IPSAS Explained

Second Edition

IPSAS Explained

A Summary of International Public

Sector Accounting Standards

Second Edition

Thomas Müller–Marqués Berger

Ernst & Young

This edition first published by John Wiley & Sons Ltd in 2012

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Ernst & Young V

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Ernst & Young VII

Foreword

In many countries all over the world, public sector accounting is in a phase

of transition to resource–oriented, accrual–based accounting and reporting.

Both nationally and internationally, however, considerable differences between

the accounting systems and the published financial statements can be identified.

Accordingly, public sector accounting is highly diversified, in formal respects and

also with regard to the content. These developments are moving away from the key

objectives of public management, which include reducing bureaucracy, achieving

comparable standards in terms of accountability and transparency. Debates in

recent years and developments in France, New Zealand, South Africa or Switzerland,

for example, have shown that the International Public Sector Accounting Standards

(IPSASs) could be a suitable means of harmonizing and aligning public sector

accounting.

As a global organization with a strong focus on the public sector, Ernst & Young

has therefore set about offering a contribution to the further development and

harmonization of public sector accounting. We are convinced that the global use

of IPSASs will enhance transparency and accountability — both of them urgently

needed to overcome the current crisis of government’s finances. The aim of the

Second edition of this publication is still to provide decision-makers in the public

sector with an overview of the IPSASs and the activities of the International Public

Sector Accounting Standards Board (IPSASB). Each IPSAS is presented in brief

in the following, focusing on the core content of the relevant standard. In the

interest of readability, we decided in most cases not to look at the — often extensive

— disclosures in the notes required by the IPSASs.

This book is based on the IPSASs and Exposure Drafts (EDs) as at 1 January 2012.

New standards like the ones on financial instruments, intangible assets or service

concession arrangements are incorporated in this new edition of IPSAS Explained.

Furthermore, the current sovereign debt crisis led us to analyze these developments

and discuss the implications for public sector financial management. And finally, we

have added more graphs, figures and tables which will help the readers to get a

better understanding of the sometimes complex and inapprehensible standards.

If you have any comments or suggestions, we would be happy to consider them

for a third edition of this publication. Please send an e-mail to thomas.mueller-

marques.berger@de.ey.com. I would like to thank everyone who has contributed

to this publication for their valuable support. A special thank you goes to Dr. Holger

Wirtz, Ida Brorsson and Robin Braun. However, this publication would not have been

possible without Dr. Jens Heiling, to whom I am deeply grateful for his outstanding

level of commitment.

Thomas Müller–Marqués Berger, Stuttgart, April 2012

Ernst & Young IX

Contents

Foreword .............................................................................................. VII�

Contents ............................................................................................... IX�

Abbreviations ....................................................................................... XII�

I.� Introduction: General information about IPSASs and the IPSASB........ 1�

1� The International Public Sector Accounting Standards Board ................... 1�

1.1� General information ....................................................................... 1�

1.2� Structure and organization of the IPSASB ........................................ 2�

1.3� Objectives of the IPSASB ................................................................ 4�

1.4� Oversight of the IPSASB ................................................................. 4�

1.5� Members of the IPSASB .................................................................. 6�

2� International accounting standards for the public sector .......................... 7�

2.1� Overview of international accounting standards for the public

sector ........................................................................................... 7 �

2.2� History of the International Public Sector Accounting Standards ...... 10�

2.3� Scope of the International Public Sector Accounting Standards ........ 10�

2.4� General purpose financial statements ............................................ 11�

2.5� Authority of the International Public Sector Accounting Standards ... 11�

2.6� Strategy of the IPSASB ................................................................ 13�

2.7� The Conceptual Framework project ............................................... 14�

2.8� Other current projects of the IPSASB ............................................. 19�

2.9� Process for reviewing and modifying IASB documents ..................... 24�

2.10�Procedures for developing accounting standards ............................ 27�

2.11�IPSASs for accrual basis of accounting and cash basis of

accounting .................................................................................. 30�

2.12�Background to the application of international accounting

standards for the public sector ...................................................... 31�

2.13�Provisions for the transition from the cash basis to the accrual

basis of accounting ...................................................................... 33�

3� Measurement bases in accordance with IPSASs..................................... 34�

3.1� Cost ........................................................................................... 34 �

3.2� Fair value .................................................................................... 36�

3.3� Present value .............................................................................. 37�

Contents

X IPSAS Explained

II.� Impact of the global financial crisis and the sovereign debt crisis on

public sector accounting ................................................................. 38�

1� Context of the global financial crisis 2008—2009 ................................... 38�

2� Accounting issues relating to public sector interventions ........................ 40�

2.1� Accounting for recapitalization or investments ............................... 41�

2.2� Accounting for fiscal support ........................................................ 42�

2.3� Accounting for financial guarantees .............................................. 43�

3� The sovereign debt crisis ..................................................................... 44�

3.1� Evolution of the crisis .................................................................. 44�

3.2� Major measures taken to solve the crisis in 2010 and 2011 ............. 46�

3.3� Effects of the sovereign debt crisis on public sector financial

management ............................................................................... 48�

III.� Overview of accrual basis IPSASs .................................................... 51�

IPSAS 1: Presentation of Financial Statements ............................................. 51�

IPSAS 2: Cash Flow Statement .................................................................... 60�

IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors ..... 65�

IPSAS 4: The Effects of Changes in Foreign Exchange Rates .......................... 70�

IPSAS 5: Borrowing Costs ........................................................................... 73�

IPSAS 6: Consolidated and Separate Financial Statements ............................. 76�

IPSAS 7: Investments in Associates ............................................................. 82�

IPSAS 8: Interests in Joint Ventures ............................................................ 86�

IPSAS 9: Revenue from Exchange Transactions ............................................ 90�

IPSAS 10: Financial Reporting in Hyperinflationary Economies ....................... 95�

IPSAS 11: Construction Contracts ............................................................... 97�

IPSAS 12: Inventories ............................................................................... 101�

IPSAS 13: Leases ..................................................................................... 106 �

IPSAS 14: Events after the Reporting Date ................................................. 112�

IPSAS 15: Financial Instruments: Disclosure and Presentation...................... 116�

IPSAS 16: Investment Property ................................................................. 120�

IPSAS 17: Property, Plant and Equipment .................................................. 125�

IPSAS 18: Segment Reporting ................................................................... 133�

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets .............. 136�

IPSAS 20: Related Party Disclosures .......................................................... 142�

IPSAS 21: Impairment of Non-Cash-Generating Assets ................................ 145�

Contents

Ernst & Young XI

IPSAS 22: Disclosure of Information About the General Government Sector ..150�

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes

and Transfers) .........................................................................................153 �

IPSAS 24: Presentation of Budget Information in Financial Statements .........160�

IPSAS 25: Employee Benefits ....................................................................165�

IPSAS 26: Impairment of Cash-Generating Assets .......................................175�

IPSAS 27: Agriculture ...............................................................................181�

IPSAS 28: Financial Instruments: Presentation ............................................186�

IPSAS 29: Financial Instruments: Recognition and Measurement ..................189�

IPSAS 30: Financial Instruments: Disclosures ..............................................195�

IPSAS 31: Intangible Assets ......................................................................199�

IPSAS 32: Service Concession Arrangements: Grantor .................................206�

IV.� Overview of current Exposure Drafts ............................................ 216�

IPSAS ED 46: Recommended Practice Guideline: Reporting on the

Long-Term Sustainability of a Public Sector Entity’s Finances .......................216�

IPSAS ED 47: Financial Statement Discussion and Analysis...........................224�

V.� Cash Basis IPSAS ......................................................................... 229�

Cash Basis IPSAS: Financial Reporting Under the Cash Basis of Accounting....229�

Further reading................................................................................... 236�

Ernst & Young XII

Abbreviations

ADB Asian Development Bank

AG Application Guidance

BC Basis for Conclusion

bn Billion

CAG Consultative Advisory Group

CF Conceptual Framework

CICA Canadian Institute of Chartered Accountants

CP Consultation Paper

e.g. exempli gratia, for example

ECB European Central Bank

EC European Commission

ED Exposure Draft

EDP Excessive Deficit Procedure

EFSM European Financial Stability Mechanism

EFSF European Financial Stability Facility

EIB European Investment Bank

ESA European Space Agency

ESA 95 European System of Accounts 1995

Eumetsat European Organisation for the Exploitation of

Meteorological Satellites

et seq. et sequens/et sequentes, and the following one(s)

EU European Union

EUR Euro

FIFO First-in, first-out inventory valuation method

FSDA Financial Statement Discussion and Analysis

GBE Government Business Enterprises

GBP British Pound

Abbreviations

Ernst & Young XIII

GDP Gross Domestic Product

GFSM 2001/2008 Government Finance Statistics Manual 2001/2008

GGS General government sector

GPFR General Purpose Financial Report

GPFS General Purpose Financial Statement

HBOS banking and insurance company in the UK

i.e. id est, that is

IAS International Accounting Standard

IASB International Accounting Standards Board,

IFAC International Federation of Accountants

IFRIC International Financial Reporting Interpretations

Committee

IFRS International Financial Reporting Standard

IMF International Monetary Fund

INTOSAI International Organization of Supreme Audit

Institutions

IPSAS International Public Sector Accounting Standard

IPSASB International Public Sector Accounting Standards

Board

n/a not applicable

MoU Memorandum of Understanding

NATO North Atlantic Treaty Organization

NSS National Standard Setter

OECD Organisation for Economic Co-operation and

Development

p. Page

para. Paragraph

PFCS Public Financial Corporations Sector

PIOB Public Interest Oversight Board

PNFCS Public Non-Financial Corporations Sector

Abbreviations

XIV IPSAS Explained

PSC Public Sector Committee

RPG Recommended Practice Guideline

SECO State Secretariat for Economic Affairs

SIC Standing Interpretations Committee

SNA 2008 System of National Accounts 2008

TARP Troubled Asset Relief Program

TBG Task-based Group

TSB Trustee Savings Bank

UK United Kingdom

UK ASB United Kingdom Accounting Standards Board

UN United Nations

UNDP United Nations Development Program

UNESCO United Nations Educational, Scientific and Cultural

Organization

UNICEF United Nation International Children Emergency

Fund

US United States of America

USD United States Dollar

XRB (New Zealand) External Reporting Board

WFP World Food Program

Ernst & Young 1

I.Introduction: General information about

IPSASs and the IPSASB

1 The International Public Sector Accounting

Standards Board

1.1 General information

The International Public Sector Accounting Standards — IPSASs for short — govern

the accounting by public sector entities, with the exception of Government Business

Enterprises. According to the IPSASB regulations, Government Business Enterprises

should apply the International Financial Reporting Standards (IFRSs) issued by the

IASB, as do private sector entities. IPSASs are developed by the International Public

Sector Accounting Standards Board (IPSASB). It is an independent board founded by

the International Federation of Accountants (IFAC) to develop and publish IPSASs.

The IFAC is an international organization for the accountancy profession. It was

founded in 1977 and is domiciled in New York. According to the bylaws of the

International Federation of Accountants, its mission is as follows: “to serve the

public interest by contributing to the development, adoption and implementation

of high-quality international standards and guidance; contributing to the

development of strong professional accountancy organizations and accounting

firms, and to high-quality practices by professional accountants; promoting the

value of professional accountants worldwide; and speaking out on public interest

issues where the accountancy profession’s expertise is most relevant.” The IFAC

had this in mind when it established the Public Sector Committee (PSC) in 1986

as a standing technical committee. The PSC initially focused on preparing and

publishing studies and research reports on (international) public sector accounting.

In 2004, the PSC was renamed IPSASB. In November 2011, the Terms of Reference

of the IPSASB were extended. Henceforth, the IPSASB’s purpose is not only to set

standards for the general purpose financial statements, but also to take care of

general purpose financial reports (GPFRs). GPFRs refer to all financial reports which

are intended to meet the information needs of users who are unable to require the

preparation of financial reports tailored to meet their specific information needs.

The IPSASB now develops and issues, in the public interest and under its own

authority, high-quality accounting standards and other publications for use by public

sector entities around the world in the preparation of GPFRs.

22 November 2011, the International Accounting Standards Board (IASB) and

the International Federation of Accountants (IFAC) announced an agreement to

Introduction

2 IPSAS Explained

strengthen their cooperation in developing private and public sector accounting

standards. The mutual agreement between the IASB and IFAC, in the form

of a Memorandum of Understanding (MoU), reflects the IASB’s and IFAC’s view

that “high-quality financial reporting standards contribute significantly to the

effective functioning of capital markets and sound economic growth”.

The agreement intends to strengthen the cooperation between the two boards, with

the aim to commit to enhance initiatives of common and mutual interest. In the near

term, the IPSASB and IASB will continue to hold regular liaison meetings, to update

each Board on their respective work programs and to highlight financial reporting

issues where alignment between requirements of the IASB and the requirements

of the IPSASB is necessary. The IASB has observer status at the IPSASB board

meetings. The IASB will also continue to provide input to specific IPSASB technical

projects, especially to the Conceptual Framework project of the IPSASB. In the

medium to longer term, IASB and IFAC will mutually consult on projects where both

parties are likely to benefit from consideration of both private sector and public

sector perspectives. A common project of IPSASB and IASB could be emissions

trading schemes. The IASB and IFAC also agreed in the MoU that they want to

discuss the future institutional and governance arrangements of standard setting

for the public sector.

1.2 Structure and organization of the IPSASB

The members of the IPSASB are appointed based on recommendations by a

nominating committee of the IFAC. The appointments are then made by the IFAC,

considering technical and professional criteria, as well as a geographic and gender

balance.

The chart below shows the structure and organization of the IPSASB (cf. figure 1).

The primary objective of the IPSASB is to develop and issue IPSASs as well as

other guidance, and resources for use by public sector entities around the world,

e.g., Recommended Practice Guidelines (RPGs), Studies or other papers and

research reports. The aim of RPGs is to provide guidance that represents good

practice that public sector entities are encouraged to follow. Studies shall

provide advice on financial reporting issues in the public sector. They are based on

research of the best practices and most effective methods for dealing with the issues

being addressed. The IPSASB may delegate responsibility for conducting the

necessary research and drafting of proposed standards and guidance to so-called

Task-based Groups (TBGs), individuals or staff. They can be chaired by a member

of the IPSASB and, dependent on the topic, they can also include non-members of

the IPSASB or the IFAC (e.g., observers). In case TBGs are complemented by non-

IPSASB Members, then they are called Task Forces. The work of the Task-based

Groups is usually focused on the creation of Consultation Papers or Exposure Drafts,

which are made available to the general public. The aim of TBGs and the Task Forces

Introduction

Ernst & Young 3

is to perform preparatory work for the board. Nevertheless, the final responsibility

for the projects rests by the IPSASB. The publication of Consultation Papers and

Exposure Drafts is intended to give interested individuals, groups, public sector

entities or their representatives the opportunity to submit comments (usually within

a period of four to six months). This allows the groups concerned by IPSASs to voice

their opinion before the standards are approved and published by the IPSASB. The

observers of the IPSASB include organizations that have an interest in public sector

financial reporting, such as the European Commission, Eurostat, the International

Monetary Fund (IMF), the Organisation for Economic Co-operation and Development

(OECD), the United Nations or the World Bank. As their role is of a supervisory

nature, they are not entitled to vote.

Figure 1: Structure and organization of the IPSASB

Besides financial support from the IFAC, the IPSASB also receives funding from

several external sources, such as the Asian Development Bank (ADB), the European

Commission (EC), the governments of Canada, New Zealand or Switzerland, the

United Nations (UN) or the World Bank. Also personnel support was provided to the

IPSASB in the form of technical managers, e.g., by the People’s Republic of China,

the Canadian Institute of Chartered Accountants (CICA), Ernst & Young or New

Zealand’s External Reporting Board (XRB).

Nominating Committee IFAC Board

IPSASB

Consultative group

IPSASB observers

IPSASs

Task-based groups/

Task forces

Exposure Draft

Nominates members

Appoints

members

Observe

Prepare

Prepares

and issues

Permanent support

Introduction

4 IPSAS Explained

The Consultative Group of the IPSASB provides a platform to facilitate the exchange

of information between the IPSASB and specialists. Its aim is to provide a forum in

which the IPSASB can consult with representatives of different groups of

constituents to obtain input and feedback on its work program, project priorities,

major technical issues, due process and activities in general.

In addition to IPSASs, the IPSASB issues other, non-binding publications such as

studies, research reports and occasionally discussion papers dealing with specific

accounting issues for the public sector. For example, in December 2010 the IPSASB

issued the third edition of Study 14, Transition to the Accrual Basis of Accounting:

Guidance for Governments and Government Entities.

1.3 Objectives of the IPSASB

The objective of the IPSASB is to serve the public interest by developing high-quality

accounting standards for the public sector and by facilitating the convergence

of international and national standards, thereby enhancing the quality and

standardization of financial reporting around the world. Public interest in the

pronouncement of IPSASs may arise, for example, from a national or supranational

need to harmonize financial reporting of public sector entities. It is also in the public

interest to continue developing public sector accounting by means of the IPSASB

standardization projects. The IPSASB achieves these goals by:

► Publishing International Public Sector Accounting Standards

(IPSASs)

► Promoting their acceptance and compliance on an international

scale with these standards

► Publishing other documents that contain guidance on issues and

experience with financial reporting in the public sector

1.4 Oversight of the IPSASB

The IPSASB has been actively discussing the need for oversight since

September 2009. The IPSASB considered the fact that many member bodies

of the International Federation of Accountants (IFAC) are currently not involved

in public sector standard setting. On that basis, questions have been raised as to

whether the IPSASB has the relevant standing to maintain its status as a credible

standard setter for the public sector internationally. In order to sustain the IPSASB’s

growing credibility as the international standard setter for the public sector,

the Board decided to develop a Consultation Paper that will address the need for

oversight and explore how oversight might be implemented. The Consultation Paper

explored the options for addressing the need for oversight, and has been prepared

as a basis for consultation with a number of governments and stakeholders.

Introduction

Ernst & Young 5

According to the Consultation Paper, IPSASB, Proposals for Oversight, the objective

of oversight would be to increase the confidence of governments and other

stakeholders that standard–setting by the IPSASB would respond to the interest of

the public. Oversight would ensure that the development of international accounting

standards for the public sector is independent and comprehensive. An oversight

body would also warrant that the composition of the Board is well-balanced, that

qualified members are selected and that the Board is complying with the due process

requirements.

The Consultation Paper set out the proposed form and structure of two potential

models of oversight. The first is a model based on existing structures of the Public

Interest Oversight Board (PIOB, an international body that seeks to improve the

quality and public interest focus of the international standards formulated by the

IFAC in the areas of audit, education, and ethics), but with some adaptation to serve

a public sector mandate. The model is premised on adding two additional members

to the PIOB with a specific public sector focus. The public sector exclusive model

(model 2) envisions a small oversight body of four members with high profile in the

public sector.

The following table contrasts the two models:

Model 1: Oversight by PIOB Model 2: Oversight by a Public Sector

Exclusive Body

► Oversight will be provided

by the existing PIOB.

► The PIOB will be extended by

two additional members with a

specific public sector background.

► Oversight will be provided by a

dedicated oversight body for the

IPSASB, comparable to the PIOB

but with a much narrower scope,

focusing only on the public sector.

► This body would need to be founded.

Table 1: Models of oversight

An independent oversight regime for the IPSASB is also seen as necessary to

encourage wider adoption of IPSASB standards. The creation of an oversight body

may also provide assurance that the Board has the long-term capability and capacity

to independently and rigorously address public sector financial reporting issues.

For either potential model of oversight described, the Consultation Paper anticipates

that a Consultative Advisory Group (CAG) would be established comparable to other

standard-setting boards within IFAC. Whereas the oversight body would not provide

feedback to technical matters of the IPSASB’s work, the CAG would have a direct

role in providing feedback to technical questions. It is not expected that the set up

of the CAG would change under either scenario.

The IPSASB also started to consider whether the composition of the IPSASB should

be amended to increase the number of public members and decrease the number

Introduction

6 IPSAS Explained

of member body appointees commensurately. And finally, it is planned that a full–

time Chair of the IPSASB will be implemented in the future.

In 2011 several IPSASB members, IFAC board members as well as IPSASB senior

staff had consultations with selected governments based on the Consultation

Papers. The result of these consultations was that there is high support for oversight

of the IPSASB. Respondents underlined that changes in the oversight governance

will enhance credibility of the IPSASB. Strong support was also expressed for the

formation of a CAG. The feedback on the proposed two models of oversight was

mixed. Overall, a preference for the PIOB adapted model (model 1) was expressed

by a slight majority of respondents.

1.5 Members of the IPSASB

The members of the IPSASB are appointed by the IFAC Board. The IPSASB

comprises a total of 18 members, 15 of whom are nominated by member

organizations of the IFAC. The other three are public members, who can be

nominated by any individual or organization. All IPSASB meetings convened to

develop IPSASs or approve their publication are public.

The table below shows the countries represented on the IPSASB:

► Australia

► Canada

► China

► France

► Germany

► Japan

► Kenya

► Morocco

► New Zealand

► Pakistan

► Romania

► South Africa

► United Kingdom

► United States of America

► Uruguay

Table 2: Members of the IPSASB (without public members) (as of January 2012)

Currently, the public members of the IPSASB are from Canada, Italy and

Switzerland. The public member from Switzerland, Prof. Dr. Andreas Bergmann,

currently serves as the IPSASB’s chair. In addition, the IPSASB appoints a limited

number of observers from organizations that have an interest in public sector

financial reporting. These observers have full speaking rights at IPSASB meetings,

but no voting rights. The list below shows the organizations that have observer

status:

Introduction

Ernst & Young 7

► Asian Development Bank (ADB)

► European Commission (EC)

► European Investment Bank (EIB)

► Eurostat

► International Accounting Standards Board (IASB)

► International Monetary Fund (IMF)

► International Organisation of Supreme Audit Institutions (INTOSAI)

► Organization for Economic Co-operation and Development (OECD)

► United Nations/United Nations Development Programme (UN/UNDP)

► World Bank

Table 3: Organizations with observer status on the IPSASB (as of January 2012)

2 International accounting standards

for the public sector

2.1 Overview of international accounting standards

for the public sector

The IPSASB develops IPSASs for financial statements prepared on the accrual

basis of accounting as well as for financial statements prepared on the cash basis

of accounting. IPSASs govern the recognition, measurement, presentation and

disclosure requirements in relation to transactions and events in general purpose

financial statements. Such financial statements are characterized by the fact that

they are issued for users who are unable to demand financial information to meet

their specific information needs. On the basis of the new IPSASB Terms of

References and as one of the consequences of its Conceptual Framework Project

and the Projects on Reporting Service Performance Information and Reporting on

the Long-Term Sustainability of a Public Sector Entity’s Finances the IPSASB widened

its scope to GPFRs. According to IPSASB Conceptual Framework ED 1 Par. 1.3

GPFRs are a central component of, and support and enhance, transparent financial

reporting by governments and other public sector entities. GPFRs are characterized

by the fact that they not only comprise financial statements but also refer to other

financial reports intended to meet the information needs of users who are unable to

require the preparation of financial reports tailored to meet their specific

information needs. GPFRs may include information about the past, present, and the

future that is useful to users — including financial and non-financial quantitative and

qualitative information about the achievement of financial and service delivery

objectives in the current reporting period, and anticipated future service delivery

activities and resource needs. More insights and information about the scope and

content of GPFRs is given in IPSASB Conceptual Framework ED 1 Par. 1.

Introduction

8 IPSAS Explained

With respect to the development of accrual IPSASs, the IPSASB pursues the aim

of convergence of IPSASs and IFRSs. In many cases the International Financial

Reporting Standards (IFRSs) are used as a starting point for developing new IPSASs.

The IPSASB will adapt IFRSs only if the public sector has specific accounting

requirements. Provided these specific requirements of the public sector are taken

into account, the IPSASB seeks to retain the accounting treatment and original text

of the IFRSs. The specific requirements of the public sector, such as transactions

without consideration (e.g., taxes and transfers), Government Finance Statistics

(GFS) or public budgeting, however mean that the IPSASB does issue accounting

standards for which there is no corresponding IFRS. These IPSASs principally contain

rules which are not covered, or only to a minor extent covered, by existing IFRSs.

The table below provides an overview of the international accounting standards

for the public sector (as of 1 January 2012) and the underlying IFRSs:

IPSAS Title Corresponding IFRS

IPSAS 1 Presentation of Financial Statements IAS 1

IPSAS 2 Cash Flow Statements IAS 7

IPSAS 3 Accounting Policies, Changes in

Accounting Estimates and Errors

IAS 8

IPSAS 4 The Effects of Changes in Foreign

Exchange Rates

IAS 21

IPSAS 5 Borrowing Costs IAS 23

IPSAS 6 Consolidated and Separate Financial

Statements

IAS 27

IPSAS 7 Investments in Associates IAS 28

IPSAS 8 Interests in Joint Ventures IAS 31

IPSAS 9 Revenue from Exchange Transactions IAS 18

IPSAS 10 Financial Reporting in Hyperinflationary

Economies

IAS 29

IPSAS 11 Construction Contracts IAS 11

IPSAS 12 Inventories IAS 2

IPSAS 13 Leases IAS 17

IPSAS 14 Events After the Reporting Date IAS 10

IPSAS 15 Financial Instruments: Disclosure and

Presentation

IAS 32

IPSAS 16 Investment Property IAS 40

IPSAS 17 Property, Plant and Equipment IAS 16

IPSAS 18 Segment Reporting IAS 14

IPSAS 19 Provisions, Contingent Liabilities and

Contingent Assets

IAS 37

Introduction

Ernst & Young 9

IPSAS Title Corresponding IFRS

IPSAS 20 Related Party Disclosures IAS 24

IPSAS 21 Impairment of Non-Cash-Generating

Assets

No directly

corresponding IFRS

IPSAS 22 Disclosure of Financial Information about

the General Government Sector

No corresponding IFRS

IPSAS 23 Revenue from Non-Exchange Transactions

(Taxes and Transfers)

No corresponding IFRS

IPSAS 24 Presentation of Budget Information in

Financial Statements

No corresponding IFRS

IPSAS 25 Employee Benefits IAS 19

IPSAS 26 Impairment of Cash-Generating Assets IAS 36

IPSAS 27 Agriculture IAS 41

IPSAS 28 Financial Instruments: Presentation IAS 32/IFRIC 2

IPSAS 29 Financial Instruments: Recognition and

Measurement

IAS 39/IFRIC 9/ IFRIC

16

IPSAS 30 Financial Instruments: Disclosures IFRS 7

IPSAS 31 Intangible Assets IAS 38/SIC 32

IPSAS 32 Presentation of Financial Statements Mirror to SIC 12

Cash Basis

IPSAS

Cash Flow Statements No corresponding IFRS

Table 4: Overview of the International Public Sector Accounting Standards (as of 1 January 2012)

The following table gives an overview of the Proposed International Public Sector

Accounting Standards (Exposure Drafts) as of 1 January 2012:

Exposure

Draft (ED)

Title Corresponding IFRS

ED 46 Recommended Practice Guideline,

Reporting on the Long-Term

Sustainability of a Public Sector Entity’s

Finances

N/A

Table 5: Overview of the Proposed International Public Sector Accounting Standards (Exposure Drafts)

as of 1 January 2012

Introduction

10 IPSAS Explained

2.2 History of the International Public Sector Accounting

Standards

The IPSASs are based on the work of the PSC of the IFAC. This standing committee

has been dealing with public sector accounting and audits since 1986. Its core tasks

include the development of concepts to optimize the financial management and

financial reporting of public authorities. In its early days, the PSC developed and

promulgated a large number of guidelines, studies and research reports. However,

these pronounce¬ments did not play such an important role as IPSASs today.

The Standards Project launched in 1996 marked a turning point in the work

of the PSC. The purpose of the Standards Project was to formulate IPSASs aimed

at improving the financial management and accounting of public authorities and

harmonizing public accounting at an international level. This project fundamentally

changed the way the PSC saw itself; from then on it considered itself an independent

committee for the standardization of public sector accounting and changed its name

to IPSASB in 2004.

2.3 Scope of the International Public Sector Accounting Standards

IPSASs are currently intended for application for general purpose financial

statements of all public sector entities. Public sector entities generally include

national and regional governments (e.g., state, provincial, territorial governments),

local authorities (e.g., towns and cities) as well as related governmental entities

(e.g., agencies, boards, commissions and enterprises). In general, IPSASB guidance

which is dealing with GPFRs other than GPFSs (e.g., Reporting on the Long-term

Sustainability of an Entity’s Finances) is not part of the set of IPSASs. Currently, this

guidance is called “Recommended Practice Guideline”.

As already mentioned, IPSASs do not apply to Government Business Enterprises. A

Government Business Enterprise within the meaning of IPSASs is an entity that has

all of the following characteristics:

1) It is an entity with the power to contract in its own name.

2) It has been assigned the financial and operational authority to carry

on a business.

3) It sells goods and services, in the normal course of its business, to other

entities at profit or full cost recovery.

4) It is not reliant on continuing government funding to be a going concern

(other than purchases of outputs at arm’s length).

5) It is controlled by a public sector entity.

Introduction

Ernst & Young 11

The characteristics of Government Business Enterprises show that within the

meaning of IPSASs these entities operate on an economically sustainable basis,

i.e., they must at least cover their costs or have the intention of generating a profit.

Typically, they are controlled or owned by state, regional or local government. In its

December 2011 meeting, the IPSASB approved a project on Government Business

Enterprises which aims to explore issues with the current definition of GBEs and will

consider whether the current accounting requirements are adequate.

2.4 General purpose financial statements

Financial statements that are issued for users who are not in a position to demand

financial information to meet their specific information needs are referred to as

general purpose financial statements. Examples of such users of financial

statements are citizens, voters, their political representatives and other members

of the general public. The term “financial statements” used here and in the

standards covers all disclosures and notes that have been identified as components

of the general purpose financial statements.

Financial statements prepared on the accrual basis of accounting comprise

a statement of financial position, a statement of financial performance, a cash flow

statement and a statement of changes in net assets/equity. For financial statements

prepared on the cash basis of accounting, the statement of cash receipts and

payments is the primary component of the financial statements next to the

accounting policies and explanatory notes.

In addition to the general purpose financial statements a public sector entity may

prepare financial statements for other parties (such as executive committees, the

legislature and other parties with supervisory functions) that can request financial

information tailored to their needs. Such financial statements are referred to as

special purpose financial statements. The IPSASB recommends that IPSASs also

be adopted for special purpose financial statements where appropriate.

2.5 Authority of the International Public Sector Accounting

Standards

The IPSASB recognizes the right of governments and national standard setters to

establish accounting standards and associated guidance within their jurisdictions.

Its objectives are “to serve the public interest by developing high-quality public

sector financial reporting standards and by facilitating the convergence of

international and national standards, thereby enhancing the quality and uniformity

of financial reporting throughout the world”. Thus, the IPSASB sees itself in a

supportive function. Jurisdictions which decide to adopt IPSASs may use IPSASs as

international best practice and use them in their own standard-setting processes as

guidance. The general purpose financial statements of public sector entities may be

governed by rules or laws in a jurisdiction. These rules may take the form of

statutory reporting rules, directives or statements on accounting and/or accounting

standards issued by governments, regulatory authorities and/or professional

associations in the jurisdiction.

Introduction

12 IPSAS Explained

However, neither the IPSASB nor the accounting and audit profession can enforce

compliance with IPSASs on their own. This means that IPSASs do not have a directly

binding effect for territorial authorities or other public sector entities.

The existing IPSASs can assist legislators and national standard setters in developing

new standards or revising existing ones in order to achieve greater comparability

of public sector entities’ financial statements at a national and international level.

The IPSASs can be of great help especially for all jurisdictions that do not have

accrual basis accounting standards for the public sector yet.

Developing and emerging countries are also one of the main target groups for

IPSASs. Financial institutions such as the International Monetary Fund, the World

Bank or the Asian Development Bank play an important role as major donors and

lending institutions for these countries. The strategy of providing financial resources

to developing countries via these institutions nowadays is mostly focused on

creating transparent and consistent financial reporting structures as a basis for

further financial help in the future. Accordingly, financial aid by these institutions is

often related to the implementation of reporting procedures and structures based

on IPSASs. For example, the World Bank encourages borrowers to prepare their

financial reports in accordance with IPSASs. Thus, the IPSASs have gained

increasing importance as an internationally accepted standard.

However, in the so-called developed part of the world there is also an increasing

demand for the adoption of IPSASs for compatibility and comparability reasons.

The various processes of collection and reallocation of resources employed by

different countries, such as within the European Union, create the need for

transparency regarding allocation criteria and the use of these means — especially

in times of limited financial resources. Given that IPSASs are the only internationally

accepted public sector accounting model, these standards therefore are a guideline

for the new member states in the eastern part of Europe who have decided to

establish a state-of-the-art accounting system following the destruction of the

old political systems.

But also in established European countries like Austria, Germany or the Netherlands,

the need to modernize budgeting and financial reporting systems is uncontested.

The IPSASs could be regarded as a reference model for the reform of governmental

accounting there.

The IPSASB strongly recommends adopting IPSASs and harmonizing national

requirements of public sector accounting and financial reporting with those

of IPSASs. Some states and national standard setters have already developed

generally accepted accounting standards for the public sector in their jurisdiction.

In many jurisdictions, however, public sector accounting is still highly fragmented,

typically containing special rules for certain levels or areas.

The IPSASB believes that the application of IPSASs, together with a statement

of compliance, significantly enhances the quality of general purpose financial

statements prepared by public sector entities. In turn, this improves the basis for

decisions on the appropriation of funds by public authorities, allowing for greater

transparency and accountability.

Introduction

Ernst & Young 13

2.6 Strategy of the IPSASB

The strategy of the IPSASB for the development of standards for the public sector

can be broken down into different working periods which correlate with the stages

of maturity of the board:

► First working period: Creation of a core set of standards (complete)

► Second working period: Transition period (convergence with IFRSs

and focus

on public sector specific issues)

► Third working period: Focus on public sector critical issues

During the first period, the main target of the board was the creation of a core set

of IPSASs based on IFRS. Thereby, the IPSASB was able to build on an accounting

basis that was well established in the private sector. The first period took place

between 1996 and 2002. IPSAS 1 to IPSAS 20 (the so-called “core set of accounting

standards for the public sector”) were developed during this period.

End of 2009 the IPSASB has passed his second phase, which was a kind of transition

period. The aim of this period was, on the one hand, to reach full convergence of the

IPSASs with the IFRSs as approved by 31 December 2008 either by adjusting

existing standards or, on the other hand, by closing major gaps through developing

new standards. The IPSASB’s goal was to realize a stable platform date for all second

generation IPSASs by 1 January 2010 (to take effect for periods commencing on or

after 1 January 2011). 21 December 2009 the IPSASB has announced that it had

achieved its strategic goal of substantial convergence with the International

Financial Reporting Standards (IFRSs) dated 31 December 2008. At this time

the only public sector relevant IFRS the IPSASB has not achieved convergence with

was IFRS 3, Business Combinations. Another characteristic of the second working

period of the IPSASB was a focus on public sector specific issues.

IPSAS 22, Disclosure of Financial Information about the General Government Sector,

IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers) and

IPSAS 24, Presentation of Budget Information in Financial Statements consider the

specific requirements of the public sector with regard to accounting and financial

reporting. The process for reviewing and modifying IASB documents (as described

below) reflects the rationale of the IPSASB of differentiating between a convergence

project, i.e., adapting an IFRS to the public sector, and a public sector specific

project for developing a new standard.

Currently, the IPSASB is in its third phase, as public sector critical issues are coming

to the fore and consequently public sector specific standard setting is more focused.

Given the constraint in Board resources, the IPSASB decided in its December 2011

meeting to develop the selection criteria for projects from “public sector specific” to

“public sector critical”. It is no longer sufficient that a subject is mainly occurring in

the public sector. Rather, there must be an urgent need for guidance regarding the

financial accounting and reporting of the issue.

Introduction

14 IPSAS Explained

The maturity process described, and especially reaching the current development

phase, indicates that the IPSASB has developed into a true global standard-setter

for public sector financial reporting. Given the importance of the public sector for

the development of societies and their welfare, it is absolutely necessary for a

standard–setting body to sharpen its profile to specialize and focus on public sector

specific as well as public sector critical issues.

The creation of an unparalleled and independent conceptual framework (see below

for further details) and the decision not to await the results of the improvements

project regarding the IFRS framework might be seen as building blocks to the current

stage of maturity of the IPSASB.

2.7 The Conceptual Framework project

In 2006 the IPSASB started a collaborative project with participation from a group

of national standards setters and other organizations to develop a conceptual

framework for general purpose financial reporting by public sector entities.

The conceptual framework is regarded as a necessary means for ensuring coherent

and consistent standards. The IPSASB emphasizes that the Conceptual Framework

should not develop new authoritative requirements for financial reporting by public

sector entities that adopt IPSAS. Neither shall it override existing requirements

specified in IPSASs. Instead, the Framework should be seen as a direction to develop

current and new IPSASs and should be used as guidance where an accounting issue

may not be specifically addressed in an IPSAS or other IPSASB guidance.

The Conceptual Framework projects deals with financial reporting under the accrual

basis and is organized in four phases:

► Phase 1 deals with the role, authority and scope of general purpose

financial reporting, the objectives and users, the qualitative

characteristics and the reporting entity.

► Phase 2 covers mainly the definition and recognition of the

elements that

are reported in financial statements.

► Phase 3 considers the measurement base(s) that are adopted for

the elements that are recognized in the financial statements.

► Phase 4 deals with presentation and disclosure under IPSASs.

Whereas phases 2 and 3 focus on GPFS, the scope of phases 1 and 4 comprises

GPFRs. In the following each phase of the Conceptual Framework project will be

summarized briefly:

Introduction

Ernst & Young 15

Phase 1: Conceptual Framework for General Purpose Financial Reporting by

Public Sector Entities: Role, Authority, and Scope; Objectives and Users;

Qualitative Characteristics; and Reporting Entity.

The Conceptual Framework Exposure Draft 1 describes several perspectives

regarding the objectives and scope of financial reporting issued by IPSASB.

The objectives of financial reporting by public sector entities are to provide

information about the entity that is useful to users of GPFRs for accountability and

decision-making purposes. The information is determined by the users of GPFRs and

their information needs for accountability proposes and decision–making purposes.

Users of GPFRs are defined as service recipients, resource providers and those with

special interest in particular services. The legislature in many jurisdictions is also

acknowledged as a main user of GPFRs.

The Exposure Draft includes a discussion regarding the scope of financial reporting.

IPSASB defines the scope of financial reporting as “to establish the boundary

around the transactions, other events and activities that may be reported in GPFRs”.

IPSASB identifies different aspects of information that may be included within the

scope of financial reporting in order to meet the objectives of financial reporting.

As a result, the IPSASB considers additional information and reports that

encompasses financial and non-financial information, past and prospective

information and reporting compliance, to be included in the GPFRs. IPSASB

distinguishes between GPFRs and GPFSs. They refer to GPFRs to be more

comprehensive than the financial statements currently dealt within IPSASs. It is

IPSASB’s expectation that the scope of financial reporting will develop over time in

accordance with the users’ information needs. However, the financial statements of

public sector entities and their notes remain at the core of financial reporting.

The Exposure Draft defines the qualitative characteristics of information included in

GPFRs as the attributes that make information useful to users in order to achieve the

objectives of financial reporting. IPSASB has identified the qualitative characteristics

as relevance, faithful representation, understandability, timeliness, comparability

and verifiability. Materiality, cost-benefit, and achieving an appropriate balance

between the qualitative characteristics are defined as constraints on financial

reporting.

Finally, the Exposure Draft discusses the definition of a reporting entity. The ED

defines a reporting entity as a public sector entity that is required to, or elect to,

prepare GPFRs to be able to meet the users’ information needs. IPSASB does not

identify which governments or other public sector entities in any jurisdiction meet

the criteria for a reporting entity or a group reporting entity. In this regard IPSASB

refers to specified criteria in legislation, regulation or decisions from other

authoritative bodies in their respective jurisdiction. As a guidance in determining

whether a reporting entity exist, IPSASB has identified characteristics that

a reporting entity or a group reporting entity is expected to possess.

Introduction

16 IPSAS Explained

Phase 2: Elements and Recognition in Financial Statements

The Consultation Paper of Phase 2, Elements and Recognition in Financial

Statements, discusses issues associated with the elements of financial statements

and their recognition. It includes both a discussion of how the elements of GPFSs of

public sector might be defined but also what criteria might be established for their

recognition.

The Consultation Paper starts by discussing the definitions of assets and liabilities

and revenues and expenses in order to give guidance on the recognition criteria

when these elements should be recognized in the financial statements of the entity.

IPSASB’s approach to reporting public sector financial performance is thereafter

discussed. The objective of the statement of financial performance is to gain an

understanding of the sources, allocations and consumptions of resources, but also

any claims to the resources of the entity during the reporting period. IPSASB

describes two underlying approaches regarding public entities financial

performance. The first approach measures financial performance as the net result

of all changes in the entity’s economic resources and obligations during the period,

which is defined as the asset and liability–led approach. The second approach

measures financial performance as the result of revenue inflows and expense

outflow more intently associated with operations in the current period, defined

as revenue and expense–led approach. The decision to follow one of these

approaches may imply the need to amend or define elements of revenue and

expense and other elements such as deferred inflows and deferred outflows.

The Consultation Paper discusses advantages of each approach, but does not

designates the most favorable approach.

The definitions of revenues and expenses in financial statements constitute a crucial

issue to the IPSASB that needs to be solved in order to determine whether they

should be based on changes in assets and liabilities during the period, or based

on goods and services provided in the period and the taxes levied and other inflows

generated to cover the cost of those goods and services.

In addition to the four core elements – assets, liabilities, revenues and expenses –

the IPSASB considers whether other items should be separately identified as

elements and recognized as required building blocks in public sector financial

statements. The Consultation Papers refers to deferred outflows/deferred inflows,

net assets/net liabilities and transactions with residual/equity interests as other

possible elements that may be reported separately in public sector financial

statements.

Another important issue associated with the elements of financial statements,

is how the recognition criteria can be determined in order to recognize and

incorporate the item to the financial statement, and if so how items can be

measured in a reliable way. The IPSASB approaches the issue in two ways;

by describing uncertain existence and uncertain measurement. Since public sector

entities operate in uncertain environments, it may create difficulties to determine

whether a transaction or event can be defined and meet the recognition criteria.

As a result, standardized threshold criteria may be established in order to deal with

Introduction

Ernst & Young 17

items with uncertain existence. The same issue arises when there is uncertainty

about the reliability of the amount associated with those elements.

Phase 3: Measurement of Assets and Liabilities in Financial Statements

The Consultation Paper of Phase 3, Measurement of Assets and Liabilities in

Financial Statements, considers the measurement of assets and liabilities in the

GPFSs of public sector entities. The Consultation Paper focuses on factors that

should be taken into account when choosing measurement bases. IPSASB

distinguishes the term “measurement basis” to be applied for particular assets and

liabilities in specific circumstances rather than to identify a single measurement

basis to be applied to all circumstances.

The Consultation Paper identifies possible measurement bases and categorizes

whether they will reflect the historical or current attributes of an asset or liability,

represent an entry or an exit perspective or reflect a market or an entity-specific

perspective. The Consultation Paper also discusses advantages and disadvantages

of using the respective measurement bases in comparison with the qualitative

characteristics of financial reporting. The main measurement bases are the

following:

a) Historical cost

The historical cost basis is simple and familiar to apply and is therefore very

verifiable and easy to understand. However, as with other measurement bases,

some uncertainties may arise due to market or price changes. For example the basis

may not provide relevant information on the resources held by the entity, especially

if prices have fluctuated.

The International Valuation Standards Council defines market value as “the

estimated amount for which a property should exchange on the date of the valuation

between a willing buyer and a willing seller in an arm’s length transaction after

proper marketing wherein the parties had each acted knowledgeably, prudently,

and without compulsion.” The measurement base is generally beneficial to use if the

assets (and liabilities) are traded in a deep and liquid market. As an occurrence of a

market value, IPSASs currently already use the so called fair value, which is defined

as the amount for which an asset could be exchanged, or a liability settled, among

knowledgeable, willing parties in an arm’s length transaction.

b) Market value

To distinguish from that is the present value which, as a value in use (not assuming

a disposal or an acquisition), is defined as the future cash inflows that the entity will

derive from the asset if it continues to be used.

In an ideal world, which means deep and liquid markets, market value possesses all

of the qualitative characteristics of financial information. For example, the market

value of an asset is a relevant measure of the asset’s utility to the entity, as the

asset cannot be worth more and less than market value. The market value basis

respectively the market perspective also provides a faithful representation of the

Introduction

18 IPSAS Explained

value of the asset as the same asset (or liability) can be expected to be reported

at the same amount by different entities.

A disadvantage of the market value basis is that often there is a lack of market

values for specialized assets, which is especially the case in the public sector.

c) Replacement cost

Replacement cost is defined as “the most economic cost required for the entity

to replace service potential of an asset (including the amount that the entity will

receive from its disposal at the end of its useful life) at the reporting date.”

The measurement basis is particularly known to provide relevant information

because it reflects the economic position of the entity at the reporting date,

especially for service providing assets. The disadvantage of using the replacement

cost is that its calculation is complex and costly to apply and may decrease the

verifiability and comparability of the financial statement.

d) Deprival value model

The deprival value model does not prescribe a single measurement basis, but

rather provide a means of selecting the most relevant measurement basis in specific

circumstances. The model is determined on the premise that the value of an asset

is equivalent to the loss that the owner of an asset would sustain if deprived of that

asset. As a result, the model identifies just the amount that would compensate the

entity for the loss of an asset. The loss that the entity would sustain if deprived of

the asset cannot be higher than the current cost of obtaining equivalent service

potential (replacement cost), or lower than the amount that the entity can recover

from the asset (recoverable amount). Replacement cost is selected where the asset

is worth replacing. Net selling price (as a subset of recoverable amount) is selected

when it is not and the highest value will be obtained from immediate sale. The value

in use (as a subset of recoverable amount) is selected when an asset is not worth

replacing but the value of its service potential is greater than that which would be

derived from sale.

All of the bases considered by the deprival value model are current, entity-specific

bases, and reflect bases that are highly relevant. However, it is important to

consider whether the basis comprises other qualitative characteristics of financial

reporting other than relevance.

Phase 4: Presentation in General Purpose Financial Reports

The Consultation Paper of Phase 4 describes the meaning of presentation and

discusses an approach to the presentation of information, which involves

a) Presentation objectives;

b) Application of the qualitative characteristics to presentation decisions; and

c) Three presentation concepts.

Introduction

Ernst & Young 19

The definitions of presentation, display and disclosure with regard to GPFRs are

described in the Consultation Paper. Presentation of information refers to selection,

location and organization of information that is displayed and disclosed in the GPFRs

to meet the objectives of financial reporting, needs of users and qualitative

characteristics. The IPSASB decided to depart from the current understanding

of presentation and disclosure under IFRS, due to the necessity also to cover

presentation decisions in other General Purpose Financial Reports than General

Purpose Financial Statements. As a result, presentation includes both display and

disclosure of information. Display relates to core information which should be shown

prominently in the financial statement in order to highlight key messages and to

achieve the information needs of users, whereas presentation of supporting

information is defined as disclosure. Supporting information presents details related

to the core information such as applicable policies and methodology and is presented

to make core information more useful.

Generally speaking and regardless of the selection process and criteria used, an

entity has to make three presentation decisions which include the dimensions of:

► What information needs to be shown;

► Where information should be located; and

► How information should be organized.

In order to develop guidance regarding the selection and location of information that

should be presented, the Consultation Paper suggests three approaches. In the first

approach to the presentation of information the qualitative characteristics would be

applied to the three types of presentation decisions.

The second approach results in presentation objectives which would operationalize

the two objectives of financial reporting from Phase 1 — to provide information

useful for accountability and decision making. The preparer would have to select

information accordingly to meet users’ needs.

The third approach is addressing users’ needs even more directly: IPSASB has

developed three presentation concepts which would be applied within an overall

approach to presentation of information. The first concept requires the preparer

to select the information that best meets the user’s needs, satisfies the cost-benefit

test and is sufficiently timely. The approach of the second concept is to locate

information in a way that best meets user needs. Finally, according to the third

concept the preparer has to organize information appropriately to make important

relationships and support comparability.

Depending on the feedback of commentators to the Consultation Paper of Phase 4,

the IPSASB will further develop the approaches.

2.8 Other current projects of the IPSASB

In March 2007 the IPSASB has set up a project on Entity Combinations.

The objective of this project is to prescribe the accounting treatment for entity

combinations undertaken by public sector entities. In its December 2011 meeting

Introduction

20 IPSAS Explained

the IPSASB changed the project title to Public Sector Combinations. In the first

half of 2012 the IPSASB aims to issue a Consultation Paper. The Consultation Paper

considers the basis on which a transaction or other event that gives rise to a public

sector combination should be recognized in GPFSs of an entity that uses accrual

IPSASs.

In 2008 the IPSASB started a project on Narrative Reporting, which is now titled

“Financial Statement Discussion and Analysis”. The project aims to develop

mandatory guidance on financial statement discussion and analysis. It deals

with issues such as:

► What are the objectives of narrative reporting on financial

statements?

► What are the main attributes of high-quality narrative explanations?

► Are there essential content elements to include in narrative

reporting

on financial statements?

► What type of guidance is appropriate?

The Exposure Draft (ED) 47, Financial Statement Discussion and Analysis, was

approved in March 2012. The objective of the ED is to propose an authoritative

IPSAS for the preparation of financial statement discussion and analysis by public

sector entities. Financial statement discussion and analysis is intended to address

similar matters to reports that may be termed “management discussion and

analysis” and “management commentary” in various jurisdictions.

Also in 2008 the IPSASB started a project on Reporting Service Performance

Information. The reporting of service performance information is an area which

has become increasingly topical and relevant to the enhancement of public sector

accountability. The aim of the project is to develop a consistent framework for

reporting service performance information of public sector programs and services

that focuses on meeting the needs of users using a principles-based approach.

The project deals with the following questions:

► What are the objectives of reporting service performance

information?

► Can a standardized terminology be developed that can be applied

internationally?

► Who are the identified users of service performance information,

what are their needs, and what type of service performance

information is needed to meet these needs?

► Are there content elements of service performance information that

should

be considered for inclusion in general purpose financial reports?

Introduction

Ernst & Young 21

► What are the alternatives for reporting service performance

information?

In October 2011, the IPSASB has issued a Consultation Paper, Reporting Service

Performance Information. The CP expresses the view that reporting service

performance information is necessary to meet the objectives of financial reporting,

i.e., accountability and decision making. In contrast to the former work of the

IPSASB, which mainly focused on financial statements, service performance

reporting is based on a wider scope as it comprises financial and non-financial

as well as quantitative and qualitative information. The information provided

focuses on the achievement of service delivery objectives in the current reporting

period, as well as anticipated future service delivery activities and resource needs.

The Consultation Paper communicates and solicits feedback on (1) the preliminary

views reached by the IPSASB, and (2) other specific matters related to the reporting

of service performance information on which the IPSASB has not yet reached a

preliminary view. A sub-objective of the Consultation Paper is also to present a

standardized service performance information terminology with associated working

definitions.

As public sector entities deliver goods and services rather than generate profits,

their success can only be partially evaluated by examining their financial position

and financial performance information at the reporting date. The IPSASB is of the

view that the reporting of performance information about services being provided

is necessary to meet the objectives of financial reporting by public sector entities.

Service performance information is defined as performance information about the

services being provided by a public sector entity. Service performance is part of

GPFRs.

Public sector entities have a responsibility to be publicly accountable to their users

(recipients of services or their representatives, and the providers of resources or

their representatives), and to provide information that is useful for the decision-

making purposes of those users. Reporting service performance information will

assist public sector entities in meeting this responsibility by providing users with

information to assist them in assessing the entity’s performance in providing

services, and the effects of those services.

The IPSASB has reached four preliminary views regarding the reporting of service

performance information:

1) The reporting of service performance information is necessary to meet the

objectives of financial reporting (accountability and decision-making) as

proposed in the Conceptual Framework Exposure Draft (CF-ED 1).

2) Developing a standardized service performance information terminology for

the reporting of service performance information is appropriate, and should

include the following seven terms and working definitions:

a) Objective: An objective is a statement of the result a reporting entity

is aiming to achieve.

Introduction

22 IPSAS Explained

b) Performance indicators: Performance Indicators are quantitative or

qualitative measures that describe the extent to which a service is

achieving its objectives.

c) Inputs: Inputs are the resources of a reporting entity used to produce

outputs in delivering its objectives.

d) Outputs: Outputs are the goods and services, including transfers

to others, provided by a reporting entity in delivering its objectives.

e) Outcomes: Outcomes are the impacts of outputs in delivering

the reporting entity’s objectives.

f) Efficiency indicators: Efficiency indicators are measures

of the relationship between inputs and outputs.

g) Effectiveness indicators: Effectiveness indicators are measures

of the relationship between outputs and outcomes.

