SYSTEMS OF ACCOUNTING IN THE PUBLIC SECTOR

Cash/Accrual/Public Sector Accounting Standards

Ian Mackintosh 2 March 2004

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OVERVIEW

• Weaknesses in current reporting• International accounting/statistical

standards• Harmonization and reconciliation of

standards• The reporting entity• A suggested reporting framework• The bottom line• The National Standard Setter

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Weaknesses in the Current System• Resources reported-allocation of

financial resources or use of economic resources?

• Reporting entity-what do we want the information for?

• Comparability- what comparability?

Movement to Accrual Accounting• Good cash system first

• Each step to be a useful step

• Part of overall reform-not an end in itself

INTERNATIONAL ACCOUNTING/STATISTICAL STANDARDS

(Lies, damn lies and standards/statistics)

• International financial reporting standards (IASB)

• International public sector accounting standards (PSC)

• Government Finance Statistics (IMF)

• European system of accounts 1995 (Eurostat)

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INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

(Previously IAS)

• IASB is a full-time adequately resourced board

• An imperative to have an improved and increased set of standards by 2005

• These standards used as a basis for IPSASs

• Harmonization of IFRS and IPSASs is of prime importance

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IASB WORK PROGRAM

Projects under way or proposed include:

• Financial instruments• Reporting performance• Consolidation and special purpose entities• Pension accounting• Foreign exchange• Small and medium sized entities• Revenue recognition• Lease accounting• Government grants• Measurement• Impairment of assets• Share based payments• Insurance contracts 5

RELEVANCE OF IASB TO PUBLIC SECTOR

• Basic concepts are the same in private/public sectors

• Later topic of harmonization IFRS/IPSAS/GFS/ESA95

• The IASB is advancing conceptual thinking at a rapid rate

• The public sector needs to keep up

• The PSC and IASB are working constructively together

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INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSASs)

• Public Sector Committee (PSC) a committee of IFAC

• Funded by ADB, IFAC, IMF, UNDP, WB

• Standards program started 1996/Standards based on IASs including notion of control

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PSC OUTPUT TO DATE

• Study on governmental financial reporting

• 20 accrual accounting standards• A standard on cash based accounting• Guidance on transition to accrual

based accounting• Occasional papers on governments’

financial reporting (including NZ, France, UK and Argentina)

• Governance in the public sector

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PSC 2003+ AGENDAPublic sector specific issues• Accounting for social policies of government• Non-exchange revenue• Budget reporting• Accounting for development assistance• Heritage assets

Broad issues• GFS/ESA95/IPSAS harmonization• Alliance with IMF• Conceptual framework

Other matters• Consultative group• Workshops• Translations (to date French, Spanish, Italian, Arabic, Russian,

Bahasa, Portuguese, Mandarin, Mongolian, Japanese)• Adopting new IASB standards• Care and maintenance 9

ACCOUNTING FOR SOCIAL POLICIES OF GOVERNMENTS

• Developing an IPSAS on accounting for obligations like pensions, health care, education

• Members from NZ, Australia, Canada, China, FEE, IMF. Pakistan, Sweden, UK

• ITC January 2004

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NON-EXCHANGE REVENUE

• Developing an IPSAS to account for revenues like taxes, grants, transfers

• Members from Canada, Australia, China, Czech Republic, FEE, France, New Zealand, Sweden, South Africa, UK, USA

• ITC January 2004

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BUDGET REPORTING

• On the edge of accounting/economics• Two stage approach

1. Research report to identify: Current best practices Whether budget reporting falls under the PSC

mandate Any precedent, or argument for, an accounting

standard setter to deal with this topic The matters appropriately dealt with in any

proposed standard2. A possible exposure draft

• Steering committee being appointed with very wide representation

• Preliminary report March 2004 12

GFS/ESA95/IPSAS HARMONIZATION

1. Technical working group PSC Chair, IMF, Eurostat, Australia, UK Test extent of possible harmonization Provide a reconciliation

2. Task Force Chaired by IMF-broad membership Overviewing changes to IPSASs, GFS and SNASNA to be revised in 2008

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ACCOUNTING FOR DEVELOPMENT ASSISTANCE

• Stage one dealing with the disclosure of information on development assistance under the cash basis of accounting

