely. This will involve linking
financial and non-financial performance to demonstrate that value
for money has been achieved.
Public sector organisations may also have to show that services have
been appropriately cross subsidised – e.g. that chargeable services
have operated at a surplus and thus reduced the funding burden on
non-chargeable services. Conversely it may sometimes be necessary
to show that chargeable services have not subsidised other services
depending on the statutory or regulatory framework.
Reporting may also have to focus on the outcomes derived from
the resources expended in addition to financial information. For
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 1: The external reporting framework

instance a local authority receiving a grant to fund services for

the rehabilitation of drug users might have prepare a separate
grant claim to report the income and expenditure (and assets
and liabilities) associated with this project in order to keep the
grant.
The grant-awarding body may also want the local authority to report
non-financial activity information such as the number of people seen
and the number of people who have successfully completed the
programme in order to assess the effectiveness of the programme.
The focus of the financial reporting is to demonstrate that funds
have been applied as intended.
Public sector organisations may need to report non-financial
information along with financial performance to demonstrate what
outcomes have been achieved as a result of spending in certain
areas.

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 Public Sector Financial Reporting

Exercise Solution 1.4

Sources of funding
Your answer will vary depending on the organisations that you
selected in exercise 1.1 and the funding structures in your country.
Sources of funding may include:

 Taxation (direct or indirect)

 Grants
 Commissioning agreements (i.e. being paid to provide services)
 Fees and charges
 Donations
 Receipts from the sale of non-current assets
 Loans or finance leases
 Private sector partnership agreements
 Investment income

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 1: The external reporting framework

Exercise Solution 1.5

Funders and financial supporters
 Effectiveness of managerial stewardship
 Utilisation of resources
 The need for resources in the future

Lenders (not relevant to all public sector organisations)

 Liquidity

 Gearing

Suppliers
 Liquidity
 Reliance of the public sector organisation on a key supplier (to
determine if prices for supplies can be raised)

Employees
 Liquidity
 Amount invested in services/organisation
 Average salary for an employee
 Services provided

Beneficiaries/customers

 Amounts budgeted for and spent on services compared with

the services delivered
 Level of investment in services

The public
 As per beneficiaries/customers
 Amount of taxation/funding contributed directly by the public
 Comparative allocation of resources between
services/objectives
 Whether financial targets have been met

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 Public Sector Financial Reporting

Government and other agencies (including regulators)

 Whether non-financial targets have been met
 Whether specific targets associated with regulatory activities
have been met
 Whether services have delivered expected outcomes
 Amount invested in service areas
 Liquidity (especially cash needs)
 Level of debt to assess public services borrowing limits
You can see therefore see that accountability in the public sector is
much more diverse than it is in the private sector, where
accountability is mainly focussed on shareholders.

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 1: The external reporting framework

Exercise Solution 1.6

Accountability
Your answer will depend on the organisation you are considering, for
example:

 A local authority will be accountable to its electorate, service

users, partners in service delivery and to central government,
among others.

 A hospital will be accountable to patients, carers, central

government regulators and central government funding
providers.

 A university’s governing body will be accountable to its funding

council, staff, students, local businesses,

 A housing association will be accountable to its tenants, staff,

local authority, central government regulators and central
government funding providers.

 A charity will be accountable to the charity regulators, its

donors, the beneficiaries of the charity and others.
You can see therefore see that accountability in the public sector is
much more diverse than it is in the private sector, where
accountability is mainly focussed on shareholders.

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 Public Sector Financial Reporting

Exercise Solution 1.7

Practical issues for implementing WGA

The following list provides an indication of some of the practical
issues that need to be overcome when preparing WGA. The list is not
exhaustive and you may have identified other issues.

 Ensuring that accounting policies are applied consistently.

 Collecting the information to allow accounting policies to be

applied consistently. For instance there will be a need to record
all transactions which are internal to the WGA boundary so that
they can be eliminated on consolidation (consolidation
eliminations are covered later in workbook 7).

 Increase in preparation time as need to identify WGA

transactions when the entity’s financial statements are
prepared.

 The timetable for producing WGA means that entity accounts

may need to be published earlier than previously. This can add
to the cost of preparing the financial statements.

 Year-ends may not be in alignment.

 Will WGA be used by anyone, especially given how long they will
probably take to prepare? Does it offer value for money to
prepare WGA?

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Exercise Solution 1.8

Consultation
Examples of consulted parties:

 Preparers of public sector financial statements

 Auditors of public sector financial statements
 Users of public sector financial statements
 Governments
 Academics
 Professional accountancy bodies in member jurisdictions

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 Public Sector Financial Reporting

Exercise Solution 1.9

Why harmonise public sector accounting standards?
You may have come up with other ideas but the most commonly
used reasons are:

Comparability:
In an increasingly globalised world it is vital that governments can
compare financial information across countries. This means financial
statements must be prepared using the same reporting framework
to ensure comparability.

High quality reporting:

In some countries international standards provide a ready-made
high quality basis of reporting which is likely to be considered more
credible than any standards which governments might develop for
themselves.

Cross border cooperation:

With the huge importance of cross border alliances and
partnerships in the world today, having standard financial practice
is perceived to demonstrate cooperation and progress.

Movement of finance professionals

With consistent financial reporting practices across borders finance
professionals can apply their skills irrespective of the country they
are in. To a lesser extent this could be said of any users of financial
information, e.g. business analysts.

Consistent with private sector

In some countries there is pressure to report using the same
standards as business to encourage comparisons across different
types of entity whether publicly or privately funded. Since IPSASs
are aiming to be consistent with IFRSs, applying IPSASs can
contribute to this objective.

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 1: The external reporting framework

Exercise Solution 1.10

The objectives of financial reporting in the public sector
(a) Uses of public service financial reports
Answer should list at least six uses of the financial statements,
together with a brief explanation. It should cover such areas as:

 compliance with statutory and mandatory requirements

 demonstrating stewardship of assets and resources

 demonstrate accountability, including performance

evaluation; benchmarking; achievement of objectives

 planning future policy and activities; e.g. data to justify

future funding bids

 viability and VFM

 public relations

 sources of facts and figures.

(b) Users of public sector financial reports
Should list at least six users of financial statements and some of
their potential needs. For example:

 funders and financial supporters: to take decisions about

resources they may chose or be required to provided in the
future

 politicians: to assess policy delivery and efficiency; also to

monitor activities against objectives and budget

 the public: to gain information about how their taxes are

being spent and also to satisfy themselves that those
activities are in line with the public interest and manifesto
commitments

 service users: to gauge performance and quality of service

delivery and how well service matches their requirements;
to assess present and future charging policies

 senior civil servants: to monitor performance and assist in

future planning and policy formation

 lenders/suppliers: to assess ongoing viability of activities

and future policy directions


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 Public Sector Financial Reporting

 employees: to satisfy themselves about future employment

prospects and future developments which will affect them.

(c) Meeting the needs of users of published financial reports

Answers will vary depending on choice of sector but should have
done the following:

 referred to the financial reports produced by bodies in that

sector

 referred to the particular users in that sector and their

specific needs with regards to those reports

 compared and analysed the gap between the two if any,

and

 drawn a conclusion from this analysis.

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 1: The external reporting framework

77 Mansell Street

London E1 8AN

+ 44 (0)20 75435600

Email: studentsupport@cipfa.org

Website: www.cipfa.org

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