The following graph outlines the relationships within the IPSASB’s terminology:

Figure 2: Terminological relationships in service performance reporting

3) Components of service performance information to be reported are

(a) information on the scope of the service performance information reported,

(b) information on the public sector entity’s objectives, (c) information on the

achievement of objectives, and (d) narrative discussion of the achievement of

objectives.

4) The qualitative characteristics of information and pervasive constraints

on the information that is currently included in GPFRs of public sector entities

also apply to service performance information.

Besides these preliminary views the IPSASB has identified a number of specific

matters related to the reporting of service performance information. The IPSASB

is requesting feedback from respondents on these specific matters for comments,

Objectives

Inputs Outputs Outcomes

Efficiency

indicators

Effectiveness

indicators

Performance

indicators

Introduction

Ernst & Young 23

e.g., the question whether the IPSASB should consider issuing (1) non-authoritative

guidance for those public sector entities that choose to report service performance

information, (2) authoritative guidance requiring public sector entities that choose

to issue a service performance report to apply the guidance, or (3) authoritative

guidance requiring public sector entities to report service performance information.

In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements,

IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities,

IAS 27 (revised 2011), Separate Financial Statements, and IAS 28 (revised 2011),

Investments in Associates and Joint Ventures, for which the IPSASB has equivalent

standards. In June 2011, the IPSASB approved a Project Brief on Revision of

IPSASs 6-8. The project will now consider the revision of IPSASs 6-8 as they

relate to the underlying IFRSs.

In June 2011, the IPSASB approved a project on the First-time Adoption of Accrual

IPSASs. In this project the IPSASB intends to develop a standard that sets out

requirements for the first-time adoption of accrual IPSASs. The project will deal

with questions such as:

► What are the issues relating to the implementation of IPSASs for

those entities that are not already using the accrual basis of

accounting?

► For those entities already on an accrual basis of accounting, should

the requirements be converged to IFRS 1, First-Time Adoption of

International Financial Reporting Standards or are there public

sector specific reasons for departures?

► Should there be specific requirements for entities that adopt IPSASs

over

a number of reporting periods?

Another project approved in June 2011 is a project on Alignment of IPSASs and

Public Sector Statistical Reporting Guidance. This project involves an analysis of

the differences between the revised Government Finance Statistics Manual 2008

(GFSM 2008) and pronouncements in the IPSASB Handbook of International Public

Sector Accounting Pronouncements and an evaluation of the extent to which further

harmonization between statistical reporting guidance and IPSASs might be feasible.

In the project also an illustrative chart of accounts will be developed that could

facilitate compilation of reports based on the statistical reporting guidance and

IPSASs. Furthermore, an evaluation will be performed whether amendments should

be made to IPSAS 22, Disclosure of Financial Information about the General

Government Sector in the light of changes to System of National Accounts 2008

(SNA 2008) and updated GFSM and European System of Accounts 1995 (ESA 95).

Finally, the IPSASB has a continuously repeating project on Updating IPSASs.

The aim of this project is to maintain alignment between the IPSASs which are

Introduction

24 IPSAS Explained

adapted from IASs/IFRSs to the extent appropriate for the public sector. In this

project the IPSASB monitors the IASBs work program. By tracking the activities

of the IASB the IPSASB is aware where there is a need for convergence.

In December 2011 meeting the IPSASB approved a project on Government Business

Enterprises (GBEs). The objective of the project is to explore issues with the current

definitions of GBEs and will consider whether the current accounting requirements

are adequate. In this meeting the IPSASB also agreed that an education session on

social benefit obligations would be helpful in the ongoing discussions about the

appropriate timing for starting a project. In addition, the IPSASB expressed its

interest in a project on emissions trading schemes and the work done by the

IASB on that project so far.

The IPSASB also pursues a project on Heritage Assets, but this project is not active

at the moment.

2.9 Process for reviewing and modifying IASB documents

The IPSASB addresses public sector financial reporting issues in two different ways:

on the one hand, the IPSASB develops public sector specific IPSASs which have no

equivalent in IFRS. Typically, these IPSASs deal with issues that have not been

comprehensively or appropriately dealt with in IFRS or for which there is no related

IFRS. On the other hand, the IPSASB develops IPSASs that are converged with IFRS

by adapting them to the public sector context.

In order to have guidelines for the development of IPSASs by adaptation,

the IPSASB developed its “Process for Reviewing and Modifying IASB Documents”

in October 2008. The IPSASB will use the analysis resulting from this process when

developing the related IPSASB document to determine whether identified public

sector issues warrant departures from the IASB document. The IPSASB will use

professional judgement in reaching its conclusions.

The IPSASB is using the following “Process for Reviewing and Modifying IASB

Documents” for its analysis:

Introduction

Ernst & Young 25

Figure 3: Process for reviewing and modifying IASB documents

The goal of the first step in the analysis is to determine whether there are public

sector issues that warrant a departure in recognition, measurement or in

presentation or disclosure from an IASB document.

Therefore, it has to be considered whether applying the requirements of the IASB

documents would mean (i) that objectives of public sector financial reporting are

not adequately met, (ii) that the qualitative characteristics of public sector financial

reporting are not adequately met, or (iii) that undue costs or efforts are required.

The decisions of the IPSASB are made in the context of consistency with the

Conceptual Framework for General Purpose Financial Reporting by Public Sector

Entities as it develops, of internal consistency with the existing IPSASs and of

consistency with the statistical bases.

In the event that identified public sector issues do not warrant departure, step 4

is applied. If identified public sector issues do warrant departure, step 2 follows.

The goal of the second step is to decide whether to initiate a separate public sector

project by considering the nature of the identified public sector issue. The need to

consider the nature of the identified public sector issue arises when a public sector

issue is not dealt with at all in an IASB document. In this case, it is likely that a

separate public sector project will be initiated.

In other situations, the IASB document may deal with an issue but may not address

public sector circumstances, or may not do so adequately. For the decision whether

Process for reviewing and modifying IASB documents

1. Are there

public sector

issues that warrant

departure?

2. Should a

seperate public

sector project be

initiated?

3. Modify IASB

documents

4. Make IPSASB style and terminology changes

5. Seperate public

sector project

6. IPSASB document

Yes Yes

NoNo

Introduction

26 IPSAS Explained

to amend an IASB document or whether to initiate a separate public sector project

(a) the importance and prevalence of the public sector issue and (b) the adequacy

with which it has been dealt with in the IASB documents has to be assessed.

If step 2 leads to a separate public sector project, a project brief is prepared for

the IPSASB approval and the project follows the regular standard-setting due

process. If the public-sector-specific issues can be addressed within a document

that is converged with the related IASB document, step 3 will apply.

The goal of the third step is to set parameters for modifying an IASB document

to address public sector departures. When public sector issues warranting departure

can be addressed in an IPSASB document that is converged with a related IASB

document with some modification, it is important to establish parameters for the

extent of modification. Modifications are made only to address the public sector

issue that triggered the amendment. The IPSASB paper concerning the “Process

for Reviewing and Modifying IASB Documents” lists possible modifications and/or

amendments for modifying IASB documents.

The goal of the fourth step is to identify changes in style and terminology to be

applied to all IPSASs. In many cases, the style and terminology of an IPSASB

document that is converged with a related IASB document will require changes.

Amendments, which will be limited according to the IPSASB, could result from

the following considerations:

i) Changes in text and style that simplify or clarify the document from a public

sector perspective.

ii) Definitions in an IASB document that have no public sector context may be

deleted or amended.

iii) References to an IASB document for which for which an equivalent IPSAS has

not been issued will be replaced with” the relevant international or national

accounting standard dealing with [specific topic]”.

iv) Terminology changes may be made to better reflect the public sector scope

of the documents.

v) Each IPSAS will be accompanied by a Basis for Conclusions that does not form

part of the IPSAS. The Basis for Conclusions will focus on the modifications to

the IASB document. Specifically, it will include a detailed description of the

public sector issue, the rationale for departing from the related IASB document,

and the implication of the changes.

vi) Initial adoption and transitional provisions may differ to reflect public sector

circumstances.

Steps 3 and 4 give an existing IASB document a “public sector flavor”. If no IASB

document exists which covers a certain issue, a separate public sector project will be

Introduction

Ernst & Young 27

initiated (step 5). After reaching a conclusion, the IPSASB will apply its standard-

setting due process in developing the final standard (see section 2.9 below).

The process of reviewing IASB documents is ongoing and will be regularly assessed

to determine whether any changes are needed to enhance the process.

2.10 Procedures for developing accounting standards

To develop IPSASs, the IPSASB has chosen a due process that gives interested

parties such as the IFAC member organizations, auditors and accountants, preparers

of financial statements (including ministries of finance), standard setters and

individuals the opportunity to submit their comments. In addition, the IPSASB has

a consultative group to discuss important projects, technical questions and priorities

relating to the working program. In its Conceptual Framework project the IPSASB is

supported by a group of national standard setters (NSS).

Introduction

28 IPSAS Explained

The IPSASB’s due process for a project generally comprises the steps illustrated in

figure 4:

Figure 4: The IPSASB’s due process

The due process starts with a decision by the board whether a standard or other

guidance should be developed on a certain matter or not. This decision is typically

made within a work planning session at an IPSASB meeting. In general, the IPSASB

agrees to continue with a project based on a so-called project brief, which is

developed by the IPSASB staff. Then, the board agrees on the project brief and

sets a rough guideline for the further development of the standard. Depending on

the project the IPSASB will either choose to develop an Exposure Draft directly or

to start with a consultation paper and develop the Exposure Draft afterwards. Once

the draft consultation paper has been completed by the IPSASB staff, the board

issues its final remarks on the consultation paper and approves it. Usually, the

Study of national accounting requirements and practice and an exchange of views

about the issues with national standard setters.

Consideration of pronouncements issued by the International Accounting standards Board

(IASB), national standard setters, regulatory authorities and other authoritative bodies,

professional accounting bodies, and other organizations interested in financial reporting

in the public sector.

Formation of Task-Based Groups (TBGs), Task Forces or subcommittees to provide input

to the IPSASB on a project.

Publication of an exposure draft for public comment usually for at least four months. This

provides an opportunity for those affected by the IPSASB’s pronouncements to present their

views before the pronouncements are finalized and approved by the IPSASB. The exposure

draft will include a basis for conclusion.

Publication of an IPSAS which includes a Basis for Conclusion that explains the steps

in the IPSASB’s due process and how the IPSASB reached its conclusions.

Consideration of all comments received within the comment period, and to make modifications

to proposed standards as considered appropriate in the light of the IPSASB’s objectives.

Introduction

Ernst & Young 29

consultation paperccontains requests for comments on certain matters of the paper.

The paper is made available to the general public on the website of the IFAC and can

be commented on by interested parties. Following the phase of exposure for

comment and subsequent revision by IPSASB employees, an Exposure Draft is

presented to the board for approval. Once the IPSASB has approved the Exposure

Draft, it is published and requests for comment are sought publicly. Based on the

comments received the IPSASB will revise the proposed standard and finally approve

it as a standard. Occasionally, the IPSASB may reissue the Exposure Draft as such

(re-exposure) if there are any significant issues that have been changed due to

constituent’s comments.

A majority of two thirds of the voting rights on the IPSASB is required for approval

of consultation papers, Exposure Draft or standards. Each member of the IPSASB

has one vote. Since January 2012, the vote can be exercised only by the appointed

member, i.e., votes can no longer be delegated to other IPSASB members. The text

of a pronouncement that is published by the IPSASB in English is deemed to be the

approved version.

The general structure of an IPSAS is as follows:

► Introduction*

► Objective

► Scope

► Definitions

► Accounting policies/content of the IPSAS

► Transitional provisions

► Effective date

► Appendices

► Basis for conclusions

► Application guidance (where appropriate)

► Comparison with the corresponding IFRS (where appropriate)

Figure 5: Structure of an IPSAS

* Introduction section of each IPSAS will be deleted according to the IPSASB Pronouncement

“Improvements to IPSASs 2011”

It has to be noted that Application Guidance is an integral part of an IPSAS, whereas

Implementation Guidance accompanies but is not part of an IPSAS.

Introduction

30 IPSAS Explained

2.11 IPSASs for accrual basis of accounting and cash basis

of accounting

Due to their financial sovereignty, jurisdictions such as nations or states have the

authority to decide on how they want to structure public sector accounting within

their jurisdiction. A global survey of Ernst & Young on public sector accounting

in 2011 showed that most countries apply IPSAS-like standards (8 out of 33)

at the central/federal level of government which means that these countries

have their own national accounting and financial reporting system but used the

IPSAS as a blueprint or guideline. Apart from that, mainly requirements relating

to financial statistics have had an impact on public financial reporting to date.

This impact is going to increase due to the enhancing trend of alignment of

statistical regulations, such as the IMF Statistics Department’s Government

Finance Statistics Manual 2001 (GFSM 2001), the System of National Accounts

2008 (2008 SNA) or the European System of Accounts (ESA 95), and IPSASs

(see section 2.8, Other Current Projects of the IPSASB).

Public sector entities that keep their accounts in accordance with IPSASs can

choose to use either accrual accounting or cash accounting. The IPSASB has

decided to issue only one standard on the cash basis of accounting — the Cash Basis

IPSAS. All other IPSASs are developed exclusively on the accrual basis of

accounting − in line with the accounting concept applied in IFRSs. This documents

the IPSASB’s preference for this basis of accounting. This preference seems to be

more and more reflected by accounting reality. The above mentioned survey showed

that accrual accounting is more and more used at the national/federal government

level in all regions of the world. Although, cash-basis accounting is still very

common, especially in Asia and Africa, the results of the survey have also shown

that these regions share the most dynamic development and reform plans towards

accrual accounting. Other countries in the Americas, Europe and Oceania have

already largely moved to accrual-based accounting.

As a large number of the accrual basis IPSASs are based on IFRSs, the “Framework

for the Presentation of Financial Statements” issued by the IASB is a key reference

point in the application of the IPSASs. However, the IPSASB has realized that the

specific nature of the public sector calls for an individual framework for the public

sector. Additionally, many IFRS-using countries have indicated their willingness to

consider a conversion towards IPSAS, based on the condition that the way of future

standard-setting is clearly outlined in a Conceptual Framework. In cooperation with

national standard setters and other organizations, the IPSASB therefore is in the

process of drafting such a framework (for further information on the IPSASB’s

Conceptual Framework project see chapter 2.7).

Introduction

Ernst & Young 31

2.12 Background to the application of international accounting

standards for the public sector

Internationally, the (New) Public Management movement has gained outstanding

importance in the public sector reform. One of the key components of this new way

of managing public affairs is the reform of public sector accounting and financial

reporting. This new financial governance model for public sector organizations often

entails reforms of their budgets. The accrual basis of accounting constitutes a major

reform element in this context.

A global trend of alignment of public sector accounting with the international

accounting standards for the public sector is currently emerging. The table below

gives an overview of major countries and regions that have decided to introduce

IPSASs or similar accounting standards or have already done so.

Argentina

Armenia

Austria

Brazil

Israel

Latvia

Lithuania

Malaysia

Romania

Russia

Switzerland

South Africa

China

France

India

Morocco

New Zealand

Nigeria

Spain

Tanzania

Ukraine

Indonesia Pakistan

Table 6: Overview of major countries that have decided to introduce IPSASs/similar accounting standards

or have already done so (sources: http://www.ifac.org/sites/default/files/downloads/

IPSASB_Adoption_Governments.pdf, September 2008 and Ernst & Young, Toward transparency,

A comparative study on the challenges of reporting for governments and public bodies around the

world, 2011)

The IPSASB has also found that the public sector accounting practice in Australia,

Canada, the UK and the United States is already largely in compliance with IPSASs.

For example, Australia and UK use IFRSs as a basis for governmental accounting.

The supranational organizations listed below have also decided to introduce IPSASs.

This is another fact underlining the growing importance of IPSASs.

► Commonwealth secretariat

► Council of Europe

► European Commission

► European Space Agency (ESA)

► European Organisation for the Exploitation of Meteorological Satellites

(Eumetsat)

► OECD

► NATO

► United Nations (including all its institutions, such as UNESCO, UNICEF,WFP, etc.)

Table 7: Overview of supranational organizations that have decided to introduce IPSASs or have already

done so (source: own research)

Introduction

32 IPSAS Explained

The project launched by the United Nations and its institutions is one of the most

significant and noteworthy cases worldwide of a transition to IPSASs.

In contrast to supranational organizations, which often adopt IPSASs directly,

states have financial and legislative power and therefore tend to use this power

to align their national accounting provisions to these standards instead of adopting

them directly.

The adoption of international accounting standards ensures comparative and

standardized information on finances and the economic situation of public sector

entities across jurisdictions. Since IPSASs have been derived from IFRSs, they are

able to build on an accounting basis that has been well established in the private

sector over recent years. This common basis makes for convergence in private and

public sector accounting for comparable matters − while at the same time allowing

for divergence where rules specifically adapted to the public sector are required.

Because they are geared towards decision-making needs, the IPSASs provide the

executive and legislature with a better basis for their decisions on the allocation

of resources. The accrual basis IPSASs take account of operational performance

indicators such as provisions or amortization and depreciation. This makes IPSASs

a suitable basis for efficient and effective public management. The accrual basis

IPSASs can thus promote action guided by the principle of intergenerational equity

and make a contribution to sustainable administrative action.

The IPSASB has the aim of creating high-quality international accounting

standards for the public sector such that they ensure a fair presentation of the

financial position, financial performance and cash flows of public sector entities

(cf. IPSAS 1.27). In addition, they are intended to achieve transparency in the

presentation of the financial position of public sector entities (cf. paragraph 27

of the Preface to International Public Sector Accounting Standards). Finally, they

serve to enhance the accountability of the executive and legislature. The objective

of accounting in accordance with IPSASs is, on the one hand, to provide public

decision-makers with relevant information and, on the other, to ensure

accountability for the public funds and resources entrusted to the entity

(cf. IPSAS 1.15).

The IPSASs can also make a significant contribution for national standard setters.

They can be of help to the authorities responsible for public sector accounting

(e.g., a specially established standard setter) or the legislature when amending

or revising accrual basis standards.

Introduction

Ernst & Young 33

2.13 Provisions for the transition from the cash basis to the accrual

basis of accounting

The Cash Basis IPSAS recommends that public sector entities make voluntary

disclosures on the accrual basis of accounting even if their financial statements

are prepared using the cash basis of accounting. A public sector entity in transition

from the cash basis to the accrual basis of accounting may want to include certain

accrual basis disclosures in the financial statements during that phase. The status

(e.g., audited or unaudited) and the part of the report that contains the additional

disclosures (the notes to the financial statements or an extra section in the financial

report) are determined by the nature of the disclosures (e.g., reliability and

completeness) as well as the legislative environment and the legal provisions that

apply to the financial statements within the jurisdiction.

The IPSASB has also set itself the aim of facilitating compliance with the accrual

basis IPSASs by means of transitional provisions in certain standards. Once a public

sector entity has decided to adopt accrual accounting in accordance with the

IPSASs, the transitional provisions set forth the dates applicable for the transition.

Upon expiry of the transitional provisions, the public sector entity is required

to prepare its financial statements in compliance with accrual basis IPSASs in

all respects. IPSAS 1, Presentation of Financial Statements includes the following

requirements: “An entity whose financial statements comply with International

Public Sector Accounting Standards should disclose that fact. Financial statements

should not be described as complying with International Public Sector Accounting

Standards unless they comply with all the requirements of each applicable

International Public Sector Accounting Standard.” (cf. par. 24 of the Preface to

International Public Sector Accounting Standards). IPSAS 1 also requires disclosures

on the extent to which the public sector entity has applied transitional provisions.

IPSASs containing transitional provisions grant public sector entities an additional

period to achieve full compliance with certain accrual basis IPSASs or afford an

exemption from certain duties for the first-time adoption of IPSASs. Subject to the

approval of the competent national legislature or standard setter and the applicable

statutory provisions, a public sector entity may choose to adopt accrual accounting

in accordance with IPSASs. As of that point in time, the public sector entity is then

required to comply with all accrual basis IPSASs. As mentioned earlier, however,

it may also make use of the transitional provisions afforded by the individual IPSAS.

In order to facilitate the adoption of IPSASs, the IPSASB has prepared Study 14,

Transition to the Accrual Basis of Accounting: Guidance for Public Sector Entities.

This IPSASB Study provides guidance on the transition from the cash to the accrual

basis but it may also be useful for entities reporting on an accrual basis and

considering the adoption of accrual IPSASs. In January 2011 an updated and

improved version of Study 14 was issued. Besides IPSAS 32 the third edition

of Study 14 covers all 31 IPSASs.

Introduction

34 IPSAS Explained

In 2011 the IPSASB has started a project on the first-time adoption of accrual

IPSASs. The project will consider issues related to public sector entities that are

moving from an accrual basis of accounting to accrual IPSASs, but it will also

consider entities that are moving from a cash basis, modified cash basis or partial

accrual basis of accounting to accrual IPSASs. The project will consistently refine

the current transitional provisions under IPSASs and will also concentrate them in

one single standard.

3 Measurement bases in accordance with IPSASs

The principal measurement bases for initial and for subsequent measurement

in accordance with IPSASs include cost, fair value and present value. Since these

measurement bases are fundamental to numerous IPSASs, they will be introduced

in this chapter.

In this context it has to be stated that the IPSASB covers measurement in phase 3

of its conceptual framework project (cf. chapter 2.7). Phase 3 will obviously have

an impact on the measurement bases in accordance with IPSASs. Discussions of the

board have shown that it will not be possible to specify a single measurement basis

for all the elements of financial reporting. The IPSASB therefore is in the process

of discussing the appropriate measurement basis for the different types of assets

and liabilities.

In addition to the principal measurement bases underlying the IPSASs, most

of which correspond to those of IFRSs, certain IPSASs introduce further specific

bases for initial or subsequent measurement such as net realizable value and

current replacement cost in IPSAS 12, recoverable (service) amount in IPSAS 17,

21 and 26 or value in use under IPSAS 21 and 26. These measurement bases are

presented in more detail in the context of the relevant standard.

3.1 Cost

As defined in IPSAS 16.7, cost is the amount of cash or cash equivalents paid

or the fair value of any other consideration given to acquire an asset at the time

of its acquisition or construction. Cost thus also includes all consideration given in

exchange for the asset subject to measurement, which is either the cash and cash

equivalents paid for the acquisition or, for barter transactions for example, the fair

value of the consideration at the date of acquisition.

As a rule, IPSASs use the generic term “cost” instead of distinguishing between

acquisition and construction cost or costs of purchase and costs of conversion

(cf. IPSAS 12, 16 and 17).

Introduction

Ernst & Young 35

Acquisition cost/costs of purchase

Acquisition costs or costs of purchase are one of the key measurement bases

(as under IFRS) for all assets acquired by a public sector entity (cf. IPSAS 12.18,

16.26 or 17.26). In accordance with IPSAS 17.26, for example, items of property,

plant and equipment that qualify for recognition in the statement of financial

position are recognized at cost. The individual elements of cost are listed in IPSAS

17.30 et seq.

Construction cost/costs of conversion

Construction costs or costs of conversion are the key measurement basis for all

assets wholly or partly constructed by a public sector entity itself (cf. in particular

IPSAS 12.20 and IPSAS 17.26). Such assets include self-constructed and internally

used property, plant and equipment as well as work in progress and finished goods.

In accordance with IPSAS 17.36, the cost of a self-constructed asset is determined

using the same principles as for an acquired asset. If an entity produces similar

assets for sale in the normal course of business or administrative operations,

the cost of the asset is usually the same as the cost of constructing an asset for

sale (cf. IPSAS 12, Inventories). Therefore, any internal surpluses are eliminated in

arriving at such costs. Similarly, the cost of abnormal amounts of spoilage, labor,

or other resources incurred in self-constructing an asset is not included in the cost

of the asset.

Neither IPSASs nor IFRSs indicate that a distinction should be made between

the production cost of property, plant and equipment and the costs of conversion

of inventories. Commentaries on the IFRSs take this to mean that the production

cost of property, plant and equipment incurred in making the asset available for

use should be determined in the same way as the costs of conversion of inventories.

The cost of self-constructed property, plant and equipment hence comprises full

construction-related costs. For determining costs of conversion of inventories,

please refer to IPSAS 12, Inventories.

Advantages and disadvantages of cost as measurement basis

On the one hand, the Conceptual Framework Phase 3 Consultation Paper

acknowledges that (historical) cost is a widely used measurement basis of financial

reporting, and therefore is a familiar concept to preparers and users alike. Because

historical cost is usually recorded when assets are acquired by purchase, it is often

relatively objective and simple to apply.

Compared to other measurement bases, historical cost information generally has a

high degree of verifiability. Because of its simplicity, historical cost information can

likely be prepared more quickly than that prepared using other bases, and so its use

contributes to timeliness, and minimizes preparation cost. Also there is a high

degree of understandability of information based on historical cost, because

it generally relates to actual transactions the entity undertakes.

Introduction

36 IPSAS Explained

On the other hand, public sector entities often have to deal with assets which are

contributed, or provided on subsidized terms, or received in exchange for other

non-cash assets. Here, the historical cost basis may not faithfully represent the

value of the assets acquired, as the value of the asset has been change in the

course of time.

The same argument applies to liabilities as they do not always arise from

transactions or events that specify the amount of the obligation.

3.2 Fair value

Fair value is another principal measurement base of IPSASs. It is referred

to in measuring assets and liabilities for example in IPSAS 4, 9, 12, 13, 15,

16, 17, 21, 26, 27, 29, 31 or 32.

Fair value is defined as the amount for which an asset could be exchanged,

or a liability settled, between knowledgeable, willing parties in an arm’s length

transaction. Fair value is also at the heart of the revaluation method for measuring

property, plant and equipment after recognition as an asset.

It is of importance especially for the public sector that assets acquired in a

non-exchange transaction are measured at fair value as at the date of acquisition

(cf. IPSAS 17.27). Moreover, as a reference value for comparison with amortized

cost, fair value plays an important role in impairment testing (cf., e.g., IPSAS 26.20

et seq.)

If the asset to be measured is publicly traded, e.g., on an exchange, determining

fair value is comparatively straight-forward. If it is not publicly traded, IPSAS 26.40

requires fair value to be “based on the best information available”, taking into

account “the outcome of recent transactions for similar assets within the same

industry”.

Advantages and disadvantages of fair value as measurement basis

In contrast to the historical cost basis, fair value represents a market value approach

and can be characterized as an exit value. In case that fair value cannot be derived

from direct observation, it is estimated by reference to hypothetical markets and

participants on those markets. In case that fair value can be observed, it can easily

be understood, whereas when it is derived by reference to hypothetical markets its

determination is sometimes hard to comprehend. Because of possible references

to hypothetical markets fair values are characterized by more subjectivity than for

example cost. In case of non-exchange transactions fair value more faithfully

represents the actual value a public sector entity receives as a result of the

transaction.

Introduction

Ernst & Young 37

3.3 Present value

The present value of an asset comprises the discounted cash flows expected

to be generated by the asset in the ordinary course of operations. Accordingly,

the present value of a liability comprises the discounted cash flows required

to be paid to settle the liability in the ordinary course of operations.

For instance in exchange transactions for a consideration that have long-term

payment terms, the present value of the monetary consideration serves as a basis

to measure the outstanding receivable (cf. IPSAS 9.16). Another example are

provisions, which are recognized at present value in accordance with IPSAS 19.53

if the effect of the time value of money relating to the settlement of the obligation

is material.

According to Consultation Paper Phase 3 the present value is not considered

as a separate measurement basis other than cost or fair value.

38 IPSAS Explained

II. Impact of the global financial crisis

and the sovereign debt crisis on

public sector accounting

1 Context of the global financial crisis 2008—2009

The year 2008 saw the deepest recession since the 1930s. An unprecedented

series of government interventions in the financial sector followed and the

economy at large aimed at restoring confidence in national financial institutions

and supporting global demand. Governments had to provide considerable financial

resources to help the economy to recover from severe disruptions on the world’s

capital markets. The actions taken by governments involved significant expenditure

of taxpayers’ money.

The scale and breadth of this financial crisis and the complexity of the policy

responses have created two crucial issues for public sector accounting. The first

issue is simply to understand the nature of these unprecedented government

interventions. While the developments are similar throughout all countries,

no two countries’ policy responses are identical. The second issue is to consider

how these interventions should be reported in government accounts.

These interventions took place in many different ways. Public sector entities had

granted guarantees, taken responsibility for toxic loans, performed fiscal support

and made a number of purchases. Governments had put forward different sets

of measures to counteract the economic downturn, with different emphasis on a

particular policy according to the specific nature of the local environment, industry

focus of the country, budget constraints, etc.

Interventions have typically included:

► Recapitalization and investments: Bank recapitalization became

fairly common in the crisis, especially for financial institutions that

were material to the financial system as a whole. In addition, some

corporate entities needed capital injections. As a result, public

sector entities had become shareholders in banks and other

corporate entities. In some cases corporate entities had even been

nationalized (e.g., Freddie Mac and Fannie Mae in the US, Hypo Real

Estate in Germany or Northern Rock in the UK).

► Takeover risks: Some direct asset purchases had been made in the

wake of the crisis, with public sector entities purchasing illiquid or

toxic bonds from banks. So-called “bad banks” had been set up

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

Ernst & Young 39

around the world as a means of allowing private banks to take

problem assets off their books.

► Fiscal support: A wide range of measures had been taken, aimed at

different target groups. In various countries around the world,

economic stimulus packages offering direct subsidies had been set

up to stimulate the economy

as a whole. Many governments also launched infrastructure

investment programs (mainly transportation, housing, schools,

universities, hospitals and energy). Supplementing these general

programs, the targeted measures introduced range from liquidity

support provided to individual market players

in the form of credit lines and tax relief for certain enterprises and

persons right through to support for household incomes (especially

for persons with low income and the unemployed).

► Financial guarantees: In many countries, state guarantees were

provided

for bank deposits, interbank loans and, in some cases, for bonds and

even corporate loans.

Around the world, financial support had been provided mainly to enterprises in the

banking, automotive, energy and real estate/construction industries. State aid was

also directed towards small and medium-sized enterprises. In the US, government

had taken several measures to provide support to the damaged US financial system.

In 2008, a US$700b scheme was approved, known as the Troubled Asset Relief

Program (TARP). TARP allowed the United States Department of the Treasury

to purchase or insure up to US$700b of “troubled” assets from US financial

institutions. The American Recovery and Reinvestment Act of 2009 was signed

into law on 17 February 2009. The measures were nominally worth a total

of US$787b. The act included federal tax relief, expansion of unemployment

benefits and other social welfare provisions, and domestic spending on education,

healthcare and infrastructure, including the energy sector. One of the main

objectives of the act was to save three to four million jobs. In Canada, the Economic

Action Plan provided support in the region of CAD 30-40b to the Canadian economy

in 2009. The French government, for example, proposed a €26b plan, with €11.6b

to support private companies and €10.5b for public investments. In Germany,

parliament approved a €32b rescue package in November 2008. In 2009, a second

rescue plan was approved including the spending of €82b over the next two years.

In the UK one of the biggest challenges was the turmoil in the banking sector.

The UK has spent GBP 94b to prop up the Royal Bank of Scotland, HBOS and

Lloyds TSB, as well as nationalizing Northern Rock and parts of Bradford & Bingley.

The Treasury and the Bank of England have pledged hundreds of billions of pounds

of further support for the fragile banking system. The Indian government announced

two stimulus packages, involving additional government expenditure of US$8b.

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

40 IPSAS Explained

The main focus of the Indian government had been to ensure adequate liquidity

in the banking system.

In light of the strong governmental interventions, the question was how to reflect

these actions appropriately in the financial reporting of public sector entities.

Many of the interventions were not directly addressed in currently existing public

sector accounting standards because the underlying transactions were new for

public sector entities. Especially during the global financial crisis, however, there

was a need for a clear and fair presentation of the economic consequences of these

interventions.

In May 2009, the IPSASB and the International Monetary Fund (IMF) formed

a joint task force to exchange experiences about government interventions made

in response to the global financial crisis and to consider how these interventions

should be treated in financial statements. The aim of the task force was to achieve

consistency in financial reporting between governments.

Although the fact that aftershocks have been observed, literature comes to the

conclusion that the global financial crisis ended between late 2008 and mid 2009.

The public sector’s response to the financial crisis as described above had a

significant impact on short and long-term budgets. This gave rise to political

pressure in many jurisdictions, as citizens questioned the long-term financial

consequences of the various interventions that had been adopted to deal with

the crisis. As a consequence the IPSASB set up a project on long-term fiscal

sustainability. In October 2011 the IPSASB has issued Exposure Draft 46,

Recommended Practice Guideline, Reporting on the Long-Term Sustainability

of a Public Sector Entity’s Finances, which is one of the main outputs of the

IPSASB’s project on long-term fiscal sustainability.

2 Accounting issues relating to public sector

interventions

The global financial crisis has raised a number of issues that had to be considered

thoroughly in the analysis and development of accounting standards. In the light

of the IPSASB’s strategic aim to provide a complete set of accounting standards,

a discussion started on how the existing and future IPSASB’s pronouncements might

address relevant accounting issues relating to the different kinds of governmental

interventions.

The recurrent use of the term “transparency” in the context of the discussion

underlines that it represents one of the key values in financial reporting by

governments. Transparency raises the issue whether general purpose financial

statements or general purpose financial reports must include all information

necessary for accountability purposes. This leads to the question whether the

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

Ernst & Young 41

current IPSASB’s pronouncements give sufficient guidance on financial reporting

of governmental interventions in order to achieve accountability. Besides the

Recommended Practice Guideline, Reporting on the Long-Term Sustainability

of a Public Sector Entity’s Finances the current focus of the IPSASB’s

pronouncements is on General Purpose Financial Statements.

2.1 Accounting for recapitalization or investments

As a result of the financial crisis, public sector entities became shareholders

in financial institutions and other corporate entities. In some cases, financial

institutions and other corporate entities had even been nationalized. From the

perspective of the public sector entity, consideration had to be given to how

these interests should be accounted for and whether they need to be consolidated.

When a government purchased interests directly, the question was how to measure

these assets. When interests in financial institutions and other corporate entities

were purchased, there is a risk that impairment losses might need to be recognized

by the public sector entities in subsequent accounting periods. In general, these

interventions − most of which relating to the acquisition of cash-generating assets −

are addressed in IPSAS 26, Impairment of Cash-Generating Assets. According

to IPSAS 26.22 an entity must assess at each reporting date whether there is any

indication that a cash-generating asset may be impaired. If any such indication

exists, the entity estimates the recoverable amount of the asset. In order to

determine whether a cash-generating asset is impaired, public sector entities must

consider the indications listed in IPSAS 26.25. An impairment loss is recognized

if the recoverable amount of an asset is less than its carrying amount

(cf. IPSAS 26.72). However, the scope of that standard does not cover financial

instruments. IPSAS 29 deals with impairment and uncollectibility of financial assets

(cf. IPSAS 29.67 et seq.). Thus, in its entirety the IPSASB’s pronouncements should

comprise sufficient guidance regarding the treatment of impairment losses on

purchases of assets as state intervention.

According to IPSAS 6, the acquired entities may be subject to consolidation in some

cases. The decisive criterion for consolidation according to IPSAS 6.20 is control,

which is the power to govern the financial and operating policies of another entity

in order to benefit from its activities. Some might argue that consolidation is not

required because control over the acquired entity is only temporary or because the

activities of the acquired entity are dissimilar to those of the public sector entity.

Under IPSAS 6, a controlled entity may be excluded from consolidation if there is

evidence that (a) control is intended to be temporary because the controlled entity is

acquired and held exclusively with a view to its disposal within 12 months from

acquisition and (b) management is actively seeking a buyer (cf. IPSAS 6.21).

However, a controlled entity is not excluded from consolidation under IPSASs when

its activities are dissimilar to those of the other entities within the economic entity.

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

42 IPSAS Explained

In that case, relevant information is provided by disclosing additional information,

for example by way of segment reporting (cf. IPSAS 6.27). Based on the planned

revision of IPSAS 6, the IPSASB had in its September 2011 meeting a discussion

whether the temporary control exemption from consolidation of a controlled entity

in IPSAS 6 should be retained. IPSAS 6 is based on IAS 27, Consolidated and

Separate Financial Statements. With the issuance of IFRS 5, Non-current Assets Held

for Sale and Discontinued Operations, by the IASB the temporary control exemption

was removed from IAS 27. IFRS 5 includes requirements where a subsidiary is

classified as held for sale. When the IPSASB had this discussion, it was noted that

there are public sector-specific issues relating to the use of the temporary control

exemption. As an example coming out of the financial crisis, the acquisition of a bank

by a government with the intention of selling it as soon as economic conditions

improved sufficiently to allow this, was given. In this meeting the IPSASB agreed that

the use of the temporary control exemption needs to be resolved taking into account

the public sector context and that the acquisition of banks by governments in the

global financial crisis is a separate issue to the temporary control exemption.

As a result of this discussion the temporary control exemption is still valid and the

IPSASB will likely deal with this issue in more depth in its project on the revision of

IPSASs 6-8.

During the financial crisis some governments acted through special purpose entities

with no direct interest, often referred to as “bad banks”. A bad bank is a financial

institution created by a government to hold “non-performing loans” (which are

essentially assets). Currently, IPSASs do not cover the question of consolidation

of special purpose entities. Under IFRSs SIC Interpretation 12, Consolidation –

Special Purpose Entities, address the question when a special purpose entity should

be consolidated.

2.2 Accounting for fiscal support

Against the backdrop of the financial crisis, fiscal support had been implemented by

means such as the purchase of goods and services for current use, the purchase of

goods and services for the creation of future benefits (infrastructure investments

or research spending), liquidity support, tax reduction or transfers (mainly for social

security and social benefits).

Where fiscal support is provided by way of direct public expenditure, investments in

infrastructure assets are a popular target of investments. Such infrastructure assets

are mainly covered by IPSAS 17 (cf. IPSAS 17.21). Furthermore, the IPSASB has

developed guidance for service concession arrangements, often referred to as public

private partnerships (PPP, cf. IPSAS 32, Service Concession Arrangements).

Where fiscal support takes the form of liquidity support involving credit lines rather

than direct subsidies, the terms of the credit transactions need to be examined.

Concessionary loans pose particular accounting issues to the public sector

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

Ernst & Young 43

(cf. IPSAS 29.AG84 to AG90). These are loans granted to or received by an entity

at below-market terms. They must be distinguished from the waiver of debt.

A waiver of debt results from loans initially granted or received at market terms

where the intention of either party to the loan has changed subsequent to its initial

issue or receipt. This distinction determines whether below-market conditions are

considered in the initial recognition or measurement of the loan, or as part of the

subsequent measurement or derecognition. Where the concessionary loan is granted

by a public sector entity, any difference between the fair value of the loan and the

transaction price is recognized as an expense in surplus or deficit at initial

recognition (cf. IPSAS 29.AG89 (b)).

To sum up one may conclude that IPSASs give sufficient guidance to achieve

accountability on the issues relating to fiscal support. However, that does not

hold true for future tax reduction programs which have been announced by several

governments. These programs will lead to future financial burdens because they will

impair the power to tax. As the power to tax is not recognized as an intangible asset

(see discussion in phase 2 of the Conceptual Framework project, cf. CP — Phase 2,

Conceptual Framework for General Purpose Financial Reporting by Public Sector

Entities: Elements and Recognition in Financial Statements, Par. 2.49 ff.), there

is no point to account for announced tax reduction programs.

2.3 Accounting for financial guarantees

As a consequence of the financial crisis, many public sector entities have

provided financial guarantees to banks and corporate entities. As long as the

outflow of resources embodying economic benefits or service potential is not

probable, financial guarantees fall into the category of contingent liabilities

(cf. IPSAS 19.18, 19.20 and 19.37), which, in accordance with IPSAS 19.35,

may however not be recognized in the statement of financial position. Accordingly,

financial guarantees are treated as an off-balance sheet transaction (cf. IPSAS

19.36 and 19.100), in contrast to direct liquidity support which is reported in the

statement of financial position.

In the public sector, financial guarantees are frequently provided for no

consideration or for nominal consideration to further the entity’s economic and

social objectives. In the current financial crisis, financial guarantees have been used

to restore confidence in, and protect the stability of, the financial markets.

From an accounting point of view there is the difficulty of identifying an accurate

measurement. In cases of contractual financial guarantees for nominal

consideration, the transaction price related to a financial guarantee contract does

not reflect fair value because recognition on the basis of the transaction price would

not accurately reflect the issuer’s exposure to financial risk.

IPSAS 29 now provides guidance on the accounting treatment of contractual

financial guarantees. The IPSASB has concluded that financial guarantee contracts

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

44 IPSAS Explained

issued for no consideration or for nominal consideration (non-exchange transaction)

should be accounted for as financial instruments (cf. IPSAS 29.AG3). At initial

recognition, where no fee is charged or where the consideration is not fair value,

a public sector entity firstly considers whether the fair value can be obtained

through observation of quoted prices available in an active market for financial

guarantee contracts directly equivalent to that entered into (level one). Where

there is no active market for a directly equivalent guarantee contract, public sector

entities should apply a mathematical valuation technique to obtain a fair value (level

two). Alternatively, the principles of IPSAS 19 for initial recognition are applied

(level three).

In summary it can be concluded that the application of IPSASs on financial

guarantee contracts is sufficient from an accountability point of view. However,

it has to be stated that currently IPSASs contain no specific guidance dealing with

non-contractual financial guarantees announced by governments. For example,

a government may give general deposit guarantees to its citizens. This gives rise

to financial risks which are not shown in the general purpose financial reports.

Finally, one has to add that as soon as the outflow of resources becomes probable,

non-contractual guarantees announced by governments may give rise to a provision

in accordance with IPSAS 19.18 ff.

3 The sovereign debt crisis

3.1 Evolution of the crisis

At the end of 2009, the sovereign debt crisis started mainly because of the fear of

rising government debt levels across the globe. In November 2009, following the

Dubai sovereign debt crisis, concerns about some EU member states’ debts arose. In

December 2009, Greece admitted that its current debts were €300b. At that time,

Greece was burdened with debt of about 113% of gross domestic product (GDP),

which is nearly double the eurozone limit as set by the Maastricht criteria

of 60%. Based on these developments, ratings agencies started to downgrade

Greek bank and government debt.

In January 2010, a report of the European Commission (EC) on Greek government

deficit and debt statistics identified “severe irregularities in the Excessive Deficit

Procedure (EDP) notifications of April and October 2009, including submission

of incorrect data, and non-respect of accounting rules and of the timing of the

notification”. The report of the EC states that on 2 and 21 October 2009, the

Greek authorities transmitted two different sets of complete EDP notification

tables to Eurostat, covering the government deficit and debt data for 2005–2008,

and a forecast for 2009. In the 21 October notification, the Greek government

deficit for 2008 was revised from 5.0% of GDP to 7.7% of GDP. At the same time,

the Greek authorities also revised the planned deficit ratio for 2009 from 3.7% of

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

Ernst & Young 45

GDP to 12.7% of GDP, reflecting a number of factors (impact of the economic crisis,

budgetary slippages in an electoral year and accounting decisions). Based in the

Maastricht Stability and Growth Pact, the European member states are only allowed

to have a deficit-to-GDP ratio of 3%. This revision upwards from 3.7% to 12.7% was

more than four times the maximum allowed by the Maastricht criteria. In April 2010,

new data from Greece even showed a gap of 13.6% of GDP, and not the 12.7% first

reported beginning of the year.

The Maastricht criteria are essential to the so-called Excessive Deficit Procedure

(EDP). The statistics related to EDP are based on the European System of Accounts

1995 (ESA 1995). Eurostat is responsible for assessing the quality of the data

provided by the EU member states and for providing the data to be used within the

context of the EDP.

The EC report which was prepared by Eurostat explained that revisions of this

magnitude in the estimated past government deficit ratios had been extremely

seldom in other EU member states, but had taken place for Greece more often.

According to the report, these revisions illustrate the lack of quality of the Greek

fiscal statistics. The European Commission concluded that despite the progress in

the compilation of fiscal statistics in Greece and despite the intense scrutiny of the

Greek fiscal data by Eurostat since 2004, these measures had not been sufficient

to bring the quality of Greek fiscal data to the level reached by other EU member

states. The report named problems related to statistical weaknesses and problems

related to failures of the relevant Greek institutions as the main factors leading

to these major revisions.

Later in 2010 concerns started to rise about other heavily indebted countries in

Europe, like Portugal, Ireland, Italy or Spain. One of the main fears was and still is

that the crisis could spread to several other countries in Europe. As a result of these

developments, the euro continued to fall against the dollar and other major

currencies in the world. In 2010 and 2011, certain European states besides Greece

experienced a wave of downgrading of their government debt, e.g., Belgium, Italy,

Portugal and Spain. As a consequence of downgrading, investors demanded higher

interest rates from several governments with higher debt levels or deficits. This in

turn made it more difficult for governments to finance further budget deficits and

service existing high debt levels. In 2011 even Spain and Italy were forced to act:

In September 2011, Spain passed a constitutional amendment to add in a “golden

rule,” keeping future budget deficits to a strict limit. On 14 September 2011, Italy’s

parliament approved a supplementary budget which aims to reach a balanced budget

already in 2013. The overall fiscal adjustment comprises an amount of €59.8b,

which represents 3.4% of the Italian GDP. In Germany, a so-called “debt brake”

was introduced. This fiscal instrument is an amendment to the constitution that

legally limits the size of sovereign debt of the federal government and of the state

governments in Germany.

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

46 IPSAS Explained

3.2 Major measures taken to solve the crisis in 2010 and 2011

On the one hand, those countries which came under scrutiny of capital markets were

forced to act and many of them presented austerity measures mainly to increase tax

returns and to cut expenditures. On the other hand, supranational organizations like

the European Union or the IMF took measures in order to help the respective

countries. The following table gives an overview of major measures by supranational

organizations to solve the European sovereign debt crisis:

1) 25 March 2010: The heads of state and government of the euro area agreed

on that the euro area member states will contribute to coordinated bilateral

loans. These bilateral loans are a part of a package for Greece involving IMF

as well as European financing. On 23 April 2010, the Greek government

requested that the EU/IMF bailout package be activated.

2) 7/9 May 2010: the eurozone members and the IMF agreed on a €110b bailout

package to rescue Greece. Based on the decisions taken on 9 May 2010 within

the framework of the Ecofin Council, the European Union and euro-area

member states set up the European Stabilisation Mechanism that consists

of the European Financial Stabilisation Mechanism (EFSM) and the European

Financial Stability Facility (EFSF). The EFSM allows member states in difficulties

caused by exceptional circumstances beyond their control to ask for financial

assistance from the mechanism. The EFSM has a total volume of up to €500b.

The EFSF’s mandate is to safeguard financial stability in Europe by providing

financial assistance to euro area member states.

3) 28 November 2010: Following the official Irish request for financial assistance

from the European Union, the euro-area member states and the IMF, the joint

EC/IMF/ECB mission reached agreement with the Irish authorities on a

comprehensive policy package for the period 2010–2013. This includes a joint

financing package of €85b.

4) 16/17 December 2010: The European Council agreed on the establishment

of a future permanent mechanism to safeguard the financial stability of the

euro area as a whole (so-called European Stability Mechanism (ESM)). The ESM

will be based on the European Financial Stability Facility capable of providing

financial assistance packages to euro area member states under strict

conditionality functioning according to the rules of the current EFSF. The ESM

will become operational as of mid–2013 following the expiry of the existing

EFSF. It is foreseen that the ESM will act as an intergovernmental organization

and will have €80b paid-in capital and €620b callable capital. Currently,

it is planned that the ESM will have a lending capacity of about €500b.

5) 17 May 2011: Eurozone countries and the IMF approved a €78b bailout

for Portugal.

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Ernst & Young 47

6) 21 July 2011: The heads of state or government of the euro area set up

a second bailout program for Greece. It was agreed to support a new program

for Greece and, together with the IMF and the voluntary contribution of the

private sector, to fully cover the financing gap.

The total official financing will amount to an estimated €109b.

7) 7 August 2011: The European Central Bank announced that it would buy

eurozone bonds, following emergency talks on the debt crisis.

8) 26 October 2011: The leaders of the 17 Eurozone countries agreed on the

following major measures:

a) An agreement that should secure the decline of the Greek debt to GDP

ratio with an objective of reaching 120% by 2020. Euro area Member

States will contribute to the bail-out package up to €30b. The nominal

discount will be 50% on notional Greek debt held by private investors.

b) The EFSF is allowed to leverage its resources. The leverage effect will

vary, depending on their specific features and market conditions, but

could be up to 4 or 5, which is expected to yield around €1t. Currently

it is not clear how this leverage effect will be achieved.

c) A comprehensive set of measures to raise confidence in the banking

sector by (i) facilitating access to term-funding through a coordinated

approach at EU level and (ii) the increase in the capital position of banks

to 9% by the end of June 2012.

d) Strengthening of economic and fiscal coordination and surveillance

within the eurozone as well as measures to improve the governance

of the euro area.

9) 9 December 2011: The euro area heads of state or government agreed on

a new “fiscal compact” and on significantly stronger coordination of economic

policies in areas of common interest. Attempts to get all 27 EU countries to

agree to the European Union treaties changes failed. The new accord is to be

agreed by the participating member states (the 17 members of the euro area

and 6 other EU member states) by March 2012. The main measures agreed will

be described in further detail in the next chapter.

Table 8: Major measures taken by supranational organizations to solve the European sovereign debt crisis

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

48 IPSAS Explained

3.3 Effects of the sovereign debt crisis on public sector

financial management

The above mentioned report of the European Commission in January 2010

concluded that Greek authorities need to resolve the methodological problems.

Nevertheless, also a need to put in place transparent and reliable working practices

between the national services concerned, and to revise the institutional setting

in order to guarantee the professional independence and full accountability of the

European national statistical offices and of the other services involved in the domain

of EDP data was identified.

As a result of the Greek crisis the European Commission identified the quality of

statistical data in the context of the excessive deficit procedure as a major issue.

In the Council Regulation (EU) No 679/2010 of 26 July 2010 the European Council

concluded that “it is of the utmost importance that data reported by Member States

[…] on the application of the Protocol on the excessive deficit procedure […] are

of high quality and reliability.” Based on the experiences with Greek reporting the

council recognizes that “recent developments have also clearly demonstrated that

the current governance framework for fiscal statistics still does not mitigate, to the

extent necessary, the risk of incorrect or inaccurate data being notified to the

Commission.” Therefore, the above mentioned Council Regulation grants Eurostat

additional rights of access to a widened scope of information for the needs of data

quality assessment. Eurostat is allowed to undertake measures to assure quality and

to manage the quality of the data received from member states. In carrying out

methodological visits to a member state whose statistical information is under

scrutiny Eurostat is now entitled to have access to the accounts of all government

entities at central, state, local and social security levels, including the provision of

underlying detailed accounting and budgetary information, relevant statistical

surveys and questionnaires and further related information, respecting the

legislation on data protection as well as statistical confidentiality.

In May 2011, the European Parliament discussed a proposal for a Council

directive on requirements for budgetary frameworks of the member states

(cf. http://www. europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-

2011-0184&language=EN). The first draft of this proposal foresaw in Article 3

No. 1b that EU member states shall move to adopt International Public Sector

Accounting Standards within three years of this Directive coming into force.

During its discussions the European Parliament deleted this requirement. Instead the

final Council directive 2011/85/EU of 8 November 2011 incorporates in Article 14a

No. 3 that the Commission shall conduct no later than the end of 2012 an

assessment of the suitability of the International Public Sector Accounting Standards

for member states.

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

Ernst & Young 49

In addition, the Council directive contains a more general provision saying that EU

member states shall have in place public accounting systems comprehensively and

consistently covering all subsectors of general government and containing the

information needed to generate accrual data with a view to preparing ESA 95-based

data. Those public accounting systems shall be subject to internal control and

independent audit. Based on Article 16 of the Council Directive Eurostat was

commissioned to conduct the above mentioned assessment of the suitability of

IPSASs for EU member states. The assessment report is considered as necessary to

inform the European policy makers of the advantages and disadvantages of adopting

IPSASs. At 15 February 2012 Eurostat has issued a public consultation paper with

the aim to support and inform the European Commission’s assessment. On behalf of

European Commission, Eurostat seeks for comments on the advantages/

disadvantages, challenges and opportunities of implementing IPSAS for the EU

member states.