• Stage two dealing with the disclosure under the accrual basis of accounting

• Project advisory panel established

• Report on survey March 2004

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GOVERNMENT FINANCE STATISTICS (GFS)

• Promulgated by the IMF-latest manual issued 2001

• Accrual based, using same concepts as IPSASs

• Within over-arching System of National Accounts, used to measure movements in a national economy

• Concentrates on General Government Sector but encourages consolidation of whole of government

• There are differences with IPSASs

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THE FOUR STATEMENTS OF GFSM 2001

• Statement of government operations (like operating statement)

• Statement of other economic flows (deals with revaluations)

• Balance sheet

• Statement of sources and uses of cash

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DIFFERENCES GFS/IPSASs

• The reporting entity (control vs. sector)

• Military platforms• Require market value• Debt provisions• Gains and losses on disposal of assets• Fundamental errors• Foreign exchange• Borrowing costs

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POSSIBLE FUTURE CHANGES TO IPSASs/GFS

It is possible that future changes mayremove the differences on:

• Military platforms• Disclosure of GGS information in IPSAS• New performance statement in IPSAS• Current values required• Public/private sector arrangements

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EUROPEAN SYSTEM OF ACCOUNTS 1995 (ESA95)

• Promulgated by Eurostat, a part of the EU• It is the requirement for members of the

EU• Both GFS and ESA95 are consistent with

1993 System of National Accounts as regards definitions, accounting rules and classifications

• ESA95 differs from GFS in the presentation of its publication, and its concepts are more specific and precise

• ESA95 is more rules based than 1993 SNA• The 2002 GFS yearbook maps the ESA95

results to GFS

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STANDARDS OVER-KILL?

IPSASs

Public Sector GAAP

GFSInternational Statistics Private Sector GAAP

European Statistics

ESA 95

IFRS

HARMONIZATION AND RECONCILIATION OF STANDARDS

• PSC, IMF, EU would like to simplify the present situation• We will work to eliminate as many differences as

possible• It is inevitable that some differences will remain

because the purposes of the various reports are different

• The best hope in the short term is for a simple reconciliation statement to be agreed

• Hopefully, in the longer term the standard setters will be able to promulgate standards jointly

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THE REPORTING ENTITY

Statistical Reports• GFS and ESA95 need to have the general government sector, the financial public

corporation sector and the non-financial public corporation sector reported separately• They encourage but do not require consolidations• These statistical reports are designed to assist statistical economic analysis

Financial Reports• IPSASs are standards for general purpose financial reports, which report on the financial

performance and position of an economic entity• The economic entity reports all assets, liabilities, revenues and expenses it controls• Thus it requires full consolidation of all entities controlled• Unless you have full consolidation, the true measure of financial position and

performance is not shown• THE TWO SETS OF REPORTS ARE REQUIRED FOR SEPARATE, QUITE LEGITIMATE,

REASONS 23

A SUGGESTED FRAMEWORK

• Consolidated accounts under IPSASs• Reconciliation to GFS or ESA95• Segmentation to the three economic sectors• If an accrual budget, prepared under the

same standards as the ex-post accounts• If a cash budget, reconciled to the relevant

cash flow statement• All statements to be auditable (except as to

projections)• The PSC budget project should give some

answers as to which part of a budget is auditable

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WHICH BOTTOM LINE?

The suggested solution potentially would give us anumber of bottom lines:

• Consolidated operating result-GAAP• Consolidated operating result-GFS/ESA95• GGS operating result• Consolidated cash flow• GGS cash flow

THE BOTTOM LINE YOU CHOOSE DEPENDSON WHAT YOU WANT TO KNOW

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WHAT DO YOU WANT TO KNOW?

• If you want to know how the government is performing financially, you need the IPSAS based full consolidation

• If you want to know the fiscal effects of the financial transactions of the general government sector on the national economy, you need the GFS/ESA95 general government operating result

• If you are interested in the cash flows, you probably need both the consolidated and segmented cash flows

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THE NATIONAL STANDARD SETTER SUGGESTED ROLES

Adopt relevant international standards

Set timing and method for adoption

Set standards for unique national situations

Overview introduction of new international standards

Participate in international standard setting process

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