Finally, the decisions taken by the euro area heads of state or government

on 9 December 2011 will have a strong impact on the economic governance

of the eurozone. 17 members of the euro area and six other EU countries were

ready to participate in the new fiscal compact and engage in a significantly stronger

coordination of economic policies. The goal of the compact, as a response to the

current crisis, is to strengthen fiscal discipline and introduce more automatic

sanctions and stricter surveillance. The main element of the fiscal compact is a fiscal

rule which contains the following elements:

A requirement for national general government budgets to be in balance or

in surplus (the structural deficit should not exceed 0.5% of nominal GDP) and

a requirement to incorporate this rule into the member states’ national legal systems

(at constitutional or equivalent level). The rule will contain an automatic correction

mechanism that shall be triggered in the event of deviation.

Member states undergoing an Excessive Deficit Procedure will have to submit

to the Commission and the Council for endorsement the structural reforms they

plan to take in order to meet the requirement to correct excessive deficits.

The implementation of the program, and the yearly budgetary plans consistent with

it, will be monitored by the European Commission and the Council.

A mechanism will be installed for the ex ante reporting by member states of their

national debt issuance plans.

The Excessive Deficit Procedure will be reinforced for the euro area member states.

As soon as a member state is recognized to breach the 3% ceiling by the European

Commission, there will be “automatic consequences” unless a qualified majority of

euro area member states vote against. The member states would also have to vote

by qualified majority to stop the Commission from imposing sanctions.

Impact of the global financial crisis and the sovereign debt crisis on public sector accounting

50 IPSAS Explained

The member states are also committed to coordinating their economic policies and

working towards a common economic policy. A procedure will be established to

ensure that all major economic policy reforms planned by euro area member states

will be discussed and coordinated at the level of the euro area, with a view to

benchmarking best practices.

In addition to the measures described above, the eurozone member states want to

accelerate the implementation of the European Stability Mechanism (ESM). The

purpose of the ESM will be to provide financial assistance to the euro area member

states, in case that a member experiences or is threatened by severe financing

problems, if indispensable for safeguarding financial stability in the euro area as a

whole. It is planned that as of July 2012 the ESM is available as a permanent crisis

mechanism for financial assistance. In July 2013 it should replace the current,

provisional European Financial Stability Facility.

Based on the fact that not all EU member states agreed on the decisions taken at the

Euro Summit, they decided to adopt them through an international agreement. In

the European Council meeting 1-2 March 2012, 25 EU member states signed the

Treaty on Stability, Coordination and Governance aimed at strengthening fiscal

discipline and introducing stricter surveillance within the euro area, in particular by

establishing a “balanced budget rule”. The objective remains to integrate these

provisions into the treaties of the Union as soon as possible.

51 IPSAS Explained

III. Overview of accrual basis IPSASs

IPSAS 1: Presentation of Financial Statements

Objective

IPSAS 1 provides the bases of presentation for general purpose financial

statements in order to ensure comparability on the one hand with the entity’s

financial statements of previous periods and, on the other, with the financial

statements of other public sector entities. The standard sets out overall

requirements of the presentation of financial statements prepared under the

accrual basis of accounting, and provides guidance for the structure and minimum

requirements of the content of such financial statements. The recognition and

measurement of specific transactions and other events, and the corresponding

disclosure requirements are dealt with in other International Public Sector

Accounting Standards.

The IFRS on which the IPSAS is based

IAS 1, Presentation of Financial Statements

Content

Principal definitions

Assets are resources controlled by an entity as a result of past events and from

which future economic benefits or service potential are expected to flow to the

entity.

Liabilities are present obligations of the entity arising from past events, the

settlement of which is expected to result in an outflow from the entity of resources

embodying economic benefits or service potential.

Net assets/equity is the residual interest in the assets of the entity after deducting

all its liabilities.

Revenue is the gross inflow of economic benefits or service potential during the

reporting period when those inflows result in an increase in net assets/equity, other

than increases relating to contributions from owners.

Expenses are decreases in economic benefits or service potential during the

reporting period in the form of outflows or consumption of assets or incurrences

IPSAS 1: Presentation of Financial Statements

52 IPSAS Explained

of liabilities that result in decreases in net assets/equity, other than those relating

to distributions to owners.

The term economic entity means a group of entities comprising a controlling entity

and one or more controlled entities.

Scope

IPSAS 1 is of particular significance for the financial reporting of public sector

entities as it is applicable for all general purpose financial statements prepared

under the accrual basis of accounting.

Purpose of financial statements

The objective of general purpose financial statements is to provide information

to meet the needs of those users of financial statements who are not in a position

to demand reporting adapted to their needs. The users of general purpose financial

statements include taxpayers, members of parliaments, creditors, suppliers, the

media and public sector employees.

Financial statements prepared in accordance with IPSASs must present fairly the

financial position, financial performance and cash flows of an entity (cf. IPSAS 1.27).

To meet this requirement, a public sector entity must first of all observe general

qualitative characteristics of financial reporting.

Such “qualitative characteristics of financial reporting” are fundamental principles

for preparing financial statements in accordance with IPSASs. Despite the fact that

they are presented only as an appendix to IPSAS 1, they are an integral part of

IPSAS 1. The four principal qualitative characteristics are understandability,

relevance, reliability and comparability. These principles ensure that the users of

financial statements are provided with useful information for decision-making

purposes. The following table gives an overview of all the qualitative characteristics

of financial reporting:

1) Understandability

2) Relevance

3) Materiality

4) Reliability

5) Faithful representation

6) Substance over form

7) Neutrality

8) Prudence

9) Completeness

10) Comparability

IPSAS 1: Presentation of Financial Statements

Ernst & Young 53

Constraints on Relevant and Reliable Information

1) Timeliness

2) Balance between benefit and cost

3) Balance between qualitative characteristics

Table 9: Qualitative characteristics of financial reporting

For further details of the qualitative characteristics of financial reporting please

refer to Appendix A of IPSAS 1.

Furthermore, IPSAS 1 defines general standards for the preparation of financial

statements. These include the going concern assumption (IPSAS 1.38 et seq.),

consistency of presentation (IPSAS 1.42 et seq.), materiality and aggregation

(IPSAS 1.45 et seq.), offsetting (IPSAS 1.48 et seq.) and comparative information

(IPSAS 1.53 et seq.).

Components of financial statements

A complete set of financial statements in accordance with accrual basis IPSASs

comprises the following components listed in IPSAS 1.21:

► A statement of financial position

► A statement of financial performance

► A statement of changes in net assets/equity

► A cash flow statement

► When the entity makes publicly available its approved budget, a

comparison of budget and actual amounts either as separate

additional financial statements or as a budget column in the

financial statements

► Notes, comprising a summary of significant accounting policies and

other explanatory notes

Public sector entities whose financial statements comply with IPSASs should disclose

that fact in the notes to the financial statements. Financial statements that do not

comply with all the requirements of the applicable IPSASs must not be described as

complying with IPSASs. Only in extremely rare circumstances when the management

of a public sector entity has reached the conclusion that compliance with a

requirement in an IPSAS would give a misleading presentation may an entity depart

from this requirement. The following graph illustrates the principal relationships

between fair presentation and IPSAS compliance:

IPSAS 1: Presentation of Financial Statements

54 IPSAS Explained

Figure 6: Relationship between fair presentation and IPSAS compliance

When preparing financial statements, a public sector entity is required to assess

whether it can be assumed that it is able to continue as a going concern (cf. IPSAS

1.38). Generally, financial statements of a public sector entity are prepared on a

going concern basis unless there is an intention to liquidate the entity or discontinue

business or administrative operations, or there is no alternative but to do so. Should

the management of a public sector entity have significant doubt as to the entity’s

ability to continue as a going concern, such uncertainties must be disclosed. Where

financial statements are not prepared on a going concern basis, the public sector

entity is required to disclose the fact, together with the reasons for that assessment

as well as the basis on which the financial statements are prepared (cf. IPSAS 1.38).

Principle of fair presentation

(cf. IPSAS 1.27)

‘The application of IPSASs […] is presumed to result

in financial statement that achieve a fair presentation’

Does the entity

comply with all

the requirements

by IPSASs?

The entity is in

compliance with IPSASs

The entity is not in

compliance with IPSASs

The entity shall make an explicit and

unreserved statement of compliance

with IPSASs in the notes (cf. IPSAS 1.28)

IPSAS 1: Presentation of Financial Statements

Ernst & Young 55

The presentation and classification of items in the financial statements must be

consistent from one period to another unless required otherwise by a significant

change in the nature of the entity’s operations or a change in one or more IPSASs

(cf. IPSAS 1.42).

Each material class of items in the financial statements must be presented

separately (cf. IPSAS 1.45). Aggregating items of a different nature or function

is permitted only if they are immaterial individually.

Assets and liabilities, and revenue and expenses, may not be offset unless offsetting

is expressly permitted or required by another IPSAS (cf. IPSAS 1.48).

Comparative prior-period information must be presented for all amounts shown

in the financial statements and notes (cf. IPSAS 1.53). Comparative information

is included for narrative and descriptive information where relevant to an

understanding of the current period’s financial statements. If the presentation

or classification is amended, comparative amounts are also reclassified unless

it is impracticable to do so. The nature and amount reclassified and reason for

the reclassification must be disclosed.

Financial statements are presented at least annually (cf. IPSAS 1.66). If the

reporting date changes and financial statements are presented for a period

other than one year, disclosure thereof is required.

Statement of financial position

IPSAS 1 specifies minimum line items to be presented in the statement of financial

position and the statement of financial performance, and includes guidance for

identifying whether additional line items, headings and sub-totals are required (see

table 10).

There is no particular requirement as to the format of presentation of the statement

of financial position (cf. IPSAS 1.90). It may be presented either in account form or

vertical form.

In accordance with IPSAS 1.70, the statement of financial position presents assets

and liabilities classified by maturity as current and non-current. An exception may

only be made if classification by liquidity provides more reliable and relevant

information.

Assets and liabilities are classified as current when they are expected to be

recovered or settled in the course of ordinary operations or within 12 months

of the reporting date (for further details, cf. IPSAS 1.76 et seq. and IPSAS 1.80 et

seq.). A public sector entity must disclose the amount expected to be recovered

or settled after more than 12 months for each asset and liability line item that

combines amounts expected to be recovered or settled both within 12 months

of the reporting date or thereafter.

IPSAS 1: Presentation of Financial Statements

56 IPSAS Explained

Information to be presented on the face of the statement of financial position:

a) Property, plant and equipment

b) Investment property

c) Intangible assets

d) Financial assets (excluding amounts shown under (e), (g), (h) and (i))

e) Investments accounted for using the equity method

f) Inventories

g) Recoverables from non-exchange transactions (taxes and transfers)

h) Receivables from exchange transactions

i) Cash and cash equivalents

j) Taxes and transfers payable

k) Payables under exchange transactions

l) Provisions

m) Financial liabilities (excluding amounts shown under (j), (k) and (l))

n) Minority interests, presented within net assets/equity

o) Net asset/equity attributable to owners of the controlling entity

Table 10: Minimum requirements of the statement of financial position in accordance with IPSAS 1.88

The specific recognition and measurement requirements for the individual line items

of the statement of financial position are set forth in the relevant standards instead

of in IPSAS 1.

Statement of financial performance

The minimum classification of a statement of financial performance is set forth

in IPSAS 1.102 (see table 11).

Public sector entities are required to present an analysis of expenses either

in the statement of financial performance or in the notes (cf. IPSAS 1.109 et seq.).

The expenses are classified either by nature or by their function within the entity,

depending on which classification provides more reliable and relevant information.

If an entity decides to classify expenses by function, it must also provide a

presentation by nature of expense in the notes, including depreciation and

amortization expense and employee benefits expense.

IPSAS 1: Presentation of Financial Statements

Ernst & Young 57

Information to be presented on the face of the statement

of financial performance:

20X1 20X0

a) Revenue X X

b) Finance costs X X

c) Share of the surplus or deficit of associates and joint

ventures accounted for using the equity method

X X

d) Pre-tax gain or loss recognized on the disposal of assets or

settlement of liabilities attributable to discontinuing

operations

X X

e) Surplus or deficit X X

Table 11: Minimum requirements of the statement of financial performance in accordance with

IPSAS 1.102

Statement of changes in net assets/equity

IPSAS 1 also contains provisions regarding the presentation of a statement

of changes in net assets/equity. The aim is to provide a break-down of movements

in equity, which are not recognized in surplus or deficit nor, accordingly, in the

statement of financial performance (cf. IPSAS 1.118 et seq.).

Information to be presented on the face of the statement of changes

in net assets/equity:

a) Surplus or deficit for the period

b) Each item of revenue and expense for the period that, as required by other

standards, is recognized directly in net assets/equity, and the total of these

items

c) Total revenue and expense for the period (calculated as the sum of (a) and (b)),

showing separately the total amounts attributable to owners of the controlling

entity and to minority interest

d) For each component of net assets/equity separately disclosed, the effects

of changes in accounting policies and corrections of errors recognized in

accordance with IPSAS 3

Table 12: Minimum requirements of the statement of changes in net assets/equity in accordance with

IPSAS 1.118

By analogy to IAS 1.97, public sector entities are required to present the amounts

of transactions with owners acting in their capacity as owners either in the

statement of changes in net assets/equity or in the notes, and to show distributions

or allocations to owners separately.

IPSAS 1: Presentation of Financial Statements

58 IPSAS Explained

Cash flow statement

The requirements of a cash flow statement and its structure are governed by

IPSAS 2.

Notes to the financial statements

IPSAS 1 contains extensive minimum disclosure requirements for the notes

to the financial statements. IPSAS 1 prescribes the following disclosures in the

notes, supplementing the disclosures required by individual IPSASs:

► Disclosure of the measurement bases used

► Disclosure of accounting policies used that are relevant to an

understanding

of the financial statements

► Information required by IPSASs that is not presented on the face of

the statement of financial position, statement of financial

performance, statement

of changes in equity or cash flow statements

► Disclosure of the extent to which transitional provisions have been

used

► Presentation of the judgments that management has made in the

process

of applying the public sector entity’s accounting policies that have

the most significant effect on the amounts recognized in the

financial statements

► Disclosure of the key assumptions concerning the future, and other

key sources of estimation uncertainty, that have a significant risk of

causing a material adjustment to the carrying amounts of assets

and liabilities within the next financial year. In respect of those

assets and liabilities the notes should include details of their nature

and their carrying amount as at the reporting date.

► Disclosure of the domicile and legal form of the entity

► A description of the nature of the entity’s operations

► A reference to the relevant legislation governing the entity’s

operations

► Disclosure of the name of the controlling entity and the ultimate

controlling entity of the economic entity

The implementation guidance to IPSAS 1 provides illustrative financial statements

comprising illustrative statements of financial position, statements of financial

IPSAS 1: Presentation of Financial Statements

Ernst & Young 59

performance and statements of changes in net assets/equity for public sector

entities.

Effective date

Periods beginning on or after 1 January 2008. Since 2010 IPSAS 1 has been

amended by other IPSASs as well as by Improvements to IPSASs. For the effective

dates of these amendments please refer to IPSAS 1.153A et seq.

IPSAS 2: Cash Flow Statement

60 IPSAS Explained

IPSAS 2: Cash Flow Statement

Objective

This standard requires the presentation of information about the historical changes

in cash and cash equivalents of an entity by means of a cash flow statement which

classifies cash flows during the period by operating, investing and financing

activities. The cash flow statement identifies the sources of cash inflows, the items

on which cash was expended during the reporting period, and the cash and cash

equivalents as at the reporting date. The cash flow statement is intended to provide

users of financial statements with information for both accountability and decision–

making purposes. Cash flow information allows users to understand how a public

sector entity raised the cash it required to fund its business and administrative

operations and how that cash was used.

The IFRS on which the IPSAS is based

IAS 7, Cash Flow Statements

Content

Principal definitions

The cash flow statement reports the cash flows during a reporting period and serves

to analyze the changes in cash and cash equivalents.

Cash flows are inflows and outflows of cash and cash equivalents.

Cash comprises cash on hand and demand deposits, whereas cash equivalents are

short-term, highly liquid investments that are readily convertible to known amounts

of cash and which are subject to an insignificant risk of changes in value. In some

countries, short-term bank borrowings (overdraft facilities) are also considered to

be cash provided they are payable on demand, thereby forming an integral part of

the entity’s cash management (cf. IPSAS 2.10). Cash generally does not include

equity investments.

Presentation, structure and content of the cash flow statement

The cash flows are reported separately by operating activities, investing activities

and financing activities. The following graph gives an overview of how the different

activities are separated in the cash flow statement.

IPSAS 2: Cash Flow Statement

Ernst & Young 61

Figure 7: Reporting of cash flows in separate activities

Cash flows from operating activities of a public sector entity are an indicator of the

extent to which a public sector entity is financed by taxes or the sale of goods and

services. Examples of cash flows from operating activities in accordance with

IPSAS 2.22 are:

a) Cash receipts from taxes, levies and fines

b) Cash receipts from charges for goods and services provided by the entity

c) Cash receipts from grants or transfers and other appropriations or other

budget authority made by central government or other public sector entities

d) Cash receipts from royalties, fees, commissions and other revenue

e) Cash payments to other public sector entities to finance their operations

(not including loans)

f) Cash payments to suppliers for goods and services

g) Cash payments to and on behalf of employees

h) Cash receipts and payments of an insurance entity for premiums and claims,

annuities and other policy benefits

i) Cash payments of local property taxes or income taxes (where appropriate)

in relation to operating activities

j) Cash receipts and payments from contracts held for dealing or trading purposes

k) Cash receipts or payments from discontinued operations

l) Cash receipts or payments in relation to litigation settlements

Table 13: Examples of cash flow from operating activities

In accordance with IPSAS 2.27 cash flows for operating activities are reported using

either the direct method recommended by the IPSASB or the indirect method.

Public sector entities reporting cash flows using the direct method are encouraged

to provide a reconciliation of the surplus/deficit from ordinary activities (statement

of financial performance) with the net cash flow from operating activities (cash flow

statement) either in the cash flow statement or the notes.

Cash flows are reported

in separate activities

Operating activities

(cf. IPSAS 2.21-24)

Direct method

(preferred by IPSASB)

(cf. IPSAS 2.27(a)

et seq.)

Investing activities

(cf. IPSAS 2.25)

Financing activities

(cf. IPSAS 2.26)

Indirect method

(allowed by IPSASB)

(cf. IPSAS 2.27(b)

et seq.)

IPSAS 2: Cash Flow Statement

62 IPSAS Explained

Cash flows from investing activities mainly consist of cash payments to acquire

resources that are intended to contribute to the entity’s future public service

delivery. Examples of cash flows from investing activities in accordance with

IPSAS 2.25 are:

a) Cash payments to acquire property, plant and equipment, intangibles and other

long-term assets. These payments include those relating to capitalized

development costs and self-constructed property, plant and equipment.

b) Cash receipts from sales of property, plant and equipment, intangibles

and other long-term assets

c) Cash payments to acquire equity or debt instruments of other entities

and interests in joint ventures (other than payments for those instruments

considered to be cash equivalents or those held for dealing or trading purposes)

d) Cash receipts from sales of equity or debt instruments of other entities

and interests in joint ventures (other than receipts for those instruments

considered to be cash equivalents and those held for dealing or trading

purposes)

e) Cash advances and loans made to other parties (other than advances

and loans made by a public financial institution)

f) Cash receipts from the repayment of advances and loans made to other parties

(other than advances and loans of a public financial institution)

g) Cash payments for futures contracts, forward contracts, option contracts

and swap contracts except when the contracts are held for dealing or trading

purposes, or the payments are classified as financing activities

h) Cash receipts from futures contracts, forward contracts, option contracts

and swap contracts except when the contracts are held for dealing or trading

purposes, or the receipts are classified as financing activities

Table 14: Examples of cash flows from investing activities

Cash flows from financing activities present valuable information in that they show

future claims by providers of capital to the entity. Examples of cash flows from

financing activities in accordance with IPSAS 2.26 are:

a) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and

other short or long-term borrowings

b) Cash repayments of amounts borrowed

c) Cash payments by a lessee for the reduction of the outstanding liability relating

to a finance lease

Table 15: Examples of cash flows from financing activities

Public sector entities are required to report separately all major classes of gross

cash receipts and gross cash payments arising from investing and financing activities

unless the standard expressly permits reporting cash flows on a net basis

(cf. IPSAS 2.32-35).

IPSAS 2: Cash Flow Statement

Ernst & Young 63

Cash flows arising from transactions in a foreign currency are recorded in an entity’s

functional currency by applying to the foreign currency amount the exchange rate

between the functional currency and the foreign currency at the date of the cash

flow. For the functional currency concept, see IPSAS 4.

Cash flows from interest and dividends received and paid are each disclosed

separately and classified in a consistent manner from period to period as either

operating, investing or financing activities.

Cash flows arising from taxes on net surplus are classified as cash flows from

operating activities unless they can be allocated to specific financing or investing

activities.

The aggregate cash flows arising from acquisitions and from disposals of subsidiaries

or other business units are presented separately and classified as investing

activities. Further specific disclosures are required.

In accordance with IPSAS 2.56, entities are required to disclose the components

of cash and cash equivalents and to present a reconciliation of the amounts in their

cash flow statement with the equivalent items reported in the statement of financial

position.

The following table is an example of the structure using the direct method:

20X0 20X1

Cash flows from operating activities

Receipts

Taxation X X

Sales of goods and services X X

Grants X X

Interest received X X

Other receipts X X

Payments

Employee costs (X) (X)

Superannuation (X) (X)

Suppliers (X) (X)

Interest paid (X) (X)

Other payments (X) (X)

Net cash flows from operating activities X X

Cash flows from investing activities

Purchase of property, plant and equipment (X) (X)

IPSAS 2: Cash Flow Statement

64 IPSAS Explained

20X0 20X1

Proceeds from the sale of property, plant and equipment X X

Proceeds from the sale of investments X X

Purchase of foreign currency securities (X) (X)

Net cash flows from investing activities (X) (X)

Cash flows from financing activities

Proceeds from borrowings X X

Repayment of borrowings (X) (X)

Distribution/dividend to government (X) (X)

Net cash flows from financing activities X X

Net increase/(decrease) in cash and cash equivalents X X

Cash and cash equivalents at the beginning of the

reporting period

X X

Cash and cash equivalents at the end of the reporting

period

X X

Table 16: Example of a cash flow statement prepared using the direct method in accordance with IPSAS 2

(cf. Appendix to IPSAS 2)

Effective date

Periods beginning on or after 1 July 2001. Since 2010 IPSAS 2 has also been

amended by Improvements to IPSASs. For the effective dates of these amendments

please refer to IPSAS 2.63A and 2.63B.

IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors

Ernst & Young 65

IPSAS 3: Accounting Policies, Changes in Accounting

Estimates and Errors

Objective

This standard governs the process of selecting and changing accounting policies, as

well as the accounting treatment and disclosure of changes in accounting policies,

changes in accounting estimates and the corrections of errors. IPSAS 3 sets out a

hierarchy of authoritative guidance for management to consider in the absence of a

standard that specifically applies to an item. The standard is intended to enhance the

relevance and reliability of a public sector entity’s financial statements as well as

comparability of those financial statements over time and with the financial

statements of other entities.

Disclosure requirements for accounting policies, except those for changes in

accounting policies, are set out in IPSAS 1, Presentation of Financial Statements”.

The IFRS on which the IPSAS is based

IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors

Content

Principal definitions

Accounting policies are the specific principles, bases, conventions, rules and

practices applied by an entity in preparing and presenting financial statements.

Retrospective application is applying a new accounting policy to transactions, other

events and conditions as if that policy had always been applied.

Prospective application of a change in accounting policy and of recognizing

the effect of a change in an accounting estimate, respectively, are

(a) Applying the new accounting policy to transactions, other events and

conditions occurring after the date as at which the policy is changed; and

(b) Recognizing the effect of the change in the accounting estimate in the current

and future periods affected by the change.

A change in accounting estimate is an adjustment of the carrying amount of an

asset or a liability, or the amount of the periodic consumption of an asset, that

results from the assessment of the present status of, and expected future benefits

and obligations associated with, assets and liabilities. Changes in accounting

estimates result from new information or new developments and, accordingly,

are not correction of errors.

IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors

66 IPSAS Explained

Omissions or misstatements of items are material if they could, individually or

collectively, influence the decisions or assessments of users made on the basis of the

financial statements.

Prior period errors are omissions from, and misstatements in, the entity’s financial

statements for one or more prior periods arising from a failure to use, or misuse

of, (a) reliable information that was available when financial statements for those

periods were authorized for issue; and (b) could reasonably be expected to have

been obtained and taken into account in the preparation and presentation of those

financial statements.

General provisions

When an IPSAS expressly refers to a transaction, other event or condition, the

accounting policies applicable to that item are determined by applying the standard

and considering any relevant Implementation Guidance issued by the IPSASB for the

standard.

In the absence of an IPSAS applicable to a transaction, other event or condition,

management must use judgment in developing and applying an accounting policy to

achieve disclosures that are:

► Relevant to the decision-making needs of users, and

► Reliable, in that the financial statements:

► Represent faithfully the financial position, financial performance and cash

flows of the entity

► Reflect the economic substance of transactions, other events and conditions

and not merely the legal form

► Are neutral, i.e., free from bias

► Are prudent

► Are complete in all material aspects

In the absence of an IPSAS applicable to a transaction, other event or condition,

IPSAS 3 refers to the hierarchy of authoritative guidance and prescribes that

management determine the relevant accounting policies by referring to the following

sources in the order given below:

► First, the requirements and guidance in IPSASs dealing with similar

and related issues are to be consulted.

► Second, management should refer to the definitions, recognition

and measurement criteria for assets, liabilities, revenue and

expenses described in other IPSASs.

IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors

Ernst & Young 67

► Finally, management may also consult recent pronouncements

issued by other standard setters and renowned public or private

sector practitioners, provided they do not conflict with the above

sources. These include in particular the pronouncements issued by

the International Accounting Standards Board (IASB) (including the

Framework), International Financial Reporting Standards (IFRSs)

and International Accounting Standards (IASs) and all

interpretations published by the International Financial Reporting

Interpretations Committee (IFRIC) or its predecessor, the Standing

Interpretations Committee (SIC).

The following graph summarizes the IPSASB’s hierarchy of authoritative guidance:

Figure 8: IPSASB’s hierarchy of authoritative guidance

Changes in accounting policies

Changes in accounting policy may be made only when required by an IPSAS or when

such changes result in the financial statements providing reliable and more relevant

information about the effects of transactions, other events or conditions on the

entity’s financial position, financial performance or cash flows.

A change from one basis of accounting to another, e.g., from cash basis to accrual

basis of accounting, or changes in the accounting treatment, recognition or

measurement within the same basis of accounting (e.g., accrual basis of accounting)

5.

Accepted public or private sector practices

(e.g., pronouncement of the IASB, IFRIC, or SIC)

2.

IPSASs dealing with

similar and related

issues

1.

IPSASs

3.

Definitions, recognition and

measurement criteria for assets,

liabilities, revenue and expenses

described in other IPSASs

4.

Most recent pronouncements of other

standard-setting bodies

IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors

68 IPSAS Explained

are deemed changes in a public sector entity’s accounting in accordance with

IPSAS 3.19 and 3.20.

By contrast, (a) the application of an accounting policy for transactions, other events

or conditions that differ in substance from those previously occurring and (b) the

application of a new accounting policy for transactions, other events or conditions

that did not occur previously or that were immaterial are not changes in accounting

policies. In addition, it has to be taken into account that the initial application of an

accounting policy to revalue assets in accordance with IPSAS 17, Property, Plant,

and Equipment, or IPSAS 31, Intangible Assets, is a change in accounting policy to

be dealt with as a revaluation in accordance with IPSAS 17 or IPSAS 31, rather than

in accordance with this Standard (cf. IPSAS 3.22).

When applying changes in accounting policies resulting from the initial application of

a standard, public sector entities must consider any specific transitional provisions

(cf. IPSAS 3.24 (a)).

When changing an accounting policy upon initial adoption of a standard that does

not include any specific transitional provisions applying to that change, entities must

apply the change retrospectively. The same applies when entities change an

accounting policy on a voluntary basis (cf. IPSAS 3.24(b)).

Figure 9: Accounting for a change in accounting policy

When retrospective application in accordance with IPSAS 3.24 (a) or (b) is required,

a change in accounting policy must be applied retrospectively unless it is

impracticable to determine either the period-specific effects or the cumulative effect

of the change.

Accounting for a change

in accounting policy

Initial application of an IPSAS

Upon initial application

of an IPSAS that does not

include specific transitional

provisions applying to that

change, or changes an

accounting policy voluntarily

Apply specific transitional

provisions in a standard (if any)

(cf. IPSAS 3.24(a))

Apply the change

retrospectively

(cf. IPSAS 3.24(b))

Take account

of IPSAS 3.28 et seq.

for limitations

of retrospective application

IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors

Ernst & Young 69

When a change in accounting policy is applied retrospectively, public sector entities

adjust the opening balance of each affected component of net assets/equity for the

earliest prior period presented and the other comparative amounts disclosed for

each prior period presented as if the new accounting policy had always been applied.

Consistency principle

Accounting policies must be applied consistently for similar transactions unless a

standard permits or requires categorization of items for which different policies may

be appropriate. If a standard requires or permits such categorization, an appropriate

accounting policy is selected and applied consistently to each category.

Changes in accounting estimates

The effects of changes in accounting estimates are recognized prospectively in

accordance with IPSAS 3.41 through surplus or deficit

a) in the period of change if the change affects the period only (e.g., changes in

the estimate of a doubtful receivable), or

b) in the period of the change and future periods if the change affects both the

reporting period and future periods (e.g., changes in accounting estimates

relating to the useful life of an asset subject to depreciation).

To the extent that a change in an accounting estimate gives rise to changes in assets

and liabilities or relates to an item of net assets/equity, it is recognized by adjusting

the carrying amount of the related asset, liability or net assets/equity item in the

period of change (cf. IPSAS 3.42).

Corrections of errors

Public sector entities are required to correct any material prior period errors

retrospectively in the first complete set of financial statements authorized for issue

after their discovery by: (a) restating the comparative amounts for the prior periods

presented in which the error occurred; or (b) if the error occurred before the earliest

prior period presented, restating the opening balances of assets, liabilities and net

assets/equity for the earliest prior period presented. An exception to this rule may

be made when it is impracticable to determine either the period-specific effects or

the cumulative effect of the error.

Effective date

Periods beginning on or after 1 January 2008. IPSAS 2.9, 2.11, and 2.14 were

amended by Improvements to IPSASs issued in January 2010. An entity shall apply

those amendments beginning on or after 1 January 2011.

IPSAS 4: The Effects of Changes in Foreign Exchange Rates

70 IPSAS Explained

IPSAS 4: The Effects of Changes in Foreign Exchange

Rates

Objective

There are two ways for public sector entities to enter into business relations at an

international level. Such business relations can either take the form of foreign

currency transactions with a foreign business partner or business or administrative

operations performed abroad. In addition, public sector entities may present their

financial statements in a foreign currency. The objective of this standard is to

prescribe how public sector entities should account for foreign currency transactions

and foreign operations in their financial statements and how to translate financial

statements into a presentation currency. In particular it addresses general issues

such as the exchange rates to be used and how the financial effects of changes in

exchange rates should be accounted for in the financial statements.

The IFRS on which the IPSAS is based

IAS 21, The Effects of Changes in Foreign Exchange Rates

Content

Principal definitions

Functional currency is the currency of the primary economic environment in which

the entity operates. The primary economic environment of an entity is normally the

one in which it primarily generates and expends cash.

Presentation currency is the currency in which the financial statements

are presented.

Scope

Public sector entities preparing financial statements under the accrual basis

of accounting are required to apply IPSAS 4:

a) In accounting for transactions and balances in foreign currencies, except for

those derivative transactions and balances that are within the scope of IPSAS

29, Financial Instruments: Recognition and Measurement;

b) In translating the financial performance and financial position of foreign

operations that are included in the financial statements of the entity by

consolidation, proportionate consolidation or by the equity method

c) In translating an entity’s financial performance and financial position

into a presentation currency

IPSAS 4: The Effects of Changes in Foreign Exchange Rates

Ernst & Young 71

Functional currency concept

The factors relevant for determining a public sector entity’s functional currency are

listed in IPSAS 4.11 et seq.

The functional currency reflects the underlying transactions, events and conditions

that are of relevance to the public sector entity. Once it has been determined,

a functional currency may therefore be changed only if there has been a change

in the underlying transactions, events and conditions.

If the functional currency is the currency of a hyperinflationary economy, the

requirements of IPSAS 10, Financial Reporting in Hyperinflationary Economies must

be observed in the entity’s financial statements.

Accounting for transactions in foreign currencies

As public sector entities tend to have only very few transactions in foreign currency

and conduct business or administrative operations abroad on a small scale only,

IPSAS 4 is not as relevant for the public sector as the corresponding IFRS is for the

private sector.

In preparing financial statements, every public sector entity – whether a stand-alone

entity, an entity with foreign operations (e.g., a parent) or a foreign operation

(e.g., a subsidiary or a branch) – decides on its functional currency.

Upon initial recognition, foreign currency transactions are recognized in the

functional currency by translating the foreign currency amount at the spot

exchange rate between the functional currency and foreign currency on the date of

the transaction.

Reporting in subsequent periods (cf. IPSAS 4.27): At each reporting date

a) Foreign currency monetary items are translated using the closing rate.

b) Non-monetary items that are measured in terms of historical cost in a foreign

currency are translated using the exchange rate at the date of the transaction.

c) Non-monetary items that are measured at fair value in a foreign currency are

translated using the exchange rates at the date when the fair value was

determined.

Exchange differences arising on the settlement of monetary items and on

translating monetary items at rates different from those used upon initial

recognition are recognized in surplus or deficit. Exchange differences arising from a

monetary item that forms part of the reporting entity’s net investment in a foreign

(business or administrative) operation are recognized as a separate component of

net assets/equity in the consolidated financial statements. Consolidated financial

statements also include the separate financial statements of foreign operations.

IPSAS 4: The Effects of Changes in Foreign Exchange Rates

72 IPSAS Explained

Upon disposal of the net investment the associated exchange differences are

recognized in surplus or deficit.

Translating to the presentation currency

IPSAS 4 permits reporting entities in the public sector to choose their presentation

currency (or currencies) freely. In addition, the financial position and financial

performance of every individual entity within the reporting entity whose functional

currency differs from the presentation currency must be translated to the reporting

entity’s presentation currency. The translation of financial statements to the

presentation currency is governed by IPSAS 4.43 et seq. When translating a foreign

(business or administrative) operation, the requirements of IPSAS 4.50 et seq. must

also be observed.

The financial performance and financial position of a public sector entity whose

functional currency is not the currency of a hyperinflationary economy are

translated into a different presentation currency as follows:

► Assets and liabilities for each statement of financial position

presented (i.e., including comparatives) are translated at the closing

rate at the date of that statement of financial position.

► Revenue and expenses in all statements of financial performance

(i.e., including comparative information) are translated at exchange

rates at the date of the transaction and all resulting exchange

differences are recognized as a separate component of net

assets/equity.

► Special rules apply for translating the financial performance and

financial position of an entity whose functional currency is the

currency of a hyperinflationary economy into a presentation

currency (cf. IPSAS 4.48).

Changing the functional currency

When changing the functional currency public sector entities must apply the

translation procedures applicable to the new functional currency prospectively as of

the date of transition.

Effective date

Periods beginning on or after 1 January 2010.

IPSAS 5: Borrowing Costs

Ernst & Young 73

IPSAS 5: Borrowing Costs

Objective

IPSAS 5 governs the accounting treatment for borrowing costs. In general, it

requires borrowing costs to be expensed immediately, but does permit, as an

allowed alternative treatment, the capitalization of borrowing costs that are directly

attributable to the acquisition, construction or production of a qualifying asset.

The IFRS on which the IPSAS is based

IAS 23, Borrowing Costs

Content

Principal definitions

Borrowing costs are interest and other expenses incurred by an entity in connection

with the borrowing of funds. Borrowing costs may include

► Interest on overdraft facilities or short-term and long-term

borrowings;

► Amortization of discounts or premiums relating to borrowings;

► Amortization of ancillary costs incurred in connection with the

arrangement of borrowings;

► Finance charges for finance leases; and

► Exchange differences arising from foreign currency borrowings to

the extent that they qualify as an adjustment to interest costs.

A qualifying asset is an asset that necessarily takes a substantial period of time to

get ready for its intended use or sale. Examples relevant for the public sector include

office buildings, hospitals, and infrastructure assets such as roads, bridges and

power generation facilities. Moreover, inventories that require a substantial period

of time to get ready for their intended use or sale are also qualifying assets

(IPSAS 5.13).

Recognition

Public sector entities can refer to the debt market to finance qualifying assets.

IPSAS 5: Borrowing Costs

74 IPSAS Explained

IPSAS 5 generally provides for two alternative methods with respect to the

accounting treatment for borrowing costs:

► Under the benchmark treatment, borrowing costs are recognized

as an expense in the period in which they are incurred. In this case,

the borrowings do not need to be allocated directly to the individual

assets. The benchmark treatment is the preferred method pursuant

to IPSAS 5 (see the section “Proposed Changes to IPSAS 5” below).

► Under the allowed alternative treatment, borrowing costs that are

directly attributable to the acquisition, construction or production

of a qualifying asset are capitalized as part of the cost of that asset.

When a public sector entity decides to adopt the allowed alternative treatment,

IPSAS 5.20 requires the treatment to be applied consistently to all borrowing costs

that are directly attributable to the acquisition, construction or production of the

qualifying assets of that public sector entity.

If funds are borrowed specifically for the purpose of obtaining a qualifying asset, the

amount of borrowing costs eligible for capitalization on that asset is determined by

deducting any investment income on the temporary investment of those borrowings

from the actual borrowing costs incurred during the period.

For funds that are initially borrowed without a specific purpose in mind and then at a

later stage used for the purpose of obtaining a qualifying asset, the amount of

borrowing costs eligible for capitalization is determined by applying a capitalization

rate to the expenditures on that asset. The capitalization rate is the weighted

average of the borrowing costs applicable to the borrowings of the entity that are

outstanding during the period, other than borrowings made specifically for the

purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized

during a period may not exceed the total borrowing costs incurred during that

period.

Capitalization of the borrowing costs as part of the cost of a qualifying asset

commences when (a) expenditure is incurred on the asset, (b) borrowing costs are

incurred, and (c) the work necessary to get the asset ready for its intended use or

sale has started.

Capitalization of borrowing costs is suspended and therefore expensed when active

development of the qualifying asset is interrupted during an extended period of time.

Capitalization of borrowing costs ceases when substantially all the activities

necessary to prepare the qualifying asset for its intended use or sale are complete.

IPSAS 5: Borrowing Costs

Ernst & Young 75

When the construction of a qualifying asset is completed in parts and each part is

capable of being used while construction continues on other parts, capitalization of

borrowing costs ceases provided that substantially all the activities necessary to

prepare that part for its intended use or sale are completed. An office complex

comprising several buildings, each of which can be used individually, is an example of

a qualifying asset for which each part can be used while construction continues on

other parts.

In accordance with IPSAS 5.16, the accounting treatment for borrowing costs must

be disclosed in the financial statements.

Effective date

Periods beginning on or after 1 July 2001.

Proposed changes to IPSAS 5

In ED 35, Borrowing Costs published on 3 September 2008, the IPSASB proposed

revising IPSAS 5. Diverging from the revised IAS 23, the IPSASB has taken the

stance that borrowing costs should be expensed rather than capitalized as part of

the cost of an asset without effect on surplus or deficit. It argues that borrowing

costs should, if at all, only be eligible for capitalization if they were incurred

specifically for the acquisition, construction or production of a qualifying asset

(option).

The comment period of IPSAS ED 35 ended on 7 January 2009. The analysis of

the responses showed that roughly half of the respondents did not agree with the

proposals in IPSAS ED 35. Therefore, in the end the IPSASB concluded that there

was no clear mandate to revise IPSAS 5 based on IPSAS ED 35. In its Washington

Meeting in May the IPSASB agreed to consider the issue further in the

measurement phase (Phase 3) of its Conceptual Framework project. It is likely that

a decision on ED 35 will be postponed by the IPSASB as long as the Conceptual

Framework project has not been completed.

IPSAS 6: Consolidated and Separate Financial Statements

76 IPSAS Explained

IPSAS 6: Consolidated and Separate Financial

Statements

Objective

The standard sets out requirements of the preparation and presentation of

consolidated financial statements of an economic entity under the accrual basis of

accounting. In addition, it contains guidance on the scope of a consolidated group of

an economic entity and describes the consolidation procedures. It also presents rules

on accounting for public sector subsidiaries, jointly controlled public sector entities

and associates in the separate financial statements of the controlling entity, the

venturer, and the investor.

The IFRS on which the IPSAS is based

IAS 27, Consolidated and Separate Financial Statements

Content

Principal definitions

Economic entity means a group of entities comprising a controlling entity (public

sector parent) and one or more controlled entities (public sector subsidiaries).

Control is the power to govern the financial and operating policies of another entity

so as to benefit from its activities.

The financial statements of an economic entity are referred to as consolidated

financial statements under IPSASs. This is equivalent to the term used under IFRS.

Separate financial statements in accordance with IPSASs are financial statements

presented by a controlling entity, an investor in an associate or a venturer in a

jointly controlled entity, in which the investments are accounted for on the basis of

the direct net assets/equity interest rather than on the basis of the reported results

and net assets of the investees.

Duty to present consolidated financial statements

A controlling entity presents consolidated financial statements by consolidating its

controlled entities in accordance with the provisions of this standard. It is exempted

from the presentation of consolidated financial statements in accordance with

IPSAS 6.16 if it satisfies all of the following criteria:

IPSAS 6: Consolidated and Separate Financial Statements

Ernst & Young 77

a) The controlling entity is

i) itself a wholly-owned controlled entity and users of consolidated financial

statements of this entity are unlikely to exist or their information needs

are met by its controlling entity’s consolidated financial statements; or

ii) a partially-owned controlled entity of another entity and its other owners,

including those not otherwise entitled to decide on the presentation of

consolidated financial statements, have been informed about, and do not

object to, such a decision.

b) The controlling entity’s debt or equity instruments are not traded in a public

market.

c) The controlling entity did not file, nor is it in the process of filing, its financial

statements with a securities commission or other regulatory organization for

the purpose of issuing any class of instruments in a public market.

d) This controlling entity’s ultimate or any intermediate controlling entity

produces consolidated financial statements available for public use that comply

with IPSASs.

If a controlling entity satisfies the exempting criteria, it may elect not to present

consolidated financial statements and present only separate financial statements.

Scope of the consolidated group

Consolidated financial statements are generally required to include all public sector

subsidiaries in the group of consolidated entities (cf. IPSAS 6.20). In accordance

with IPSAS 6.21, the only exception to this rule are those controlled entities where

control is created temporarily only because they are acquired and held exclusively

for the purpose of disposal within 12 months of the acquisition date, and

management is actively seeking a buyer. In this case, the entity concerned is

classified as a financial instrument, and accounted for accordingly (cf. IPSAS 15, or

IPSAS 28, Financial Instruments: Presentation, IPSAS 29, Financial Instruments:

Recognition and Measurement, and IPSAS 30, Financial Instruments: Disclosures

provides guidance on financial instruments for further guidance). The following

graph outlines the scope of consolidated financial statements

IPSAS 6: Consolidated and Separate Financial Statements

78 IPSAS Explained

Figure 10: Scope of consolidated financial statements

The decisive criterion for consolidation of an entity is control. The assessment of

whether an entity is controlled is made based on the above criteria of the definition

of control. IPSAS 6.30 et seq. elaborates how control should be interpreted in the

public sector and in which cases control exists for financial reporting purposes.

Some examples are also given here. When examining the relationship between two

entities, IPSAS 6.39 prescribes that control be assumed when one or more of the

power conditions and one or more of the benefit conditions are satisfied, unless

there is clear evidence that the entity in question is controlled by another entity. If

one or more of the conditions for power and benefits listed in IPSAS 6.39 apply for

the entities in question, the indicators listed in IPSAS 6.40 for power and benefit can

be used to assess whether control exists.

Figure 11 “Determining the consolidated group for consolidated financial statements

in accordance with IPSASs” below summarizes the procedure for determining the

entities to be included in consolidated financial statements in accordance with

IPSASs.

Control is intended to be temporary because the controlled

entity is acquired and held exclusively with a view to its disposal

within twelve months from acquisition (cf. IPSAS 6.21(a)) and

Management is actively seeking a buyer (cf. IPSAS 6.21(b))

Include all controlled entities of the controlling entity (cf. IPSAS

6.20), except for entities where

Scope of consolidated

financial statements

IPSAS 6: Consolidated and Separate Financial Statements

Ernst & Young 79

Figure 11: Determining the consolidated group for consolidated financial statements in accordance

with IPSASs

Source: International Federation of Accountants, Handbook of International Public Sector Accounting

Pronouncements, 2011 Edition, Volume 1, p. 198

Consolidation procedures

In preparing consolidated financial statements, the financial statements of the

controlling entities and its controlled entities are combined on a line-by-line basis by

adding together similar or identical items of assets, liabilities, net assets/equity,

revenue and expenses.

The financial statements of the controlling entity and its controlled entities used in

the preparation of the consolidated financial statements shall be prepared as of the

same reporting date. When the reporting dates of the controlling entity and a

controlled entity are different, the controlled entity prepares interim financial

statements as of the same date as the financial statements of the controlling entity

unless it is impracticable to do so.

When the date of the financial statements of a controlled entity used in the

preparation of consolidated financial statements differs from that of the controlling

entity, adjustments are made for the effects of significant transactions or events

that occur between that date and the date of the controlling entity’s financial

statements. The difference between the reporting date of the controlled entity and

that of the controlling entity may not, however, be more than three months. The

Establishing control of another entity for financial reporting purposes

Does the entity benefit from the

activities of the other entity?

(cf. IPSAS 6.29, 6.39 and 6.40)

Does the entity have the power to

govern the financial and operating

policies of the other entity?

(cf. IPSAS 6.30, 6.34, 6.39 and 6.40)

Is the power to govern the financial and

operating policies presently

exercisable?

The entity controls the other entity

Control does not appear to exist.

Consider whether the other entity

is an associate, as defined by IPSAS 7,

or whether the relationship between

the two entities constitutes

‘joint control’ as in IPSAS B

Yes

No

Yes

Yes

No

No

IPSAS 6: Consolidated and Separate Financial Statements

80 IPSAS Explained

length of the reporting periods and any difference in the reporting dates must be the

same from period to period.

The following steps are required in order to make sure that the consolidated

financial statements present financial information about the economic entity as if it

were a single entity (cf. IPSAS 6.43):

a) The carrying amount of the shares belonging to the controlling entity in each

controlled entity and the controlling entity’s share in the net assets/equity of

each controlled entity are eliminated ((the relevant international or national

accounting standard dealing with business combinations provides guidance on

the treatment of any resultant goodwill).

b) Minority interests in the surplus or deficit of consolidated subsidiaries for the

reporting period are identified separately.

c) Minority interests in the net assets/equity of consolidated controlled entities

are identified and presented in the consolidated statement of financial position

separately from liabilities and the controlling entity’s shareholders’ net

assets/equity. Minority interests in the net assets/equity consist of:

i) the amount of the minority interests at the date of the original

combination (the relevant international or national accounting standard

dealing with business combinations provides guidance on calculating this

amount); and

ii) the share of changes in net assets/equity attributable to the minority

interest since the date of the combination.

Intercompany balances, transactions and revenue and expenses between entities are

eliminated in full in accordance with IPSAS 6.45. Consolidated financial statements

must be prepared using uniform accounting policies for similar or identical

transactions and other events in similar circumstances. Minority interests are

presented in the consolidated statement of financial position within net

assets/equity, separately from the controlling entity’s net assets/equity. Minority

interests in the surplus or deficit of the group are also disclosed separately.

Accounting for investments in subsidiaries, jointly controlled entities and associates

in separate financial statements in accordance with IPSASs

IPSAS 6: Consolidated and Separate Financial Statements

Ernst & Young 81

IPSAS 6.58 provides for investments in subsidiaries, jointly controlled entities and

associates to be accounted for in separate financial statements in accordance with

IPSASs either

a) Using the equity method described in IPSAS 7,

b) At cost, or

c) As a financial instrument in accordance with IPSAS 29.

The same accounting policies must be applied for each category of investments.

Subsidiaries, jointly controlled entities and associates that are accounted for as

financial instruments in the consolidated financial statements are accounted for

in the same way in the shareholder’s separate financial statements.

Effective date

Periods beginning on or after 1 January 2008.

IPSAS 7: Investments in Associates

82 IPSAS Explained

IPSAS 7: Investments in Associates

Objective

This standard governs the accounting for investments in associates where the

investment in the associate takes the form of shares or other equity instruments,

but does not cover investments in associates held by venture capital organizations

or investment funds, unit trusts or similar entities such as investment-linked

insurance funds. Such investments are measured at fair value with changes in fair

value recognized in surplus or deficit in the period in accordance with IPSAS 29,

Financial Instruments: Recognition and Measurement.

The IFRS on which the IPSAS is based

IAS 28, Investments in Associates

Content

Principal definitions

An associate is an entity, including an unincorporated entity such as a partnership,

over which the investor has significant influence and that is neither a controlled

entity nor an interest in a joint venture (cf. IPSAS 8).

Separate financial statements in accordance with IPSASs are financial statements

presented by a controlling entity, an investor in an associate or a venturer in a

jointly controlled entity, in which the investments are accounted for on the basis

of the direct net assets/equity interest rather than on the basis of the reported

results and net assets of the investees (cf. IPSAS 6.7). Financial statements of an

entity that does not have a controlled entity (subsidiary), associate or venturer’s

interest in a joint venture are not separate financial statements in accordance with

IPSASs.

Significant influence

Significant influence according to IPSAS 7.7 is the power to participate in the

financial and operating policy decisions of the investee but is not control or joint

control over those policies. The assessment of whether an investor has significant

influence over the investee is judged based on the nature of the relationship. IPSAS

7.12 lists indicators that should be referred to for assessing whether an investor has

significant influence. The existence of significant influence is usually evidenced in

one or more of the following ways:

IPSAS 7: Investments in Associates

Ernst & Young 83

► Representation on the board of directors or equivalent governing

body

of the investee;

► Participation in policy-making processes, including participation in

decisions about dividends or other distributions;

► Material transactions between the investor and the investee;

► Interchange of managerial personnel; or

► Provision of essential technical information.

If a public-sector investor holds, directly or indirectly (e.g., through subsidiaries),

20% or more of the voting power of the investee, it is presumed that the investor

does have significant influence, unless it can be clearly demonstrated that this

is not the case. Conversely, if the investor holds less than 20% of the voting rights,

directly or indirectly (e.g., through a subsidiary), it is presumed that the investor

does not have significant influence unless such influence can be clearly

demonstrated. A substantial or majority ownership by another investor does

not necessarily preclude an investor from having significant influence.

Application of the equity method

Investments in associates are generally accounted for in the consolidated financial

statements using the equity method. The equity method is a method of accounting

whereby the investment is initially recognized at cost and subsequently adjusted for

the post-acquisition change in the investor’s share of net assets/equity of the

investee. The surplus or deficit of the investor includes the investor’s share of the

surplus or deficit of the investee. Distributions received from an investee reduce the

carrying amount of the investment. Adjustments to the carrying amount may also be

necessary for changes in the investor’s proportionate interest in the investee arising

from changes in the investee’s equity that have not been recognized in the

investee’s surplus or deficit. Such changes can arise from revaluation of property,

plant and equipment (cf. IPSAS 17) or from translation of financial statements

denominated in foreign currency (IPSAS 4). In contrast to the adjustments to the

carrying amount for changes in the investor’s proportionate interest, the investor’s

share of those changes is recognized directly in the investor’s equity/net assets.

IPSAS 7.19 describes exceptional cases where an investee is not accounted for using

the equity method. This is the case, for example, when investments are acquired

with the aim of disposal within 12 months from the acquisition date and

management is actively seeking a buyer. Such investments must be classified as

“held for trading” and be accounted for in accordance with the applicable

international or national accounting standards for the recognition and measurement

of financial instruments.

IPSAS 7: Investments in Associates

84 IPSAS Explained

As soon as an investor ceases to have significant influence over an associate,

it discontinues the use of the equity method and accounts for the investment in

accordance with the applicable international or national accounting standards for

the recognition and measurement of financial instruments, provided the associate

does not become a subsidiary or a joint venture as defined in IPSAS 8.

The carrying amount of the investment at the date that the investee ceases to be

an associate is regarded as its cost on initial measurement as a financial asset in

accordance with IPSAS 29, Financial Instruments: Recognition and Measurement.

In applying the equity method, the investor uses the most recent available financial

statements of the associate (cf. IPSAS 7.30). When the reporting dates of the

investor and the associate are different, the associate prepares, for the use of the

investor, financial statements as of the same date as the financial statements of

the investor unless it is impracticable to do so.

When the financial statements of an associate used in applying the equity method

are prepared as of a different reporting date from that of the investor, adjustments

must be made for the effects of significant transactions or events that occur

between that date and the date of the investor’s financial statements. In any case,

the difference between the reporting date of the associate and that of the investor

may not exceed three months. The length of the reporting periods and any

difference in the reporting dates must be the same from period to period.

In accordance with IPSAS 7.32, the investor’s financial statements are usually

prepared using uniform accounting policies for similar or identical transactions and

events in similar circumstances. If an associate uses accounting policies other than

those of the investor for similar or identical transactions and events in similar

circumstances, adjustments must be made to bring the associate’s accounting

policies in line with those of the investor.

Deficits of investments accounted for using the equity method

In the event that the associate sustains deficits on a permanent basis, the carrying

amount of the investment would be negative as of a certain date if the investor

continued recognizing its share of the deficits. For this reason, IPSAS 7.35 et seq.

rules that the investor should not recognize any further share in deficits once the

investor’s share in an associate’s deficits equals or exceeds its interest in the

associate. The investment is thus reported at a value of nil. A separate record must

be kept of any additional losses. If surpluses are generated subsequently, they are

initially used to offset the share of deficits recorded separately. Only when they

exceed the additional losses does the investor resume recognizing its share in the

surplus in the carrying amount of the investment.

Determining impairment losses

IPSAS 7: Investments in Associates

Ernst & Young 85

After application of the equity method, including recognizing the associate’s

losses in accordance with IPSAS 7.35 et seq., the investor applies the requirements

of IPSAS 29 to determine whether it is necessary to recognize any additional

impairment loss with respect to the investor’s net investment in the associate.

The investor also applies the requirements of IPSAS 29 to determine whether any

additional impairment loss is recognized with respect to the investor’s interest

in the associate that does not constitute part of the net investment and the amount

of the impairment loss.

Accounting for investments in associates in separate financial statements

In an investor’s separate financial statements prepared under IPSASs, investments

in associates are recognized in accordance with IPSAS 6.58-64 (cf. IPSAS 7.41).

Entities may prepare separate financial statements in accordance with IPSASs as

their only set of financial statements if they are exempted in accordance with IPSAS

6.16 (“Consolidated and Separate Financial Statements”) from consolidation or in

accordance with IPSAS 8.3 (“Interests in Joint Ventures”) from proportionate

consolidation or in accordance with IPSAS 7.19(b) from application of the equity

method.

Effective date

Periods beginning on or after 1 January 2008. Par. 1 of IPSAS 7 was amended by

Improvements to IPSASs issued in January 2010. The entity shall apply that

amendment beginning on or after 1 January 2011.

IPSAS 8: Interests in Joint Ventures

86 IPSAS Explained

IPSAS 8: Interests in Joint Ventures

Objective

IPSAS 8 governs accounting for interests in joint ventures and the reporting of joint

venture assets, liabilities, revenue and expenses in the financial statements of

venturers and investors, regardless of the structures or forms under which the joint

venture activities take place.

The IFRS on which the IPSAS is based

IAS 31, Interests in Joint Ventures

Content

Principal definitions

A joint venture is a binding arrangement whereby two or more parties are

committed to undertake an activity that is subject to joint control. The binding

arrangement may for example take the form of a contract. The arrangement usually

specifies the original capital contribution and the sharing of revenue or other forms

of consideration and expenses between the venturers.

Joint control is the agreed sharing of control over an activity by a binding

arrangement. IPSAS 8.7 et seq. specifies what kinds of arrangements qualify

as a binding arrangement.

A venturer is a party to a joint venture and has joint control over that joint venture.

IPSAS 8 refers to the fact that joint ventures in the public sector may conduct

commercial activities and/or provide community services at no charge.

An investor in a joint venture is a party to a joint venture and does not have joint

control over that joint venture.

Scope

IPSAS 8 does not apply to venturers’ interests in jointly controlled entities held by

(a) venture capital organizations or (b) mutual funds, unit trusts or similar entities

such as investment-linked insurance funds. Such investments are measured at fair

value with changes in fair value recognized in surplus or deficit in the period of the

change in accordance with IPSAS 29, Financial Instruments: Recognition and

Measurement.

IPSAS 8: Interests in Joint Ventures

Ernst & Young 87

Forms and characteristics of joint ventures

In practice, joint ventures take many different forms and structures. IPSAS 8.11 et

seq. identifies three broad types which are commonly described as joint ventures

and meet the definition of joint ventures:

► Jointly controlled operations

► Jointly controlled assets

► Jointly controlled entities

Accounting for joint ventures

Different accounting treatments apply for each type of joint venture.

Jointly controlled operations (cf. IPSAS 8.19): For their interests in jointly

controlled operations, venturers are required to recognize in their financial

statements:

a) The assets that they control and the liabilities that they incur

b) The expenses that they incur and their share of the revenue that they earn

from the sale or provision of goods or services by the joint venture

Jointly controlled assets (cf. IPSAS 8.25): For their interests in jointly controlled

assets, venturers are required to recognize in their financial statements:

a) Their share of the jointly controlled assets, classified according to the nature

of the assets

b) Any liabilities that they have incurred, for example for financing their share

of the assets

c) Their share of any liabilities incurred jointly with the other venturers in relation

to the joint venture

d) Any revenue from the sale or use of their share of the output of the

joint venture, together with their share of any expenses incurred by the

joint venture

e) Any expenses that they have incurred in respect of their interest in the joint

venture

Jointly controlled entities: There are two possible methods of consolidation:

a) Proportionate consolidation: Proportionate consolidation is a method of

accounting whereby a venturer’s share of each of the assets, liabilities, revenue

and expenses of a jointly controlled entity is combined line by line with similar

items in the venturer’s financial statements or reported as separate line items

in the venturer’s financial statements. A venturer should discontinue the use

IPSAS 8: Interests in Joint Ventures

88 IPSAS Explained

of proportionate consolidation from the date on which it ceases to have joint

control over a jointly controlled entity.

b) Equity method (also see the rules of IPSAS 7): A venturer should discontinue

the use of the equity method from the date on which it ceases to have joint

control over, or have significant influence in, a jointly controlled entity.

Like the IASB, the IPSASB recommends using the proportionate method of

consolidation for jointly controlled entities because it better reflects the substance

and economic reality of a venturer’s interest in a jointly controlled entity (cf. IPSAS

8.37 and IPSAS 8.45).

Special aspects of accounting for joint ventures

Exceptions to proportionate consolidation and equity method

► When there is evidence that the interest in a joint venture has been

acquired and is held exclusively with a view to its disposal within 12

months from acquisition and that management is actively seeking a

buyer, as set out in IPSAS 8.3(a), the interest shall be classified as

held for trading and accounted for in accordance with IPSAS 29.

► The venturer must account for its interest in accordance with

IPSAS 6 as of the date on which the jointly controlled entity

becomes a subsidiary of the venturer. The venturer must account

for its interest in accordance with IPSAS 7 as of the date on which

the jointly controlled entity becomes an associate of the venturer.

IPSAS 6.54 et seq. describes the accounting treatment for transactions between

a venturer and a joint venture in the financial statements.

In accordance with IPSAS 8.52, interests in jointly controlled entities are recognized

in a venturer’s separate financial statements in accordance with IPSAS 6.58-64.

An investor in a joint venture that does not have joint control, but does have

significant influence is required to account for its interest in a joint venture in

accordance with IPSAS 7.

The following overview summarizes the common features of the different forms

of joint ventures and also refers to the respective applicable accounting guidance:

IPSAS 8: Interests in Joint Ventures

Ernst & Young 89

Figure 12: Forms of joint ventures and applicable accounting guidance

Effective date

Periods beginning on or after 1 January 2008. Par. 1 of IPSAS 8 was amended by

Improvements to IPSASs issued in January 2010. The entity shall apply that

amendment beginning on or after 1 January 2011.

Forms of joint ventures

Joint controlled

operations

Common features of all joint ventures:

► Two or more ventures are bound by a binding arrangement; and

► The binding arrangement establishes joint control.

Apply IPSAS 8.19 et

seq.

Joint controlled

assets

Apply IPSAS 8.25 et

seq.

Joint controlled

entities

Apply IPSAS 8.29 et

seq.

IPSAS 9: Revenue from Exchange Transactions

90 IPSAS Explained

IPSAS 9: Revenue from Exchange Transactions

Objective

This standard prescribes the accounting treatment of revenue arising from exchange

transactions and events, the main question being when to recognize revenue.

Revenue is recognized when it is probable that future economic benefits or service

potential will flow to the entity and these benefits can be measured reliably. IPSAS 9

identifies those circumstances in which these criteria are satisfied and when revenue

needs to be recognized accordingly. It also provides practical guidance on the

application of these criteria.

The IFRS on which the IPSAS is based

IAS 18, Revenue

Content

Principal definitions

Revenue is the gross inflow of economic benefits or service potential during the

reporting period when those inflows result in an increase in net assets/equity, other

than increases relating to contributions from owners.

Exchange transactions are transactions in which one entity receives assets or

services, or has liabilities extinguished, and directly gives approximately equal value

(primarily in the form of cash, goods, services, or use of assets) to another entity in

exchange. Typical exchange transactions are the purchase or sale of goods or

services based on market prices.

Non-exchange transactions are transactions that are not exchange transactions.

In a non-exchange transaction, an entity either receives value from another entity

without directly giving approximately equal value in exchange, or gives value to

another entity without directly receiving approximately equal value in exchange.

In the public sector, typical examples of revenue from non-exchange transactions

are taxes and dues, transfers and donations.

Application

IPSAS 9 applies to revenue arising from the following exchange transactions and

events:

► The rendering of services

► The sale of goods

IPSAS 9: Revenue from Exchange Transactions

Ernst & Young 91

► The use by others of entity assets yielding interest, royalties and

dividends

Certain specific items to be recognized as revenues are addressed in other standards

and are therefore excluded from the scope of this standard. For example, gains

arising on the sale of property, plant and equipment are specifically addressed in

standards on property, plant and equipment and are therefore not covered in this

standard.

Measurement of revenue

As in the private sector, revenue from exchange transactions is measured at the

fair value of the consideration received or receivable taking into account the amount

of any trade discounts and volume rebates allowed by the entity. In the case of long-

term payment terms, IPSAS 9.16 stipulates that the present value of all future

receipts be used as a basis.

Recognition of revenue from the rendering of services

When the outcome of a transaction involving the rendering of services can be

estimated reliably, revenue associated with the transaction is recognized by

reference to the stage of completion of the transaction at the reporting date

(cf. IPSAS 9.19 et seq.). IPSAS 9.19 thus provides for recognition of the revenue

according to the stage of completion, also referred to as the percentage of

completion method. The stage of completion of a transaction can be determined

in a variety of ways. IPSAS 9.23 instructs public sector entities to use the method

that measures reliably the services performed. Depending on the nature of the

transaction, the methods may include:

a) Surveys of work performed

b) Services performed to date as a percentage of total services to be performed

c) The proportion that costs incurred to date bear to the estimated total costs of

the transaction. Only costs that reflect services performed to date are included

in costs incurred to date. Only costs that reflect services performed or to be

performed are included in the estimated total costs of the transaction.

This list of methods given in IPSAS 9.23 is not exhaustive. IPSAS 9.23 also refers to

the fact that progress payments and advances received from customers often do not

reflect the services performed, i.e., the stage of completion cannot be inferred from

them.

For practical purposes, IPSAS 9.24 allows revenue to be recognized on a straight-

line basis over the specified time frame when services are performed in an

indeterminate number of steps over a specified time frame, unless there is evidence

that some other method better represents the stage of completion.

IPSAS 9: Revenue from Exchange Transactions

92 IPSAS Explained

The outcome of a transaction involving the rendering of services can be estimated

reliably only when all the following conditions are satisfied (cf. IPSAS 9.19):

a) The amount of revenue can be measured reliably.

b) It is probable that the economic benefits or service potential associated with

the transaction will flow to the entity.

c) The stage of completion of the transaction at the reporting date can be

measured reliably (cf. IPSAS 9.22 for further details).

d) The costs incurred for the transaction and the costs to complete the

transaction can be measured reliably.

When the outcome of the transaction involving the rendering of services cannot

be estimated reliably, revenue may be recognized in accordance with IPSAS 9.25

only to the extent of the expenses recognized that are recoverable.

Recognition of revenue from sale of goods

Revenue from the sale of goods is recognized when all the following conditions have

been satisfied (cf. IPSAS 9.28):

a) The entity has transferred to the purchaser the significant risks and rewards

of ownership of the goods.

b) The entity retains neither continuing managerial involvement to the degree

usually associated with ownership nor effective control over the goods sold.

c) The amount of revenue can be measured reliably.

d) It is probable that the economic benefits associated with the transaction will

flow to the entity.

e) The costs incurred or to be incurred in respect of the transaction can be

measured reliably.

The assessment of when an entity has transferred the significant risks and rewards

of ownership to the purchaser requires an examination of the circumstances of the

transaction in accordance with IPSAS 9.29. If the entity retains significant risks of

ownership, the transaction does not constitute a sale and revenue is therefore not

recognized. It is therefore possible that a public sector entity might retain significant

risks of ownership in a number of different ways (e.g., by means of guarantees or

collateral). If an entity retains only an insignificant risk of ownership, the transaction

constitutes a sale and revenue is recognized (cf. IPSAS 9.31). Another key criterion

regarding the reliability of revenue recognition is that an inflow of resources is

probable. In some cases, this may not be probable until the consideration is received

or until an uncertainty is removed. For example, a public sector entity’s revenue may

depend on the ability of another entity to supply goods on the basis of contractual

arrangements (cf. example given in IPSAS 9.32). Should there be any doubt that this

IPSAS 9: Revenue from Exchange Transactions

Ernst & Young 93

will occur, revenue is not realized until the doubt is eliminated. When goods have

been supplied, the uncertainty is removed and revenue can be recognized.

Recognition of revenue from interest, royalties and dividends

Revenue from the use by others of entity assets – including interest, royalties and

dividends in accordance with IPSAS 9.33 – is recognized when it is probable that the

economic benefits or service potential associated with the transaction will flow to

the entity and the amount of the revenue can be measured reliably. If the revenue

meets these conditions, it is recognized as follows:

► Interest is recognized on a time proportion basis that takes into

account the effective yield on the asset.

► Royalties are recognized as they are earned in accordance with the

substance

of the relevant agreement.

► Dividends or their equivalents are recognized when the

shareholder’s or the entity’s right to receive payment is established.

The graph below summarizes the general as well as the specific requirements

for the recognition of exchange transactions under IPSAS.

IPSAS 9: Revenue from Exchange Transactions

94 IPSAS Explained

Figure 13: Overview of the recognition of revenue from exchange transactions”

The appendix to IPSAS 9 contains illustrative examples on determining when to

recognize revenue from certain exchange transactions.

Effective date

Periods beginning on or after 1 July 2002.

IPSAS 9: Recognition of revenue from exchange transactions

1. General

requirements

The amount of revenue can be measured reliably.

Definition of the date of recognition for which

the following requirements are fulfilled

2. Specific

requirements for:

Sale of goods

Rendering

of services

Interest

Royalties

Dividends

The significant risks and rewards of ownership of the goods have

been transferred to the purchases (cf. IPSAS 9.28(a))

The entity retains neither continuing managerial involvement to the

degree usually associated with ownership nor effective control over

the goods sold (cf. IPSAS 9.28(b))

It is probable that the economic benefits or service potential

associated with the transaction will flow to the entity

The costs incurred or to be incurred in respect of the transaction can

be measured reliably (cf. IPSAS 9.28(e))

The stage of completion of the transaction at the reporting date can

be measured reliably (cf. IPSAS 9.19(c))

The costs incurred for the transaction and the costs to complete the

transaction can be measured reliably (cf. IPSAS 9.19(d))

Shall be recognized on a time proportion basis that takes into

account the effective yield on the asset (cf. IPSAS 9.34(a))

Shall be recognized as they are earned in accordance with the

substance of the relevant agreement (cf. IPSAS 9.34(b))

Shall be recognized when the shareholder’s or the entity’s right to

receive payment is established (cf. IPSAS 9.34(c))

IPSAS 10: Financial Reporting in Hyperinflationary Economies

Ernst & Young 95

IPSAS 10: Financial Reporting in Hyperinflationary

Economies

Objective

IPSAS 10 governs financial statements of public sector entities whose functional

currency is the currency of a hyperinflationary economy. In a hyperinflationary

economy, financial reporting in the local currency without restatement is not useful.

Money loses purchasing power at such a rate that comparison of amounts from

transactions and other events that have occurred at different times, even within the

same reporting period, is misleading.

The IFRS on which the IPSAS is based

IAS 29, Financial Reporting in Hyperinflationary Economies

Content

Principal definitions

Functional currency is the currency of the primary economic environment in which

the entity operates. The primary economic environment of an entity is normally the

one in which it primarily generates and expends cash (cf. IPSAS 4.11).

Presentation currency is the currency in which the financial statements are

presented (cf. IPSAS 4.10).

Monetary items are units of currency held and assets and liabilities to be received

or paid in fixed or determinable number of units of currency (cf. IPSAS 4.10).

Application

IPSAS 10 applies to the primary financial statements, including the consolidated

financial statements, of any entity whose functional currency is the currency

of a hyperinflationary economy.

IPSAS 10 does not establish an absolute rate at which hyperinflation is deemed to

exist. When restatement of financial statements in accordance with this standard

becomes necessary is a matter of judgment. Hyperinflation is indicated by

characteristics of the economic environment of a country which include, but are

not limited to, the list given in IPSAS 10.4.

Recognition

The financial statements of an entity that reports in the currency of a

hyperinflationary economy should be stated in terms of the measuring unit current

IPSAS 10: Financial Reporting in Hyperinflationary Economies

96 IPSAS Explained

at the reporting date. The comparative figures for the previous period required by

IPSAS 1 “Presentation of Financial Statements” and any information in respect

of earlier periods must also be stated in terms of the measuring unit current at the

reporting date. For the purpose of presenting comparative amounts in a different

presentation currency, cf. IPSAS 4.47 (b) and IPSAS 4.48. The surplus or deficit on

the net monetary position must be included in the surplus or deficit for the period

and be disclosed separately in the statement of financial performance.

The restatement of financial statements in accordance with IPSAS 10

(e.g., by applying a general price index) requires the application of certain

procedures as well as judgment. The consistent application of these procedures

and judgments from period to period is more important than the precise accuracy

of the resulting amounts included in the restated financial statements.

When an economy ceases to be hyperinflationary and an entity discontinues the

preparation and presentation of financial statements prepared in accordance with

this standard, it is required to treat the amounts expressed in the measuring unit

current at the end of the previous reporting period as the basis for the carrying

amounts in its subsequent financial statements.

Effective date

Periods beginning on or after 1 July 2002. Paragraphs 17, 18 and 22 of IPSAS 10

were amended by Improvements to IPSASs issued in January 2010. An entity shall

apply those amendments by 1 January 2011.

IPSAS 11: Construction Contracts

Ernst & Young 97

IPSAS 11: Construction Contracts

Objective

IPSAS 11 regulates the accounting treatment of revenue and costs associated with

construction contracts in the financial statements of public sector entities acting as

contractor under such contract. The standard

► Identifies the arrangements that are to be classified as construction

contracts,

► Provides guidance on the types of construction contracts that can

arise in the public sector, and

► Specifies the basis for recognition and disclosure of contract

expenses and,

if relevant, contract revenues

Because of the nature of the activity undertaken in construction contracts, the

date at which the contract activity is entered into and the date when the activity

is completed usually fall into different reporting periods.

In many jurisdictions, construction contracts entered into by public sector entities

will not specify an amount of contract revenue. Rather, funding to support the

construction activity will be provided by an appropriation or similar allocation of

general government revenue, or by aid or grant funds. In these cases, the primary

issue in accounting for construction contracts is the allocation of construction costs

to the reporting period in which the construction work is performed and the

recognition of related expenses.

In some jurisdictions, construction contracts entered into by public sector entities

may be established on a commercial basis or a non-commercial full or partial cost

recovery basis. In these cases, the primary issue in accounting for construction

contracts is the allocation of both contract revenue and contract costs to the

reporting periods in which construction work is performed.

The IFRS on which the IPSAS is based

IAS 11, Construction Contracts

Principal definitions

A construction contract is a contract, or a similar binding arrangement, specifically

negotiated for the construction of an asset or a combination of assets that are

closely interrelated or interdependent in terms of their design, technology and

function or their ultimate purpose or use (cf. IPSAS 11.4 and for more detail

IPSAS 11.5 et seq.).

IPSAS 11: Construction Contracts

98 IPSAS Explained

IPSAS 11 essentially distinguishes between fixed price contracts and cost plus

contracts (or cost-based contracts) (cf. IPSAS 11.8 et seq.). A fixed price contract

is a construction contract in which the contractor agrees to a fixed contract price, or

a fixed rate per unit of output, which in some cases is subject to cost escalation

clauses. A cost plus contract is a construction contract in which the contractor is

reimbursed for allowable or otherwise defined costs and, in the case of a

commercially-based contract, an additional percentage of these costs or a fixed fee,

if any. In practice, the distinction might not always be that straight-forward.

General remark

IPSAS 11 governs the accounting for construction contracts for those rare cases in

the public sector where a public sector entity acts as contractor. It is much more

frequent for public sector entities to assume the position of principal, for example in

a public invitation to tender.

Application

The requirements of IPSAS 11 are usually applied separately to each construction

contract. However, in certain circumstances, it is necessary to apply the standard to

the separately identifiable components of a single contract or to a group of contracts

together in order to reflect the substance of a contract or a group of contracts.

If a contract covers a number of assets, the construction of each asset should be

treated as a separate construction contract when the conditions set forth in

IPSAS 11.13 are satisfied.

In certain cases, a group of contracts, whether with a single customer or with several

customers, needs to be treated as a single construction contract. For further details,

cf. IPSAS 11.14.

A contract may provide for the construction of an additional asset at the option of

the customer or may be amended to include the construction of an additional asset.

The construction of the additional asset is treated as a separate construction

contract provided the conditions listed in IPSAS 11.15 are satisfied.

Contract revenue and contract costs

Contract revenue comprises (cf. IPSAS 11.16):

a) The initial amount of revenue agreed in the contract; and

b) Variations in contract work, claims and incentive payments

i) to the extent that it is probable that they will result in revenue and

ii) they are capable of being reliably measured.

IPSAS 11: Construction Contracts

Ernst & Young 99

Contract revenue is measured at the fair value of the consideration received or

receivable.

Contract costs comprise (cf. IPSAS 11.23):

a) Costs that relate directly to the specific contract (cf. IPSAS 11.24 et seq.

for details);

b) Costs that are attributable to contract activity in general and can be allocated

to the specific contracts (cf. IPSAS 11.26 for details); and

c) Such other costs that are specifically chargeable to the customer under

the terms of the contract (cf. IPSAS 11.27).

Costs that cannot be attributed to contract activity or cannot be allocated

to a contract are excluded from the costs of a construction contract. Such costs

include (cf. IPSAS 11.28):

a) General administration costs for which reimbursement is not specified

in the contract;

b) Selling costs;

c) Research and development costs for which reimbursement is not specified

in the contract;

d) Depreciation of idle plant and equipment that is not used on a particular

contract.

Recognition

When the outcome of a construction contract can be estimated reliably, contract

revenue and contract costs associated with the construction contract are recognized

as revenue and expenses respectively by reference to the stage of completion of the

contract activity at the reporting date. An expected deficit on the construction

contract is recognized as an expense immediately in accordance with IPSAS 11.44.

The recognition of revenue and expenses by reference to the stage of completion of

a contract is often referred to as the percentage of completion method.

In the case of a fixed price contract, the outcome of a construction contract can be

estimated reliably when all the following conditions are satisfied (cf. IPSAS 11.31):

a) Total contract revenue, if any, can be measured reliably;

b) It is probable that the economic benefits or service potential associated with

the contract will flow to the entity;

c) Both the contract costs to complete the contract and the stage of contract

completion at the reporting date can be measured reliably; and

IPSAS 11: Construction Contracts

100 IPSAS Explained

d) The contract costs attributable to the contract can be clearly identified and

measured reliably so that actual contract costs incurred can be compared with

prior estimates.

In the case of a cost plus contract, the outcome of a construction contract can be

estimated reliably when all the following conditions are satisfied (cf. IPSAS 11.32):

a) It is probable that the economic benefits or service potential associated with

the contract will flow to the entity; and

b) The contract costs attributable to the contract, whether or not specifically

reimbursable, can be clearly identified and measured reliably.

The stage of completion of a contract may be determined in a variety of ways.

Public sector entities should use the method that measures reliably the work

performed. Depending on the nature of the contract, the methods may include

(cf. IPSAS 11.38):

a) The proportion that contract costs incurred for work performed to date bear

to the estimated total contract costs;

b) Surveys of work performed; or

c) Completion of a physical proportion of the contract work.

When the outcome of a construction contract cannot be measured reliably, revenue

is recognized only to the extent of contract costs incurred that it is probable will be

recoverable and the contract costs are recognized as an expense in the period in

which they are incurred. An expected deficit on the construction contract is

recognized as an expense immediately in accordance with IPSAS 11.44.

The percentage of completion method is applied on a cumulative basis in each

reporting period to the current estimates of contract revenue and contract costs.

Therefore, the effect of a change in the estimate of contract revenue or contract

costs, or the effect of a change in the estimate of the outcome of a contract, is

accounted for as a change in accounting estimate (cf. IPSAS 3, Accounting Policies,

Changes in Accounting Estimates and Errors). The changed estimates are used when

determining the amount of revenue and expenses recognized in the statement of

financial performance in the period in which the change is made and in subsequent

periods.

Effective date

Periods beginning on or after 1 July 2002.

IPSAS 12: Inventories

Ernst & Young 101

IPSAS 12: Inventories

Objective

The objective of this standard is to prescribe the accounting treatment for

inventories. A primary issue in accounting for inventories is the amount of cost

to be recognized as an asset and carried forward until the related revenues are

recognized. This standard provides guidance on the determination of cost and its

subsequent recognition as an expense, including any write-down to net realizable

value. It also provides guidance on the cost formulas that are used to assign costs

to inventories.

The IFRS on which the IPSAS is based

IAS 2, Inventories

Content

Principal definitions

In accordance with IPSAS 12.9, inventories are assets

a) In the form of materials and supplies to be consumed in the production process

b) In the form of materials or supplies to be consumed or distributed in the

rendering of services

c) Held for sale or distribution in the ordinary course of operations

d) In the process of production for sale or distribution

Inventories include goods purchased for resale, such as merchandise purchased

by a retailer and held for resale or land and other property held for sale. In addition,

inventories encompass finished goods produced or work in progress being produced

and include materials and supplies awaiting use in the production process.

Specifically in the public sector, inventories also comprise goods purchased or

produced by the entity that are distributed to third parties for no charge or for

a nominal charge. An example would be children’s books produced by a ministry

of family affairs for donation to schools.

Other examples of inventories in the public sector given in IPSAS 12.12 include:

ammunition, maintenance materials, spare parts, strategic stockpiles (e.g., energy

reserves or medicine), stocks of unissued currency, stamps, work in progress and

property held for sale.

IPSAS 12: Inventories

102 IPSAS Explained

Net realizable value is the estimated selling price in the ordinary course of

operations less the estimated costs of completion and the estimated costs necessary

to make the sale, exchange or distribution.

Application

IPSAS 12 applies for all inventories except for:

a) Work in progress arising under construction contracts, including directly

related service contracts (cf. IPSAS 11, Construction Contracts)

b) Financial instruments (see IPSAS 28, Financial Instruments: Presentation

and IPSAS 29, Financial Instruments: Recognition and Measurement);

c) Biological assets related to agricultural activity and agricultural produce

at the point of harvest (see IPSAS 27, Agriculture); and

d) Work-in-progress of services to be provided for no or nominal consideration

directly in return from the recipients.

IPSAS 12 does not apply for the measurement of the following inventories:

a) Producers’ inventories of agricultural and forest products, agricultural produce

after harvest, and minerals and mineral products, to the extent that they are

measured at net realizable value in accordance with well-established practices

in certain industries. When such inventories are measured at net realizable

value, changes in that value are recognized in surplus or deficit in the period of

the change.

b) Inventories of commodity broker-traders who measure their inventories at fair

value less costs to sell. When such inventories are measured at fair value less

cost to sell, changes in that value are recognized in surplus or deficit in the

period of the change.

Measurement of inventories

Inventories are required to be measured at the lower of cost and net realizable

value (cf. IPSAS 12.15, for the basic measurement principles under IPSASs see

Chapter I. 3).

Inventories acquired through a non-exchange transaction are measured at their fair

value as of the date of acquisition (cf. IPSAS 12.16).

In contrast, inventories

► held for distribution at no charge or for a nominal charge

► held for consumption in the production process of goods to be

distributed at no charge or for a nominal charge are measured at

the lower of cost and current replacement cost (cf. IPSAS 12.17).

IPSAS 12: Inventories

Ernst & Young 103

The cost of inventories comprises all costs of purchase, costs of conversion and

other costs incurred in bringing the inventories to their present location and

condition (cf. IPSAS 12.18).

The following graph provides a concise overview of the measurement of inventories:

Figure 14: Measurement of inventories

The costs of purchase of inventories comprise the purchase price, import duties and

other taxes (other than those subsequently recoverable by the entity from the taxing

authorities), and transport, handling and other costs directly attributable to the

acquisition of finished goods, materials and supplies. Trade discounts, rebates and

other similar items are deducted in determining the costs of purchase. The costs of

conversion of inventories under IPSAS 12.20 et seq. include full production-related

costs. The basis for determining costs of conversion is presented in IPSAS 12.20-23

(costs of conversion) and IPSAS 12.24-27 (other costs).

Measurement of inventories

No

Inventories are

measured at the

lower of cost and net

realizable value

(cf. IPSAS 12.15)

Cost are measured

at their fair value

as at the date

of acquisition

(cf. IPSAS 12.16)

Are inventories;

a) Held for distribution at no charge

or for a nominal charge?

b) Held for consumption in the production

process of goods to be distributed

at no charge or for a nominal charge?

No Yes

Yes

Acquisition through

a non-exchange transaction?

Inventories are measured at the

lower of cost and current

replacement cost

(cf. IPSAS 12.17).

The cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing

the inventories to their present location and condition (cf. IPSAS 12.18)

IPSAS 12: Inventories

104 IPSAS Explained

The formula for calculating the costs of conversion of inventories is as follows:

Direct costs

+ Fixed production overheads

+ Variable production overheads

+ Other costs

Costs of conversion

Table 17: Calculating costs of conversion for inventories

In accordance with IPSAS 12.32 et seq., inventories are measured by applying the

principle of specific identification according to which assets are measured

individually. In the course of subsequent measurement, public sector entities have to

review the existing inventories to ascertain whether their cost is recoverable or not,

e.g., due to damage, if the inventories have become wholly or partially obsolete, or if

their selling prices have declined. For this purpose, the net realizable value as of the

reporting date must be determined (cf. IPSAS 12.38 et seq.). Inventories are usually

written down to net realizable value item by item. However, according to IPSAS

12.39, in some circumstances it may be appropriate to group similar or related

items together.

Simplified measurement methods

In accordance with IPSAS 12.32 et seq., inventories are generally measured

individually. However, when inventories are stored, they may not be kept strictly

separate and with prices fluctuating over time it is frequently impracticable to

determine which portion of the asset or which assets have already been consumed

and which are still in stock. If, however, there are a large number of inventories and

they are ordinarily interchangeable, simplified measurement methods may be

applied (cf. IPSAS 12.33 et seq.). If these conditions are satisfied, the costs of

purchase or conversion of inventories are calculated by using the first-in, first-out

(FIFO) or weighted average cost formulas. For all inventories of a similar nature and

use to the entity, public sector entities must use the same cost formula. For

inventories with a different nature or use, different cost formulas may be justifiable.

This does not apply for inventories that are ordinarily not interchangeable and such

goods, commodities or services produced and segregated for specific projects (cf.

IPSAS 12.33).

Recognition of expenses relating to inventories

When inventories are sold, exchanged or distributed, the carrying amounts of those

inventories are recognized as an expense in the period in which the related revenue

is recognized (cf. IPSAS 12.44). If there is no related revenue, the expense is

recognized when the goods are distributed or related service is rendered. The

amount of any write-down of inventories and all losses of inventories are required

to be recognized as an expense in the period the write-down or loss occurs.

IPSAS 12: Inventories

Ernst & Young 105

Any reversal of a write-down of inventories is deducted from the inventories

recognized as an expense in the period in which the reversal occurs.

The disclosures in the notes required in relation to inventories are set forth

in IPSAS 12.47 et seq.

Effective date

Periods beginning on or after 1 January 2008. IPSAS 12.29 was amended by IPSAS

27. An entity shall apply that on or after 1 April 2011.

IPSAS 13: Leases

106 IPSAS Explained

IPSAS 13: Leases

Objective

The objective of this standard is to prescribe, for lessees and lessors, the

appropriate accounting policies and disclosures to apply in relation to finance and

operating leases.

The IFRS on which the IPSAS is based

IAS 17, Leases

Content

Principal definitions

A lease is an agreement whereby the lessor conveys to the lessee in return for

a payment or series of payments the right to use an asset for an agreed period

of time.

A finance lease is a lease that transfers substantially all the risks and rewards

incident to ownership of an asset. Title may or may not eventually be transferred.

All other leases are operating leases. Operating leases do not transfer substantially

all the risks and rewards incident to ownership of an asset.

Minimum lease payments are the payments over the lease term that the lessee is,

or can be, required to make, excluding contingent rent, costs for services and, where

appropriate, taxes to be paid by and reimbursed to the lessor, together with:

a) For a lessee, any amounts guaranteed by the lessee or by a party related to the

lessee

b) For a lessor, any residual value guaranteed to the lessor by:

i) The lessee

ii) A party related to the lessee

iii) An independent third party unrelated to the lessor that is financially

capable of discharging the obligations under the guarantee

However, if the lessee has an option to purchase the asset at a price that

is expected to be sufficiently lower than the fair value at the date the option

becomes exercisable for it to be reasonably certain, at the inception of the lease,

that the option will be exercised, then the result will be different. In this case the

minimum lease payments comprise the minimum payments payable over the lease

IPSAS 13: Leases

Ernst & Young 107

term to the expected date of exercise of this purchase option and the payment

required to exercise it.

Scope

IPSAS 13 should be applied in accounting for all leases other than:

a) Leases to explore for or use minerals, oil, natural gas and similar non-

regenerative sources

b) Licensing agreements for such items as motion picture films, video recordings,

plays, manuscripts, patents and copyrights

IPSAS 13 is not applied as the basis of measurement for:

a) Property held by lessees that are accounted for as investment property

(cf. IPSAS 16, Investment Property)

b) Investment property provided by lessors under operating leases (cf. IPSAS 16)

c) Biological assets held by lessees under finance leases (cf. IPSAS 27,

Agriculture); or

d) Biological assets provided by lessors under operating leases (cf. IPSAS 27).

Distinction between finance and operating leases

Whether a lease is a finance lease or an operating lease depends on the substance of

the transaction rather than the form of the contract (cf. IPSAS 13.15). The following

are examples of situations that individually or in combination would normally lead to

a lease being classified as a finance lease:

a) The lease transfers ownership of the asset to the lessee by the end of the

lease term.

b) The lessee has the option to purchase the asset at a price that is expected to be

sufficiently lower than the fair value at the date the option becomes exercisable

for it to be reasonably certain, at the inception of the lease, that the option will

be exercised.

c) The lease term is for the major part of the economic life of the asset even

if title is not transferred.

d) At the inception of the lease the present value of the minimum lease payments

amounts to at least substantially all of the fair value of the leased asset.

e) The leased assets are of such a specialized nature that only the lessee can use

them without major modifications.

f) The leased assets cannot easily be replaced by another asset.

IPSAS 13: Leases

108 IPSAS Explained

According to IPSAS 13.16, other indicators that individually or in combination

could also lead to a lease being classified as a finance lease are:

a) If the lessee can cancel the lease, the lessor’s losses associated with the

cancellation are borne by the lessee.

b) Gains or losses from the fluctuation in the fair value of the residual accrue

to the lessee (for example, in the form of a rent rebate equaling most of the

sales proceeds at the end of the lease).

c) The lessee has the ability to continue the lease for a secondary period at a rent

that is substantially lower than market rent.

Pursuant to IPSAS 13.20A, the land and buildings elements of a lease of land

and buildings are considered separately for the purposes of lease classification.

The flowchart in figure 14 aims to provide support in classifying lease agreements.

Accounting for leases in the financial statements of lessees

a) Finance leases

At the commencement of the lease term, lessees must recognize assets acquired

under finance leases as assets and the associated lease obligations as liabilities in

their statements of financial position (cf. IPSAS 13.28). The assets and liabilities

are recognized at amounts equal to the fair value of the leased property or, if lower,

the present value of the minimum lease payments, each determined at the inception

of the lease. The discount rate to be used in calculating the present value of the

minimum lease payments is the interest rate implicit in the lease, if this is practicable

to determine. If not, the lessee’s incremental borrowing rate must be used. In

addition, the revenue from the lease should be distributed over the term of the

lease in the same way as the depreciation and financing of a purchased asset

(IPSAS 13.29).

Minimum lease payments are apportioned between the finance charge and the

reduction of the outstanding liability (cf. IPSAS 13.34). The finance charge must be

allocated to each period during the lease term so as to produce a constant periodic

rate of interest on the remaining balance of the liability. Contingent rents must be

charged as expenses in the period in which they are incurred.

A finance lease gives rise to a depreciation expense for depreciable assets as well

as the aforementioned finance charge for each accounting period. The depreciation

policy for depreciable leased assets must be consistent with that for depreciable

assets that are owned, and the depreciation recognized must be calculated in

accordance with IPSAS 17, Property, Plant and Equipment, and IPSAS 31, Intangible

Assets, as appropriate. If there is no reasonable certainty that the lessee will obtain

ownership by the end of the lease term, the asset must be fully depreciated over the

shorter of the lease term or its useful life.

IPSAS 13: Leases

Ernst & Young 109

Figure 15: Classification of a lease agreement

b) Operating leases

Lease payments under an operating lease must be recognized as an expense on a

straight-line basis over the lease term unless another systematic basis is

representative of the time pattern of the user’s benefit.

Classification of a lease agreement

Operating lease Finance lease

Examples of situations that individually or in combination

would normally lead to a lease being classified as a

finance lease (cf. IPSAS 13.15):

a) Ownership transferred by end of lease term

b) Lease contains bargain purchase option

c) Lease term is for the major part of asset’s economic life

d) Present value of minimum lease payment amount

to substantially all the asset value

e) Specialized nature

f) Not easily replaced

Finance

lease or

operating

lease?

Depends on the substance

of the transaction rather

than the form of the contract

(cf. IPSAS 13.15)

Other indicators that individually or in combination could

also lead to a lease being classified as a finance lease

(cf. IPSAS 13.16):

a) Lessee bears lessor’s cancellation losses

b) Lessee bears/gains losses from changes in fair value

of residual

c) Lessee has option to extend rental at lower than

market price

Yes

No

No

Yes

IPSAS 13: Leases

110 IPSAS Explained

Leases in the financial statements of lessors

a) Finance leases

A finance lease is a lease that transfers substantially all the risks and rewards

incidental to ownership of an asset from the lessor to the lessee. In line with the

assumption that the leased asset is purchased by the lessee, the lessor does not

recognize the leased asset itself. In accordance with IPSAS 13.48, lessors must

recognize lease payments receivable under a finance lease as assets in their

statements of financial position and as a receivable at an amount equal to the net

investment in the lease. The lessor recognizes as an asset in surplus or deficit a

receivable for the payments expected in connection with the lease.

The result from the lease for the lessor is the unearned finance revenue that the

lessor must distribute over the term of the lease. Unearned finance revenue is the

total of the payments by the lessee (gross investment) and the fair value of the

leased asset (net investment). IPSAS 13.51 provides that recognition of finance

revenue should be based on a pattern reflecting a constant periodic rate of return on

the lessor’s net investment in the finance lease.

If artificially low rates of interest are quoted, any gains or losses on sale of assets

must be restricted to that which would apply if a market rate of interest were

charged.

b) Operating leases

Lessors must present assets subject to operating leases in their statements of

financial position according to the nature of the asset.

Lease revenue from operating leases must be recognized as revenue on a straight-

line basis over the lease term, unless another systematic basis is more

representative of the time pattern in which benefits derived from the leased asset

are diminished.

Initial direct costs incurred by lessors in negotiating and arranging an operating

lease are added to the carrying amount of the leased asset and recognized as an

expense over the lease term on the same basis as the lease revenue.

The depreciation policy for depreciable leased assets must be consistent with the

lessor’s normal depreciation policy for similar assets. Depreciation must be

calculated in accordance with IPSAS 17, or IPSAS 31, as appropriate.

Accounting for sale and leaseback transactions

The accounting treatment of a sale and leaseback transaction depends mainly

on whether the lease is a finance or an operating lease.

IPSAS 13: Leases

Ernst & Young 111

If a sale and leaseback transaction results in a finance lease, any excess of sales

proceeds over the carrying amount cannot be immediately recognized as revenue

by a seller-lessee. Instead, it must be deferred and amortized over the lease term.

If a sale and leaseback transaction results in an operating lease, and it is clear that

the transaction is established at fair value, any gain or loss must be recognized

immediately. Losses must be deferred if they are compensated by future lease

payments below market price. If the sale price is above fair value, the excess over

fair value is deferred and amortized over the period for which the asset is expected

to be used. If the fair value is less than the carrying amount, any loss must be

recognized immediately.

Effective date

Periods beginning on or after 1 January 2008. IPSAS 13.19 and 13.20 were

deleted, and paragraphs 20A and 84A were added by Improvements to IPSASs

issued in November 2010. An entity shall apply those amendments beginning

on or after 1 January 2012. Earlier application is encouraged. If an entity applies the

amendments for a period beginning before 1 January 2012, it shall disclose that

fact.

IPSAS 14: Events after the Reporting Date

112 IPSAS Explained

IPSAS 14: Events after the Reporting Date

Objective

The objective of IPSAS 14 is to prescribe:

a) When an entity should adjust its financial statements for events after the

reporting date

b) The disclosures that an entity should give about the date when the financial

statements were authorized for issue and about events after the reporting date

The standard also requires that an entity should not prepare its financial statements

on a going concern basis if events after the reporting date indicate that the going

concern assumption is not appropriate (IPSAS 14.1).

The IFRS on which the IPSAS is based

IAS 10, Events after the Balance Sheet Date

Content

Principal definitions

Events after the reporting date are those events that occur between the reporting

date and the date when the financial statements are authorized for issue. These

events can be favorable and unfavorable for an entity.

Reporting date means the date of the last day of the reporting period to which the

financial statements relate.

IPSAS 14.5 distinguishes between two types of events:

a) Events after the reporting date that provide evidence of conditions that existed

at the reporting date (adjusting events after the reporting date)

b) Events after the reporting date that are indicative of conditions that arose after

the balance sheet date (non-adjusting events after the reporting date)

In order to determine which events satisfy the definition of events after the

reporting date, it is necessary to identify both the reporting date and the date on

which the financial statements are authorized for issue. The date of authorization

for issue is the date on which the financial statements have received approval from

the individual or body with the authority to finalize those statements for issue.

This can be a parliament or a local council (cf. IPSAS 14.7). IPSAS 14.8 points out

that the date of authorization for issue of the financial statements will be determined

IPSAS 14: Events after the Reporting Date

Ernst & Young 113

in the context of the particular jurisdiction. The audit opinion is rendered on the

basis of these financial statements.

In the period between the reporting date and the date of authorization for issue,

elected government officials may announce a government’s intentions in relation

to certain matters (cf. IPSAS 14.9). Whether or not these announced government

intentions require recognition as adjusting events would depend upon whether they

provide more information about the conditions existing at the reporting date and

whether there is sufficient evidence that they can and will be fulfilled. In most cases,

the announcement of government intentions will not lead to the recognition of

adjusting events. Instead, they would generally qualify for disclosure as non-

adjusting events.

The following figure outlines the specific definitions as well as the relevant period

for IPSAS 14:

Figure 16: Specific definitions and relevant period for IPSAS 14

Accounting treatment of events after the reporting date

According to IPSAS 14.10, an entity must adjust the amounts recognized

in its financial statements to reflect adjusting events after the reporting date.

An example of an adjusting event after the reporting date could be the settlement

after the reporting date of a court case, confirming that the entity had a present

obligation at the reporting date. The entity adjusts any previously recognized

provision related to this court case in accordance with IPSAS 19, Provisions,

Contingent Liabilities and Contingent Assets or recognizes a new provision.

The receipt of information after the reporting date indicating that an asset was

impaired at the reporting date, or that the amount of a previously recognized

impairment loss for that asset needs to be adjusted, also qualifies as an adjusting

event after the reporting date. This is why the bankruptcy of a debtor which occurs

Relevant period for IPSAS 14

Reporting

date

Date of

authorization

Start of fiscal year

(e.g., 1.1.20x0)

End of fiscal year

(e.g., 31.12.20x0)

Approval to issue

(e.g., 30.4.20x1)

t

IPSAS 14: Events after the Reporting Date

114 IPSAS Explained

after the reporting date usually confirms that a loss already existed at the reporting

date on a receivable account and that the entity needs to adjust the carrying amount

of the receivable account.

According to IPSAS 14.12 an entity cannot adjust the amounts recognized

in its financial statements to reflect non-adjusting events after the reporting date.

For example, in the event that an entity generally measures its land at fair value

pursuant to IPSAS 17.44, a drop in the fair value of the land between the reporting

date and the date of authorization for issue does not lead to any adjustments.

The drop in the fair value of the land generally had nothing to do with its condition

on the reporting date. Instead, it reflects the change in circumstances in the

subsequent reporting period.

In the notes, an entity must disclose the following information for each material

category of non-adjusting event after the reporting date:

► The nature of the event

► An estimate of its financial effect or a statement that such an

estimate cannot

be made

The following graph gives some examples for adjusting and non-adjusting events

after the reporting date.

Figure 17: Examples for events after the reporting date

Events after the reporting date

(events that occur between the reporting

date and the date when the financial

statements are authorized for issue)

Adjusting events after the

reporting date; examples are (cf. IPSAS 14.11):

Non-adjusting events after the

reporting date; examples are (cf. IPSAS 14.13):

The settlement after the reporting date of a

court case that confirms that the entity had a

present obligation at the reporting date.

The receipt of information after the reporting

date indicating that an asset was impaired at

the reporting date.

The determination after the reporting date

of the amount of revenue collected during the

reporting period to be shared with another

government under a revenue-sharing

agreement in place during the reporting

period.

The discovery of fraud or errors that show

that the financial statements were incorrect.

Where an entity has adopted a policy of

regularly revaluing property to fair value, a

decline in the fair value of property between

the reporting date and the date when

financial statements are authorized for issue.

Where an entity charged with operating

particular community service programs

decides after the reporting date, but before

the financial statements are authorized, to

provide/distribute additional benefits directly

or indirectly to participants in those

programs.

IPSAS 14: Events after the Reporting Date

Ernst & Young 115

Going concern

The determination of whether the going concern assumption is appropriate needs

to be considered by each entity. In the public sector, however, the assessment

of going concern is likely to be of more relevance for individual entities (e.g., for

local authorities) than for a government as a whole. For example, a government

can decide to transfer the activities of one entity to another government agency.

This could influence the going concern assumption for the transferring entity and

its accounting.

According to IPSAS 14.18, an entity cannot prepare its financial statements

on a going concern basis if those responsible for the preparation of the financial

statements or the governing body determine after the reporting date either that

there is an intention to liquidate the entity or to cease operating, or that there

is no realistic alternative to this course of action.

In the case of entities whose operations are substantially budget-funded, going

concern issues generally only arise if the government announces its intention

to cease funding the entity (cf. IPSAS 14.20).

If the going concern assumption is no longer appropriate, IPSAS 14.22 provides

that an entity must reflect this in its financial statements. Judgment is required

in determining whether a change in the carrying amount of assets and liabilities

is required, or whether additional liabilities have to be created (cf. IPSAS 14.22

et seq.). When the going concern assumption is no longer appropriate, effects

on the maturity and classification of liabilities (e.g., due to contractual provisions

that render liabilities due immediately in certain cases) may occur.

Other disclosure obligations

IPSAS 14.26 states that an entity must disclose the date when the financial

statements were authorized for issue and who gave that authorization. If another

body has the power to amend the financial statements after issuance, the entity

must disclose that fact.

Effective date

Periods beginning on or after 1 January 2008. Par. 16 of IPSAS 14 was amended

by Improvements to IPSASs issued in January 2010. An entity shall apply that

amendment on or after 1 January 2011.

IPSAS 15: Financial Instruments: Disclosure and Presentation

116 IPSAS Explained

IPSAS 15: Financial Instruments: Disclosure and

Presentation

Preliminary note

IPSAS 15 was issued in December 2001 and was drawn primarily from IAS 32

(revised 1998). Since then the IASB has issued revised standards on financial

instruments. In January 2010 the IPSASB published IPSAS 28, Financial

Instruments: Presentation, IPSAS 29, Financial Instruments: Recognition and

Measurement and IPSAS 30, Financial Instruments: Disclosures as an integrated

package. IPSAS 15 has been superseded by IPSAS 28 and IPSAS 30. IPSAS 28 as

well as IPSAS 30 apply for annual financial statements covering periods beginning

on or after 1 January 2013 (earlier application is encouraged). Therefore, IPSAS 15

remains applicable until IPSAS 28 and IPSAS 30 are applied or become effective,

whichever is earlier.

Objective

The dynamic nature of international financial markets has resulted in the widespread

use of a variety of financial instruments ranging from traditional primary

instruments, such as bonds, to various forms of derivative instruments, such as

interest rate swaps. Public sector entities use a wide range of financial instruments

from simple instruments such as payables and receivables to more complex

instruments (such as cross-currency swaps to hedge commitments in foreign

currencies) in their operations. To a lesser extent, public sector entities may issue

equity instruments or compound liability/equity instruments. This may occur where

an economic entity includes a partly-privatized Government Business Enterprise

(GBE) that issues equity instruments into the financial markets or where a public

sector entity issues debt instruments that convert to an ownership interest under

certain conditions.

The objective of this standard is to enhance financial statement users’ understanding

of the significance of recognized and unrecognized financial instruments to a

government’s or other public sector entity’s financial position, performance and cash

flows.

IPSAS 15 prescribes certain requirements for presentation of on-balance-sheet

financial instruments and identifies the information that should be disclosed about

both on-balance-sheet (recognized) and off-balance-sheet (unrecognized) financial

instruments. The presentation rules deal with the classification of financial

instruments between liabilities and net assets/equity, the classification of related

interest, dividends, revenues and expenses, and the circumstances in which financial

assets and financial liabilities should be offset. The disclosure rules deal with

IPSAS 15: Financial Instruments: Disclosure and Presentation

Ernst & Young 117

information about factors that affect the amount, timing and certainty of an entity’s

future cash flows relating to financial instruments and the accounting policies

applied to the instruments. In addition, IPSAS 15 encourages disclosure of

information about the nature and extent of an entity’s use of financial instruments,

the financial purposes that they serve, the risks associated with them and

management’s policies for controlling those risks.

The IFRS on which the IPSAS is based

IPSAS 15 is mainly based on IAS 32, Financial Instruments: Presentation. Accounting

for financial instruments under IFRS is dealt with in IAS 32, of which the disclosures

part has been replaced by IFRS 7, Financial Instruments: Disclosures since 2007, and

in IAS 39, Financial Instruments: Recognition and Measurement.

Because IPSAS 15 is based on IAS 32, it mainly deals with a distinction between net

assets/equity and liabilities, possibilities of offsetting financial assets and liabilities

as well as disclosure requirements in relation to financial instruments.

Content

Principal definitions

In accordance with IPSAS 15.9, a financial instrument is any contract that gives rise

to both a financial asset of one entity and a financial liability or equity instrument of

another entity.

A financial asset is any asset that is:

a) Cash;

b) A contractual right to receive cash or another financial asset from another

entity (e.g., bonds held);

c) A contractual right to exchange financial instruments with another entity under

conditions that are potentially favorable (e.g., a forward purchase of foreign

currency at a forward rate that is below the spot rate); or

d) An equity instrument (e.g., shares) of another entity.

A financial liability is any liability that is a contractual obligation:

a) To deliver cash or another financial asset to another entity (e.g., bonds issued)

b) To exchange financial instruments with another entity under conditions that

are potentially unfavorable (e.g., the writer obligation for an option)

An equity instrument is any contract that evidences a residual interest in the assets

of an entity after deducting all of its liabilities (e.g., shares).

IPSAS 15: Financial Instruments: Disclosure and Presentation

118 IPSAS Explained

Financial instruments thus comprise both primary instruments such as receivables,

liabilities or equity securities, and derivative financial instruments such as futures

or forwards, options or swaps (e.g., interest swaps).

Presentation of debts and net assets/equity

According to IPSAS 15.22, the issuer of a financial instrument should classify the

instrument, or its component parts, as a liability or as net assets/equity in

accordance with the substance of the contractual arrangement on initial recognition

and the definitions of a financial liability and an equity instrument. The issuer of a

financial instrument that comprises both a liability and a net assets/equity

component must classify the two components separately in order to be in

accordance with IPSAS 15.22 (cf. IPSAS 15.29).

Interest, dividends, losses and gains relating to a financial instrument, or a

component, classified as a financial liability should be reported in the statement of

financial performance as expense or revenue. Distributions to holders of a financial

instrument classified as an equity instrument should be debited by the issuer directly

to net assets/equity.

Offsetting of a financial asset and a financial liability

A financial asset and a financial liability should be offset and the net amount

reported in the statement of financial position (cf. IPSAS 15.39) when an entity:

a) Has a legally enforceable right to set off the recognized amounts; and

b) Intends either to settle on a net basis, or to realize the asset and settle the

liability simultaneously

Disclosure requirements

In particular an entity should describe its financial risk management objectives and

policies, including its policy for hedging each major type of forecasted transaction

for which hedge accounting is used.

For each class of financial assets, financial liabilities and equity instruments, both

recognized and unrecognized, an entity should disclose (cf. IPSAS 15.54):

a) Information about the extent and nature of the financial instruments, including

significant terms and conditions that may affect the amount, timing and

certainty of future cash flows; and

b) The accounting policies and methods adopted, including the criteria for

recognition and the basis of measurement applied.

IPSAS 15: Financial Instruments: Disclosure and Presentation

Ernst & Young 119

Disclosures on the interest rate risk are also required. For each class of financial

asset and financial liability, both recognized and unrecognized, an entity should

disclose information about its exposure to interest rate risk (cf. IPSAS 15.63),

including:

a) Contractual repricing or maturity dates, whichever dates are earlier; and

b) Effective interest rates, when applicable

Furthermore, for each class of financial asset, both recognized and unrecognized,

an entity should disclose information about its exposure to credit risk (cf. IPSAS

15.73), including:

a) The amount that best represents its maximum credit risk exposure at the

reporting date, in the event of other parties failing to perform their obligations

under financial instruments. The fair value of collateral is not considered here;

and

b) Significant concentrations of credit risk

For each class of financial assets and financial liabilities, both recognized and

unrecognized, an entity should disclose information about the fair value. When

it is not practicable within constraints of timeliness or cost to determine the fair

value of a financial asset or financial liability with sufficient reliability, that fact

should be disclosed together with information about the principal characteristics

of the underlying financial instrument that are pertinent to its fair value.

IPSAS 15 contains disclosures in addition to the disclosure requirements stated

here for financial assets carried at an amount in excess of fair value and for hedges

of anticipated future transactions. Finally, additional disclosures are encouraged

when they are likely to enhance financial statement users’ understanding of financial

instruments.

Effective date

Periods beginning on or after 1 January 2003.

IPSAS 16: Investment Property

120 IPSAS Explained

IPSAS 16: Investment Property

Objective

The objective of IPSAS 16 is to prescribe the accounting treatment for investment

property and related disclosure requirements.

The IFRS on which the IPSAS is based

IAS 40, Investment Property

Content

Principal definitions

Investment property is property (land or a building – or part of a building – or both)

held to earn rentals or for capital appreciation or both, rather than for:

► Use in the production or supply of goods or services or for

administrative purposes

► Sale in the ordinary course of operations

General remarks

Investment property generates cash flows largely independently of the other assets

held by an entity, distinguishing it from other land or buildings controlled by public

sector entities, including owner-occupied property.

There are a number of circumstances in which public sector entities may hold

property to earn rental and for capital appreciation. For example, a public sector

entity (other than a GBE) may be established to manage a government’s property

portfolio on a commercial basis.

Scope

IPSAS 16 does not apply to

a) Biological assets related to agricultural activity (see IPSAS 27, Agriculture);

and

b) Mineral rights and mineral reserves such as oil, natural gas, and similar

non-regenerative resources.

IPSAS 16: Investment Property

Ernst & Young 121

Recognition

According to IPSAS 16.20, investment property should be recognized as an asset

when, and only when:

a) It is probable that the future economic benefits of service potential that are

associated with the investment property will flow to the entity; and

b) The cost or fair value of the investment property can be measured reliably.

Measurement of investment property: Initial measurement

According to IPSAS 16.23, an entity evaluates all its investment property at costs at

the time they are incurred. These costs include costs incurred initially to acquire an

investment property and costs incurred subsequently to add to, replace part of, or

service a property. However, the carrying amount of an investment property does

not include the costs of the day-to-day servicing of such a property (cf. IPSAS

16.24). Rather, these costs are recognized in surplus or deficit as incurred. Costs of

day-to-day servicing are primarily the costs of labor and consumables, and may

include the cost of minor parts.

An investment property is measured initially at its cost. Transaction costs are

included in the initial measurement. Where an investment property is acquired

through a non-exchange transaction, its cost is measured at its fair value as at the

date of acquisition.

The following graph summarizes the initial measurement of investment property:

Figure 18: Initial measurement of investment property

Initial measurement

of investment property

An investment property

is initially measured at its

costs (cf. IPSAS 16.26).

Transaction costs

shall be included in the initial

measurement.

If an investment property

is acquired through a non-

exchange transaction,

its cost is measured at its fair

value at the date of

acquisition (cf. IPSAS 16.27).

If an investment property

is acquired in exchange

for a non-monetary asset

or assets, or a combination

of monetary and

non-monetary assets then

the asset is measured at fair

value unless

a) the exchange transaction

lacks commercial

substance (cf. IPSAS

16.36), or

b) the fair value of neither

the asset received nor

the asset given up

Is reliably measurable

(cf. IPSAS 16.36).

IPSAS 16: Investment Property

122 IPSAS Explained

Measurement of investment property after recognition

For the purpose of measurement after recognition, an entity can choose either the

fair value model or the cost model:

► Fair value model: Investment property is measured at fair value. A

gain or loss arising from a change in the fair value of investment

property is recognized in surplus or deficit for the period in which it

arises.

► Cost model: Investment property is measured at cost less any

accumulated depreciation and any accumulated impairment losses

(cf. IPSAS 17, Property, Plant and Equipment).

The measurement model chosen must be applied uniformly to all investment

property of the entity.

Figure 19: Measurement of recognized investment property

There is a rebuttable presumption that an entity can reliably determine the fair

value of an investment property on a continuing basis. If an entity uses the fair

value model and if, in exceptional cases, there is clear evidence when the entity first

acquires an item of investment property that the fair value of this investment

property is not reliably determinable on a continuing basis, the entity shall measure

that investment property using the cost model according to IPSAS 17 until disposal.

The residual value of this investment property is assumed to be zero.

Measurement of recognized

investment property

Fair value model (cf. IPSAS 16.42)

Investment property is measured

at fair value, unless

Chosen method

shall be applied to all of an

entity’s investment

property.

There is clear evidence when

the entity first acquires an item

of investment property that the fair

value of the asset is not reliably

determined on a continuing basis

(cf. IPSAS 16.62)

Recognized

assets can be

measured by

two applicable

methods

Cost model (cf. IPSAS 16.65)

Investment property is measured

at its cost less any accumulated

depreciation and any accumulated

impairment losses

The entity must measure that

investment property using the

cost model

IPSAS 16: Investment Property

Ernst & Young 123

Accounting treatment on disposal or retirement of investment property

An investment property should be derecognized (eliminated from the statement

of financial position) on disposal or when the investment property is permanently

withdrawn from use and no future economic benefits or service potential are

expected from its disposal.

Gains or losses arising from the retirement or disposal of investment property are

generally determined as the difference between the net disposal proceeds and the

carrying amount of the asset and recognized in surplus or deficit in the period of the

retirement or disposal.

The following graph gives an overview of the measurement of investment property

at first application of IPSAS 16:

Figure 20: Measurement of recognized investment property at first application of

IPSAS 16

Measurement

of recognized investment

property at first application of

IPSAS 16

Fair value model

(cf. IPSAS 16.42 et seq.)

Investment property is measured

at fair value

The entity shall recognize the effect

of applying IPSAS as an adjustment

to the opening balance of accumulated

surpluses or deficits for the period

in which IPSAS is first applied

(cf. IPSAS 16.94)

Recognized

assets can be

measured by

two applicable

methods

Cost model (cf. IPSAS 16.98 et seq.)

Investment property is measured at its

cost less any accumulated depreciation

and any accumulated impairment losses

The entity shall recognize any

accumulated depreciation and any

accumulated impairment losses that

relate to the property, as if it had always

applied those accounting policies

(cf. IPSAS 16.98)

IPSAS 16: Investment Property

124 IPSAS Explained

Initial measurement of investment property af first-time adoption of accrual IPSASs

The following graphs summarizes the measurement of investment property at first-

time adoption of accrual IPSASs:

Figure 21: Initial measurement of investment property at first-time adoption of accrual IPSASs

Effective date

Periods beginning on or after 1 January 2008. Several paragraphs of IPSAS 16

were amended as well as deleted by Improvements to IPSASs issued in January

2010. For the effective dates of those amendments please refer to IPSAS 16.101A.

Initial measurement of investment property

at first-time adoption of accrual IPSASs

Cost

(cf. IPSAS 16.91)

Investment properties acquired

at no cost, or for a nominal cost

Fair value

(cf. IPSAS 16.91)

Cost is the investment

property’s fair value

as at the date of acquisition

(cf. IPSAS 16.91)

Recognize the effect of the initial recognition of investment property as an adjustment to the opening balance

of accumulated surpluses or deficits for the period of adopting accrual accounting

(cf. IPSAS 16.92)

IPSAS 17: Property, Plant and Equipment

Ernst & Young 125

IPSAS 17: Property, Plant and Equipment

Objective

The objective of IPSAS 17 is to prescribe the accounting treatment for property,

plant and equipment so that users of financial statements can discern information

about an entity’s investment in its property, plant and equipment and any changes in

such investment. The principal issues in accounting for property, plant and

equipment are the recognition of the assets, the determination of their carrying

amounts and the depreciation charges and impairment losses to be recognized in

relation to them.

The IFRS on which the IPSAS is based

IAS 16, Property, Plant and Equipment

Content

Principal definitions

Property, plant and equipment are tangible items that (a) are held for use in the

production or supply of goods or services, for rental to others, or for administrative

purposes; and (b) are expected to be used during more than one reporting period.

Recognition

According to IPSAS 17.14, the cost of an item of property, plant and equipment

is recognized as an asset if, and only if:

a) It is probable that the future economic benefits or service potential associated

with the item will flow to the entity.

b) The cost or fair value of the item can be measured reliably.

IPSAS 17 does not prescribe the unit of measure for recognition, i.e., what

constitutes an item of property, plant and equipment. Thus, judgment is required

in applying the recognition criteria to an entity’s specific circumstances. It may be

appropriate to aggregate individually insignificant items, such as library books and

computer peripherals, and to apply the criteria to the aggregate value.

IPSAS 17: Property, Plant and Equipment

126 IPSAS Explained

Figure 22: Recognition criteria for property, plant and equipment

IPSAS 17 neither requires nor prohibits the recognition of heritage assets. An entity

that recognizes heritage assets in its financial statements must apply the disclosure

requirements of IPSAS 17 to the heritage assets recognized. However, it is not

required to apply the other requirements of IPSAS 17 with respect to these heritage

assets. However, acknowledging the significance and the problems related to

recognizing and measuring heritage assets, the IPSASB developed a corresponding

approach in the Consultation Paper, Accounting for Heritage Assets under the

Accrual Basis of Accounting in February 2006. The consultation paper is based

on a joint initiative by the IPSASB with the United Kingdom Accounting Standards

Board (UK ASB). The IPSASB has analyzed the feedback on this consultation paper

and decided to defer the project.

Specialist military equipment will normally meet the definition of property, plant and

equipment and must therefore be recognized as an asset. Infrastructure assets such

as road networks or sewer systems must also be recognized in accordance with the

principles of IPSAS 17.

Measurement of property, plant and equipment at recognition

An item of property, plant and equipment that qualifies for recognition as an asset

should initially be measured at its cost.

IPSAS 17.30 provides that the cost of an item of property, plant and equipment

comprises:

a) Its purchase price, including import duties and non-refundable purchase taxes,

after deducting trade discounts and rebates;

b) Any costs directly attributable to bringing the asset to the location and

condition necessary for it to be capable of operating in the manner intended

by management;

Recognition criteria

for property, plant and equipment

The future economic benefits

or service potential associated

with the item will flow to the entity

(cf. IPSAS 17.14(a)).

The cost or fair value of the item

can be measured reliably

(cf. IPSAS 17.14(b)).

IPSAS 17: Property, Plant and Equipment

Ernst & Young 127

c) The initial estimate of the costs of dismantling and removing the item and

restoring the site on which it is located, the obligation for which an entity incurs

either when the item is acquired or as a consequence of having used the item

during a particular period for purposes other than to produce inventories

during that period.

If an asset is acquired in a non-exchange transaction, its cost is determined at fair

value at the time of acquisition. Items of property, plant and equipment acquired

in an exchange transaction (including an exchange of similar items) are measured

at fair value unless the exchange transaction lacks commercial substance or the fair

value of neither the asset received nor the asset given up is reliably measurable

(cf. IPSAS 17.38).

The following graph summarizes the initial measurement of property, plant and

equipment.

Figure 23: Recognition criteria for property, plant and equipment

Measurement of property, plant and equipment on first-time adoption of accrual

IPSASs

When an entity adopts accrual accounting for the first time in accordance with

IPSASs it shall initially recognize property, plant, and equipment at cost or fair value

(cf. IPSAS 17.96). For items of property, plant, and equipment that were acquired at

no cost, or for a nominal cost, (e.g., by a non-exchange transaction) cost is the

item’s fair value as at the date of acquisition. The effect of the initial recognition

of property, plant, and equipment shall be recognized as an adjustment to the

Initial measurement

of property, plant and equipment

An asset should initially

be measured at its costs

(cf. IPSAS 17.26).

If an asset is acquired

in a non-exchange

transaction, its cost

is determined at fair value

at the time of acquisition

(cf. IPSAS 17.27).

If PP&E is acquired

in exchange for a non-

monetary asset or assets,

or a combination of monetary

and non-monetary assets

then the asset is measured

at fair value unless

a) The exchange transaction

lacks commercial

substance

(cf. IPSAS 17.38), or

b) The fair value of neither

the asset received nor

the asset given up

is reliably measurable

(cf. IPSAS 17.38).

IPSAS 17: Property, Plant and Equipment

128 IPSAS Explained

opening balance of accumulated surpluses or deficits for the period in which the

property, plant, and equipment is initially recognized.

Measurement of property, plant and equipment after recognition

For the purpose of measurement after recognition, IPSAS 17.42 et seq. provides

for a choice of two accounting models that must be applied uniformly to the entire

class of property, plant and equipment:

► Cost model: The asset is carried at its cost less any accumulated

depreciation and any accumulated impairment losses.

► Revaluation model: Subsequent to initial recognition as an asset, an

item of property, plant and equipment whose fair value can be

measured reliably should be carried at a revalued amount, being its

fair value at the date of the revaluation less any subsequent

accumulated depreciation and subsequent accumulated impairment

losses.

Figure 24: Measurement of recognized property, plant and equipment

A class of property, plant and equipment means a grouping of assets of a similar

nature or function in an entity’s operations. IPSAS 17.52 lists the following as

examples of classes of property, plant and equipment:

Measurement of recognized

property, plant and equipment

Cost model (IPSAS 17.43)

The asset is carried at its cost, less

any accumulated depreciation and

impairment losses.

Chosen method shall be

applied to an entire class

of property, plant and

equipment.

Recognized

assets can be

measured by

two methods

Revaluation model (IPSAS 17.44)

The asset is carried at a revalued

amount less any subsequent

accumulated depreciation and

impairment losses. Revaluations

should be made regularly.

IPSAS 17: Property, Plant and Equipment

Ernst & Young 129

Figure 25: Examples of classes of property, plant and equipment

If the revaluation model is used, revaluations should be made with sufficient

regularity to ensure that the carrying amount does not differ materially from that

which would be determined using fair value at the reporting date. Not just individual

assets but all items of an existing class of property, plant and equipment must

be remeasured in this case.

Accounting treatment for measurement of property, plant and equipment after

recognition

If the carrying amount of a class of assets is increased as a result of a revaluation,

the increase is credited directly to revaluation surplus. However, the increase is

recognized in surplus or deficit to the extent that it reverses a revaluation decrease

of the same class of assets previously recognized in surplus or deficit. If the carrying

amount of a class of assets is decreased as a result of a revaluation, the decrease

is initially debited directly to revaluation surplus relating to the same class of assets.

To the extent that the decrease exceeds the amount of the corresponding

revaluation surplus, the excess is recognized in surplus or deficit. If a remeasured

asset is sold, the revaluation reserve is reclassified directly to revenue reserves.

Recognition in surplus or deficit is not permissible.

Revaluation increases and decreases relating to individual assets within a class of

property, plant and equipment must be offset against one another within that class.

However, they must not be offset in respect of assets in different classes.

Each part of an item of property, plant and equipment with a cost that is significant

in relation to the total cost of the item must be depreciated separately. In the case of

a road system, for example, the formation, bridges, tunnels, lighting and footpaths

must be depreciated separately.

Depreciation and impairment

Depreciation is charged systematically over the useful life. The depreciation charge

for each period is recognized in surplus or deficit unless it is included in the carrying

amount of another asset. The depreciation method must reflect the pattern in which

Examples of classes of property,

plant and equipment

(cf. IPSAS 17.52)

Examples of separate classes

of property and plant are: land,

operational buildings, roads.

Examples of separate classes

of equipment are: machinery,

aircraft, specialist military

equipment, motor vehicles,

furniture and fixtures, office

equipment.

IPSAS 17: Property, Plant and Equipment

130 IPSAS Explained

the asset’s future economic benefits or service potential is expected to be consumed

by the entity. The residual value of an asset must be reviewed at least at each annual

reporting date and must correspond to the amount that the entity would currently

obtain from the disposal of the asset if the asset were already of the age and in the

condition expected at the end of its useful life. If a condition of continuing to operate

an item of property, plant and equipment (for example, an aircraft) is performing

regular major inspections, the cost of each major inspection is recognized in the

carrying amount of the item of property, plant and equipment as a replacement if

the recognition criteria are satisfied. If expectations differ from previous estimates,

the change(s) must be accounted for as a change in an accounting estimate in

accordance with IPSAS 3, Accounting Policies, Changes in Accounting Estimates and

Errors.

Land and buildings are separable assets and are accounted for separately, even

when they are acquired together. With some exceptions, such as quarries and sites

used for landfill, land has an unlimited useful life and therefore is not depreciated.

Buildings have a limited useful life and therefore are depreciable assets. An increase

in the value of the land on which a building stands does not affect the determination

of the depreciable amount of the building.

To determine whether an item of property, plant and equipment is impaired, an

entity applies IPSAS 21, Impairment of Non-Cash-Generating Assets or IPSAS 26,

Impairment of Cash-Generating Assets.

Derecognition of property, plant and equipment

IPSAS 17.82 states that the carrying amount of an item of property, plant and

equipment is derecognized:

► On disposal; or

► When no future economic benefits or service potential is expected

from its use or disposal.

The gain or loss arising from the derecognition of an item of property, plant and

equipment is in general included in surplus or deficit when the item is derecognized.

Gains are not classified as revenue. The gain or loss arising from the derecognition

of an item of property, plant and equipment is determined as the difference between

the net disposal proceeds, if any, and the carrying amount of the item, regardless of

whether it was previously measured at cost or fair value.

Extensive disclosures must be made for property, plant and equipment

(cf. IPSAS 17.88 et seq.).

IPSAS 17: Property, Plant and Equipment

Ernst & Young 131

Finally, the following illustrative decision tree below summarizes the interplay

between IPSAS 12, 13, 16 and 17.

Figure 26: Illustrative decision tree

Source: International Federation of Accountants, Handbook of International Public Sector Accounting

Pronouncements, 2011 Edition, Volume 1, p. 500

Initial recognition and measurement of property, plant and equipment at first-time

adoption of accrual IPSASs

The following figure summarizes the initial recognition and measurement of

property, plant and equipment at first-time adoption of accrual IPSASs:

Illustrative decision tree

Start

Is the property

held for sale in the

ordinary course

of business?

Use IPSAS 12, inventories

Is the property

owner occupied?

Is the property

held under an

operating lease?

Which model

is chosen for all

investment

properties?

The property is an investment

property.

Use IPSAS 17, property,

plant and equipment

(cost or revaluation model)

Does the

entity choose

to classify the

property

as investment

property?

Use IPSAS 13,

leases

Use IPSAS 16, investment property

(fair value model)

Use IPSAS 17, property, plant

and equipment (cost model)

with disclosure from IPSAS 16,

investment property

Yes

No

No

No

Yes

Yes No

Yes

Fair value

model

Cost model

IPSAS 17: Property, Plant and Equipment

132 IPSAS Explained

Figure 27: Initial recognition and measurement of property, plant and equipment at first-time adoption of

accrual IPSASs

Effective date

Periods beginning on or after 1 January 2008. Since 2010 IPSAS 17 has also been

amended by other IPSASs as well as by Improvements to IPSASs. For the effective

dates of these amendments please refer to IPSAS 17.107A et seq.

Initial recognition of property, plant and equipment

at first-time adoption of accrual IPSASs

An asset should initially

be measured at its costs

or fair value as at the date

of first adoption of IPSAS

(cf. IPSAS 17.96).

Entities are not required to recognize assets for reporting periods beginning on a date within

five years following the date of first adoption of IPSAS. Nevertheless, entities are encouraged

to comply in full with the provisions of IPSAS 17 as soon as possible (cf. IPSAS 17.95).

Initial measurement of property, plant and equipment

at first-time adoption of accrual IPSASs

Recognize the effect of the initial recognition of PP&E as an adjustment to the opening balance

of accumulated surpluses or deficits for the period in which the property, plant, and equipment is

initially recognized (cf. IPSAS 17.97).

Where the cost of acquisition

of an asset is not known, its

costs may be estimated

by reference to its fair value

as at the date of acquisition

(cf. IPSAS 17.98).

If an asset is acquired at no

cost, or for a nominal cost,

cost is the asset’s fair value

as at the date of acquisition

(cf. IPSAS 17.96).

IPSAS 18: Segment Reporting

Ernst & Young 133

IPSAS 18: Segment Reporting

Objective

The objective of IPSAS 18 is to establish principles for reporting financial

information by segments. The disclosure of this information will:

a) Help users of the financial statements to better understand the entity’s past

performance and to identify the resources allocated to support the major

activities of the entity

b) Enhance the transparency of financial reporting and enable the entity to better

discharge its accountability obligations

The IFRS on which the IPSAS is based

IAS 14, Segment Reporting (as revised 1997)

Content

Principal definitions

A segment is a distinguishable activity or group of activities of an entity for which

it is appropriate to separately report financial information for the purpose of

evaluating the entity’s past performance in achieving its objectives and for making

decisions about the future allocation of resources.

IPSAS 18 distinguishes between service segments and geographical segments.

A service segment refers to a distinguishable component of an entity that is engaged

in providing related outputs or achieving particular operating objectives consistent

with the overall mission of each entity. A geographical segment is a distinguishable

component of an entity that is engaged in providing outputs or achieving particular

operating objectives within a particular geographical area.

Scope

An entity which prepares and presents financial statements under the accrual basis

of accounting should apply IPSAS 18 in the presentation of segment information.

IPSAS 18 should be applied in complete sets of published financial statements

(according to IPSAS 1.21) that comply with International Public Sector Accounting

Standards (cf. IPSAS 18.4).

If both consolidated financial statements of a government or other economic entity

and the separate financial statements of the parent entity are presented together,

segment information need be presented only on the basis of the consolidated

financial statements.

IPSAS 18: Segment Reporting

134 IPSAS Explained

Identification of reportable segments

An entity generally identifies service and geographical segments on the basis

of its organizational structure and internal reporting system. In most cases, the

major classifications of activities identified in budget documentation will best reflect

the segment structure (cf. IPSAS 18.14). In most cases, the segments reported

to the governing body and senior management of the public entity will also reflect

the segments reported in the financial statements.

Government departments and agencies are usually managed along service lines

because this reflects the way in which major outputs are identified, their

achievements monitored, and their resource needs identified and budgeted.

IPSAS 18.19 and IPSAS 18.22 set out criteria for defining service and geographical

segments. Factors that will be considered in determining whether outputs (goods

and services) are related and should be grouped as segments for financial reporting

purposes according to IPSAS 18.19 include:

a) The primary operating objectives of the entity and the goods, services and

activities that relate to the achievement of each of those objectives and

whether resources are allocated and budgeted on the basis of groups of goods

and services;

b) The nature of the goods or services provided or activities undertaken;

c) The nature of the production process and/or service delivery and distribution

process or mechanism;

d) The type of customer or consumer for the goods or services;

e) The way in which the entity is managed and financial information is reported to

senior management and the governing board;

f) If applicable, the nature of the regulatory environment, (for example,

department or statutory authority) or sectors of government (for example

finance sector, public utilities, or general government).

The following factors are considered in determining whether financial information

should be reported on a geographical basis (cf. IPSAS 18.22):

a) Similarity of economic, social and political conditions in different regions;

b) Relationships between the primary objectives of the entity and the different

regions;

c) Whether service delivery characteristics and operating conditions differ in

different regions;

IPSAS 18: Segment Reporting

Ernst & Young 135

d) Whether this reflects the way in which the entity is managed and financial

information is reported to senior management and the governing board;

e) Special needs, skills or risks associated with operations in a particular area.

Segment disclosures

An entity must disclose segment revenue and segment expense for each segment

(cf. IPSAS 18.27 for a definition of segment revenue and segment expense).

Segment revenue from budget appropriation or similar allocation, segment revenue

from other external sources, and segment revenue from transactions with other

segments should be reported separately. An entity must also disclose the total

carrying amount of segment assets and segment liabilities for each segment

(cf. IPSAS 18.27 for a definition of segment assets and segment liabilities).

An entity must further disclose the total cost incurred during the period to acquire

segment assets that are expected to be used during more than one period for each

segment (cf. IPSAS 18.52-56).

According to IPSAS 18.43, segment information should be prepared in conformity

with the accounting policies adopted for preparing and presenting the financial

statements of the consolidated group or entity.

IPSAS 18.47 states that assets that are jointly used by two or more segments should

be allocated to segments if, and only if, their related revenues and expenses also are

allocated to those segments.

If a segment is identified as a segment for the first time in the current period, prior

period segment data that is presented for comparative purposes should be restated

to reflect the newly reported segment as a separate segment, unless it is

impracticable to do so (cf. IPSAS 18.49).

Multiple segmentation

Pursuant to IPSAS 18.23, an entity may report on the basis of more than one

segment structure, for example by both service and geographical segments.

A primary and secondary segment reporting structure can be adopted, with

only limited disclosures made about secondary segments.

Disclosures

The disclosure requirements in IPSAS 18.52-75 must be made for each segment (cf.

IPSAS 18.51).

Effective date

Periods beginning on or after 1 July 2003.

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets

136 IPSAS Explained

IPSAS 19: Provisions, Contingent Liabilities and

Contingent Assets

Objective

The objective of IPSAS 19 is to define provisions, contingent liabilities and

contingent assets, identify the circumstances in which provisions should be

recognized, how they should be measured and the disclosures that should be made

about them. The standard also requires that certain information be disclosed about

contingent liabilities and contingent assets in the notes to the financial statements to

enable users to understand their nature, timing and amount.

The IFRS on which the IPSAS is based

IAS 37, Provisions, Contingent Liabilities and Contingent Assets

Content

Principal definitions

A liability is a present obligation of the entity arising from past events, the

settlement of which is expected to result in an outflow from the entity of resources

embodying economic benefits or service potential.

A provision is a liability of uncertain timing or amount.

IPSAS 19.18 defines a contingent liability as:

a) A possible obligation that arises from past events and whose existence will be

confirmed only by the occurrence or non-occurrence of one or more uncertain

future events not wholly within the control of the entity, or

b) A present obligation that arises from past events but is not recognized

because:

i) It is not probable that an outflow of resources embodying economic

benefits or service potential will be required to settle the obligation, or

ii) The amount of the obligation cannot be measured with sufficient

reliability.

IPSAS 19.18 defines a contingent asset as a possible asset that arises from past

events and whose existence will be confirmed only by the occurrence or non-

occurrence of one or more uncertain future events not wholly within the control

of the entity.

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets

Ernst & Young 137

Scope

IPSAS 19.1 expressly states that accounting for provisions and contingent liabilities

arising from social benefits provided by an entity for which it does not receive

consideration that is approximately equal to the value of goods and services

provided directly in return from the recipients of those benefits is not regulated

by IPSAS 19. Also, IPSAS 19 does not apply to financial instruments that are carried

at fair value.

Recognition

According to IPSAS 19.22, a provision should be recognized when

a) An entity has a present obligation (legal or constructive) as a result of a past

event,

b) It is probable that an outflow of resources embodying economic benefits

or service potential will be required to settle the obligation, and

c) A reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision should be recognized.

Figure 28: Recognition of provisions

It may not always be clear whether there is a present obligation. In these cases,

a past event is deemed to give rise to a present obligation if, taking account of all

available evidence, it is more likely than not that a present obligation exists at the

reporting date. IPSAS 19.24 gives a lawsuit as an example.

In cases where the recognition criteria are not met, disclosures for contingent

liabilities might be required (e.g., IPSAS 19.31, IPSAS 19.34). An entity should not

Recognition of provisions

A provision is recognized.

Are the

conditions

met?

A provision shall not be recognized.

A provision according to IPSAS 19.22 shall be recognized when:

a) An entity has a present obligation (legal or constructive) as a result

of a past event

b) It is probable that an outflow of resources embodying economic benefits

or service potential will be required to settle the obligation, and

c) A reliable estimate can be made of the amount of the obligation

NoYes

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets

138 IPSAS Explained

recognize contingent liabilities or contingent assets (IPSAS 19.35 and IPSAS

19.39).

Figure 29: Recognition of contingent liabilities and contingent assets

The following illustrative decision tree gives guidance when a provision should

be recognized, a contingent liability disclosed and when nothing should be shown

in the financial statements:

Figure 30: Illustrative decision tree

Source: International Federation of Accountants, Handbook of International Public Sector Accounting

Pronouncements, 2011 Edition, Volume 1, p. 607

Recognition of contingent

liabilities and contingent assets

An entity shall not recognize

a contingent liability in the

statement of financial position

(cf. IPSAS 19.35).

An entity shall not recognize

a contingent asset in the statement

of financial position

(cf. IPSAS 19.39)

A contingent liability shall be

disclosed, unless the possibility

of an outflow of resources

embodying economic benefits

or service potential is remote

(cf. IPSAS 19.36).

A contingent asset shall be

disclosed, where an inflow

of economic benefits or service

potential is probable

(cf. IPSAS 19.42).

Illustrative decision tree

Start

Present

obligation as a

result of an

obligating

event?

Probable

outflow?

Reliable

estimate?

Possible

obligation?

Recognize a provision

(cf. IPSAS 19.22)

Yes

No

No No

Yes

Yes

Yes

No (rare)

Disclose

a contingent liability

(cf. IPSAS 19.36)

Do nothing

(cf. IPSAS 19.36)

Remote?

Yes

No

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets

Ernst & Young 139

Measurement

The amount recognized as a provision should be the best estimate of the

expenditure required to settle the present obligation at the reporting date.

According to IPSAS 19.45, the best estimate of the expenditure required to settle

the present obligation is the amount that an entity would rationally pay to settle

the obligation at the reporting date or to transfer it to a third party at that time.

The estimates of outcome and financial effect are determined mainly by the

judgment of the management of the entity (cf. IPSAS 19.46). Additional, objective

sources of information therefore include experience of similar transactions and,

in some cases, reports from independent experts. Events after the reporting date

must also be taken into account in the estimates (cf. IPSAS 19.46).

To determine the best estimate, IPSAS 19.47 et seq. refers − by analogy

to IAS 37.39 et seq. − to a statistical method of estimation which corresponds

to the expected value under IPSAS 19.47. According to IPSAS 19.47, the expected

value method should be used when the provision being measured involves a large

population of items and the obligation is based on a distribution of probabilities.

The overall scope of obligations is estimated by weighting all possible outcomes

by their associated probabilities. Where there is a continuous range of possible

outcomes, and each point in that range is as likely as any other, the mid-point

of the range is used.

Where a single obligation is being measured and no statistical experience is

available, IPSAS 19.48 provides that the individual most likely outcome may be the

best estimate of the liability. According to IPSAS 19.50, the risks and uncertainties

that inevitably surround many events and circumstances should be taken into

account in reaching the best estimate of a provision. This means that other possible

developments must also be included that can necessitate a higher or lower provision

depending on the circumstances. However, IPSAS 19.51 does not encourage

overcautious accounting.

Where the effect of the time value of money is material, the amount of a provision

should be the present value of the expenditures expected to be required to settle the

obligation (cf. IPSAS 19.53). This should serve to avoid overstatement of provisions.

For this reason, future outflows of resources expected must be discounted.

Future events that may affect the amount required to settle an obligation should be

reflected in the amount of a provision where there is sufficient objective evidence

that they will occur (cf. IPSAS 19.58). If future events relate to possible new

legislation, its effects can only be taken into account by the public sector entity

when it is virtually certain to be enacted (cf. IPSAS 19.60).

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets

140 IPSAS Explained

Reimbursements

Where some or all of the expenditure required to settle a provision is expected to be

reimbursed by another party, the reimbursement should be recognized when, and

only when, it is virtually certain that reimbursement will be received if the entity

settles the obligation. The reimbursement should be treated as a separate asset.

The amount recognized for the reimbursement should not exceed the amount

of the provision. In the statement of financial performance, the expense relating

to a provision may be presented net of the amount recognized for a reimbursement.

Changes in and use of provisions

Provisions should be reviewed at each reporting date and adjusted to reflect

the current best estimate. If it is no longer probable that an outflow of resources

embodying economic benefits or service potential will be required to settle the

obligation, the provision should be reversed (cf. IPSAS 19.69).

A provision should be used only for expenditures for which the provision was

originally recognized (cf. IPSAS 19.71).

Application of the recognition and measurement rules

Provisions should not be recognized for net deficits from future operating activities

(cf. IPSAS 19.73). If an entity has a contract that is onerous, the present obligation

(net of recoveries) under the contract should be recognized and measured as a

provision (cf. IPSAS 19.76).

IPSAS 19.81 et seq. discusses the recognition and measurement of provisions for

restructuring measures.

Disclosures in the notes

For each class of provision, an entity should disclose (cf. IPSAS 19.97):

a) The carrying amount at the beginning and end of the period

b) Additional provisions made in the period, including increases in existing

provisions

c) Amounts used (i.e., incurred and charged against the provision) during

the period

d) Unused amounts reversed during the period

e) The increase during the period in the discounted amount arising from the

passage of time and the effect of any change in the discount rate

Comparative information is not required.

IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets

Ernst & Young 141

An entity should disclose the following for each class of provision (cf. IPSAS 19.98):

a) A brief description of the nature of the obligation and the expected timing

of any resulting outflows of economic benefits or service potential

b) An indication of the uncertainties about the amount or timing of those

outflows. Where necessary to provide adequate information, an entity should

disclose the major assumptions made concerning future events, as addressed

in IPSAS 19.58

c) The amount of any expected reimbursement, stating the amount of any asset

that has been recognized for that expected reimbursement

Further disclosure requirements in relation to provisions, contingent liabilities and

contingent assts can be found in IPSAS 19.99 et seq.

Effective date

Periods beginning on or after 1 January 2004.

IPSAS 20: Related Party Disclosures

142 IPSAS Explained

IPSAS 20: Related Party Disclosures

Objective

The objective of IPSAS 20 is to require the disclosure of the existence of related

party relationships where control exists. The disclosure of information about

transactions between the entity and its related parties is also required in certain

circumstances. This information is required for accountability purposes and to

facilitate a better understanding of the financial position and performance of the

reporting entity. The principal issues in disclosing information about related parties

are identifying which parties control or significantly influence the reporting entity

and determining what information should be disclosed about transactions with those

parties.

The IFRS on which the IPSAS is based

IAS 24, Related Party Disclosures

Content

Principal definitions

Related party: Parties are considered to be related if one party has the ability to

control the other party or exercise significant influence over the other party in

making financial and operating decisions or if the related party entity and another

entity are subject to common control. Related parties include:

a) Entities that directly, or indirectly through one or more intermediaries, control,

or are controlled by the reporting entity;

b) Associates;

c) Individuals owning, directly or indirectly, an interest in the reporting entity

that gives them significant influence over the entity, and close members

of the family of any such individual;

d) Key management personnel, and close members of the family of key

management personnel; and

e) Entities in which a substantial ownership interest is held, directly or indirectly,

by any person described in (c) or (d), or over which such a person is able to

exercise significant influence.

Key management personnel are all directors or members of the governing body

of the entity, where that body has the authority and responsibility for planning,

directing and controlling the activities of the entity (cf. IPSAS 20.6). At the whole-of-

IPSAS 20: Related Party Disclosures

Ernst & Young 143

government level, the governing body may consist of elected or appointed

representatives (for example, a president or governor, ministers, councilors and

aldermen or their nominees).

Disclosure requirements

According to IPSAS 20.25, related party relationships where control exists should be

disclosed irrespective of whether there have been transactions between the related

parties.

In respect of transactions between related parties other than transactions that

would occur within a normal supplier or client/recipient relationship on terms and

conditions no more or less favorable than those which it is reasonable to expect the

entity would have adopted if dealing with that individual or entity at arm’s length in

the same circumstances, the reporting entity should disclose (cf. IPSAS 20.27):

a) The nature of the related party relationships;

b) The types of transactions that have occurred; and

c) The elements of the transactions necessary to clarify the significance of these

transactions to its operations and sufficient to enable the financial statements

to provide relevant and reliable information for decision making and

accountability purposes.

The following are examples of situations where related party transactions may lead

to disclosures by a reporting entity (cf. IPSAS 20.28):

a) Rendering or receiving of services;

b) Purchases or transfers/sales of goods (finished or unfinished);

c) Purchases or transfers/sales of property and other assets;

d) Agency arrangements;

e) Leasing arrangements;

f) Transfer of research and development;

g) License agreements;

h) Finance (including loans and capital contributions); and

i) Guarantees and collateral.

According to IPSAS 20.32, items of a similar nature may be disclosed in aggregate

except when separate disclosure is necessary to provide relevant and reliable

information for decision making and accountability purposes.

IPSAS 20: Related Party Disclosures

144 IPSAS Explained

An entity must disclose the following in relation to the remuneration of key

management personnel (cf. IPSAS 20.34):

a) The aggregate remuneration of key management personnel and the number

of individuals, determined on a full time equivalent basis, receiving

remuneration within this category. This must show separately major classes

of key management personnel, including a description of each class; and

b) The total amount of all other remuneration and compensation provided to key

management personnel, and close members of the family of key management

personnel, by the reporting entity during the reporting period showing

separately the aggregate amounts provided to:

i) Key management personnel;

ii) Close members of the family of key management personnel; and

c) In respect of loans which are not widely available to persons who are not key

management personnel and loans whose availability is not widely known by

members of the public, for each individual member of key management

personnel and each close member of the family of key management personnel:

i) The amount of loans advanced during the period and terms and conditions

thereof

ii) The amount of loans repaid during the period

iii) The amount of the closing balance of all loans and receivables; and

iv) Provided the individual is not a director or member of the governing body

or senior management group of the entity, the relationship of the

individual to such body or group.

Structure of disclosures pursuant to IPSAS 20

The appendix to IPSAS 20 contains examples of how disclosures on related parties

can be structured.

Effective date

Periods beginning on or after 1 January 2004.

IPSAS 21: Impairment of Non-Cash-Generating Assets

Ernst & Young 145

IPSAS 21: Impairment of Non-Cash-Generating Assets

Objective

The objective of IPSAS 21 is to prescribe the procedures that an entity applies

to determine whether a non-cash-generating asset is impaired and to ensure that

impairment losses are recognized. The standard also specifies when an entity would

reverse an impairment loss and prescribes disclosures.

The IFRS on which the IPSAS is based

IAS 36, Impairment of Assets generally corresponds to IPSAS 21. However,

as IPSAS 21 relates solely to non-cash-generating assets, IAS 36 and IPSAS 21

do not correspond in all respects.

Content

Principal definitions

Cash-generating assets are assets held with the primary objective of generating

a commercial return. Non-cash-generating assets are assets not held with the

primary objective of generating a commercial return (cf. IPSAS 21.14).

Depreciation (amortization) is the systematic allocation of the depreciable amount

of an asset over its useful life.

IPSAS 21.14 states that impairment is a loss in the future economic benefits or

service potential of an asset, over and above the systematic recognition of the loss

of the asset’s future economic benefits or service potential through depreciation.

An impairment loss of a non-cash-generating asset is the amount by which the

carrying amount of an asset exceeds its recoverable amount.

Recoverable service amount is the higher of a non-cash-generating asset’s fair

value less costs to sell and its value in use. Value in use of a non-cash-generating

asset is the present value of the asset’s remaining service potential.

Scope

IPSAS 21 generally applies to all non-cash-generating assets.

IPSAS 21: Impairment of Non-Cash-Generating Assets

146 IPSAS Explained

IPSAS 21 does not apply to:

a) Inventories (cf. IPSAS 12, Inventories)

b) Assets arising from construction contracts (cf. IPSAS 11, Construction

Contracts)

c) Financial assets that are included in the scope of IPSAS 29, Financial

Instruments: Recognition and Measurement”

d) Investment property that is measured using the fair value model (cf. IPSAS 16,

Investment Property)

e) Non-cash-generating property, plant and equipment that is measured at

revalued amounts (cf. IPSAS 17, Property, Plant and Equipment)

f) Non-cash-generating intangible assets that are measured at revalued amounts

(see IPSAS 31, Intangible Assets); and

g) Other assets in respect of which accounting requirements for impairment are

included in another IPSAS

Public sector entities that hold cash-generating assets must apply IPSAS 26,

Impairment of Cash-Generating Assets to such assets.

Measurement procedure

A non-cash-generating asset is impaired when the carrying amount of the asset

exceeds its recoverable service amount. The recoverable service amount is the

higher of the non-cash-generating asset’s fair value less costs to sell and its value

in use.

IPSAS 21: Impairment of Non-Cash-Generating Assets

Ernst & Young 147

Figure 31: Impairment of non-cash-generating assets

Impairment testing

IPSAS 21.26 states that an entity must assess at each reporting date whether there

is any indication that an asset may be impaired. If any such indication exists, the

entity must estimate the recoverable service amount of the asset.

IPSAS 21.27 describes some indications that show whether an asset is impaired.

A distinction is made between internal and external sources of information. If any

one of those indications is present, an entity is required to make a formal estimate

of the recoverable service amount. If no indication of a potential impairment loss is

present, IPSAS 21 does not require an entity to make a formal estimate of

recoverable service amount.

It is not always necessary to determine both an asset’s fair value less costs to sell

and its value in use. If either of these amounts exceeds the asset’s carrying amount,

the asset is not impaired and it is not necessary to estimate the other amount.

Impairment of non-cash-generating assets

Carrying amount: Amount at which

an asset is recognized after

deducting any accumulated

depreciation and accumulated

impairment losses (cf. IPSAS 10.7).

Recoverable service amount: Higher

of a non-cash-generating asset’s fair

value less costs to sell and its value

in use (cf. IPSAS 21.14).

Carrying amount >

recoverable

service amount?

(cf. IPSAS 21.52)

Value in use of a non-cash-

generating asset: Present value

of the asset’s remaining service

potential (cf. IPSAS 21.14).

Fair value: Amount for which an

asset could be exchanged, or a

liability settled, between

knowledgeable, willing parties in an

arm’s length transaction

(cf. IPSAS 9.11).

IPSAS 21: Impairment of Non-Cash-Generating Assets

148 IPSAS Explained

Measuring recoverable service amount

a) Determining fair value less costs to sell

It may be possible to determine fair value less costs to sell, even if an asset is not

traded in an active market. If there is no active market for an asset, IPSAS 21.42

describes possible alternative approaches to determine the fair value less costs

to sell. However, sometimes it will not be possible to determine fair value less costs

to sell because there is no basis for making a reliable estimate of the amount

obtainable from the sale of the asset in an arm’s length transaction between

knowledgeable and willing parties. In this case the entity can use the value in use

of the asset as its recoverable service amount.

b) Determining value in use

Unlike IAS 36, IPSAS 21 defines the value in use of a non-cash-generating asset as

the present value of the asset’s remaining service potential. The present value of the

remaining service potential of a non-cash-generating asset is determined using one

of following three approaches, depending on the data available and the nature of the

impairment (cf. IPSAS 21.45-49).

► Depreciated replacement cost approach (cf. IPSAS 21.45 et seq.):

The present value of the remaining service potential of an asset is

determined as the depreciated replacement cost of the asset. The

replacement cost of an asset is the cost to replace the asset’s gross

service potential. This cost of the asset is depreciated to adequately

reflect the technical, physical and/or economic ageing of the asset.

An asset may be replaced either through reproduction (replication)

of the existing asset or through replacement of its gross service

potential. The depreciated replacement cost is measured as the

reproduction or replacement cost of the asset, whichever is lower,

less accumulated depreciation calculated on the basis of such cost,

to reflect the already consumed or expired service potential of the

asset.

► Restoration cost approach (cf. IPSAS 21.48): The present value of

the remaining service potential of the asset is determined by

subtracting the estimated restoration cost of the asset from the

current cost of replacing the remaining service potential of the

asset before impairment. The latter cost is usually determined as

the depreciated reproduction or replacement cost of the asset,

whichever is lower.

IPSAS 21: Impairment of Non-Cash-Generating Assets

Ernst & Young 149

► Service units approach (cf. IPSAS 21.49): The present value of the

remaining service potential of the asset is determined by reducing

the current cost of the remaining service potential of the asset

before impairment to conform to the reduced number of service

units expected from the asset in its impaired state.

As in the restoration cost approach, the current cost of replacing

the remaining service potential of the asset before impairment is

usually determined as the depreciated reproduction or replacement

cost of the asset before impairment, whichever is lower.

The choice of the most appropriate approach to measuring value in use depends on

the availability of data and the nature of the impairment (cf. IPSAS 21.50 for more

detail). The figure below gives an overview of the choice of the most appropriate

approach for determining the value in use of a non-cash-generating asset:

IPSAS 22: Disclosure of Information About the General Government Sector

150 IPSAS Explained

IPSAS 22: Disclosure of Information About the General

Government Sector

Objective

The objective of this standard is to prescribe disclosure requirements for

governments which elect to present information about the general government

sector (GGS) in their consolidated financial statements. The disclosure of

appropriate information about the GGS can enhance the transparency of financial

reports, and provide for a better understanding of the relationship between the

market and non-market activities of the public sector and between financial

statements and statistical bases of financial reporting.

The IFRS on which the IPSAS is based

IPSAS 22 is an IPSAS specifically for the public sector. As a result, there is no IFRS

equivalent.

Content

Principal definitions

Under statistical bases of financial reporting the public sector comprises the general

government sector (GGS), the public financial corporations sector (PFCS) and

public non-financial corporations sector (PNFCS). The general government sector

encompasses the central operations of government and typically includes all those

resident non-market non-profit entities that have their operations funded primarily

by the government and government entities. The general government sector does

not include public financial corporations or public non-financial corporations (cf.

IPSAS 22.18). The public non-financial corporations sector includes for example

publicly owned utilities.

Scope

IPSAS 22 only applies for governments that prepare and present consolidated

financial statements under the accrual basis of accounting and elect to disclose

financial information about the general government sector (cf. IPSAS 22.2).

IPSAS 22: Disclosure of Information About the General Government Sector

Ernst & Young 151

Financial statements for the government and statistical bases of financial reporting

While financial statements consolidate only controlled entities, these provisions do

not apply for statistical bases of financial reporting. The consolidated group in

accounting therefore differs from that in the statistical bases of financial reporting.

The general government sector according to the System of National Accounts 93

(SNA 93) comprises all national, state/provincial and local government levels, social

insurance at all administrative levels as well as non-profit entities which undertake

non-market activities controlled by public entities in the country of residence.

It usually includes public entities such as government agencies, courts, public

educational institutions, public medical care providers and other official entities.

Accounting policies for the general government sector

According to IPSAS 22.23, financial information about the general government

sector must be disclosed in conformity with the accounting policies adopted for

preparing and presenting the consolidated financial statements of the government.

However, the general government sector does not apply the requirements of IPSAS

6, Consolidated and Separate Financial Statements in respect of entities in the public

financial corporations and public non-financial corporations sectors. IPSAS 22

reflects the view that the consolidated financial statements of a government which

elects to disclose information about the general government sector are to be

disaggregated to present the general government sector as one sector of the

government reporting entity (cf. IPSAS 22.26).

According to IPSAS 22.25, the general government sector must recognize its

investment in the public financial corporations sector and public non-financial

corporations sector as an asset and must account for that asset at the carrying

amount of the net assets of its investees.

Disclosures in the notes

Disclosures made in respect of the general government sector must include at least

the following:

a) Assets by major class, showing separately the investment in other sectors

b) Liabilities by major class

c) Net assets/equity

d) Total revaluation increments and decrements and other items of revenue and

expense recognized directly in net assets/equity

e) Revenue by major class

f) Expenses by major class

g) Surplus or deficit

IPSAS 22: Disclosure of Information About the General Government Sector

152 IPSAS Explained

h) Cash flows from operating activities by major class

i) Cash flows from investing activities

j) Cash flows from financing activities

The manner of presentation of the general government sector disclosures should

be no more prominent than the government’s financial statements prepared in

accordance with IPSASs (cf. IPSAS 22.35).

According to IPSAS 22.40, entities preparing general government sector disclosures

must disclose the significant controlled entities that are included in the general

government sector. IPSAS 22 also requires disclosures on changes in those entities

from the prior period, together with an explanation of the reasons why any such

entity that was previously included in the general government sector is no longer

included.

According to IPSAS 22.43 the general government sector disclosures must be

reconciled to the consolidated financial statements of the government showing

separately the amount of the adjustment to each equivalent item in those financial

statements.

Effective date

Periods beginning on or after 1 January 2008.

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

Ernst & Young 153

IPSAS 23: Revenue from Non-Exchange Transactions

(Taxes and Transfers)

Objective

The objective of IPSAS 23 is to prescribe requirements for the financial reporting

of revenue arising from non-exchange transactions, other than non-exchange

transactions that give rise to an entity combination. The standard deals with issues

that need to be considered in recognizing and measuring revenue from non-

exchange transactions including the identification of contributions from owners.

While the revenue of public sector entities stems both from exchange and non-

exchange transactions, most transactions at public sector entities are non-exchange

transactions. In particular, these include revenue from taxes and transfers (both

cash and non-cash transfers).

The IFRS on which the IPSAS is based

IPSAS 23 is an IPSAS specifically for the public sector. As a result, there is no IFRS

equivalent.

Content

Principal definitions

Exchange transactions are transactions in which one entity receives assets or

services, or has liabilities extinguished, and directly gives approximately equal

value (primarily in the form of cash, goods, services, or use of assets) to another

entity in exchange.

Non-exchange transactions are transactions that are not exchange transactions.

In a non-exchange transaction, an entity either receives value from another entity

without directly giving approximately equal value in exchange, or gives value to

another entity without directly receiving approximately equal value in exchange.

The following graph gives an overview of the non-exchange transaction which are

covered by IPSAS 23.

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

154 IPSAS Explained

Figure 32: Overview of non-exchange transactions

IPSAS 23 defines taxes as economic benefits or service potential compulsorily paid

or payable to public sector entities, in accordance with laws and/or regulations,

established to provide revenue to the government. Taxes do not include fines or

other penalties imposed for breaches of the law.

Fines are economic benefits or service potential received or receivable by public

sector entities, as determined by a court or other law enforcement body, as a

consequence of the breach of laws or regulations.

Transfers are inflows of future economic benefits or service potential from non-

exchange transactions, other than taxes.

Stipulations on transferred assets are terms in laws or regulation, or a binding

arrangement, imposed upon the use of a transferred asset by entities external

to the reporting entity.

Conditions on transferred assets are stipulations that specify that the future

economic benefits or service potential embodied in the asset is required to be

consumed by the recipient as specified or future economic benefits or service

potential must be returned to the transferor.

Restrictions on transferred assets are stipulations that limit or direct the purposes

for which a transferred asset may be used, but do not specify that future economic

benefits or service potential is required to be returned to the transferor if not

deployed as specified.

Debt forgiveness

and assumption

of liabilities

(cf. IPSAS 23.84-

87)

Fines

(cf. IPSAS 23.88-

89)

Bequests

(cf. IPSAS 23.90-

92)

Gifts and

donations,

incl. goods in-kind

(cf. IPSAS 23.93-

97)

Services in-kind

(cf. IPSAS 23.98-

103)

Transfers include (amongst

others, cf. IPSAS 23.76-

105B):

Taxes

(cf. IPSAS 23.59-75)

Overview of non-exchange

transactions

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

Ernst & Young 155

A present obligation is a duty to act or perform in a certain way and may give rise

to a liability in respect of any non-exchange transaction (cf. IPSAS 23.51). Present

obligations may be imposed by stipulations in laws or regulations or binding

arrangements establishing the basis of transfers. They may also arise from the

normal operating environment, such as the recognition of advance receipts.

Recognition and measurement of assets from non-exchange transactions

Under IPSAS 23.31, an inflow of resources from a non-exchange transaction, other

than services in-kind, that meets the definition of an asset is recognized as an asset

when, and only when:

a) It is probable that the future economic benefits or service potential associated

with the asset will flow to the entity, and

b) The fair value of the asset can be measured reliably.

An inflow of resources from a non-exchange transaction is probable when the inflow

is more likely than not to occur (cf. IPSAS 23.35).

According to IPSAS 23.42, an asset acquired through a non-exchange transaction

is initially measured at its fair value as at the date of acquisition.

Recognition of revenue from non-exchange transactions

IPSAS 23.44 states that an inflow of resources from a non-exchange transaction

recognized as an asset is recognized as revenue, except to the extent that a liability

is also recognized in respect of the same inflow. This is generally the case if and for

as long as the future inflow of resources is contingent on unsatisfied conditions.

When an entity satisfies a present obligation recognized as a liability in respect

of an inflow of resources from a non-exchange transaction recognized as an asset,

it reduces the carrying amount of the liability recognized and recognizes an amount

of revenue equal to that reduction.

Figure 33 gives an overview of the different options of recognizing revenue from

non-exchange transactions.

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

156 IPSAS Explained

Figure 33: Illustration of the analysis of initial inflows of resources

Source: International Federation of Accountants, Handbook of International Public Sector Accounting

Pronouncements, 2011 Edition, Volume 1, p. 727

Does the

inflow give rise

to an item that

meets the efinition

of an asset?

(IPSAS 1)

Does the inflow

satisfy the criteria

for recognition as

an asset?

(IPSAS 23.31)

Is the transaction

a non-exchange

transaction?

(IPSAS 23.39—41)

Has the entity

satisfied all of the

present bligations

related to the

inflow? (IPSAS

23.50-56)

Do not recognize

an increase in an

asset, consider

disclosure.

(IPSAS 23.36)

Does the inflow

result from a

contribution from

owners?

Recognize

► An asset and revenue to the

extent that a liability is not also

recognized; and

► A liability to the extent that the

present obligations have not been

satisfied. (IPSAS 23.44-45)

Refer to other IPSASs.

Recognize an asset and

recognize revenue. (IPSAS 23.44)

Refer to other

IPSASs.

No

Do not recognize

an increase in an

asset, consider

disclosure.

No

Yes

Yes

Yes

Yes

Yes

No

No No

Start

Illustration of the analysis of initial

inflow of resources

Yes

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

Ernst & Young 157

Measurement of revenue from non-exchange transactions

Revenue from non-exchange transactions is measured at the amount of the increase

in net assets recognized by the entity.

Present obligations recognized as liabilities

According to IPSAS 23.50, a present obligation arising from a non-exchange

transaction that meets the definition of a liability is recognized as a liability when,

and only when:

a) It is probable that an outflow of resources embodying future economic benefits

or service potential will be required to settle the obligation, and

b) A reliable estimate can be made of the amount of the obligation.

According to IPSAS 23.51, a present obligation is a duty to act or perform

in a certain way and may give rise to a liability in respect of any non-exchange

transaction. Present obligations may be imposed by stipulations in laws or

regulations or binding arrangements establishing the basis of transfers. They may

also arise from the normal operating environment, such as the recognition of

advance receipts.

In many instances, taxes are levied and assets are transferred to public sector

entities in non-exchange transactions pursuant to laws, regulations or other binding

arrangements that impose stipulations that they be used for particular purposes. In

turn, the statutory regulations provide that these assets can only be used for certain

purposes. For example, these can include taxes, the use of which is limited by laws

or other legal regulations to specified purposes, or transfers, established by a

binding arrangement that includes conditions.

Conditions on a transferred asset thus give rise to a present obligation on initial

recognition that will be recognized when the criteria for recognition as a liability are

fulfilled (cf. IPSAS 23.55). The amount recognized as a liability is the best estimate

of the amount required to settle the present obligation at the reporting date.

Accounting for taxes

An entity must recognize an asset in respect of taxes when the taxable event occurs

and the asset recognition criteria are met (cf. IPSAS 23.59). The taxable event

is determined by the government, parliament or another authorized body and the

taxable event is the subject of taxation. In the case of income tax, for example, the

taxable event is the taxable income of the taxpayer in a tax period.

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

158 IPSAS Explained

According to IPSAS 23.71, taxation revenue is determined at a gross amount.

It is not reduced for expenses paid through the tax system. It cannot be reduced

by other types of expenses (e.g., subsidies to health insurance premiums) that are

paid in a simplified manner through the tax system, for example by offsetting against

the tax liability. In fact, the (collected) taxation revenue must be increased by

expenses paid through the tax system for the presentation in the financial

statements (cf. IPSAS 23.71).

IPSAS 23.73 states that taxation revenue cannot be grossed up for the amount

of tax expenditures. In most jurisdictions, governments use the tax system to

encourage certain financial behavior and discourage other behavior. For example,

in some jurisdictions, home owners are permitted to deduct mortgage interest and

property taxes from their gross income when calculating tax assessable income.

These types of concessions are available only to taxpayers. If an entity (including a

natural person) does not pay tax, it cannot make use of the concession. In the public

sector, these types of concessions are called tax expenditures. Tax expenditures are

foregone revenue, not expenses, and do not give rise to inflows or outflows of

resources – that is, they do not give rise to assets, liabilities, revenue or expenses

of the taxing government.

The key distinction between expenses paid through the tax system and tax

expenditures is that for expenses paid through the tax system, the amount is

available to recipients irrespective of whether they pay taxes, or use a particular

mechanism to pay their taxes.

Accounting for transfers

An entity must recognize an asset in respect of transfers when the transferred

resources meet the definition of an asset and satisfy the criteria for recognition as

an asset (cf. IPSAS 23.76 et seq.). Transferred assets are also measured at fair

value at the date of acquisition.

The following transfer revenue is accounted for as follows:

1) Fines (IPSAS 23.88 et seq.)

Fees, fines and penalties as determined by a court or other law enforcement body

give rise to receivables. They are recognized when the receivable meets the

definition of an asset and fulfills the recognition criteria in IPSAS 23.31. They do

not impose on the recipient any obligations which may be recognized as a liability.

Assets arising from fines are measured at the best estimate of the inflow of

resources to the entity.

IPSAS 23: Revenue from Non-Exchange Transactions (Taxes and Transfers)

Ernst & Young 159

2) Bequests (IPSAS 23.90 et seq.)

A bequest is a transfer made according to the provisions of a deceased person’s will.

According to IPSAS 23.90, the past event giving rise to the control of resources

embodying future economic benefits or service potential for a bequest occurs when

the entity has an enforceable claim, for example on the death of the testator, or the

granting of probate, depending on the laws of the jurisdiction. Bequests which

satisfy the definition of an asset and meet the recognition criteria are recognized as

assets. Determining the probability of an inflow of future economic benefits or

service potential may be problematic if a period of time elapses between the death

of the testator and the entity receiving any assets. Bequests are generally measured

at fair value at the date of acquisition.

3) Gifts and donations, including goods in-kind (IPSAS 23.93 et seq.)

Gifts and donations are voluntary transfers of assets including cash or other

monetary assets, goods in-kind and services in-kind that one entity makes to

another, normally free from stipulations. Cash or other monetary gifts or donations

as well as goods in-kind are generally recognized on the date on which the gift

or donation is received. The recognition criteria pursuant to IPSAS 23.31 apply.

Services in-kind are subject to different provisions. Goods in-kind are generally

recognized as assets upon receipt of the goods. If goods in-kind are received without

conditions attached, revenue is recognized immediately. If conditions are attached, a

liability is recognized, which is reduced and revenue recognized as the conditions are

satisfied.

On initial recognition, gifts and donations including goods in-kind are measured at

their fair value as at the date of acquisition, which may be ascertained by reference

to an active market, or by appraisal. An appraisal of the value of an asset is normally

undertaken by a member of the valuation profession who holds a recognized and

relevant professional qualification.

4) Services in-kind (IPSAS 23.98 et seq.)

Services in-kind provided by individuals to public sector entities in a non-exchange

transaction can be recognized as an asset in surplus or deficit. The standard

provides an option in this case.

Effective date

Periods beginning on or after 30 June 2008. Since 2010, IPSAS 23 has been

amended by IPSAS 28, 29, and 31. For the effective dates of these amendments

please refer to IPSAS 124A and 124B.

IPSAS 24: Presentation of Budget Information in Financial Statements

160 IPSAS Explained

IPSAS 24: Presentation of Budget Information

in Financial Statements

Objective

IPSAS 24 requires a comparison of budget amounts and the actual amounts arising

from execution of the budget to be included in the financial statements of entities

which are required to, or elect to, make publicly available their approved budget(s)

and for which they are, therefore, held publicly accountable. The standard also

requires disclosure of an explanation of the reasons for material differences between

the budget and actual amounts. Compliance with the requirements of this standard

will ensure that public sector entities discharge their accountability obligations and

enhance the transparency of their financial statements by demonstrating compliance

with the approved budget(s) for which they are held publicly accountable and, where

the budget(s) and the financial statements are prepared on the same basis, their

financial performance in achieving the budgeted results.

The IFRS on which the IPSAS is based

IPSAS 24 is an IPSAS specifically for the public sector. As a result there is no IFRS

equivalent.

Content

Principal definitions

IPSAS 24 defines the original budget as the initial approved budget for the budget

period.

Approved budget means the expenditure authority derived from laws, appropriation

bills, government ordinances and other decisions related to the anticipated revenue

or receipts for the budgetary period.

Final budget is the original budget adjusted for all reserves, carry over amounts,

transfers, allocations, supplemental appropriations, and other authorized legislative,

or similar authority, changes applicable to the budget period.

Scope

IPSAS 24 applies to public sector entities that are required or elect to make publicly

available their approved budget(s).

Presentation of a comparison of budget and actual amounts

In accordance with IPSAS 24.14, an entity must present a comparison of the budget

amounts for which it is held publicly accountable and actual amounts either as a

IPSAS 24: Presentation of Budget Information in Financial Statements

Ernst & Young 161

separate additional financial statement (referred to as a statement of comparison

of budget and actual amounts) or as additional budget columns in the financial

statements currently presented in accordance with IPSASs.

The comparison of budget and actual amounts must present separately for each

level of legislative oversight (cf. IPSAS 24.14):

a) The original and final budget amounts

b) The actual amounts on a comparable basis; and

c) By way of note disclosure, an explanation of material differences between the

budget for which the entity is held publicly accountable and actual amounts,

unless such explanation is included in other public documents issued in

conjunction with the financial statements and a cross reference to those

documents is made in the notes

In general IPSAS 24 provides that all comparisons of budget and actual amounts

must be presented on a comparable basis to the budget (cf. IPSAS 24.31). According

to IPSAS 24.21, an entity must present a comparison of budget and actual amounts

as additional budget columns in the primary financial statements only where the

financial statements and the budget are prepared on a comparable basis. For

example, if the budget is prepared on the cash basis and the financial statements are

prepared on the accrual basis, no comparison as additional budget columns is

necessary. If the financial statements and the budget were prepared on a

comparable basis, additional columns can be added to the existing primary financial

statements presented in accordance with IPSASs. These additional columns will

identify original and final budget amounts and, if the entity so chooses, differences

between the budget and actual amounts.

The following example illustrates how the additional column approach could be

achieved in the Statement of Financial Performance:

IPSAS 24: Presentation of Budget Information in Financial Statements

162 IPSAS Explained

Additional column approach for the presentation of budget information

For Government YY for the Year Ended 31 December 20XX

Both annual budget and financial statements adopt accrual basis

(Illustrated only for Statement of Financial Performance.

A similar presentation could be adopted for other financial statements)

Actual

20XX-1

(in currency units) Actual

20XX

Final

budget

20XX

Original

budget

20XX

*Difference:

Original

budget and

actual

Revenue

X Taxes X X X X

X Fees, fines, penalties, and licenses X X X X

X Revenue from exchange

transactions

X X X X

X Transfers from other governments X X X X

X Other revenue X X X X

X Total revenue X X X X

Expenses

(X) Wages, salaries, employee benefits (X) (X) (X) (X)

(X) Grants and other transfer payments (X) (X) (X) (X)

(X) Supplies and consumables used (X) (X) (X) (X)

(X) Depreciation/amortization expense (X) (X) (X) (X)

(X) Other expenses (X) (X) (X) (X)

(X) Finance costs (X) (X) (X) (X)

(X) Total expenses (X) (X) (X) (X)

X Share of surplus of associates X X X X

(X) Surplus/(deficit) for the period X X X X

*The “Difference…” column is not required. However, a comparison between actual and the original or the

final budget clearly identified as appropriate, may be included.

Figure 34: Additional column approach for the presentation of budget information

Source: International Federation of Accountants, Handbook of International Public Sector Accounting

Pronouncements, 2011 Edition, Volume 1, p. 797

When the budget and financial statements are not prepared on a comparable basis,

IPSAS 24.23 provides for a separate statement of comparison of budget and actual

amounts. In these cases, to ensure that readers do not misinterpret financial

information which is prepared on different bases, the financial statements could

usefully clarify that the budget and the accounting bases differ and the statement

of comparison of budget and actual amounts is prepared on the budget basis. The

graph below illustrates how such a Statement of Comparison of Budget and Actual

Amounts could look like:

IPSAS 24: Presentation of Budget Information in Financial Statements

Ernst & Young 163

Statement of Comparison of Budget and Actual Amounts

For Government XX for the Year Ended 31 December, 20XX

Budget on cash basis (Classification of payments by functions)

Note: The budget and the accounting basis are different.

This Statement of Comparison of Budget and Actual Amounts is prepared on the budget basis.

(in currency units) Budgeted amounts Actual amounts on

comparable basis

*Difference:

Original Final Final budget

and actual

Receipts

Taxation X X X X

Aid Agreements X X X X

Proceeds: Borrowing X X X X

Proceeds: Disposal of plant

and equipment

X X X X

Other receipts X X X X

Total receipts X X X X

Payments

Health (X) (X) (X) (X)

Education (X) (X) (X) (X)

Public order/safety (X) (X) (X) (X)

Social protection (X) (X) (X) (X)

Defense (X) (X) (X) (X)

Housing and community

amenities

(X) (X) (X) (X)

Recreational, cultural and

religion

(X) (X) (X) (X)

Economic affairs (X) (X) (X) (X)

Other (X) (X) (X) (X)

Total payments (X) (X) (X) (X)

Net receipts/(payments) X X X X

* The “Difference…” column is not required. However, a comparison between actual and the original or the

final budget, clearly identified as appropriate, may be included.

Figure 35: Additional column approach for the presentation of budget information

Source: International Federation of Accountants, Handbook of International Public Sector Accounting

Pronouncements, 2011 Edition, Volume 1, p. 796

IPSAS 24: Presentation of Budget Information in Financial Statements

164 IPSAS Explained

Disclosure requirements

Pursuant to IPSAS 24.29, an entity must present an explanation of whether changes

between the original and final budget are a consequence of reallocations within the

budget, or of other factors. This can be disclosed in the notes to the financial

statements or in a report issued before, at the same time as, or in conjunction with

the financial statements. In the latter case, it must include a cross-reference to the

report in the notes to the financial statements.

Note disclosures of budgetary basis, period and scope

An entity must explain in the notes to the financial statements the budgetary basis

and classification basis adopted in the approved budget (cf. IPSAS 24.39). An entity

must also disclose in the notes to the financial statements the period of the

approved budget (cf. IPSAS 24.43) and the entities included in the approved budget

(cf. IPSAS 24.45).

Reconciliation

Where the financial statements and budget are not prepared on a comparable basis,

the actual amounts presented on a comparable basis to the budget must be

reconciled to the amounts presented in the financial statements (cf. IPSAS 24.47).

Differences must be explained. Reconciliation must be made for the following items:

a) If the accrual basis is adopted for the budget, total revenues, total expenses

and net cash flows from operating activities, investing activities and financing

activities; or

b) If a basis other than the accrual basis is adopted for the budget, net cash flows

from operating activities, investing activities and financing activities

Differences can stem from the accounting basis, timing differences between the

budget and the financial statements and entity differences in the consolidated

group. The reconciliation must be presented either in the comparison of budget and

actual amounts or in the notes to the financial statements.

Effective date

Periods beginning on or after 1 January 2009.

IPSAS 25: Employee Benefits

Ernst & Young 165

IPSAS 25: Employee Benefits

Objective

The objective of IPSAS 25 is to provide guidance for the accounting and disclosure

of employee benefits. The standard requires an entity to recognize

a) A liability when an employee has provided service in exchange for employee

benefits to be paid in the future

b) An expense when the entity consumes the economic benefits or service

potential arising from service provided by an employee in exchange for

employee benefits

The IFRS on which the IPSAS is based

IAS 19, Employee Benefits

Content

Principal definitions

Employee benefits are all forms of consideration given by an entity in exchange

for service rendered by employees.

Short-term employee benefits are employee benefits (other than termination

benefits and equity compensation benefits) which fall due wholly within 12 months

after the end of the period in which the employees render the related service.

Postemployment benefits are employee benefits (other than termination benefits

and equity compensation benefits) which are payable after the completion of

employment.

Other long-term employee benefits are employee benefits (other than post-

employment benefits and termination benefits) which do not fall due wholly within

12 months after the end of the period in which the employees render the related

service.

Termination benefits are employee benefits payable as a result of either:

a) An entity’s decision to terminate an employee’s employment before the normal

retirement date, or

b) An employee’s decision to accept voluntary redundancy in exchange for those

benefits.

Postemployment benefit plans are formal or informal arrangements under which

an entity provides postemployment benefits for one or more employees.

IPSAS 25: Employee Benefits

166 IPSAS Explained

Defined contribution plans are postemployment benefit plans under which an

entity pays fixed contributions into a separate entity (a fund) and will have no legal

or constructive obligation to pay further contributions if the fund does not hold

sufficient assets to pay all employee benefits relating to employee service in the

current and prior periods.

Defined benefit plans are postemployment benefit plans other than defined

contribution plans.

Multiemployer plans are defined contribution plans (other than state plans and

composite social security programs) or defined benefit plans (other than state plans)

that:

a) Pool the assets contributed by various entities that are not under common

control

b) Use those assets to provide benefits to employees of more than one entity,

on the basis that contribution and benefit levels are determined without regard

to the identity of the entity that employs the employees concerned

Composite social security programs are established by legislation. They operate as

multiemployer plans to provide postemployment benefits and provide benefits that

are not consideration in exchange for service rendered by employees.

Plan assets comprise a) assets held by a long-term employee benefit fund and

b) qualifying insurance policies.

Actuarial gains and losses comprise:

a) Experience adjustments (the effects of differences between the previous

actuarial assumptions and what has actually occurred); and

b) The effects of changes in actuarial assumptions

The present value of a defined benefit obligation is the present value, without

deducting any plan assets, of expected future payments required to settle the

obligation resulting from employee service in the current and prior periods.

Scope

IPSAS 25 must be applied by an employer in accounting for all employee benefits.

IPSAS 25 does not cover share-based transactions (cf. IPSAS 25.2). The relevant

national or international accounting standards dealing with share-based transactions

are applicable to such transactions. Equally, the standard does not deal with

reporting by employee retirement benefit plans.

The standard deals (analogous to IAS 19) with four categories of employee benefits

(cf. IPSAS 25.5):

IPSAS 25: Employee Benefits

Ernst & Young 167

Figure 36: Identification of employee benefits

1) Short-term employee benefits: such as wages, salaries and social security

contributions, paid annual leave and paid sick leave, profit-sharing and bonuses

(if payable within 12 months of the end of the period) and non-monetary

benefits (such as medical care, housing, cars and free or subsidized goods or

services) for current employees

2) Postemployment benefits: such as pensions, other retirement benefits,

postemployment life insurance and postemployment medical care

3) Other long-term employee benefits: which may include long-service leave or

sabbatical leave, jubilee or other long-service benefits, long-term disability

benefits and, if they are not payable wholly within 12 months after the end of

the period, profit-sharing, bonuses and deferred compensation

4) Termination benefits

Accounting for short-term employee benefits

Short-term employee benefits under IPSAS 25.11 include items such as:

a) Wages, salaries and social security contributions

b) Short-term compensated absences (such as paid annual leave and paid sick

leave) where the absences are expected to occur within 12 months after the

end of the period in which the employees render the related employee service

c) Performance related bonuses and profit-sharing payable within 12 months

after the end of the period in which the employees render the related service

d) Non-monetary benefits (such as medical care, housing, cars and free

or subsidized goods or services) for current employees

Identification of employee benefits

Employee benefits

can be divided into

the following

categories

Short-term employee

benefits

(IPSAS 25.11-26)

Post-employment

benefits

(IPSAS 25.27-146)

Termination benefits

(IPSAS 25.154-156)

Other long-term

employee benefits

(IPSAS 25.147-153)

IPSAS 25: Employee Benefits

168 IPSAS Explained

According to IPSAS 25.13, when an employee has rendered service to an entity

during an accounting period, the entity must recognize the undiscounted amount

of short-term employee benefits expected to be paid in exchange for that service:

a) As a liability (accrued expense), after deducting any amount already paid.

If the amount already paid exceeds the undiscounted amount of the benefits,

an entity must recognize that excess as an asset (prepaid expense) to the

extent that the prepayment will lead to, for example, a reduction in future

payments or a cash refund

b) As an expense, unless another standard requires or permits the inclusion of the

benefits in the cost of an asset (cf., for example, IPSAS 12, “Inventories”, and

IPSAS 17, “Property, Plant and Equipment”)

Pursuant to IPSAS 25.14, an entity must recognize the expected cost of short-term

employee benefits in the form of compensated absences as follows:

a) In the case of accumulating compensated absences, when the employees

render service that increases their entitlement to future compensated absences

b) In the case of non-accumulating compensated absences, when the absences

occur

An entity must measure the expected cost of accumulating compensated absences

as the additional amount that the entity expects to pay as a result of the unused

entitlement that has accumulated at the reporting date (cf. IPSAS 25.17).

According to IPSAS 25.20, an entity must recognize the expected cost of bonus

payments and profit-sharing payments (pursuant to IPSAS 25.13) when, and only

when

a) The entity has a present legal or constructive obligation to make such

payments as a result of past events

b) A reliable estimate of the obligation can be made

A present obligation exists when, and only when, the entity has no realistic

alternative but to make the payments.

IPSAS 25: Employee Benefits

Ernst & Young 169

Accounting for postemployment benefits

a) Defined benefit versus defined contribution plans

According to IPSAS 25.27, postemployment benefits include, for example:

a) Retirement benefits, such as pensions

b) Other postemployment benefits, such as postemployment life insurance and

postemployment medical care

Arrangements under which an entity provides postemployment benefits are

postemployment benefit plans. An entity applies IPSAS 25 to all such arrangements

whether or not they involve the establishment of a separate entity such as a pension

scheme, superannuation scheme, or retirement benefit scheme (a fund) to receive

contributions and to pay benefits.

According to IPSAS 25, postemployment benefit plans are classified as either

defined contribution plans or defined benefit plans, depending on the economic

substance of the plan as derived from its principal terms and conditions (cf. IPSAS

25.28).

Defined contribution plans are postemployment benefit plans under which an entity

pays fixed contributions into a separate entity (a fund) and will have no legal or

constructive obligation to pay further contributions if the fund does not hold

sufficient assets to pay all employee benefits relating to employee service in the

current and prior periods (cf. IPSAS 25.28).

Thus, the amount of the postemployment benefits received by the employee is

determined by the amount of contributions paid by an entity (and perhaps also the

employee) to a postemployment benefit plan or to an insurance company, together

with return on investment arising from the contributions. In consequence, actuarial

risk (that benefits will be less than expected) and investment risk (that assets

invested will be insufficient to meet expected benefits) are borne by the employee.

All other postemployment benefit plans are defined benefit plans. Under defined

benefit plans (cf. IPSAS 25.30):

a) The entity’s obligation is to provide the agreed benefits to current and former

employees.

b) Actuarial risk (that benefits will cost more than expected) and investment risk

are borne, in substance, by the entity. If actuarial or investment experience are

worse than expected, the entity’s obligation may be increased.

IPSAS 25: Employee Benefits

170 IPSAS Explained

b) Treatment of multi-employer plans

An entity classifies a multi-employer plan as a defined contribution plan or a defined

benefit plan under the terms of the plan (including any constructive obligation that

goes beyond the formal terms) (cf. IPSAS 25.32). Where a multi-employer plan

is a defined benefit plan, an entity must:

a) Account for its proportionate share of the defined benefit obligation, plan

assets and cost associated with the plan in the same way as for any other

defined benefit plan

b) Disclose the information required by IPSAS 25.141

When sufficient information is not available to use defined benefit accounting

for a multi-employer plan that is a defined benefit plan, an entity must, pursuant

to IPSAS 25.33:

a) Account for the plan under IPSAS 25.55-57 (see below) as if it were a defined

contribution plan

b) Disclose:

i) The fact that the plan is a defined benefit plan

ii) The reason why sufficient information is not available to enable the entity

to account for the plan as a defined benefit plan

c) To the extent that a surplus or deficit in the plan may affect the amount of

future contributions, the entity must disclose in addition:

i) Any available information about that surplus or deficit

ii) The basis used to determine that surplus or deficit

iii) The implications, if any, for the entity

An entity must account for postemployment benefits under state plans or composite

social security programs in the same way as for a multi-employer plan (cf. IPSAS

25.43 and 25.47).

c) Accounting for defined contribution plans

Accounting for defined contribution plans is straightforward because the reporting

entity’s obligation for each period is determined by the amounts to be contributed

for that period (cf. IPSAS 25.54). Consequently, no actuarial assumptions are

required to measure the obligation or the expense and there is no possibility of any

actuarial gain or loss. Moreover, the obligations are measured on an undiscounted

basis, except where they do not fall due wholly within 12 months of the end of the

period in which the employees render the related service.

IPSAS 25: Employee Benefits

Ernst & Young 171

When an employee has rendered service to the entity during a period, the entity

must recognize the contribution payable to defined contribution plan in exchange for

that service (cf. IPSAS 25.55):

a) As a liability (accrued expense), after deducting any contribution already paid.

If the contribution already paid exceeds the contribution due for service before

the reporting date, an entity must recognize that excess as an asset (prepaid

expense) to the extent that prepayment will lead to, for example, a reduction

in future payments or cash refund.

b) As an expense, unless another IPSAS requires or permits the inclusion of the

benefits in the cost of an asset (cf., for example, IPSAS 12 “Inventories” and

IPSAS 17 “Property, Plant and Equipment”).

Where contributions to a defined contribution plan do not fall due wholly within

12 months of the end of the period in which the employees render the related

service, they should be discounted using the discount rate specified in IPSAS 25.91

(cf. IPSAS 25.56).

d) Accounting for defined benefit plans and determining the present value of defined

benefit obligations

Accounting for defined benefit plans is complex because actuarial assumptions

are required to measure the obligation and the expense and there is a possibility

of actuarial gains and losses (cf. IPSAS 25.59). Moreover, the obligations are

measured on a discounted basis because they may be settled many years after

the employees render the related service.

An entity must account not only for its legal obligation under the formal terms

of a defined benefit plan, but also for any constructive obligation that arises from

the entity’s informal practices (cf. IPSAS 25.63). Informal practices give rise to

a constructive obligation where the entity has no realistic alternative but to pay

employee benefits. An example of a constructive obligation is where a change in the

entity’s informal practices would cause unacceptable damage to its relationship with

employees.

Pursuant to IPSAS 25.65, the amount recognized as a defined benefit liability is the

net total of the following amounts:

a) The present value of the defined benefit obligation at the reporting date

(cf. IPSAS 25.77)

b) Plus any actuarial gains (less any actuarial losses) not recognized because

of the treatment set out in IPSAS 25.105-106

c) Minus any past service cost not yet recognized (cf. IPSAS 25.112)

d) Minus the fair value at the reporting date of plan assets (if any) out of which

the obligations are to be settled directly (cf. IPSAS 25.118-120)

IPSAS 25: Employee Benefits

172 IPSAS Explained

An entity must determine the present value of defined benefit obligations and the

fair value of any plan assets with sufficient regularity that the amounts recognized

in the financial statements do not differ materially from the amounts that would be

determined at the reporting date.

Pursuant to IPSAS 25.74, for a defined benefit plan an entity must recognize the net

total of the following amounts in surplus or deficit, unless another IPSAS requires or

permits their inclusion in the cost of an asset:

a) Current service post (cf. IPSAS 25.76-104)

b) Interest cost (cf. IPSAS 25.95)

c) The expected return on any plan assets (cf. IPSAS 25.125-127) and on any

reimbursement rights (cf. IPSAS 25.121)

d) Actuarial gains and losses, to the extent that they are recognized under

IPSAS 25.105-109

e) The effect of any curtailments or settlements (see IPSAS 25.129 and 25.130);

and

f) The effect of the limit in IPSAS 25.69(b), unless it is recognized in the

Statement of Changes in Net Assets/Equity in accordance with IPSAS 25.108.

Actuarial assumptions used in determining the present value of defined benefit

obligations must be unbiased and mutually compatible (cf. IPSAS 25.85). Actuarial

assumptions are an entity’s best estimates of the variables that will determine the

ultimate cost of providing postemployment benefits. Actuarial assumptions comprise

demographic assumptions about the future characteristics of current and former

employees (and their dependants) that are eligible for benefits. Factors used to

determine these assumptions include, for example, the mortality of the recipients or

rates of employee turnover. Financial assumptions, such as the discount rate or

future salary and benefit levels, must also be made. Financial assumptions should be

based on market expectations, at the reporting sheet date, for the period over which

the obligations are to be settled.

The rate used to discount postemployment benefit obligations (both funded and

unfunded) should reflect the time value of money (cf. IPSAS 25.91). The currency

and term of the financial instrument selected to reflect the time value of money

must be consistent with the currency and the estimated term of the postemployment

benefit obligations.

The fair value of any plan assets is deducted in determining the amount recognized

in the statement of financial position under IPSAS 25.65 (cf. IPSAS 25.118). When

no market price is available, the fair value of plan assets is estimated, for example,

by discounting expected future cash flows using a discount rate that reflects both

the risk associated with the plan assets and the maturity or expected disposal date

IPSAS 25: Employee Benefits

Ernst & Young 173

of those assets (or, if they have no maturity, the expected period until the

settlement of the related obligation).

Other long-term employee benefits

According to IPSAS 25.147, other long-term employee benefits include,

for example:

a) Long-term compensated absences such as long-service or sabbatical leave

b) Jubilee or other long-service benefits

c) Long-term disability benefits

d) Bonuses and profit-sharing payable 12 months or more after the end of the

period in which the employees render the related service

e) Deferred compensation paid 12 months or more after the end of the period

in which it is earned

f) Compensation payable by the entity until an individual enters new employment

Pursuant to IPSAS 25.150, the amount recognized as a liability for other long-term

employee benefits should be the net total of the following amounts:

a) The present value of the defined benefit obligation at the reporting date

(cf. IPSAS 25.77)

b) Minus the fair value at the reporting date of plan assets (if any) out of which the

obligations are to be settled directly (cf. IPSAS 25. 118-120)

In measuring the liability, an entity must apply IPSAS 25.55-104, excluding

IPSAS 25.65 and IPSAS 25.74. An entity must apply IPSAS 25.121 in recognizing

and measuring any reimbursement right.

For other long-term employee benefits, an entity must recognize the net total of the

following amounts as expense or (subject to IPSAS 25.69) revenue, except to the

extent that another standard requires or permits their inclusion in the cost of an

asset:

a) Current service cost (cf. IPSAS 25.76-104)

b) Interest cost (cf. IPSAS 25.95)

c) The expected return on any plan assets (cf. IPSAS 25.125-127) and on any

reimbursement right recognized as an asset (cf. IPSAS 25.121)

d) Actuarial gains and losses, which must all be recognized immediately

e) Past service cost, which must all be recognized immediately

f) The effect of any curtailments or settlements (cf. IPSAS 25.129-130)

IPSAS 25: Employee Benefits

174 IPSAS Explained

Accounting for termination benefits

IPSAS 25 deals with termination benefits separately from other employee benefits

because the event which gives rise to an obligation is the termination rather than

employee service.

IPSAS 25.155 states that an entity must recognize termination benefits as a liability

and an expense when, and only when, the entity is demonstrably committed to

either:

a) Terminate the employment of an employee or group of employees before the

normal retirement date; or

b) Provide termination benefits as a result of an offer made in order to encourage

voluntary redundancy

Where termination benefits fall due more than 12 months after the reporting date,

they must be discounted using the discount rate specified in IPSAS 25.91

(cf. IPSAS 25.161).

Effective date

Periods beginning on or after 1 January 2011. IPSAS 25 was amended by

Improvements to IPSASs issued in January 2010. For the effective dates

of these amendments please refer to IPSAS 25.177A.

IPSAS 26: Impairment of Cash-Generating Assets

Ernst & Young 175

IPSAS 26: Impairment of Cash-Generating Assets

Objective

The objective of IPSAS 26 is to prescribe the procedures that an entity applies

to determine whether a cash-generating asset is impaired and to ensure that

impairment losses are recognized. The standard also specifies when an entity should

reverse an impairment loss and prescribes the necessary disclosures.

The IFRS on which the IPSAS is based

IAS 36, Impairment of Assets generally corresponds to IPSAS 26. However, because

IPSAS 26 relates solely to cash-generating assets, IAS 36 and IPSAS 26 do not

correspond in full.

Content

Principal definitions

Cash-generating assets are assets held with the primary objective of generating

a commercial return.

A cash-generating unit is the smallest identifiable group of assets held with the

primary objective of generating a commercial return that generates cash inflows

from continuing use that are largely independent of the cash inflows from other

assets or groups of assets.

An impairment loss of a cash-generating asset is the amount by which the carrying

amount of an asset exceeds its recoverable amount.

The recoverable amount of an asset or a cash-generating unit is the higher of its fair

value less costs to sell and its value in use.

Value in use of a cash-generating asset is the present value of the estimated future

cash flows expected to be derived from the continuing use of an asset and from its

disposal at the end of its useful life.

Scope

IPSAS 26 applies to all cash-generating assets with the exception of assets arising

from construction contracts (cf. IPSAS 11), inventories (cf. IPSAS 12), financial

assets that are within the scope of IPSAS 15 or IPSAS 29, investment property that

is measured at fair value (cf. IPSAS 16), cash-generating property, plant and

equipment that is measured at revalued amounts (cf. IPSAS 17), deferred tax assets

(in accordance with the national and international provisions), assets arising from

IPSAS 26: Impairment of Cash-Generating Assets

176 IPSAS Explained

employee benefits (cf. IPSAS 25), intangible assets that are regularly revalued to

fair value and other assets listed in IPSAS 26.2.

Non-cash-generating assets, i.e., assets not held with the primary objective of

generating a commercial return, are dealt with in IPSAS 21, Impairment of Non-

Cash-Generating Assets.

Carrying out an impairment test

IPSAS 26.22 states that an entity must assess at each reporting date whether there

is any indication that an asset may be impaired. If any such indication exists, the

entity must estimate the recoverable amount of the asset. The criteria used to

assess as a minimum whether there is any indication that an asset may be impaired

are provided in IPSAS 26.25:

Figure 37: Identification of an asset that may be impaired

Identification of an asset that

may be impaired

Any

indications

that an asset

may be

impaired?

Indications from internal sources of information

(as a minimum) (cf. IPSAS 26.25):

d) Obsolescence or physical damage

e) Significant changes with an adverse effect

on the entity

f) Decision to halt the construction of the asset

before it is complete or in a usable condition

g) Evidence from internal reporting that

indicates worse economic performance than

expected

Indications from external sources of information

(as a minimum) (cf. IPSAS 26.25):

a) Market value has declined significantly

b) Significant changes in the technological,

market, economic, or legal environment

c) Increased market interest rates

Irrespective of whether there

is any indication of impairment,

an entity must also test an

intangible asset with an

indefinite useful life or an

intangible asset not yet available

for use for impairment annually

(cf. IPSAS 26.23)

An assessment shall be performed

at each reporting date

(cf. IPSAS 26.22).

IPSAS 26: Impairment of Cash-Generating Assets

Ernst & Young 177

Irrespective of whether there is any indication of impairment, an entity must also

test an intangible asset with an indefinite useful life or an intangible asset not yet

available for use for impairment annually by comparing its carrying amount with

its recoverable amount (cf. IPSAS 26.23). This impairment test may be performed

at any time during the reporting period, provided it is performed at the same time

every year. Different intangible assets may be tested for impairment at different

times. However, if such an intangible asset was initially recognized during the

current reporting period, that intangible asset must be tested for impairment before

the end of that period.

In assessing whether there is any indication that an asset may be impaired, an

entity must at least consider the indications listed in IPSAS 26.25. The standard

distinguishes between external and internal sources of information

(cf. IPSAS 26.25).

Measuring recoverable amount

The recoverable amount of a cash-generating asset is the higher of an asset’s

fair value less costs to sell and its value in use (cf. IPSAS 26.31). The value in use

of a cash-generating asset is the present value of the estimated future cash flows

expected to be derived from the continuing use of an asset and from its disposal at

the end of its useful life. The elements listed in IPSAS 26.43, such as an estimate

of the future cash flows the entity expects to derive from the asset or expectations

about possible variations in the amount or timing of those future cash flows must be

reflected in the calculation of an asset’s value in use.

The following graph summarizes the impairment of cash-generating assets:

Figure 38: Impairment of cash-generating assets

Impairment of cash-generating assets

Carrying amount: Amount at which an asset

is recognized after deducting any

accumulated depreciation and accumulated

impairment losses.

(cf. IPSAS 10.7)

Recoverable amount: Higher of an asset’s

fair value less costs to sell and its value in

use. (cf. IPSAS 26.31)

Value in use of a cash-generating asset:

Present value of the estimated future cash

flows expected to be derived from the

continuing use of an asset and from its

disposal at the end of its useful life

(cf. IPSAS 26.13).

Fair value: Amount for which an asset could

be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm’s

length transaction (cf. IPSAS 9.11).

Carrying amount

> recoverable

amount?

(cf. IPSAS 26.72)

IPSAS 26: Impairment of Cash-Generating Assets

178 IPSAS Explained

Recognizing and measuring an impairment loss

Pursuant to IPSAS 26.72, an impairment loss is recognized if, and only if, the

recoverable amount of an asset is less than its carrying amount. In this case the

carrying amount of the asset is reduced to its recoverable amount. The impairment

loss is recognized immediately in surplus or deficit (cf. IPSAS 26.73).

After the recognition of an impairment loss, the depreciation (amortization) charge

for the asset is adjusted in future periods to allocate the asset’s revised carrying

amount, less its residual value (if any), on a systematic basis over its remaining

useful life (cf. IPSAS 26.75).

If there is any indication that an asset may be impaired, the recoverable amount is

estimated for the individual asset. If it is not possible to estimate the recoverable

amount of the individual asset, an entity must determine the recoverable amount

of the cash-generating unit to which the asset belongs (the asset’s cash-generating

unit).

Cash-generating units

A cash-generating unit is the smallest identifiable group of assets a) held with the

primary objective of generating a commercial return that b) generates cash inflows

from continuing use that are c) largely independent of the cash inflows from other

assets or groups of assets. The appendix to IPSAS 26 contains examples that explain

how to determine a cash-generating unit.

If an active market exists for the output produced by an asset or group of assets,

that asset or group of assets is identified as a cash-generating unit, even if some or

all of the output is used internally (cf. IPSAS 26.81). If the cash inflows generated by

any asset or cash-generating unit are affected by internal transfer pricing, an entity

must use management’s best estimate of future price(s) that could be achieved in

arm’s length transactions in estimating a) the future cash inflows used to determine

the asset’s or unit’s value in use and b) the future cash outflows used to determine

the value in use of any other assets or cash-generating units that are affected by the

internal transfer pricing.

According to IPSAS 26.83, cash-generating units are identified consistently from

period to period for the same asset or types of assets, unless a change is justified.

Recognizing an impairment loss for a cash-generating unit

An impairment loss is recognized for a cash-generating unit if, and only if, the

recoverable amount of the unit is less than the carrying amount of the unit. The

impairment loss is allocated to reduce the carrying amount of cash-generating

assets of the unit on a pro rata basis, based on the carrying amount of each asset

in the unit. These reductions in carrying amounts are treated as impairment losses

on individual assets and recognized in accordance with IPSAS 26.73.

IPSAS 26: Impairment of Cash-Generating Assets

Ernst & Young 179

In allocating an impairment loss for a cash-generating unit, an entity cannot reduce

the carrying amount of an asset below the highest of (cf. IPSAS 26.92):

a) Its fair value less costs to sell (if determinable)

b) Its value in use (if determinable)

c) Zero

The amount of the impairment loss that would otherwise have been allocated

to the asset is allocated pro rata to the other cash-generating assets of the unit.

After the requirements in IPSAS 26.91-93 have been applied, a liability is recognized

for any remaining amount of an impairment loss for a cash-generating unit if, and

only if, that is required by another IPSAS (cf. IPSAS 26.97).

Reversing an impairment loss

As far as reversing an impairment loss recorded on an asset or a cash-generating

unit in earlier reporting periods is concerned, an entity must assess at each

reporting date whether there is any indication that an impairment loss recognized

in prior periods for an asset may no longer exist or may have decreased (cf. IPSAS

26.99). This means that there is a duty to reverse impairment losses.

If any such indication exists, the entity must estimate the recoverable amount

of the asset. The comments in IPSAS 26.100 are applicable in assessing whether

there is any such indication. An impairment loss recognized in prior periods for an

asset is reversed if, and only if, there has been a change in the estimates used to

determine the asset’s recoverable amount since the last impairment loss was

recognized (cf. IPSAS 26.103). If this is the case, the carrying amount of the asset

is increased to its recoverable amount (reversal of impairment loss).

The increased carrying amount of an asset due to a reversal of an impairment loss

cannot exceed the carrying amount that would have been determined (net of

amortization or depreciation) had no impairment loss been recognized for the asset

in prior years (cf. IPSAS 26.106). A reversal of an impairment loss for an asset is

recognized immediately in surplus or deficit pursuant to IPSAS 26.108.

After a reversal of an impairment loss is recognized, the depreciation (amortization)

charge for the asset is adjusted in future periods to allocate the asset’s revised

carrying amount, less its residual value (if any), on a systematic basis over its

remaining useful life (cf. IPSAS 26.109).

A reversal of an impairment loss for a cash-generating unit is allocated to the cash-

generating assets of the unit pro rata with the carrying amounts of those assets

(cf. IPSAS 26.110). These increases in carrying amounts are treated as reversals

of impairment losses for individual assets and recognized in accordance with IPSAS

26.110. No part of the amount of such a reversal is allocated to a non-cash-

generating asset contributing service potential to a cash-generating unit.

IPSAS 26: Impairment of Cash-Generating Assets

180 IPSAS Explained

In allocating a reversal of impairment loss for a cash-generating unit as described

above, the carrying amount of an asset cannot be increased above the lower of

(cf. IPSAS 26.111):

a) Its recoverable amount (if determinable)

b) The carrying amount that would have been determined (net of amortization

or depreciation) had no impairment loss been recognized for the asset in prior

periods

The amount of the reversal of the impairment loss that would otherwise have been

allocated to the asset is allocated pro rata to the other assets of the unit.

Redesignation of cash-generating and non-cash-generating assets

The redesignation of an asset from a cash-generating asset to a non-cash-

generating asset or from a non-cash-generating asset to a cash-generating asset

can only occur when there is clear evidence that such a redesignation is appropriate.

A redesignation, by itself, does not necessarily trigger an impairment test

or a reversal of an impairment loss. At the subsequent reporting date after a

redesignation, an entity must at least consider the listed indications in IPSAS 26.25.

Disclosure requirements

An entity must disclose the criteria developed by the entity to distinguish cash-

generating assets from non-cash-generating assets.

Further disclosure requirements in relation to cash-generating assets and cash-

generating units can be found in IPSAS 115 et seq.

Effective date

Periods beginning on or after 1 April 2009. Since 2010 IPSAS 26 has been amended

by other IPSASs as well as by Improvements to IPSASs. For the effective dates

of these amendments please refer to IPSAS 26.126A et seq.

IPSAS 27: Agriculture

Ernst & Young 181

IPSAS 27: Agriculture

Objective

IPSAS 27 prescribes the accounting treatment and disclosures related to agricultural

activity. It deals mainly with the accounting treatment for biological assets during

the period of growth, degeneration, production, and procreation, and for the initial

measurement of agricultural produce at the point of harvest.

The IFRS on which the IPSAS is based

IAS 41, Agriculture

Content

Principal definitions

Agricultural activity is the management by an entity of the biological transformation

and harvest of biological assets for sale, distribution at no charge or for a nominal

charge or for conversion into agricultural produce, or into additional biological

assets for sale or for distribution at no charge or for a nominal charge. Agricultural

activity comprises such activities as raising livestock, forestry, annual or perennial

cropping, cultivating orchards and plantations, floriculture, and aquaculture

(including fish farming). IPSAS 27.10 lists certain common features of agricultural

activities.

Agricultural produce is the harvested product of the entity’s biological assets,

whereas a biological asset is a living animal or plant.

Biological transformation comprises the processes of growth, degeneration,

production, and procreation that cause qualitative or quantitative changes in a

biological asset. Biological transformation has the following types of outcomes:

a) Asset changes through

i) Growth (an increase in quantity or improvement in quality of an animal

or plant),

ii) Degeneration (a decrease in the quantity or deterioration in quality

of an animal or plant), or

iii) Procreation (creation of additional living animals or plants); or

b) Production of agricultural produce such as latex, tea leaf, wool, and milk.

Costs to sell are the incremental costs directly attributable to the disposal

of an asset, excluding finance costs and income taxes.

IPSAS 27: Agriculture

182 IPSAS Explained

The following table shows examples of (a group of) biological assets, agricultural

produce, and products that are the result of processing after harvest:

Biological assets Agricultural produce Products that are the

result of processing after

harvest

Dairy cattle Milk Cheese

Fruit trees Picked fruit Processed fruit

Vines Grapes Wine

Table 18: Examples of biological assets, agricultural produce and products that are the result of processing

after harvest

Scope

A public sector entity using the accrual basis of accounting has to apply IPSAS 27 for

biological assets and agricultural produce at the point of harvest when they relate

to agricultural activity. After the point of harvest, IPSAS 12, Inventories or another

applicable standard is used for the accounting of agricultural produce. The proposed

standard will not deal with the processing of agricultural produce after harvest; for

example, the processing of picked tea leaves into tea by a farmer who has grown the

tea bushes. Also, the standard will not apply to:

a) Land related to agricultural activity (cf. IPSAS 16 and IPSAS 17)

b) Intangible assets related to agricultural activity (cf. IPSAS 31)

c) Biological assets held for the provision or supply of (public) services

Recognition of biological assets and agricultural produce

According to IPSAS 27.13 an entity shall recognize a biological asset or agricultural

produce when and only when:

a) The entity controls the asset as a result of past events;

b) It is probable that future economic benefits or service potential associated with

the asset will flow to the entity; and

c) The fair value or cost of the asset can be measured reliably.

The recognition criteria refer to the definition of an asset as prescribed in IPSAS 1.

In agricultural activity, control may be substantiated by legal ownership, branding,

or marking. The future benefits or service potential in agricultural activity are

normally assessed by measuring the significant physical attributes.

IPSAS 27: Agriculture

Ernst & Young 183

Measurement of biological assets and agricultural produce

IPSAS 27.16 prescribes that a biological asset be measured on initial recognition

and at each reporting date at its fair value less costs to sell, except where the fair

value cannot be measured reliably. For subsequent measurement, IPSAS 27.35

states that an entity that has previously measured a biological asset at its fair value

less costs to sell continues to measure the biological asset at its fair value less costs

to sell until disposal.

In the case that a public sector entity acquires a biological asset through a non-

exchange transaction, this asset is then measured on initial recognition and at each

reporting date in accordance with IPSAS 27.16, i.e., at fair value less costs to sell,

except where the fair value cannot be measured reliably.

According to IPSAS 27.18 agricultural produce harvested from an entity’s biological

assets is measured at its fair value less costs to sell at the point of harvest. This

measurement will be used as cost at that date when applying IPSAS 12 “Inventories”

or another applicable standard. In the determination of cost, accumulated

depreciation and accumulated impairment losses, the entity is also required to

consider IPSAS 12, Inventories, IPSAS 17, Property, Plant and Equipment, IPSAS 21,

Impairment of Non-Cash-Generating Assets as well as IPSAS 26, Impairment of Cash-

Generating Assets (cf. IPSAS 27.37).

Contrary to biological assets, agricultural produce harvested from an entity’s

biological assets will be measured at its fair value less costs to sell only at the point

of harvest. IPSAS 27.36 indicates that there are no exceptions to the rule of

measuring agricultural produce at the point of harvest at its fair value less costs to

sell, i.e., a measurement at cost is precluded. The standard assumes that the fair

value of agricultural produce at the point of harvest can always be measured

reliably. To conclude, the primary measurement basis for biological assets and

agricultural produce is fair value.

Determination of fair value for a biological asset or agricultural produce

IPSAS 27.14 states that the fair value of an asset is based on its present location

and condition. As a result, for example, the fair value of cows at a farm is the price

for the cows in the relevant market less the transport and other costs of getting the

cows to that market.

If an active market exists for a biological asset or agricultural produce in its present

location and condition, the quoted price in that market is the appropriate basis for

determining the fair value of that asset (cf. IPSAS 27.21). If an entity has access

to different active markets, the entity uses the most relevant one. For example,

if an entity is able to sell the cows in two active markets, it would use the price

existing in the market expected to be used.

IPSAS 27: Agriculture

184 IPSAS Explained

If there is no active market, IPSAS 27.23 proposes that an entity use one or more

of the following as reference for determining fair value:

a) The most recent market transaction price, provided that there has not been

a significant change in economic circumstances between the date of that

transaction and the reporting date

b) Market prices for similar assets with adjustment to reflect differences

c) Sector benchmarks such as the value of an orchard expressed per export tray,

bushel, or hectare, and the value of cows expressed per kilogram of meat

The aim is to arrive at the most reliable estimate of fair value within a relatively

narrow range of reasonable estimates.

The determination of fair value for a biological asset or agricultural produce may

be facilitated by grouping biological assets or agricultural produce according to

significant attributes, for example, by age or quality. The entity has to select those

attributes which are used in the market as a basis for pricing (cf. IPSAS 27.19).

Measurement of a biological asset

a) Determination of fair value if market prices are not available

In some circumstances, market-determined prices or values may not be available

for a biological asset in its present condition. In determining fair value in these

circumstances, an entity uses the present value of expected net cash flows from

the asset discounted at a current market-determined rate. For the determination

of the present value of expected net cash flows, IPSAS 27.25 provides that entities

should include the net cash flows that market participants would expect the asset

to generate in its most relevant market. By contrast, cash flows for financing the

assets, taxation, or re-establishing biological assets after harvest (for example, the

cost of replanting trees in a plantation forest after harvest) are not included

(cf. IPSAS 27.26).

Furthermore, there are circumstances where cost may approximate fair value,

particularly when:

a) Little biological transformation has taken place since initial cost incurrence

(for example, for vegetable seedlings planted immediately prior to reporting

date); or

b) The impact of the biological transformation on price is not expected to be

material (for example, for the initial growth in a 30-year pine plantation

production cycle).

IPSAS 27: Agriculture

Ernst & Young 185

b) Measurement when fair value cannot be measured reliable

If the fair value of a biological asset cannot be measured reliably on initial

recognition, i.e., market-determined prices or values are not available and

alternative estimates of fair value are determined to be clearly unreliable, then

the biological asset is required to be measured at its cost less any accumulated

depreciation and any accumulated impairment losses. Once the fair value of the

respective biological asset becomes reliably measurable, the entity measures it

at its fair value less costs to sell. Where a non-current biological asset (e.g., diary

livestock) meets the criteria to be classified as held for sale in accordance with the

relevant international or national accounting standard dealing with non-current

assets held for sale and discontinued operations, it is presumed that fair value can

be measured reliably.

It has to be stressed that the presumption that fair value cannot be measured

reliable can be rebutted only on initial recognition (cf. IPSAS 27.35).

Accounting treatment of gains or losses

a) Gains or losses arising on initial recognition

According to IPSAS 27.30 and 27.32, a gain or loss arising on initial recognition of

a biological asset or agricultural produce at fair value less costs to sell is included in

surplus or deficit for the period in which it arises. A gain arising on initial recognition

of a biological asset may arise, e.g., when a calf is born (cf. IPSAS 27.31). A gain or

loss may arise on initial recognition of agricultural produce as a result of harvesting

(cf. IPSAS 27.33).

b) Gains or losses from a change in fair value less costs to sell

By analogy to gains or losses arising on initial recognition, IPSAS 27.30 states that

gains or losses arising from a change in fair value less costs to sell of a biological

asset should be included in surplus or deficit for the period in which it arises.

Therefore, the change in fair value less costs to sell of a biological asset will have

a direct impact on the statement of financial performance.

Government grants related to biological assets

IAS 41 contains requirements and guidance for accounting for government grants

related to biological assets measured at fair value less costs to sell and agricultural

activity. The IPSASB decided not to include requirements and guidance for

government grants in IPSAS 27 because IPSAS 23, Revenue from Non-Exchange

Transactions sets forth requirements and guidance related to government grants

provided in non-exchange transactions.

Effective date

1 April 2011.

IPSAS 28: Financial Instruments: Presentation

186 IPSAS Explained

IPSAS 28: Financial Instruments: Presentation

Preliminary note

IPSAS 28, Financial Instruments: Presentation, replaces IPSAS 15, Financial

Instruments: Disclosure and Presentation, and should be applied for annual reporting

periods beginning on or after 1 January 2013.

Objective

The objective of IPSAS 28 is to establish principles for presenting financial

instruments as liabilities or net assets/equity and for offsetting financial assets and

financial liabilities. It applies to the classification of financial instruments, from the

perspective of the issuer, into financial assets, financial liabilities and equity

instruments; the classification of related interest, dividends or similar distributions,

losses and gains; and the circumstances in which financial assets and financial

liabilities should be offset. Together with IPSAS 29 and IPSAS 30, IPSAS 28 covers

all aspects of the accounting for and disclosure of financial instruments. The

disclosure requirements relating to financial instruments are included in IPSAS 30.

The IFRS on which the IPSAS is based

IPSAS 28 is based on IAS 32, Financial Instruments: Presentation. (amended as

at 31 December 2008). Because there is a strong link between IAS 32 and IFRIC 2,

Members’ Shares in Co-operative Entities and Similar Instruments, in relation to

puttable financial instruments and obligations arising on liquidation the principles

and examples from IFRIC 2 have been included in IPSAS 28 as an authoritative

appendix.

Content

Principal definitions

An equity instrument is any contract that evidences a residual interest in the assets

of an entity after deducting all of its liabilities.

A financial instrument is any contract that gives rise to both a financial asset of one

entity and a financial liability or equity instrument of another entity.

IPSAS 28: Financial Instruments: Presentation

Ernst & Young 187

A financial asset is any asset that is:

► Cash;

► An equity instrument of another entity or a contractual right to

receive cash or another financial asset from another entity or to

exchange financial assets or financial liabilities with another entity

under conditions that are potentially favorable to the entity; or

► A contract that will or may be settled in the entity’s own equity

instruments and is a non-derivative for which the entity is or may be

obliged to receive a variable number of the entity’s own equity

instruments; or a derivative that will or may be settled other than by

the exchange of a fixed amount of cash or another financial asset

for a fixed number of the entity’s own equity instruments.

A financial liability is any liability that is:

a) A contractual obligation to deliver cash or another financial asset to another

entity or to exchange financial assets or financial liabilities with another entity

under conditions that are potentially unfavorable to the entity; or

b) A contract that will or may be settled in the entity’s own equity instruments and

is a non-derivative for which the entity is or may be obliged to deliver a variable

number of the entity’s own equity instruments; or a derivative that will or may

be settled other than by the exchange of a fixed amount of cash or another

financial asset for a fixed number of the entity’s own equity instruments.

A puttable instrument is a financial instrument that gives the holder the right to put

the instrument back to the issuer for cash or another financial asset or is

automatically put back to the issuer on the occurrence of an uncertain future event

or the death or retirement of the instrument holder.

A financial guarantee contract is a contract that requires the issuer to make

specified payments to reimburse the holder for a loss it incurs because a specified

debtor fails to make payment when due in accordance with the original terms of a

debt instrument.

Scope

Excluded from the scope of IPSAS 28 are interests in controlled entities (IPSAS 6),

associates (IPSAS 7) or joint ventures (IPSAS 8), employers’ rights and obligations

under employee benefit plans (IPSAS 25), obligations arising from insurance

contracts (but note the exceptions for derivatives and financial guarantee

contracts), insurance contracts that contain a discretionary participation feature and

share-based payment transactions.

The scope of IPSAS 28 excludes insurance contracts but deals with financial

guarantee contracts and with insurance contracts that transfer financial risk.

IPSAS 28: Financial Instruments: Presentation

188 IPSAS Explained

IPSAS 28 distinguishes financial guarantee contracts arising from non-exchange

transactions (i.e., at no consideration or nominal consideration) and financial

guarantee contracts arising from exchange transactions. Financial guarantee

contracts issued by way of non-exchange transactions are required to be treated as

financial instruments in accordance with IPSAS 28, whereas financial guarantee

contracts issued by way of exchange transactions lead to an option. They should be

treated as financial instruments unless an issuer elects to treat such contracts as

insurance contracts (e.g., in accordance with IFRS 4).

Contracts that are insurance contracts but involve the transfer of financial risk

may be treated as financial instruments in accordance with IPSAS 28.

Presentation of liabilities and equity

The issuer of a financial instrument shall classify the instrument, or its component

parts, on initial recognition in accordance with the substance of the contractual

arrangement as a financial liability, a financial asset or an equity instrument

(substance over form). A critical feature in distinguishing a financial liability from an

equity instrument is the existence of a contractual obligation to deliver either cash

or another financial asset.

Presentation of treasury shares

If an entity reacquires its own equity instruments, those instruments (“treasury

shares”) shall be deducted from net assets/equity. No gain or loss shall be

recognized in surplus or deficit of an entity’s own equity instruments.

Presentation of interest, dividends or similar distributions, losses and gains

Interest, dividends, losses and gains relating to a financial instrument that

is a financial liability are recognized as revenue or expense in surplus or deficit.

Distributions to holders of an equity instrument are debited directly to net

assets/equity.

Offsetting a financial asset and a financial liability

Financial assets and financial liabilities shall be offset when an entity has a legally

enforceable right to set off and intends either to settle on a net basis, or to realize

the asset and settle the liability simultaneously.

Effective date

Periods beginning on or after 1 January 2013. Earlier application is encouraged

by the IPSASB. If an entity applies this Standard for a period beginning before

1 January 2013, it shall disclose that fact. An entity shall not apply this Standard

before 1 January 2013, unless it also applies IPSAS 29 and IPSAS 30.

IPSAS 29: Financial Instruments: Recognition and Measurement

Ernst & Young 189

IPSAS 29: Financial Instruments: Recognition and

Measurement

Objective

The objective of IPSAS 29 is to establish principles for recognizing and measuring

financial assets, financial liabilities and some contracts to buy or sell non-financial

items. Together with IPSAS 28 and IPSAS 30, IPSAS 29 covers all aspects of the

accounting for and disclosure of financial instruments.

The IFRSs on which the IPSAS is based

IPSAS 29 is based on IAS 39, Financial Instruments: Recognition and Measurement

(revised 2009), IFRIC 9, Reassessment of Embedded Derivatives, and IFRIC 16,

Hedges of a Net Investment in a Foreign Operation.

The IASB issued in the meantime IFRS 9, Financial Instruments, to replace IAS 39

in several phases. The IPSASB committed a project to update IPSASs 28-30 once

the IASB completes its project on IFRS 9.

Content

Principal definitions (cf. IPSAS 29.10 for more details)

The terms financial instrument, financial asset, financial liability and equity

instrument are defined in IPSAS 28. These terms are used in IPSAS 29 with the

same meaning.

IPSAS 29 specifies categories of financial instruments. This classification is of

importance because the accounting treatment for a particular financial instrument

depends on its classification. IPSAS 29 distinguishes between the following

categories of financial assets and financial liabilities:

Financial assets Financial liabilities

► Financial assets at fair value

through surplus or deficit

► Held-to-maturity investments

► Loans and receivables

► Available-for-sale financial assets

► Financial liabilities at fair value

through surplus or deficit

► Other financial liabilities

Table 19: Categories of financial assets and financial liabilities

IPSAS 29: Financial Instruments: Recognition and Measurement

190 IPSAS Explained

Financial assets or financial liabilities at fair value through surplus or deficit are

financial instruments that are either classified as held for trading, or are designated

as such on initial recognition. A financial asset or a financial liability is classified as

‘held for trading’ if:

► It is acquired or incurred principally for the purpose of selling or

repurchasing it in the near term;

► On initial recognition it is part of a portfolio of identified financial

instruments that are managed together and for which there is

evidence of a recent actual pattern of short-term profit-taking; or

► It is a derivative.

A financial asset or a financial liability at fair value through surplus or deficit

is designated as such on initial recognition, if:

► It eliminates or significantly reduces a measurement or recognition

inconsistency that would otherwise arise from measuring assets or

liabilities or recognizing the gains and losses on them on different

bases; or

► A group of financial assets, financial liabilities or both is managed

and its performance is evaluated on a fair value basis, in accordance

with a documented risk management or investment strategy, and

information about the group is provided internally on that basis to

the entity’s key management personnel.

Held-to-maturity investments are non-derivative financial assets with fixed or

determinable payments and fixed maturity, other than ‘loans and receivables’, for

which there is a positive intention and ability to hold to maturity and which have not

been designated as ‘at fair value through surplus or deficit’ or as ‘available-for-sale’.

Loans and receivables are non-derivative financial assets with fixed or determinable

payments that are not quoted in an active market, do not qualify as ‘financial assets

held for trading’ and have not been designated as ‘at fair value through surplus or

deficit’ or as ‘available-for-sale’.

Available-for-sale financial assets are non-derivative financial assets that are

designated as available for sale or are not classified as, ‘loans and receivables’,

‘held-to-maturity investments’, ‘financial assets at fair value through surplus or

deficit’.

Other financial liabilities are those liabilities that are not ‘held for trading’ or

that have not been designated as ‘at fair value through surplus or deficit’.

IPSAS 29: Financial Instruments: Recognition and Measurement

Ernst & Young 191

The following graph systematizes the scope of financial instruments:

Figure 39: Systematization of the scope of financial instruments

The amortized cost of a financial asset or financial liability is the amount at which

the financial instrument is measured at initial recognition minus principal

repayments, plus or minus the cumulative amortization, and minus any reduction

for impairment or uncollectibility.

The effective interest rate is the rate that exactly discounts estimated future cash

payments or receipts through the expected life of the financial instrument or, when

appropriate, a shorter period to the net carrying amount of the financial asset or

financial liability.

Designation

The decision to designate a financial asset or to designate a financial liability to

a certain category (‘at fair value through surplus or deficit’ or ‘available-for-sale’)

is similar to a choice of accounting policy because the accounting treatment for a

particular financial instrument depends on its classification. However, designation

Financial assets at

fair value through

surplus or deficit

Loans and

receivables

Available-for-sale

financial assets

Financial liabilities at

fair value through

surplus or deficit

Other financial

liabilities

Financial assets

(cf. IPSAS 29.10)

Financial liabilities

(cf. IPSAS 29.10)

Classified either as

► Held for trading

or

► Designated as such on

initial recognition

Held for trading if

► Acquired or

incurred principally

for the purpose of

selling or

repurchasing it in

the near term or

► Initial recognition is

part of a portfolio of

identified financial

instruments that

are managed

together and for

which there is

evidence of a recent

actual pattern of

short-term profit-

taking; or

► It is a derivative.

Designated as such on

initial recognition if

► Eliminates or

significantly

reduces

a measurement or

recognition

inconsistency; or

► A group of financial

assets, financial

liabilities is

managed and its

performance is

evaluated on a fair

value basis, in

accordance with a

documented risk

management or

investment strategy

Financial instrument

Any contract that gives rise to both a financial

asset of one entity and a financial liability or equity

instrument of another entity (cf. IPSAS 28.9).

Held-to-maturity

investments

IPSAS 29: Financial Instruments: Recognition and Measurement

192 IPSAS Explained

as ‘at fair value through surplus or deficit’ or ‘available-for-sale’ is only permitted

upon initial recognition. Furthermore in designating an instrument as at fair value

through surplus or deficit, an entity needs to demonstrate that doing so results in

more relevant information because either:

► It eliminates or significantly reduces a measurement or recognition

inconsistency (accounting mismatch) that would otherwise arise, or

► A group of financial assets, financial liabilities or both is managed

and its performance is evaluated on a fair value basis, or

► The instruments contain embedded derivates.

Recognition

IPSAS 29.16 provides for an entity to recognize a financial asset or a financial

liability in its statement of financial position when, and only when, the entity

becomes a party to the contractual provisions of the instrument.

Initial measurement

When a financial asset or financial liability is recognized initially, an entity is

required to measure it at its fair value. In the case of a financial asset or financial

liability not at fair value through surplus or deficit, an entity shall measure it at its

fair value plus transaction costs that are directly attributable to the acquisition or

issue of the financial asset or financial liability (cf. IPSAS 29.45).

Concessionary loans pose particular accounting issues to the public sector

(cf. IPSAS 29.AG83 to AG89). They are granted to or received by an entity at below-

market terms. Examples of concessionary loans granted by public sector entities

include loans to developing countries and farms as well as student loans. Entities

may receive concessionary loans, for example, from development agencies and

other government entities. Concessionary loans are distinguished from the waiver

of debt. This distinction is important because it affects whether the below-market

conditions are considered in the initial recognition or measurement of the loan

rather than as part of the subsequent measurement or derecognition. Any

differences between the transaction price of the concessionary loan and fair value

of the loan at initial recognition are treated as follows:

► Where the concessionary loan is received by a public sector entity,

the difference is accounted for in accordance with IPSAS 23.

► Where the concessionary loan is granted by a public sector entity,

the difference is treated as an expense in surplus or deficit at initial

recognition.

IPSAS 29: Financial Instruments: Recognition and Measurement

Ernst & Young 193

In the public sector, contractual financial guarantees are frequently provided for

no consideration or for nominal consideration to further the entity’s economic and

social objectives (e.g., supporting infrastructure projects or corporate entities in

times of economic distress). In many cases the transaction price related to a

financial guarantee contract will not reflect fair value and recognition, as such an

amount would be an inaccurate reflection of the issuer’s exposure to financial risk.

At initial recognition, where no fee is charged or where the consideration is not fair

value, an entity firstly considers whether the fair value can be obtained through

observation of quoted prices available in an active market (level one) (cf. IPSAS

29.AG95). Where there is no active market for a directly equivalent guarantee

contract, entities should apply a mathematical valuation technique to obtain a fair

value where this produces a reliable measure of fair value (level two) (cf. IPSAS

29.AG96). Alternatively (level three), initial recognition should be in accordance

with IPSAS 19 (cf. IPSAS 29.AG27).

Subsequent measurement

For the purpose of measuring a financial asset after initial recognition the

accounting treatment of a particular financial instrument depends on its

classification:

► ‘Financial assets at fair value through surplus or deficit’ are

measured at their fair values without any deduction for transaction

costs they may incur on sale. Gains and losses are recognized in

surplus or deficit.

► ‘Loans and receivables’ and ‘held-to-maturity investments’ are

measured

at amortized cost using the effective interest method. Gains or

losses are recognized in surplus or deficit when the financial asset is

derecognized or impaired.

► Available-for-sale financial assets whose fair value can be reliably

measured are measured at their fair values without any deduction

for transaction costs that may be incurred on sale. Gains and losses

regarding the fair value measurement are recognized directly in net

assets/equity. Investments that do not have a quoted market price

in an active market and whose fair value cannot be reliably

measured are measured at cost. In both cases, impairment losses

are recognized in surplus or deficit.

Also, the subsequent measurement of financial liabilities depends on its

classification:

Financial liabilities at fair value through surplus or deficit are measured at their fair

value. Gains and losses are recognized in surplus or deficit.

IPSAS 29: Financial Instruments: Recognition and Measurement

194 IPSAS Explained

Other financial liabilities are measured at cost. Gains or losses are recognized in

surplus or deficit when the financial liability is derecognized or impaired.

Derecognition of a financial asset

Derecognition is the removal of a previously recognized financial asset or financial

liability from an entity’s statement of financial position. An entity derecognizes a

financial asset only when the contractual rights to the cash flows from the financial

asset expire or are waived or an entity transfers the financial asset and the transfer

qualifies for derecognition (cf. IPSAS 29.19).

An entity transfers a financial asset if it only either transfers the contractual right

to receive the cash flows of the financial asset, or retains the contractual rights to

receive the cash flows of the financial asset, but assumes a contractual obligation

to pay the cash flows in an arrangement that meets the conditions in IPSAS 29.21.

The transfer qualifies for derecognition if the entity transfers substantially all the

risks and rewards of ownership of the financial asset. If the entity retains

substantially all the risks and rewards of ownership, the entity continues to

recognize the financial asset.

If the entity neither transfers nor retains substantially all the risks and rewards, the

entity must determine whether it has retained control of the financial asset. If the

entity has retained control, it continues to recognize the financial asset to the extent

of its continuing involvement. If the entity has not retained control, it derecognizes

the financial asset and recognizes separately as assets or liabilities any rights and

obligations created or retained in the transfer.

Derecognition of a financial liability

An entity shall remove a financial liability (or a part of a financial liability) from its

statement of financial position when, and only when, it is extinguished. A financial

liability is extinguished when the obligation specified in the contract is discharged,

waived, cancelled or expires.

Accounting for hedging instruments

The standard contains guidelines on hedge accounting in IPSAS 29.80-113.

Effective date

Periods beginning on or after 1 January 2013. Earlier application is encouraged

by the IPSASB. If an entity applies this Standard for a period beginning before

1 January 2013, it shall disclose that fact. An entity shall not apply this Standard

before 1 January 2013, unless it also applies IPSAS 28 and IPSAS 30.

IPSAS 30: Financial Instruments: Disclosures

Ernst & Young 195

IPSAS 30: Financial Instruments: Disclosures

Preliminary note

IPSAS 30, Financial Instruments: Disclosure, replaces IPSAS 15, Financial

Instruments: Disclosure and Presentation, and should be applied for annual reporting

periods beginning on or after 1 January 2013.

Objective

The objective of IPSAS 30 is to require entities to provide disclosures in their

financial statements that enable users to evaluate:

► The significance of financial instruments for the entity’s financial

position and performance; and

► The nature and extent of risks arising from financial instruments to

which the entity is exposed during the period and at the end of the

reporting period, and how the entity manages those risks.

Together with IPSAS 28 and IPSAS 29, IPSAS 30 covers all aspects of the

accounting for and disclosure of financial instruments.

The IFRS on which the IPSAS is based

IPSAS 30 is based on IFRS 7, Financial Instruments: Disclosures (revised 2009).

Content

Principal definitions

The terms financial instrument, financial asset and financial liability are defined in

IPSAS 28. Categories of financial instruments are specified in IPSAS 29. These terms

and classifications are used in IPSAS 30 with the same meaning.

Credit risk is the risk that one party to a financial instrument will cause a financial

loss for the other party by failing to discharge an obligation.

Currency risk is the risk that the fair value or future cash flows of a financial

instrument will fluctuate because of changes in foreign exchange rates.

Interest rate risk is the risk that the fair value or future cash flows of a financial

instrument will fluctuate because of changes in market interest rates.

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations

associated with financial liabilities that are settled by delivering cash or another

financial asset.

IPSAS 30: Financial Instruments: Disclosures

196 IPSAS Explained

Loans payable are financial liabilities, other than short-term trade payables

on normal credit terms.

Market risk is the risk that the fair value or future cash flows of a financial

instrument will fluctuate because of changes in market prices.

Other price risk is the risk that the fair value or future cash flows of a financial

instrument will fluctuate because of changes in market prices.

A financial asset is past due when a counterparty has failed to make a payment

when contractually due.

Scope

IPSAS 30 applies to recognized and unrecognized financial instruments. Recognized

financial instruments include financial assets and financial liabilities that are within

the scope of IPSAS 29. Unrecognized financial instruments include some financial

instruments that, although outside the scope of IPSAS 29, are within the scope of

this standard (such as some loan commitments).

Overview of the disclosure requirements

The disclosure requirements of this IPSAS could be divided into financial statement

disclosures resulting from financial instruments and risk disclosures resulting from

financial instruments. The following table illustrates the different kinds of disclosure

requirements in IPSAS 30.

Financial statement disclosures

resulting from financial instruments

Risk disclosures resulting from financial

instruments

► General disclosures on financial

instruments

► Specific disclosures on financial

instruments

► Specific disclosures on

concessionary loans

► Disclosures on credit risks

► Disclosures on liquidity risks

► Disclosures on market risks

Table 20: Overview on the disclosure requirements of IPSAS 30

General disclosures on financial instruments

General disclosures, such as the carrying amounts of financial instruments by

category, have to be provided in the statement of financial position or in the notes

(cf. IPSAS 30.11).

Again, in the statement of financial performance or in the notes, all entities have

to disclose items of revenue, expense and gains or losses resulting from financial

instruments (cf. IPSAS 30.24).

In addition, entities are required to disclose the significant accounting policies

relevant to an understanding of their financial instruments (cf. IPSAS 30.25).

IPSAS 30: Financial Instruments: Disclosures

Ernst & Young 197

Specific disclosures on financial instruments

An entity must provide additional specific disclosures if:

► Financial assets or financial liabilities have been designated as ‘at

fair value through surplus or deficit’ (cf. IPSAS29);

► Financial assets have been reclassified;

► Financial assets have been transferred and do not qualify for

derecognition;

► Financial assets have been pledged as collateral or are held as

collateral;

► The impairment of financial assets has been recorded in a separate

account;

► A compound financial instrument with multiple embedded

derivatives has been issued;

► Defaults of loans payable or breaches of loan agreement terms have

been occurred;

► Hedge accounting is applied; or

► Financial assets or financial liabilities have been recorded at fair

values.

Specific disclosures on concessionary loans

Concessionary loans are granted to or received by an entity on below-market terms.

Examples of concessionary loans granted by entities include loans to developing

countries, small farms, student loans granted to qualifying students for tertiary

education and housing loans granted to low income families.

Such loans are characteristic for the public sector and are often made to implement

a government’s or other public sector entity’s social policies. The intention of a

concessionary loan at the outset is to provide or receive resources on below-market

terms. For this reason the IPSASB concluded that more comprehensive disclosures

are required by public sector entities in respect of concessionary loans and it has

included additional disclosure requirements with respect to concessionary loans

(cf. IPSAS30.37):

► A reconciliation between the opening and closing balance of the

loans

► The nominal value of the loans at the end of the period

► The purpose and terms of the various types of loans

► The valuation assumptions

IPSAS 30: Financial Instruments: Disclosures

198 IPSAS Explained

Disclosures on credit risks

Besides qualitative disclosures on the credit risks arising from financial assets, an

entity has to quantify its credit risks. Specific disclosures by category of financial

instrument are required in particular for financial assets that are either past due

or impaired. Collateral and other credit enhancements obtained have to be named,

quantified and explained.

Disclosures on liquidity risks

Besides qualitative disclosures on the liquidity risks arising from financial liabilities,

an entity has to quantify its liquidity risks. A maturity analysis must be disclosed for

derivative and non-derivative financial liabilities.

Disclosures on market risks

Besides qualitative disclosures on the market risks arising from financial

instruments, an entity has to quantify its market risks. A sensitivity analysis

is required to be disclosed for each type of market risk.

Effective date

Periods beginning on or after 1 January 2013. Earlier application is encouraged

by the IPSASB. If an entity applies this Standard for a period beginning before

1 January 2013, it shall disclose that fact. An entity shall not apply this Standard

before 1 January 2013, unless it also applies IPSAS 28 and IPSAS 29.

IPSAS 31: Intangible Assets

Ernst & Young 199

IPSAS 31: Intangible Assets

Objective

The objective of IPSAS 31 is to prescribe the accounting treatment for intangible

assets that are not dealt with specifically in any other IPSAS. It requires an entity to

recognize an intangible asset if, and only if, specified criteria are met. The Standard

also specifies how to measure the carrying amount of intangible assets and requires

specified disclosures about intangible assets.

The IFRS on which the IPSAS is based

IAS 38, Intangible Assets

Content

Principal definitions

Amortization is the systematic allocation of the depreciable amount of an intangible

asset over its useful life.

Development is the application of research findings or other knowledge to a plan or

design for the production of new or substantially improved materials, devices,

products, processes, systems or services before the start of commercial production

or use.

Depreciable amount is the cost of an asset, or other amount substituted for cost,

less its residual value.

Development is the application of research findings or other knowledge to a plan

or design for the production of new or substantially improved materials, devices,

products, processes, systems or services before the start of commercial production

or use.

An impairment loss is the amount by which the carrying amount of an asset exceeds

its recoverable amount.

An intangible asset is an identifiable non-monetary asset without physical

substance. Typical examples of intangible assets in the public sector are computer

software, patents, copyrights and acquired import quotas.

Research is original and planned investigation undertaken with the prospect

of gaining new scientific or technical knowledge and understanding.

IPSAS 31: Intangible Assets

200 IPSAS Explained

Scope

The IPSAS applies to, among other things, expenditure on advertising, training,

start-up, research and development activities. Therefore, although these activities

may result in an asset with physical substance (e.g., a prototype), the physical

element of the asset is secondary to its intangible component, i.e., the knowledge

embodied in it. Because of its focus on research and development, the proposed

IPSAS on intangible assets will be of great relevance to public research institutions

as well as to public universities and colleges.

Some intangible assets may be contained in or on a physical substance such as a

compact disc (in the case of computer software), legal documentation (in the case

of a license or patent), or film. For the determination whether an asset that

incorporates both intangible and tangible elements should be treated under IPSAS

17 or as an intangible asset under IPSAS 31, an entity uses judgement to assess

which element is more significant.

IPSAS 31 shall be applied in accounting for intangible assets, except:

a) Intangible assets that are within the scope of another standard;

b) Financial assets, as defined in IPSAS 28, Financial Instruments: Presentation;

c) The recognition and measurement of exploration and evaluation assets;

d) Expenditure on the development and extraction of minerals, oil, natural gas

and similar non-regenerative resources;

e) Intangible assets or goodwill acquired in a business combination;

f) Powers and rights conferred by legislation, a constitution, or by equivalent

means, and others.

The IPSASB considered whether powers and rights conferred by legislation,

a constitution, or by equivalent means (e.g., the power to tax) should be included

in the scope of IPSAS 31. As the IPSASB has not reached a final conclusion on this

topic, these powers and rights are excluded from the scope of this Standard

(cf. IPSAS 31.BC3).

IPSAS 31: Intangible Assets

Ernst & Young 201

Recognition

An intangible asset is an identifiable non-monetary asset without physical substance.

IPSAS 31.19 states that an asset meets the “identifiable” criterion in the definition

of an intangible asset when it:

► Is separable, i.e., capable of being separated or divided from the

entity and sold, licensed, rented or exchanged, either individually or

together with a related contract, asset or liability; or

► Arises from rights from binding arrangements (including rights from

contracts

or other legal rights), regardless of whether those rights are

transferable or separable from the entity or from other rights and

obligations.

The “identifiable” criterion is necessary because the intangible asset needs to be

distinguished from goodwill. Contrary to IAS 38, the “identifiable” criterion in IPSAS

31.19 has been expanded () to include rights arising from binding arrangements

(including rights from contracts or other legal rights).

Derived from the definition of an asset, control is a further condition for recognition

of an intangible asset. According to IPSAS 31.21 a public sector entity controls an

asset if the entity has the power to obtain the future economic benefits or service

potential flowing from the underlying resource and to restrict the access of others

to those benefits or that service potential. Revenue from the sale of products or

services, cost savings, or other benefits resulting from the use of the asset by the

entity are examples for the future economic benefits or service potential flowing

from an intangible asset.

Further recognition criteria for an intangible asset are described in IPSAS 31.28-29.

Accordingly, an intangible asset shall be recognized if, and only if:

► It is probable that the expected future economic benefits or service

potential that are attributable to the asset will flow to the entity;

and

► The cost or fair value of the asset, as appropriate, can be measured

reliably.

An entity shall assess the probability of expected future economic benefits or service

potential using reasonable and supportable assumptions that represent

management’s best estimate of the set of economic conditions that will exist over

the useful life of the asset (cf. IPSAS 31.29).

Internally generated goodwill is not recognized as an asset because it is not an

identifiable resource (i.e., it is not separable nor does it arise from binding

IPSAS 31: Intangible Assets

202 IPSAS Explained

arrangements − including rights from contracts or other legal rights − controlled

by the entity that can be measured reliably at cost (cf. IPSAS 31.46).

For the assessment whether an internally generated intangible asset meets the

criteria for recognition, a public sector entity classifies the generation of the asset

into a research phase and a development phase (cf. IPSAS 31.50). If the research

phase cannot be distinguished from the development phase, then the entity should

treat the expenditure on that project as if it were incurred in the research phase

only, i.e., the expenditure is expensed. Expenditures on an intangible asset arising

from research (or from the research phase of an internal project) may not be

recognized as an asset (cf. IPSAS 31.52). IPSAS 31.53 explains that in the research

phase of an internal project, an entity cannot demonstrate that an intangible asset

exists that will generate probable future economic benefits or service potential.

Therefore, this expenditure is recognized as an expense when it is incurred.

In contrast to the research phase, the proposed standard requires recognition of an

intangible asset in the development phase because the development phase of a

project is further advanced than the research phase and the entity may be able to

demonstrate that the asset will generate probable future economic benefits or

service potential.

According to IPSAS 31.55 an intangible asset arising from development (or from

the development phase of an internal project) shall be recognized if, and only if,

an entity can demonstrate all of the following:

a) The technical feasibility of completing the intangible asset so that it will

be available for use or sale

b) Its intention to complete the intangible asset and use or sell it

c) Its ability to use or sell the intangible asset

d) How the intangible asset will generate probable future economic benefits

or service potential

e) The availability of adequate technical, financial and other resources

to complete the development and to use or sell the intangible asset

f) Its ability to measure reliably the expenditure attributable to the intangible

asset during its development

To demonstrate how an intangible asset will generate probable future economic

benefits or service potential, an entity assesses the future economic benefits or

service potential to be received from the asset using the principles in either

IPSAS 21, Impairment of Non-Cash-Generating Assets or IPSAS 26, Impairment

of Cash-Generating Assets as appropriate (cf. IPSAS 31.58).

IPSAS 31: Intangible Assets

Ernst & Young 203

According to IPSAS 31.61, internally generated brands, mastheads, publishing titles,

lists of customers or users of an entity’s services and items similar in substance shall

not be recognized as intangible assets.

The regulations on intangible heritage assets (e.g., recordings of significant

historical events or rights to use the likeness of a significant public person in postage

stamps or collectible coins) are comparable to those in IPSAS 17, Property, Plant

and Equipment. Therefore, the Standard does not require an entity to recognize

intangible heritage assets. If an entity does recognize intangible heritage assets,

it must apply disclosure requirements and may, but is not required to, apply the

measurement requirements of IPSAS 31.

Initial measurement

In general, an intangible asset that is separately acquired through an exchange

transaction is measured initially at cost (cf. IPSAS 31.31). The cost of a separately

acquired intangible asset comprises:

► Its purchase price, including import duties and non-refundable

purchase taxes, after deducting trade discounts and rebates; and

► Any directly attributable cost of preparing the asset for its intended

use.

An intangible asset that is acquired free of charge, or for nominal consideration,

through a non-exchange transaction is measured at its fair value at the date it is

acquired (cf. IPSAS 31.31). Examples of such intangible assets are airport landing

rights, licenses to operate radio or television stations or import licenses. If for

example a Nobel Prize winner bequeaths free of charge his or her personal papers,

including the copyright to his or her publications to the national archives (which are

a public sector entity), then these intangible assets should be measured at their fair

value at the acquisition date.

IPSAS 31: Intangible Assets

204 IPSAS Explained

The following graph gives a general overview of the initial recognition and

measurement of intangible assets:

Figure 40: Initial recognition and measurement of intangible assets

Subsequent measurement

For subsequent measurement of an intangible asset, an entity has the choice to use

the cost model or the revaluation model as its accounting policy (cf. IPSAS 31.71).

If an intangible asset is accounted for using the revaluation model, all the other

assets in its class shall also be accounted for using the same model, unless there is

no active market for those assets. The cost model and the revaluation model applied

to intangible assets are similar to IPSAS 17.43 et seq.

Figure 41 summarizes the two models applied under IPSAS for the subsequent

measurement of intangible assets:

A. Definition: „identifiable non-monetary assets without physical substance“ (cf. IPSAS 31.16)

1) An asset is identifiable if it either (cf. IPSAS 31.19):

a) is separable; or

b) arises from binding arrangements (including rights from contracts or other legal rights).

2) Control of an asset (cf. IPSAS 31.21):

An entity controls an asset if the entity has the power to obtain the future economic benefits or service

potential flowing from the underlying resource and to restrict the access of others to those benefits or

that service potential.

B. Recognition criteria: An intangible asset shall be recognized if, and only if:

a) It is probable that the expected future economic benefits or service potential that are

attributable to the asset will flow to the entity; and

b) The cost or fair value of the asset can be measured reliably.

Internally generated

intangible assets

Intangible

heritage assets

IPSAS 31 does

not require to

recognize an

asset (cf. IPSAS

31.11).

Internally

generated

goodwill

Research cost

Shall not be

recognized as

an asset (cf.

IPSAS 31.46).

Shall be

recognized as an

expense when

incurred (cf.

IPSAS 31.52)

Measurement at

cost (cf. IPSAS

31.31 et seq.).

Initial recognition and measurement

of intangible assets

Development

cost

Shall be

recognized as an

asset (cf. IPSAS

31.55)

Acquired intangible assets

Measurement at

fair value at the

date of

acquisition (cf.

IPSAS 31.43).

acquired through

an exchange

transaction

acquired through

a non-exchange

transaction

IPSAS 31: Intangible Assets

Ernst & Young 205

Figure 41: Subsequent measurement of intangible assets

An intangible asset with a finite useful life is amortized, while an intangible asset

with an indefinite useful life is not. Therefore, an entity must assess whether the

useful life of an intangible asset is finite or indefinite. According to ED 40.107, the

depreciable amount of an intangible asset with a finite useful life is allocated on a

systematic basis over its useful life. Amortization begins when the asset is available

for use. Amortization ceases at the earlier of the date that the asset is classified as

held for sale and the date that the asset is derecognized. The amortization method

used should reflect the pattern in which the asset’s future economic benefits or

service potential are expected to be consumed by the entity. If that pattern cannot

be determined reliably, the straight-line method should be used.

An intangible asset should be regarded by the entity as having an indefinite useful

life when, based on an analysis of all of the relevant factors, there is no foreseeable

limit to the period over which the asset is expected to generate net cash inflows for,

or provide service potential to, the entity (cf. ED 40.98). An intangible asset with

an indefinite useful life may not be amortized. The useful life of an intangible asset

that is not being amortized is reviewed each reporting period to determine whether

events and circumstances continue to support an indefinite useful life assessment

for that asset (impairment test). If they do not, the change in the useful life

assessment from indefinite to finite is accounted for as a change in an accounting

estimate in accordance with IPSAS 3.

Web site costs

Contrary to IAS 38, the IPSAS on intangible assets contains application guidance

on web site costs based on the Standing Interpretations Committee’s Interpretation

(SIC) 32, Intangible Assets − Web Site Costs. The application guidance is included as

Appendix A of IPSAS 31 and forms an integral part of the Standard.

Effective date

Periods beginning on or after 1 April 2011.

Cost model

(IPSAS 31.73)

Intangible asset shall be carried

at its cost less any accumulated

amortization and any accumulated

impairment losses.

Revaluation model

(IPSAS 31.74)

Intangible asset shall be carried at a

revalued amount, being its fair value

at the date of the revaluation less

any subsequent accumulated

amortization.

Subsequent measurement

of intangible assets

IPSAS 32: Service Concession Arrangements: Grantor

206 IPSAS Explained

IPSAS 32: Service Concession Arrangements: Grantor

Objective

IPSAS 32 establishes the accounting and reporting requirements for the grantor

in a service concession arrangement. In these kinds of arrangements the grantor

is a public sector entity. Service concession arrangements in the public sector are

characterized by binding arrangements that involve private sector participation in

the development, financing, operation and/or maintenance of assets used to provide

public services. IPSAS 32 intention is to create symmetry with IFRIC 12 on relevant

accounting issues (i.e., liabilities, revenues, and expenses) from the grantor’s point

of view.

The IFRS on which the IPSAS is based

IPSAS 32 is a public sector specific standard. Nevertheless, it is intended to “mirror”

IFRIC Interpretation 12, Service Concession Arrangements. IFRIC 12 sets out the

accounting requirements for the private sector operator in a service concession

arrangement. Here, the operator is a private sector entity. IPSAS 32 also contains

extracts from SIC Interpretation 29, Service Concession Arrangements: Disclosures.

Content

Principal definitions

A service concession arrangement can be described as a “public private

partnership” that contains an asset as well as a service component. IPSAS 32

defines a service concession arrangement as “... a binding arrangement between

a grantor and an operator in which:

a) The operator uses the service concession asset to provide a public service

on behalf of the grantor for a specified period of time; and

b) The operator is compensated for its services over the period of the service

concession arrangement.

A binding arrangement describes contracts and other arrangements that confer

similar rights and obligations on the parties to it as if they were in the form of a

contract.

A grantor is the entity that grants the right to use the service concession asset to

the operator; whereas the operator is the entity that uses the service concession

asset to provide public services subject to the grantor’s control of the asset.

IPSAS 32: Service Concession Arrangements: Grantor

Ernst & Young 207

A service concession asset is an asset (typically property, plant, and equipment or

an intangible asset) used to provide public services in a service concession

arrangement that:

a) Is provided by the operator which:

i) The operator constructs, develops, or acquires from a third party; or

ii) Is an existing asset of the operator; or

b) Is provided by the grantor which:

i) Is an existing asset of the grantor; or

ii) Is an upgrade to an existing asset of the grantor.

A whole-of-life asset is an asset used in a service concession arrangement for its

entire useful life.

Scope

An arrangement within the scope of this Standard typically involves an operator

constructing or developing an asset used to provide a public service or upgrading

an existing asset (e.g., by increasing its capacity) and operating and maintaining

the asset for a specified period of time. The operator is compensated for its services

over the period of the arrangement.

IPSAS 32.6 specifies that the standard applies only to service concession

arrangements where the operator provides public services related to the service

concession asset on behalf of the grantor. Thus, it does not apply to arrangements

that do not involve the delivery of public services and to arrangements that contain

service and management components where the asset is not controlled by the

grantor (e.g., outsourcing, service contracts, or privatization). Arrangements that

are not within the scope of IPSAS 32 would be accounted for using other IPSASs,

as appropriate to their specific terms and conditions.

Recognition of a service concession asset

IPSAS 32 uses the same principles for determining whether to recognize a service

concession asset as IFRIC 12. Providing a “mirror image” to IFRIC 12, IPSAS 32

requires the grantor to recognize an asset which is provided by the operator as a

service concession asset if the following conditions are met:

a) The grantor controls or regulates what services the operator must provide

with the asset, to whom it must provide them, and at what price; and

b) The grantor controls – through ownership, beneficial entitlement or otherwise –

any significant residual interest in the asset at the end of the term of the

arrangement.

IPSAS 32: Service Concession Arrangements: Grantor

208 IPSAS Explained

The same principles apply if the operator upgrades an existing asset of the grantor.

For a whole-of-life asset, only the conditions in par. (a) need to be met.

Only assets provided by the operator (existing asset of the operator, constructed

or developed, purchased or an upgrade to an existing asset of the grantor) are

recognized. Existing assets of the grantor (other than upgrades thereto) used

in a service concession arrangement that meet the above mentioned two conditions

(or only par. (a) in the case of a whole-of-live asset) are reclassified as service

concession assets – no additional asset and related liability are recognized in such

cases.

One area where IPSAS 32 provides further guidance relates to assets that were

constructed or developed by the operator to illustrate how the service concession

assets are be recognized in accordance with IPSAS 17, Property, Plant, and

Equipment or IPSAS 31, Intangible Assets.

Measurement of a service concession asset

In general, a grantor shall initially measure a service concession asset recognized

in accordance with IPSAS 32.9 (or IPSAS 32.10 for a whole-of-life asset) at its fair

value. Only in the case of an existing asset where the grantor performs a

reclassification the reclassified service concession asset shall be accounted for in

accordance with IPSAS 17, Property, Plant, and Equipment or IPSAS 31, Intangible

Assets, as appropriate (cf. IPSAS 32.12). After initial recognition or reclassification,

service concession assets shall be accounted for as a separate class of assets in

accordance with IPSAS 17 or IPSAS 31, as appropriate.

Recognition of the liability in a service concession arrangement

In general, the recognition of a service concession asset implies recognition

of a liability. Only when an existing asset of the grantor is reclassified as a service

concession asset then the grantor shall not recognize a liability. The type of liability

the grantor recognizes under IPSAS 32 depends on how the grantor compensates

the operator.

Measurement of the liability in a service concession arrangement

The liability recognized in a service concession arrangement shall initially be

measured at the same amount as the service concession asset, i.e., fair value.

This amount will be adjusted by the amount of any other consideration, e.g., cash,

from the grantor to the operator, or from the operator to the grantor.

With regard to the compensation the grantor receives, IPSAS 32 differs between

two compensation models. The so-called “financial liability model” applies when

the grantor performs payments to the operator. The “grant of a right to the

operator model” applies when the operator is compensated by means such as:

IPSAS 32: Service Concession Arrangements: Grantor

Ernst & Young 209

a) Granting the operator the right to earn revenue from third-party users of the

service concession asset; or

b) Granting the operator access to another revenue-generating asset for the

operator’s use (e.g., a private parking facility adjacent to a public facility).

The Financial Liability Model

In the financial liability model the grantor compensates the operator for the

construction, development, acquisition, or upgrade of a service concession asset

and service provision by making a predetermined series of payments to the

operator. IPSAS 32.18 provides where the grantor has an unconditional obligation

to pay cash or another financial asset for the services the operator performs, the

grantor shall account for the liability as a financial liability. Thus, IPSAS 28, Financial

Instruments: Presentation, the derecognition requirements in IPSAS 29, Financial

Instruments: Recognition and Measurement, and IPSAS 30, Financial Instruments:

Disclosures, apply to the financial liability, except as required by IPSAS 32.

For the predetermined series of payment to the operator the grantor shall allocate

the payments and account for the according to their substance as a reduction in the

financial liability, a finance charge, and charges for services provided by the

operator. Finance charges and charges for services provided by the operator shall be

expensed. If the asset and service components of a service concession arrangement

are separately identifiable, the amount allocated to each component is determined

by reference to their relative fair values. If they are not, the components are

determined using estimation techniques.

The Grant of a Right to the Operator Model

In the grant of a right to the operator model the grantor compensates the operator

for the construction, development, acquisition, or upgrade of a service concession

asset by granting the operator the right to earn revenue from third-party users of

the service concession asset or another revenue-generating asset. In this model the

grantor receives a service concession asset whereas the operator an intangible asset

that would have given rise to revenue for the grantor. This exchange of assets can

be seen as an exchange transaction of dissimilar assets. As the service concession

arrangement covers a period of time, the grantor does not recognize the revenue

immediately. The liability in the grant of a right to the operator model recognizes is

recognized for any portion of the revenue that is not yet earned. Following IPSAS

32.25 the revenue is recognized according to the economic substance of the service

concession arrangement, and the liability is reduced as revenue is recognized.

Dividing the arrangement

If the grantor compensates the operator partly by making payments and partly by

the grant of a right to the operator, it is necessary to account separately for each

portion of the total liability. The amount initially recognized for the total liability is

IPSAS 32: Service Concession Arrangements: Grantor

210 IPSAS Explained

the same amount as the fair value of the service concession asset. The grantor shall

account for each part of the liability in accordance with IPSAS 32.18-26, i.e., either

according to the provisions of the financial liability model or to the provisions of the

grant of a right to the operator model.

Other liabilities, commitments, contingent liabilities, contingent assets and other

revenues

Other liabilities, commitments, contingent liabilities, and contingent assets arising

from a service concession arrangement shall be accounted for in accordance with

IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets, as well as IPSAS

28, 29 and 30. Other revenue is recognized in accordance with IPSAS 9, Revenue

from Exchange Transactions.

In the case that the service concession arrangements contains a revenue-sharing

provision, the grantor recognizes revenue as it is earned, in accordance with the

substance of the service concession arrangement, after any contingent event is

deemed to have occurred (e.g., the achievement of a revenue threshold). The

grantor applies IPSAS 19 to determine when the contingent event has occurred.

The table below contrasts IPSAS 32 against IFRIC 12. It thereby reflects the mirror

approach taken by the IPSASB.

IPSAS 32, Service Concession

Arrangements: Grantor

IFRIC Interpretation 12, Service

Concession Arrangements

Objective IPSAS 32 sets out the accounting

and reporting requirements for the

grantor, which is a public sector

entity, in a service concession

arrangement.

IFRIC 12 provides guidance on

the accounting by an operator,

which is a private sector entity,

for a public-to-private service

concession arrangement.

Scope ► IPSAS 32 applies to all public

sector entities (other than

Government Business

Enterprises) using the accrual

basis of accounting.

► IPSAS 32 addresses

arrangements that involve the

operator providing public

services related to the service

concession asset on behalf of

the grantor.

Under the conditions that the

a) grantor controls or regulates

what services the operator

must provide with the asset, to

whom it must provide them,

IFRIC 12 applies to public-to-

private service concession

arrangements if:

a) The grantor controls or

regulates what services the

IPSAS 32: Service Concession Arrangements: Grantor

Ernst & Young 211

IPSAS 32, Service Concession

Arrangements: Grantor

IFRIC Interpretation 12, Service

Concession Arrangements

and at what price; and

b) grantor controls – through

ownership, beneficial

entitlement or otherwise — any

significant residual interest in

the asset at the end of the term

of the arrangement IPSAS 32

applies.

Whole of life assets are within the

scope of IPSAS 32 if the conditions

in IPSAS 32.10 are met.

operator must provide with

the infrastructure, to whom

it must provide them, and

at what price; and

b) The grantor controls —

through ownership,

beneficial entitlement or

otherwise — any significant

residual interest in the

infrastructure at the end of

the term of the

arrangement.

Whole of life assets are within the

scope of IFRIC 12 if the

conditions above under a) are

met.

IFRIC 12 applies to both:

a) Infrastructure that the

operator constructs or

acquires from a third party

for the purpose of the

service arrangement; and

b) Existing infrastructure to

which the grantor gives the

operator access for the

purpose of the service

arrangement.

Scope

exclusion

► Arrangements that do not

involve the delivery of public

services

► Arrangements that involve

service and management

components where the asset is

not controlled by the grantor

(e.g., outsourcing, service

contracts, privatization)

► Does not specify the

accounting for infrastructure

that was held and recognised

as property, plant and

equipment by the operator

before entering the service

arrangement. Here the

derecognition requirements

of IAS 16 apply.

IPSAS 32: Service Concession Arrangements: Grantor

212 IPSAS Explained

IPSAS 32, Service Concession

Arrangements: Grantor

IFRIC Interpretation 12, Service

Concession Arrangements

Recognition

of an asset/

infrastruc-

ture

Under the conditions that the

a) grantor controls or regulates

what services the operator

must provide with the asset, to

whom it must provide them,

and at what price; and

b) grantor controls – through

ownership, beneficial

entitlement or otherwise — any

significant residual interest in

the asset at the end of the term

of the arrangement

the grantor shall recognize a

service concession asset provided

by the operator and an upgrade to

an existing asset of the grantor as a

service concession asset.

Infrastructure within the scope of

IFRIC 12 (see Scope-section)

shall not be recognized as

property, plant and equipment of

the operator.

The operator shall recognise an

intangible asset to the extent

that it receives a right (a licence)

to charge users of the public

service.

Initial

measure-

ment of an

asset

The grantor shall initially measure

the service concession asset at its

fair value except in the case when

the asset is already an existing

asset of the grantor. Then the

grantor shall reclassify the asset as

a service concession asset. Here

IPSAS 17 and 31 apply.

Initial measurement of the

intangible asset is based on IAS

38.

Subsequent

measure-

ment of an

asset

After initial recognition or

reclassification, service concession

assets shall be accounted for as a

separate class of assets in

accordance with IPSAS 17 or IPSAS

31.

Subsequent measurement of the

intangible asset is based on IAS

38.

Recognition

of liabilities

associated

with a

service

concession

asset

Where the grantor recognizes a

service concession asset, the

grantor shall also recognize a

liability. In case that an existing

asset of the grantor is reclassified

as a service concession asset, the

grantor shall not recognize a

N/A

IPSAS 32: Service Concession Arrangements: Grantor

Ernst & Young 213

IPSAS 32, Service Concession

Arrangements: Grantor

IFRIC Interpretation 12, Service

Concession Arrangements

liability except in circumstances

where additional consideration is

provided by the operator.

Measure-

ment of

liabilities

associated

with an asset

The liabilities shall be initially

measured at the same amount as

the service concession asset,

adjusted by the amount of any

other consideration (e.g., cash)

from the grantor to the operator,

or vice versa. Here, either the

“financial liability” model or the

“grant of a right

to the operator” model applies.

Financial liability model

(cf. IPSAS 32.18 et seq.)

Where the grantor has an

unconditional obligation to pay

cash or another financial asset to

the operator for the construction,

development, acquisition, or

upgrade of a service concession

asset, the grantor shall account for

the liability as financial liability.

IPSAS 28, 29 and 30 apply to the

financial liability. The grantor shall

allocate the payments to the

operator and account for them

according to their substance as a

reduction in the liability, a finance

charge, and charges for services

provided by the operator (as

expenses).

Grant of a Right to the Operator

Model

Where the grantor grants the

operator the right to earn revenue

from third-party users or another

revenue-generating asset, the

grantor shall account for the

liability as the unearned portion of

the revenue arising from the

exchange of assets between the

grantor and the operator. The

grantor shall recognize and reduce

N/A

IPSAS 32: Service Concession Arrangements: Grantor

214 IPSAS Explained

IPSAS 32, Service Concession

Arrangements: Grantor

IFRIC Interpretation 12, Service

Concession Arrangements

the liability according to the

economic substance of the service

concession arrangement.

Recognition

and mea-

surement of

arrange-

ment consi-

deration

The grantor shall account for

revenue from a service concession

arrangement, other than revenue

as defined in the “Grant of a Right

to the Operator Model” in

accordance with IPSAS 9, Revenue

from Exchange Transactions.

In general, the operator shall

recognize and measure revenue

based on IASs 11 and 18 for the

services it perform. If the

operator performs more than one

service (ie construction or

upgrade services and operation

services) under a single contract

or arrangement, consideration

received or receivable shall be

allocated by reference to the

relative fair values of the services

delivered, when the amounts are

separately identifiable.

Payments related to

construction or upgrade

services:

► Revenue and costs shall be

accounted in accordance with

IAS 11

► The consideration received

from the grantor or the

receivable by the operator

shall be recognised at its fair

value.

► Depending on the

consideration the operator

has received IFRIC differs

between a financial asset and

an intangible asset.

► The operator shall recognise

a financial asset to the extent

that it has an unconditional

contractual right to receive

cash or another financial

asset from or at the direction

of the grantor for the

construction services; the

grantor has little, if any,

discretion to avoid payment,

IPSAS 32: Service Concession Arrangements: Grantor

Ernst & Young 215

IPSAS 32, Service Concession

Arrangements: Grantor

IFRIC Interpretation 12, Service

Concession Arrangements

usually because the

agreement is enforceable by

law. Subsequent

measurement of the financial

asset is based on IAS 32, IFRS

7 and 9.

Payments related to operation

services:

► Revenue and costs shall be

accounted in accordance with

IAS 18

Contractual

obligations

to restore or

maintain the

infra-

structure to

a specified

level of ser-

viceability

N/A Contractual obligations to

maintain or restore

infrastructure, except for any

upgrade element, shall be

recognised and measured in

accordance with IAS 37.

Table 21: Comparative analysis of IPSAS 32 and IFRIC 12

Effective Date

Periods beginning on or after 1 January 2014.

IPSAS ED 46: Recommended Practice Guideline

216 IPSAS Explained

IV. Overview of Current Exposure Drafts

IPSAS ED 46: Recommended Practice Guideline:

Reporting on the Long-Term Sustainability of a Public

Sector Entity’s Finances

Preliminary remarks

The development of guidance about reporting on the long-term sustainability of

governments arises primarily from the IPSASB’s project on accounting for social

policy obligations which originally started in 2002. The IPSASB issued two major

pronouncements as part of this project: ED 34, Social Benefits: Disclosure of Cash

Transfers to Individuals or Households as well as a Consultation Paper, Social

Benefits: Issues in Recognition and Measurement in March 2008. Respondents

to these two pronouncements were of the view that financial statements cannot

convey to users sufficient information about the long-term financial implications

of governmental programs providing social benefits. Based on these results the

IPSASB decided to initiate a project on long-term fiscal sustainability of

governments.

During this project the Board decided not to issue a standard on reporting on

the long-term sustainability of a public sector entity’s finances but to develop

non-mandatory guidelines. This decision was the rationale for the IPSASB to

come up with the term “Recommended Practice Guideline” (RPG). The issuance

of authoritative guidance is seen as premature as reporting on long-term fiscal

sustainability in the GPFRs is an area where practice is developing and the IPSASB

wants to encourage innovative and flexible approaches (see ED 46.BC6).

Par. 2 of ED 46 clarifies that reporting of information in accordance with this RPG

represents good practice. ED 46 is not a proposed IPSAS, and therefore an entity is

not required to comply with it in order to comply with IPSASs. Thus, public sector

entities adopting IPSASs for the first time need not comply with this RPG.

Nevertheless, the IPSASB recommends that if a public sector entity reports on the

long-term sustainability of its finances then it is encouraged to follow this RPG.

IPSAS ED 46: Recommended Practice Guideline

Ernst & Young 217

Objective

Reporting on the long-term sustainability of an entity’s finances provides

information on the impact of current policies and decisions made at the reporting

date and supplements information in the general purpose financial statements.

The RPG intends to give guidance to preparers on how to report on the long-term

sustainability of the finances of a public sector entity. The RPG should guide

preparers on how to supplement the statements of financial performance and

financial position by presenting projections of inflows and outflows and

complementary information on an entity’s projected long-term fiscal sustainability.

Based on transparent assumptions, reports on the fiscal sustainability of public

sector entities aim to provide an indication of the projected long-term fiscal

sustainability of the reporting entity for a pre-defined time horizon.

The IFRS on which the IPSAS is based

IPSASB ED 46 is a public sector specific project of the IPSASB.

Content

Principal definitions

Fiscal capacity is the ability of a public sector entity to meet financial

commitments, such as the servicing and repayment of debt and liabilities

to creditors, on a continuing basis over the period of the projections without

increasing levels of taxation.

Following Par. 7 of the ED, inflows are defined as cash and cash equivalents

projected to accrue to the reporting entity over the time horizon of the projections.

Long-term fiscal sustainability is the ability of an entity to meet service delivery and

financial commitments both now and in the future.

Service capacity is the extent to which (a) the entity can maintain services at the

volume and quality provided to current recipients at the reporting date and (b) meet

obligations related to entitlement programs for current and future beneficiaries.

And in analogy with inflows, outflows are cash and cash equivalents related to

expenditure projected to be incurred by the reporting entity over the time horizon of

the projections.

Vulnerability is

a) The extent to which an entity is fiscally dependent upon funding sources

outside its control, principally inter-governmental transfers, and

b) The extent to which an entity has powers to vary existing taxation levels or

other revenue sources and to create new sources of taxation and revenue.

IPSAS ED 46: Recommended Practice Guideline

218 IPSAS Explained

Scope

Par. 3 of ED 46 clarifies that the scope of the RPG includes all an entity’s projected

flows and is not limited to only those inflows or outflows related to programs which

provide social benefits. Also environmental sustainability is not explicitly addressed

by this RPG. However, the IPSASB refers to environmental factors that could have

a significant financial impact on public sector entities and should therefore be

considered when cash flows are projected and the long-term fiscal sustainability

of an entity is assessed. As other IPSASs, the RPG applies to all public sector

entities, except for GBEs. The scope of the RPG is not limited to the consolidated

national and whole-of-government levels.

The ED states that measures of long-term fiscal sustainability are of a broader

scope than measures of financial position derived from the financial statements.

Therefore, the definitions of inflows and outflows go beyond the definitions of assets

and liabilities. They comprise projected inflows and outflows related to the provision

of goods and services under the current policy of a government over a pre-defined

time horizon. In consequence, commitments related to decisions made by the

reporting entity [or its representatives] on or before the reporting date are taken

into account. This means that this definition comprises obligations that do not

correspond to the definition and/or recognition criteria for liabilities. Regarding the

inflow side they take into account future taxation receipts, contributions as well as

inter-governmental transfers which might not correspond to the definition of, and/or

recognition criteria for, assets.

Other than financial statements, reporting on the long-term sustainability of public

finances comprises financial and non-financial information about current economic

and demographic conditions, assumptions about national and global trends such as

productivity, etc.

Reporting boundary

Despite the fact that most governments have adopted a reporting boundary for

long-term fiscal sustainability projections determined by statistical bases of

accounting or by budgetary bases of accounting, the IPSASB is of the view that

entities and activities included in long-term fiscal sustainability projections should be

the same as those for the financial statements (cf. ED 46.11). This would enhance

the understandability of projections and increases their usefulness to the users of

general purpose financial reports. If the reporting boundary for the general purpose

financial statements deviates from the reporting boundary for the long-term fiscal

sustainability projections, then those entities should be identified, and, where

possible, the estimated impact on the projections disclosed.

IPSAS ED 46: Recommended Practice Guideline

Ernst & Young 219

Nevertheless, the IPSASB acknowledges that in many public sector entities,

reporting boundaries for financial statements and long-term fiscal sustainability

projections differ, and therefore states that:

► At the consolidated national or whole-of-government level, it may be considered

appropriate to disclose information based on the General Government Sector

(GGS), as defined in the System of National Accounts (also, a reference to IPSAS

22, Disclosure of Financial Information about the General Government Sector, is

made).

► It may also be considered appropriate to disclose information on long-term fiscal

sustainability based on a budgetary basis of accounting.

In both cases, it is underlined that an explanation is provided of how the boundary

for the statistical or budget sector differs from that of the reporting entity.

Should a public sector entity report on long-term fiscal sustainability?

In general, the IPSASB is of the view that reporting on long-term fiscal sustainability

should not be limited to particular levels of government. However, such reporting

might not be appropriate for all entities. In order to answer the question if a public

sector entity should report on long-term fiscal sustainability, the entity needs to

assess in a first step whether there are potential users for prospective financial

information. There are likely to be users for long-term fiscal sustainability

information in the case that one or more of the following characteristics of a public

sector entity are fulfilled:

a) Significant tax and/or other revenue raising powers

b) Powers to incur debt

c) Wide decision-making powers over service delivery levels

According to ED 46.BC12, reporting on the long-term sustainability of a public

sector entity’s finances is likely to be relevant at the whole-of-government level,

consolidated national level, and for major sub-national entities such as regions,

provinces, states and large local government entities (for example, cities), which

have tax raising powers enabling them to generate a significant proportion of their

total revenues.

The presentation of projections of prospective inflows and outflows

Information presented by a public sector entity on its long-term fiscal sustainability

consists mainly of projections of inflows and outflows starting in the current

reporting period and ending in a pre-defined period of time. The RPG expresses that

a single presentation approach is likely not able to satisfy the objectives of financial

reporting. Therefore the information may be presented in a statement or through

graphs along with narrative reporting. Projections may be displayed in tabular

statements or graphs which provide insights into the activities and programs that

IPSAS ED 46: Recommended Practice Guideline

220 IPSAS Explained

give rise to outflows and identify the sources of inflows. According to the IPSASB,

on the one hand multi-columnar presentation of a large number of time periods

between the reporting date and the end of the time horizon is able to provide a more

complete information set. On the other hand, preparers risk information overload

and the impairment of understandability. In contrast to presenting a large number of

time periods, a focus on a very small number may neglect trends arising from key

events between time periods. Therefore, the preparer of fiscal sustainability reports

needs to find the right level of time periods to be considered. For the selection of an

appropriate time horizon ED 36.23 recommends that an entity balances the

qualitative characteristics of verifiability and faithful representation. Also the

characteristics of a reporting entity, such as the longevity of key programs, the

estimated lives of major infrastructure assets, or the time horizons adopted by other

government bodies and agencies providing prospective information, might be

factors in considering an adequate time horizon. It is good practice for reporting

entities to explain the reason for the time horizons that they select.

Next to narrative reporting and graphical presentation a statement focusing on

information on fiscal sustainability needs to be complemented by the use of

indicators. The RPG states that projections of net debt are likely to be one of the

main financial indicators for many reporting entities. Other important indicators

are for example total gross debt, net worth, net financial worth, fiscal gap, inter-

temporal budget gap, net debt/total revenues or fiscal dependency. The definitions

of these indicators can be found in the Glossary of Indicators, which can be found in

Appendix A of the RPG.

The RPG emphasizes that formats used for tabular statements as well as graphical

disclosure should be consistently used between reporting periods and that changes

of formats between reporting periods should be disclosed. A supplementary

statement that shows the changes in projections between reporting dates and the

reasons for those changes may also help explain modifications between reporting

periods.

The IPSASB has noted that projected outflows relating to obligations as a result

of past decisions and projected inflows related to sovereign powers and taxation

powers may not be recognized or may only be partially recognized in the statement

of financial position and the statement of financial performance. The following graph

illustrates the information which is currently covered as well as not covered by a

statement of financial position according to IPSAS:

IPSAS ED 46: Recommended Practice Guideline

Ernst & Young 221

Figure 42: Information provided and not provided in the statement of financial position

Source: IPSASB, ED 46: Recommended Practice Guideline, Reporting on the Long-Term Sustainability

of a Public Sector Entity’s Finances, October 2011, p. 15

Figure 42 shows that the current statement of financial position according to IPSAS

does not provide information on expected resources to be realized in the future

(e.g., future tax revenue) as well as expected obligations to be settled in future

(e.g., programs providing social benefits). The IPSASB is of the view that users need

information on prospective inflows and outflows in order to supplement information

on the entity’s financial position in the financial statements. Therefore, projections

should begin with the cash flows related to the settlement of liabilities and cash-

generating assets recognized in the statement of financial position of the entity.

Then the perspective of short-term solvency should be addressed, which means that

cash flows related to commitments and powers not recognized as assets and

liabilities in the statement of financial position should be incorporated. Finally,

also obligations and inflows that may not be settled for many years are considered.

Addressing the dimensions of fiscal sustainability

ED 46.27 states that the presentation of information on long-term fiscal

sustainability by public sector entities should be faithfully representative.

This implies the inclusion of narrative discussion of the projections in order

to put them in context. Faithful representation is achieved by including narrative

information on both a historical and prospective basis along three inter-related

dimensions of fiscal sustainability:

► Fiscal capacity

► Service capacity

► Vulnerability

Past cash flows Future cash flows

Assets obtained and

realized to date

Liabilities incurred and

settled to date

Present economic benefits

realized in the future

(Assets)

Expected resources to be

realized in the future

Expected obligations to be

settled in the future

Present economic sacrifices

settled in future (Liabilities)

Outflows

Inflows

IPSAS ED 46: Recommended Practice Guideline

222 IPSAS Explained

With regard to fiscal capacity, the level of net debt is seen as critical, as it depicts

the amount expended on the past provision of goods and service which needs to be

serviced and financed in the future. Projections of current policies for the provision

of goods and services, and of current policies for taxation and raising other

revenues, allow to present projected levels of net debt. The users of long-term

sustainability reports are then able to assess the fiscal capacity of an entity, i.e., its

ability to raise and maintain certain levels of debt.

Service capacity gives users an indication about the amounts available for the

provision of goods and services under given policies (mainly policies for taxation

and raising other revenues and policies for raising and maintaining debt into the

future). Based on this information, users are able to relate this with an entity’s

service commitments.

Vulnerability gives an indication of the proportion of total inflows that are received

from entities at other levels of government. Entities which have a high vulnerability

typically have limited control over the sustainability of its finances. By projecting

policies for the provision of goods and services, and policies for managing debt,

the amount of revenues required to maintain such policies are shown in a long-term

sustainability report. Users can then assess this information against the entity’s

revenue-raising ability and thus evaluate vulnerability. The IPSASB considered that

the concept of vulnerability is especially important for public sector entities at sub-

national levels which have limited taxation powers and are therefore exposed to

decisions, over which they have no or very limited control, taken by other entities

at other levels of government.

Disclosure of principles and methodologies

Here, the IPSASB decided not to make firm recommendations on best practice

because the scope of the RPG includes all public sector entities and practice for

reporting on long-term fiscal sustainability that is appropriate at one level of

government may not be suitable elsewhere in the public sector. Also the early stage

of development of this kind of reporting is mentioned (cf. ED 46.BC20).

According to ED 46, the basis of preparation of projections should be clarified to the

users (cf. ED 46.38). Principles, assumptions and methodological approaches that

build the basis for projections should be disclosed. In the following, only an overview

of the disclosures can be given:

1) Updating of projections and frequency of reporting: The date at which a full

set of projections was made and the basis and timing of subsequent updating

should be disclosed. ED 46 acknowledges that an annual update might not be

feasible for all public sector entities.

2) Current and future policy: Where flows for particular programs and activities

are individually modeled, information is most useful if it is assumed that current

policy is held constant through the entire projection period.

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Ernst & Young 223

3) Approach to revenue flows: The main sources of taxation and other

revenue flows, such as inter-governmental transfers, should be identified.

Their significance to an entity’s revenue sources should be shown.

4) Demographic and economic assumptions: An entity should disclose the

key assumptions that underpin projections. These comprise information

on economic growth rates, inflation and demographic assumptions, such

as fertility, mortality and migration rates, and workforce participation rates.

Such disclosures may extend to assumptions about the fiscal impact of

environmental factors.

5) Approach to age-related and non-age-related programs: Age-related

programs may be individually modeled while non-age-related programs may

be projected to increase in line with other variables, such as GDP, or to be

constant in real terms.

6) Impact of legal requirements and policy frameworks: ED 46 encourages

disclosure of key aspects of governing legislation, underlying macro-economic

policy and fiscal frameworks.

7) Inflation and discount rates: Entities should indicate how they deal with

inflation, in particular whether inflation has been taken into account in making

projections or whether projections are made at current prices.

8) Sensitivity analysis: ED 46 encourages disclosure of the sensitivity of

demographic and economic assumptions and, at a high level, the results

of any key sensitivity analyses. Entities also need to indicate how they deal

with inflation.

9) Reliability of projections: Based on the fact that it is unlikely that projections

over the time horizon will match the actual outcome, users need to be informed

about that. Therefore, steps taken to ensure that key assumptions

underpinning projections are realistic should be disclosed.

Current status of the project

In November 2009, the IPSASB published the Consultation Paper, Reporting on the

Long-Term Sustainability of Public Finances. Comments on this paper built the basis

for the development of this ED of a RPG. Currently, the IPSASB has issued ED 46 for

comment and seeks feedback until end of February 2012.

IPSAS ED 47: Financial Statement Discussion and Analysis

224 IPSAS Explained

IPSAS ED 47: Financial Statement Discussion and

Analysis

Objective

The objective of the proposed Standard is to prescribe the manner in which financial

statement discussion and analysis (FSDA) should be prepared and presented to

assist users to understand an entity’s general purpose financial statements. In order

to allow entities to prepare and present FSDA for their specific circumstances ED 47

sets out overall considerations with respect to guidance for the structure, minimum

requirements regarding the content and presentation of FSDA.

The IFRS on which the IPSAS is based

The proposed IPSAS is intended as an IPSAS specifically for the public sector.

Despite the fact that the IASB has issued IFRS Practice Statement, Management

Commentary (which is a broad, non-binding framework for the presentation of

narrative reporting accompanying financial statements prepared in accordance with

IFRSs), the IPSASB has decided not to develop guidance that was converged with the

IFRS Practice Statement.

Content

Principal definitions

Financial statement discussion and analysis is an explanation of the significant

items, transactions, and events presented in an entity’s financial statements and the

trends and factors that influenced them.

Scope

According to IPSAS ED 47.3 an entity that prepares and presents financial

statements in accordance with IPSAS 1, Presentation of Financial Statements, shall

prepare and present FSDA. FSDA shall be prepared for the same reporting entity

that prepares and presents financial statements under the accrual basis of

accounting.

FSDA is not intended to apply to other types of reports in the public sector (e.g.,

reports on service performance information or long-term sustainability of

government finances).

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Ernst & Young 225

Requirements for FSDA

The FSDA shall be issued at the same time when an entity issues financial

statements. It shall also include information that possesses the qualitative

characteristics of general purpose financial reports identified in Appendix A of

IPSAS 1.

Structure and content of financial statement discussion and analysis

IPSAS ED 47.10 states that FSDA shall be consistent with the financial statements,

and based on currently-known facts and supportable assumptions.

FSDA shall be identified clearly, and distinguished from the financial statements.

FSDA explains information contained in the financial statements and is published in

conjunction with an entity’s financial statements. It therefore has a closer link to the

financial statements than to other reports, like reports on service performance

information or reports on long-term sustainability of government finances.

Nevertheless, FSDA is not a component of the financial statements as defined in

IPSAS 1, Presentation of Financial Statements.

IPSAS ED 47 proposes that FSDA is addressed in a pronouncement with the same

authority as the financial statements to which it relates. Therefore, FSDA should be

prepared by all entities that prepare their financial statements in accordance with

IPSASs. An entity whose FSDA complies with this proposed IPSAS shall make an

explicit and unreserved statement of compliance with this proposed Standard (cf.

IPSAS ED 47.13). FSDA shall not be described as complying with this IPSAS unless it

complies with all the requirements of this proposed IPSAS.

Following IPSAS ED 47.15 an FSDA shall include, at a minimum:

a) An overview of the entity;

b) Information about the entity’s objectives and strategies;

c) An analysis of the entity’s financial statements, including variances and trends;

and

d) Information about the entity’s risks and uncertainties, including its risk

management strategy.

Overview of an entity

The idea of an overview of the entity is to help users to understand the entity and

how the environment in which it operates affect the entity’s financial statements.

The information is intended to be the starting point in assisting users’ understanding

of the entity’s financial statements. Information provided about an entity’s

operations in FSDA may include current information, and changes from the prior

year, about:

IPSAS ED 47: Financial Statement Discussion and Analysis

226 IPSAS Explained

a) The entity’s mission and vision;

b) The entity’s governance (e.g., legislative or regulatory structure, management

structure);

c) The entity’s relationships with other entities (e.g., funding arrangements);

d) External trends, events and developments in the legal, regulatory, social,

political, and macro-economic environment specific to the entity, which have or

may have a material impact on the entity’s financial position and financial

performance (e.g., the impact of a regional or international financial crisis on

employment, the tax base, or interest rates in the jurisdiction); and

e) The entity’s main operations, including service delivery methods

(e.g., outsourcing, service concession arrangements) and significant

changes in them.

Information about the entity’s objectives and strategies

The entity’s objectives and strategies should be discussed in FSDA. Users of the

financial statements should be able to understand the entity’s priorities and to

recognize the relevant resources that must be managed to achieve its objectives.

Also the measurement of the achievement of the entity’s financial objectives

(e.g., a debt reduction strategy) should be explained.

Significant changes in an entity’s objectives and strategies from the previous period

or periods FSDA should also be discussed.

Analysis of the entity’s financial statements

In FSDA the significant events and activities that have affected the financial

statements should be described. Thereby the information presented in the financial

statements should not simply reiterated. FSDA should provide a brief discussion of

the purpose of, and information provided by, each component of the financial

statements, and their interrelationships. In addition, a discussion of the significant

commitments, contingencies, and events occurring after the reporting date should

be included.

Financial performance measures which are included within FSDA but which are not

required or defined by IPSASs should be defined and explained. The relevance of the

measure to users should be explained. In case that financial performance measures

are derived or drawn from the financial statements, those measures should be

reconciled to measures presented in the financial statements that have been

prepared in accordance with IPSASs. In addition, narrative explanations of such

illustrations should be provided if necessary to accurately and completely present

the information.

When it is relevant to an understanding of the current period’s financial statements,

comparative information should be included in FSDA. The proposed Standard does

IPSAS ED 47: Financial Statement Discussion and Analysis

Ernst & Young 227

not require the entity to disclose forward-looking information, such as forecasts or

projections. However, FSDA should explain significant changes and trends in an

entity’s financial position and financial performance. An analysis of trends should

include those financial statement items that are important and significant to gaining

a better understanding of an entity’s financial position and performance and changes

in financial position and performance over a period of time.

The identification of the main events, trends, and factors which influence the current

reporting period may provide information about the entity’s intended actions in

relation to such events, trends, and factors because the party responsible for the

preparation of the entity’s FSDA possesses informed expectations regarding the

entity’s future operations based on its detailed knowledge of the entity’s current

operations.

To the extent that such information is not included in the financial statements, FSDA

should include information about significant positive and negative variances

between:

a) Actual results and the budget; and

b) The prior year and current year financial statements, by explaining significant

changes and highlighting trends.

Risks and Uncertainties

The IPSASB is of the view that information about the entity’s risks and uncertainties

helps users to evaluate the impact of risks in the current period (e.g., contingent

liabilities disclosed in the financial statements) as well as expected outcomes (cf. ED

47.26). Information provided may include its main exposures to risk and changes in

those risks, its opportunities, along with its policies and strategies for mitigating the

risks and capitalizing on opportunities. Also the entity’s evaluation of the

effectiveness of its risk management strategies may be included. In addition, the

entity needs to disclose the underlying assumptions.

Information about the entity’s risks and uncertainties could comprise a discussion

of such matters as a summary of the entity’s investment policy and other means of

managing its risks, insurance coverage, and other controls intended to safeguard the

entity’s assets. Also relevant legislation, regulation or body that sets the risk

management policies for the entity (e.g., when risks are managed at a government-

wide level) could be included.

Additional information may be provided by the entity about uncertainties such as

environmental issues, and significant events after the reporting date (see IPSAS 14,

Events after the Reporting Date), which may affect the entity’s future operations

(e.g., debt issuance, guarantees issued in relation to a financial crisis, or entering

into a new service concession arrangement). Information about the entity’s

opportunities may also be provided. Reporting of such information must be based on

IPSAS ED 47: Financial Statement Discussion and Analysis

228 IPSAS Explained

facts and should be neutral, i.e., the assumptions made are based on conditions that

exist at the reporting date and events that occurred in the current period. Also here,

the provision of forward looking information (e.g., projections of trends,

expectations of management) is not required.

A discussion of the risks the entity faces might also provide relevant information to

users about exposure or vulnerability to concentrations of risks, for example

significant loans to particular regions or industries, or dependence on a particular

source of revenue.

As risks and uncertainties may have a pervasive effect on the financial statements,

the information covering risks and uncertainties may be reported separately, or in

relevant sections throughout the FSDA.

Proposed effective date

The ED does not propose a specific effective date.

Ernst & Young 229

V. Cash Basis IPSAS

Cash Basis IPSAS: Financial Reporting Under the Cash

Basis of Accounting

Objective

The Cash Basis IPSAS prescribes the manner in which general purpose financial

statements should be presented using the cash basis of accounting.

Information about the cash receipts, cash payments and cash balances of an entity

is necessary for accountability purposes. It also provides input useful for

assessments of the ability of the entity to generate adequate cash in the future and

the likely sources and uses of cash. In making and evaluating decisions about the

allocation of cash resources and the sustainability of the entity’s activities, users

require an understanding of the timing and certainty of cash receipts and cash

payments.

Compliance with the requirements and recommendations of this standard ensures

comprehensive and transparent financial reporting of the cash receipts, cash

payments and cash balances of the entity. It also enhances comparability with the

entity’s own financial statements of previous periods and with the financial

statements of other entities which adopt the cash basis of accounting.

The IFRS on which the IPSAS is based

The Cash Basis IPSAS is an IPSAS specifically for the public sector. As a result there

is no IFRS equivalent.

Content

Principal definitions

Unlike IPSAS 2, the Cash Basis IPSAS defines cash as cash on hand, demand

deposits and cash equivalents.

Similarly to IPSAS 2, cash equivalents are defined as short-term, highly liquid

investments (with maturities of less than three months from the date of purchase)

that are readily convertible to known amounts of cash and which are subject to an

insignificant risk of changes in value.

Cash Basis IPSAS

230 IPSAS Explained

Contrary to IPSAS 2, the Cash Basis IPSAS defines cash flows as inflows and

outflows of cash.

Cash payments are defined as cash outflows and cash receipts are defined as cash

inflows.

Structure of the Cash Basis IPSAS

The standard has two parts:

Part 1 is mandatory. It sets out the requirements which are applicable to all entities

preparing general purpose financial statements under the cash basis of accounting.

The requirements in this first part of the standard must be complied with by entities

which claim to be reporting in accordance with the Cash Basis IPSAS, Financial

Reporting Under the Cash Basis of Accounting.

Part 2 is not mandatory. It identifies additional accounting policies and disclosures

that an entity is encouraged to adopt to enhance its financial accountability and the

transparency of its financial statements. It includes explanations of alternative

methods of presenting certain information.

Overview – Part 1:

Scope

With the exception of Government Business Enterprises, all public sector entities

which prepare and present financial statements under the cash basis of accounting

should apply the standard.

An entity whose financial statements comply with the requirements of Part 1 should

disclose that fact.

Financial reporting under the cash basis of accounting

The cash basis of accounting recognizes transactions and events only when cash

(including cash equivalents) is received or paid by the entity. Financial statements

prepared under the cash basis provide readers with information about the sources of

cash raised during the period. They also provide information on the purposes for

which cash was used and the cash balances at the reporting date. The measurement

focus in the financial statements is balances of cash (including cash equivalents) and

any changes.

Cash is controlled by an entity when the entity can use the cash for the achievement

of its own objectives or otherwise benefit from the cash and exclude or regulate the

access of others to that benefit. The IPSASB established this principle in paragraph

1.2.6 of the Cash Basis IPSAS, Financial Reporting Under the Cash Basis of

Accounting.

Cash Basis IPSAS

Ernst & Young 231

Presentation of the financial statements

Paragraph 1.3.4 of the Cash Basis IPSAS sets out a complete set of financial

statements as:

a) A statement of cash receipts and payments which recognizes all cash receipts,

cash payments and cash balances controlled by the entity and separately

identifies payments made by third parties on behalf of the entity in accordance

with paragraph 1.3.24 of the Cash Basis IPSAS;

b) Accounting policies and explanatory notes;

c) When the entity makes publicly available its approved budget, a comparison of

budget and actual amounts either as a separate additional financial statement

or as a budget column in the statement of cash receipts and payments in

accordance with paragraph 1.9.8 of this Standard.

Structure of the statement of cash receipts and payments

According to Cash Basis IPSAS 1.3.12, the statement of cash receipts and payments

should present the following amounts for the reporting period:

a) Total cash receipts of the entity showing separately a sub-classification of total

cash receipts using a classification basis appropriate to the entity’s operations

b) Total cash payments of the entity showing separately a sub-classification of

total cash payments using a classification basis appropriate to the entity’s

operations

c) Opening and closing cash balances of the entity

Total cash receipts and total cash payments, and cash receipts and cash payments

for each sub-classification of cash receipt and payment should be reported on a

gross basis (cf. Cash Basis IPSAS 1.3.13). Cash receipts and payments may be

reported on a net basis when:

a) They arise from transactions which the entity administers on behalf of other

parties and which are recognized in the statement of cash receipts and

payments; or

b) They are for items in which the turnover is quick, the amounts are large and the

maturities are short

Cash Basis IPSAS 1.3.19 and 1.3.20 contain further examples of transactions where

cash receipts and payments can be reported on a net basis. Pursuant to Cash Basis

IPSAS 1.3.17, the sub-classifications (or classes) of total cash receipts and

payments which will be disclosed in accordance with Cash Basis IPSAS 1.3.12 and

1.3.14 are a matter of professional judgment. Total cash receipts may be classified

to, for example, separately identify cash receipts from: taxation or appropriation;

grants and donations; borrowings; proceeds from the disposal of property, plant and

Cash Basis IPSAS

232 IPSAS Explained

equipment; and other ongoing service delivery and trading activities. Total cash

payments may be classified to, for example, separately identify cash payments in

respect of: ongoing service delivery activities including transfers to constituents or

other governments or entities; debt reduction programs; acquisitions of property,

plant and equipment; and any trading activities. Alternative presentations are also

possible. For example, total cash receipts may be classified by reference to their

source and cash payments may be sub-classified by reference to either the nature of

the payments or their function or program within the entity, as appropriate.

Treatment of payments by third parties on behalf of the entity

Where, during a reporting period, a third party directly settles the obligations of an

entity or purchases goods and services for the benefit of the entity, the entity should

disclose this in separate columns on the face of the statement of cash receipts and

payments (cf. Cash Basis IPSAS 1.3.24). It must distinguish between total payments:

a) Made by third parties which are part of the economic entity to which the

reporting entity belongs

b) Made by third parties which are not part of the economic entity to which the

reporting entity belongs

A sub-classification of the sources and uses of total payments using a classification

basis appropriate to the entity’s operations must also be shown separately in each

case.

Disclosures in the notes

Cash Basis IPSAS 1.3.30 states that the notes to the financial statements of an

entity using the Cash Basis IPSAS should:

a) Present information about the basis of preparation of the financial statements

and the specific accounting policies selected and applied for significant

transactions and other events

b) Provide additional information which is not presented on the face of the

financial statements but is necessary for a fair presentation of the entity’s cash

receipts, cash payments and cash balances

Cash Basis IPSAS 1.4.1 provides for the general purpose financial statements to be

presented at least annually. If the reporting date changes and financial statements

are presented for a period other than one year, this must be disclosed. IPSAS 1.4.4

states the financial statements should be issued within six months of the reporting

date. However, the IPSASB strongly encourage a timeframe of no more than three

months.

Cash Basis IPSAS

Ernst & Young 233

According to Cash Basis IPSAS 1.4.5, an entity should disclose the date when the

financial statements were authorized for issue and who gave that authorization.

Consolidated financial statements

A controlling entity, other than a controlling entity identified in paragraphs 1.6.7

and 1.6.8, should issue consolidated financial statements which consolidate all

controlled entities, foreign and domestic (cf. IPSAS 1.6.5), other than controlled

entities operating under severe external long-term restrictions which prevent the

controlling entity from benefiting from its activities.

Cash Basis IPSAS 1.6.7 provides that a controlling entity that is a wholly owned

controlled entity does not have to present consolidated financial statements

provided users of such financial statements are unlikely to exist or their information

needs are met by the controlling entity’s consolidated financial statements.

According to Cash Basis IPSAS 1.6.8, the same applies to a controlling entity that is

virtually wholly owned, provided the controlling entity obtains the approval of the

owners of the minority interest.

Cash Basis IPSAS 1.6.16 sets out this procedure for consolidation:

1) Cash balances and cash transactions between entities within the economic

entity should be eliminated in full.

2) When the financial statements used in a consolidation are drawn up to different

reporting dates, adjustments should be made for the effects of significant cash

transactions that have occurred between those dates and the date of the

controlling entity’s financial statements. In any case, the difference between

the reporting dates should be no more than three months.

3) Consolidated financial statements should be prepared using uniform accounting

policies for like cash transactions. If it is not practicable to use uniform

accounting policies in preparing the consolidated financial statements, that fact

should be disclosed together with the proportions of the items in the

consolidated financial statements to which the different accounting policies

have been applied.

The aim of consolidation is to reflect only transactions between the consolidating

entity and other entities external to it, thus preventing double-counting of

transactions.

Treatment of foreign currency transactions and foreign currency balances

Cash receipts and payments arising from transactions in a foreign currency should

be recorded in an entity’s reporting currency (cf. Cash Basis IPSAS 1.7.2).

To do this, the exchange rate between the reporting currency and the foreign

currency is applied to the foreign currency at the date of the receipts and payments.

By contrast, cash balances held in a foreign currency should be reported using the

Cash Basis IPSAS

234 IPSAS Explained

closing rate. The cash receipts and cash payments of a foreign controlled entity

should be translated at the exchange rates between the reporting currency and the

foreign currency at the dates of the receipts and payments (Cash Basis IPSAS 1.7.4).

An entity should disclose the amount of exchange differences included as reconciling

items between opening and closing cash balances for the period (cf. Cash Basis

IPSAS 1.7.5).

Presentation of budget information in financial statements

An entity that makes publicly available its approved budget(s) must present

a comparison of the budget amounts for which it is held publicly accountable and

actual amounts either as a separate additional financial statement or as additional

budget columns in the statement of cash receipts and payments currently presented

in accordance with the Cash Basis IPSAS (cf. Cash Basis IPSAS 1.9.8).

An entity must present a comparison of budget and actual amounts as additional

budget columns in the statement of cash receipts and payments only where the

financial statements and the budget are prepared on a comparable basis. Otherwise

a reconciliation statement is required (cf. Cash Basis IPSAS 1.9.17).

The comparison of budget and actual amounts must present separately for each

level of legislative oversight (cf. Cash Basis IPSAS 1.9.8):

a) The original and final budget amounts

b) The actual amounts on a comparable basis

c) An entity must present by way of note disclosure in the financial statements an

explanation of material differences between the budget for which it is held

publicly accountable and actual amounts unless such explanations are

published in other public documents related to the financial statements.

Reference must be made to these documents in the note disclosure.

Treatment of external assistance

External assistance means all official resources which the recipient can use or

otherwise benefit from in pursuit of its objectives (cf. Cash Basis IPSAS 1.10.1).

Official resources mean all loans, grants, technical assistance, guarantees or other

assistance provided or committed under a binding agreement by multilateral or

bilateral external assistance agencies or by a government. They do not include

assistance within one nation.

The entity should disclose separately on the face of the statement of cash receipts

and payments, total external assistance received in cash during the period

(cf. Cash Basis IPSAS 1.10.8).

The entity should disclose separately, either on the face of the statement of cash

receipts and payments or in the notes to the financial statements, total external

assistance paid by third parties during the period (cf. Cash Basis IPSAS 1.10.9).

Cash Basis IPSAS

Ernst & Young 235

External assistance is provided either to settle an obligation of the entity or to

purchase goods and services for the benefit of the entity. Total payments made

by third parties, broken down into those which are and which are not part

of the economic entity to which the reporting entity belongs, must be presented

(cf. Cash Basis IPSAS 1.10.9). These disclosures should only be made when, during

the reporting period, the entity has been formally advised by the third party or the

recipient that such payment has been made, or has otherwise verified the payment.

Where external assistance is received from more than one source, the significant

classes of sources of assistance should be disclosed separately, either on the face

of the statement of cash receipts and payments or in the notes to the financial

statements (cf. Cash Basis IPSAS 1.10.10).

Where external assistance is received in the form of loans and grants, the total

amount received during the period as loans and the total amount received as grants

should be shown separately, either on the face of the statement of cash receipts and

payments or in the notes to the financial statements (cf. Cash Basis IPSAS 1.10.11).

Overview – part 2:

Part 2 sets out some encouraged additional disclosures. These include:

► An assessment of the entity’s ability to continue as a going concern

and, where necessary, material uncertainties (cf. Cash Basis IPSAS

2.1.3).

► Disclosures on the nature and amount of each extraordinary item,

either on the face of the statement of cash receipts and payments,

or in other financial statements or in the notes to the financial

statements (cf. Cash Basis IPSAS 2.1.6).

Other additional (recommended) disclosures relate primarily to the notes to the

financial statements (cf. Cash Basis IPSAS 2.1.15 et seq.)

Effective date

For Part 1, section 1.1-1.7: periods beginning on or after 1 January 2004.

For Part 1, section 1.9 and 1.10: periods beginning on or after 1 January 2009.

Ernst & Young 236

Further reading

Adam, Berit, Internationale Rechnungslegungsstandards für die öffentliche

Verwaltung (IPSAS) − Eine kritische Analyse unter besonderer Berücksichtigung

ihrer Anwendbarkeit in Deutschland, Frankfurt am Main 2004, also as a

dissertation, Deutsche Hochschule für Verwaltungswissenschaften Speyer 2003

Adam, Berit/Mussari, Ricardo/Jones, Rowan, The Diversity of Accrual Policies in

Local Government Financial Reporting: An Examination of Infrastructure, Art and

Heritage Assets in Germany, Italy and the UK, in: Financial Accountability &

Management, 2011, Vol. 27, pages 107-133

Adhikari, Pawan/Mellemvik, Frode, IPSASs in Developing Countries: A Case of

Nepalese Central Government, in: International Journal of Government Financial

Management, 2010, Vol. 10, pages 36-48

Aggestam, Caroline, A Project Management Perspective on the Adoption of Accrual-

Based IPSAS, in: International Journal of Government Financial Management,

2010, Vol. 10, pages 49-66

Bachmann, Oliver/Haymoz, Armin, IPSAS: Autorisierte Übersetzung des IPSAS

Standards, Ausgabe 2008, Zurich 2009

Bauer, Günter/Pasterniak, Angelika/Seiwald, Johann, Österreich und die IPSAS: Die

inhaltliche Fundierung des Rechnungswesens des Bundes, in: Das öffentliche

Haushaltswesen in Österreich, 2011, Vol. 52, pages 5-13

Bergmann, Andreas, Key Findings zum Projekt, in: Rechnungslegungsstandards für

Kantone und Gemeinden im Rahmen von IPSAS (International Public Sector

Accounting Standards), edited by Bergmann, Andreas/Gamper, Andreas, Zurich

2004, pages 1-8

Bergmann, Andreas, Public Sector Financial Management, Harlow, Essex 2009

Bergmann, Andreas, Erfahrungen mit der Anwendung des International Public

Sector Accounting Standards (IPSAS) in der Schweiz, in: Neue Formen der

Steuerung und Rechnungslegung in öffentlichen Haushalten, edited by Reinbert

Schauer, Linz 2009, pages 35-53

Bergmann, Andreas, Rahmenkonzept für die öffentliche Rechnungslegung nimmt

Gestalt an, in: Die Wirtschaftsprüfung, 2011, Vol. 64, page I

Bergmann, Andreas, Accounting for Government Interventions in the Corporate

Sector, Consolidation to be Revisited, in: Jahrbuch der Schweizerischen

Verwaltungswissenschaften, edited by Schweizerische Gesellschaft für

Verwaltungswissenschaften, Berne 2011, pages 51-60

Further reading

Ernst & Young 237

Bergmann, Andreas, The Influence of the Nature of Government Accounting and

Reporting in Decision-Making: Evidence from Switzerland, in: Public Money &

Management, 2012, Vol. 32, pages 15-20

Bergmann, Andreas/Gamper, Andreas, Chancen und Gefahren der Anwendung von

IPSAS: Erfahrungen anhand eines Pilotprojektes mit der Stadt Kloten, in: Der

Schweizer Treuhänder, 2004, Vol. 8, pages 618-624

Bergmann, Andreas/Gamper, Andreas, Rechnungslegungsstandards für Kantone

und Gemeinden im Rahmen von IPSAS (International Public Sector Accounting

Standards), Zurich 2004

Cardinaux, Pierre-Alain/Lambert, Sandrine, Les Administrations Publiques face aux

enjeux des normes IPSAS, L’exemple des Transports publiques de Genève, in: Der

Schweizer Treuhänder, 2007, Vol., pages 630-635

Chan, James L., Government Accounting: An Assessment of Theory, Purposes and

Standards, in: Public Money & Management, 2003, Vol. 23, pages 13-20

Chan, James L., Une revolution mondiale dans la comptabilite public? Une analyse

des IPSAS et quelques recommendations, in: Revue française de comptabilité,

January 2004, pp. 27-31

Chan, James L., IPSAS and Government Accounting Reform in Developing Countries,

in: Accounting Reform in the Public Sector: Mimicry, Fad or Necessity, edited by

Evelyne Lande and Jean-Claude Scheid, Paris 2006, pp. 31-42

Cheney, Glenn, United Nations adopts full accrual accounting, in: Accounting Today,

2006, Vol. 20, pages 14-16

Christiaens, Johan/Brecht, Reyniers/Rollé, Caroline, Impact of IPSAS on Reforming

Governmental Financial Information Systems: A Comparative Study, in: Revue

Internationale des Sciences Administratives, Vol. 76, 2010, pages 563-581

Davis, Annette, Accounting for social benefits, in: Chartered Accountants Journal,

2008, Vol. 87, pages 54-55

Davis, Annette, The IPSASB − Developing High-Quality Accounting Standards, in:

Chartered Accountants Journal, 2008, Vol. 87, pages 23-24

Grossi, Guiseppe/Soverchia, Michela, European Commission Adoption of IPSAS to

Reform Financial Reporting, in: Abacus, 2011, Vol. 47, pages 525-552

Ernst & Young, Toward Transparency, A Comparative Study of Governmental

Accounting in Europe, 2010

Ernst & Young, Toward Transparency, A Comparative Study on the Challenges of

Reporting for Governments and Public Bodies around the World, 2011

Further reading

238 IPSAS Explained

Ernst & Young GmbH, Auf dem Weg zur Transparenz, Eine vergleichende Studie über

die Herausforderungen der Finanzberichterstattung öffentlicher Verwaltungen

und anderer öffentlicher Institutionen weltweit, 2012

Heiling, Jens, Governmental Accounting in Germany: Current State and Future

Direction in an International Comparative Perspective, in: Accounting,

Accountability and Governance in the Public Sector, 9th International Symposium

on Public Sector Management, Johannes Kepler University, Linz (Austria), edited

by Dorothea Greiling, Arie Halachmie and Reinbert Schauer, Linz 2011, S. 67-83

Heiling, Jens/Wirtz, Holger, Anmerkungen zur Modernisierung des

Haushaltsgrundsätzegesetzes – Grundsätze staatlicher Doppik, in: Die

Wirtschaftsprüfung, 2009, Vol. 62, pages 821-827

Heiling, Jens/Müller-Marqués Berger, Thomas, Die Fortentwicklung der öffentlichen

Rechnungslegung, in: innovative Verwaltung, Issue 6, 2010, pages 22-23

Heiling, Jens/Wirtz, Holger, Bestandteile des kommunalen Gesamtabschlusses, in:

Der kommunale Gesamtabschluss, Zielsetzung, Grundlagen und Erstellung,

edited by Müller-Marqués Berger, Thomas/Krebs, Uwe, Stuttgart 2010, pages

23-39

Hughes, Jesse W., Transitioning from Current Basis to Full Accrual Basis of

Accounting for Governments in Developing Countries, in: Journal of Government

Financial Management, 2007, Vol. 56, pages 20-26

Laughlin, Richard, A Conceptual Framework for Accounting for Public-Benefit

Entities, in: Public Money & Management, 2008, Vol. 28, pages 247-254

Lüder, Klaus, Internationale Standards für das öffentliche Rechnungswesen:

Entwicklungsstand und Anwendungsperspektiven, in: Finanzpolitik und

Finanzkontrolle: Partner für Veränderung, Gedächtnisschrift für Udo Müller,

edited by Manfred Eibelshäuser, Baden-Baden 2002, pages 151-166

Lüder, Klaus, Globalisierung und transnationale Entwickungen des öffentlichen

Rechnungswesens, in: Globale und monetäre Ökonomie, Festschrift für Dieter

Duwendag, edited by Hermann Knödler and Michael H. Stierle, Heidelberg 2003,

pages 407-418

Lüder, Klaus, Internationale Harmonisierung des öffentlichen Rechnungswesens?,

in: Öffentliche Verwaltung und Nonprofit-Organisationen, Festschrift für Reinbert

Schauer, edited by Ernst-Bernd Blümle et. al., Vienna 2003, pages 341-357

Lüder, Klaus, Zur Reform des öffentlichen Rechnungswesens in Europa, in: WPg,

2004, special Vol., pages 11-18

Mackintosh, Ian, Aus der Arbeit des IFAC Public Sector Committee, in: Reform der

Rechnungslegung der öffentlichen Verwaltung, Die Wirtschaftsprüfung − special

volume, 2004, pages 3-7

Further reading

Ernst & Young 239

Meinen, Jörg, Internationale Rechnungslegung für die öffentliche Hand in Europa:

IPSAS auf dem Prüfstand der EU-Kommission, in: Die Wirtschaftsprüfung, 2012,

Vol. 65, pages 305-316

Meyer-Chanson, Sandrine, Introduction des IPSAS à l’Etat de Genève: Les normes

IPSAS sont-elles applicable?, in: L’Expert Comptable Suisse, 2009, Vol. 83,

pages 733-738

Müller-Marqués Berger, Thomas, Verpflichtungen aus Sozialpolitik und deren

bilanzielle Abbildung, Das Standards-Project des IFAC Public Sector Committee,

in: Reform der Rechnungslegung der öffentlichen Verwaltung, Die

Wirtschaftsprüfung − special volume, pages 41-49

Müller-Marqués Berger, Thomas, Internationale Rechnungslegungsstandards für den

öffentlichen Sektor (IPSAS), Grundlagen und Einzeldarstellungen, Stuttgart 2008

Müller-Marqués Berger, Thomas, Kameralistik, NKF, Grundsätze staatlicher Doppik:

What’s next? – Aktuelles aus dem IPSAS-Board, Editorial, in: Die

Wirtschaftsprüfung, Vol. 62, 2009, S. I

Müller-Marqués Berger, Thomas/Häfele, Markus, Leistungen an Arbeitnehmer:

Entwurf eines IPSAS, in: Die Wirtschaftsprüfung, 2007, Vol. 60, pages 643-646

Müller-Marqués Berger, Thomas/Heiling, Jens/Wirtz, Holger, IPSAS-Board vollendet

Konvergenz-Programm, in: Die Wirtschaftsprüfung, 2010, Vol. 63, pages 959-

963

Müller-Marqués Berger, Thomas/Krebs, Uwe, Der kommunale Gesamtabschluss,

Zielsetzung, Grundlagen und Erstellung, Stuttgart 2010

Pict, Charles/Robert, Nicolas, Les normes IPSAS: un outil précieux pour les

collectivités publiques suisses, in: L’Expert Comptable Suisse, 2009, Vol. 83,

pages 726-732

Pina, Vicente/Torres, Lourdes, Accounting Developments of Spanish Local

Governments: An International Comparison, in: Journal of Public Budgeting,

Accounting & Financial Management, 2002, Vol. 14, pages 619-654

Pina, Vicente/Torres, Lourdes, Reshaping Public Sector Accounting: An International

Comparative View, in: Canadian Journal of Administrative Sciences, 2003, Vol.

20, pages 334-350

Points, Ronald J./Bradbury, Simon, International Public Sector Accounting

Standards, in: Journal of Government Financial Management, 2001, Vol. 50,

pages 48-52

Sanderson, Ian/van Schaik, Frans, Taking Control, in: Accountancy, 2008, Vol. 142,

pages 86-87

Further reading

240 IPSAS Explained

Sanderson, Ian/van Schaik, Frans, Public Sector Accounting Standards:

Strengthening Accountability and Improving Governance, in: Accountancy

Ireland, 2008, Vol. 40, pages 22-24

Sanderson, Ian/van Schaik, Frans, Presentation of Budget Information in Financial

Statements: IPSAS 24, in: Der Schweizer Treuhänder, 2009, Vol. 83, pages 138-

140

Schauer, Reinbert, International Public Sector Accounting Standards (IPSAS) −

Notwendigkeit für eine Reform des öffentlichen Rechnungswesens?, in:

Handbuch Controlling und Consulting, Festschrift für Harald Stiegler, edited by

Feldbauer-Durstmüller, Birgit/Schwarz, Reinhard/Wimmer, Bernhard, Vienna

2005, pages 591-612

Schauer, Reinbert, Anhang: International Public Sector Accounting Standards

(IPSAS), in: Die „Kommunale Doppik“, Theoretische und praktische Überlegungen

zur Neuorganisation des kommunalen Rechnungswesens im Lichte

internationaler Erfahrungen, conference at Johannes Kepler University Linz,

seminar documents, edited by Reinbert Schauer, Linz 2007, pages 145-162

Schedler, Kuno/Knechtenhofer, Bernhard, IPSAS als möglicher Leitfaden für aktuelle

Entwicklungen in der Rechnungslegung öffentlicher Gemeinwesen in der Schweiz,

in: Öffentliche Verwaltung und Nonprofit-Organisationen, Festschrift für Reinbert

Schauer, Vienna 2003, pages 543-560

Schedler, Kuno/Knechtenhofer, Bernhard, IPSAS in der Praxisanwendung – mehr

Richtlinie als Standard?, in: Controlling und Performance Management im

Öffentlichen Sektor, Ein Handbuch, edited by Brüggemeier, Martin/Schauer,

Reinbert/Schedler, Kuno, Berne/Stuttgart/Vienna 2007, pages 299-307

Schreyer, Michaele, Accounting in the Public Sector − European Commission

Perspectives −, in: Reform der Rechnungslegung der öffentlichen Verwaltung,

Die Wirtschaftsprüfung − special volume, pages 7-11

Schuler, Felix/Bergmann, Andreas/Bietenhader, Daniel/Hofer, Maria, Finanzielle

Berichterstattung von PPP unter IPSAS, edited by IVM Institut für

Verwaltungsmanagement, Winterthur 2009

Srocke, Isabell, Konzernrechnungslegung in Gebietskörperschaften unter

Berücksichtigung von HGB, IAS/IFRS und IPSAS, Düsseldorf 2004, also a

dissertation for Hamburger Universität für Wirtschaft und Politik 2003

Streim, Hannes, Rechnungslegung von Gebietskörperschaften – HGB versus IPSAS,

in: Controlling und Performance Management im Öffentlichen Sektor, Ein

Handbuch, edited by Martin Brüggemeier, Reinbert Schauer, Kuno Schedler,

Berne, Stuttgart, Vienna 2007, pages 291-298

Further reading

Ernst & Young 241

Utelli, Christophe/Hauri, Patrick, Finanzinstrumente unter IPSAS, Was erwartet den

öffentlichen Sektor mit der Umstellung auf IPSAS 15?, in: Der Schweizer

Treuhänder, 2006, 1-2, pages 56-60

Viehweger, Cathérine, Bilanzielle Behandlung von gesellschaftlichen Verpflichtungen

des öffentlichen Sektors, in: Die Zukunft des Öffentlichen Rechnungswesens,

Reformtendenzen und internationale Entwicklungen, edited by Heinz

Bolsenkötter, Baden-Baden 2007, pages 193-208

Viehweger, Cathérine, Wertminderungen von Zahlungsmittel generierenden

Vermögenswerten – Entwurf eines IPSAS –, in: Die Wirtschaftsprüfung, 2007,

Vol. 6, pages 246-248

Vogelpoth, Norbert, Vergleich der IPSAS mit den deutschen Rechnungslegungs-

grundsätzen für den öffentlichen Bereich, in: Reform der Rechnungslegung der

öffentlichen Verwaltung, Die Wirtschaftsprüfung − special volume, 2004, pages

23-40

Vogelpoth, Norbert, Haushaltsplanung und internationale Rechnungslegung, in:

Controlling und Performance Management im Öffentlichen Sektor, Ein Handbuch,

edited by Martin Brüggemeier, Reinbert Schauer, Kuno Schedler, Berne,

Stuttgart, Vienna 2007, pages 263-270

Vogelpoth, Norbert/Dörschell, Andreas, Internationale Rechnungslegungsstandards

für öffentliche Verwaltungen, das Standards-Project des IFAC Public Sector

Commitee, in: Die Wirtschaftsprüfung, 2001, Vol. 54, pages 752-762

Vogelpoth, Norbert, /Dörschell, Andreas/Viehweger, Cathérine, Die Bilanzierung und

Bewertung von Sachanlagevermögen nach den International Public Sector

Accounting Standards, in: Die Wirtschaftsprüfung, 2002, Vol. 55, pages 1360-

1371

Vogelpoth, Norbert, /Dörschell, Andreas/Viehweger, Cathérine, Rechnungslegung

nach IPSAS − Aktuelle Entwicklungen, in: Die Wirtschaftsprüfung, 2007, Vol. 60,

pages 1000-1011

Wirtz, Holger, Grundsätze ordnungsmäßiger öffentlicher Buchführung, Second

Edition, dissertation, University of Duisburg-Essen, Berlin 2010