International Public Sector Accounting Standards (IPSASs) are the public sector accounting standards of choice for many countries of the world. Almost 70 countries have adopted IPSASs or are in the process of adopting IPSASs. Many international organisations, most notably the United Nations, are also in the process of adopting IPSASs.
IPSASs and national accounting standard setting bodies
Many countries have chosen not to adopt IPSASs lock, stock and barrel, but have developed standards that are similar to IPSASs. The main reason is that many countries want to adapt the public accounting standards to their own environment. South Africa’s public sector standards are based on IPSAS, as are those of Australia, Canada and New Zealand. The website of the Accounting Standards Board (www.asb.co.za) presents the South-African deviations from IPSASs.
The UK public sector is the only public sector that we know of that has chosen to adopt International Financial Reporting Standards (IFRSs), and supplement them where necessary with other standards, primarily IPSASs.
IPSAS in South Africa
South Africa is one of only a select group of countries that has adopted accrual accounting for their central governments. South Africa started its public sector reform process in 2003 and will start implementing 17 accrual-based public sector Standards of Generally Recognised Accounting Practice (GRAP) within the next year. The standards, developed by the Accounting Standards Board, will be applied in all the public sector entities except for departments, where they will be phased in over a period of time. The standards are based on IPSASs.
IPSASs and IFRSs
IPSASs are issued by the IPSAS Board of the International Federation of Accountants, which is the global organisation of the accounting profession. The IPSAS Board (on which one of the authors sits) focuses on the accounting and financial reporting needs of the public sector, whether it be a national or regional government, or an inter-governmental organisation.
IPSASs are closely aligned to IFRSs and this helps promote the International Accounting Standards Board ideal of a single set of global accounting standards. International Financial Reporting Standards (IFRSs) are issued by the International Accounting Standards Board (IASB), which is an independent body committed to setting a single set of global accounting standards.
There are currently 26 accrual based IPSASs (and one cash based IPSAS) of which 23 are directly based on IFRSs while three are not. An example of an IPSAS where there is currently no equivalent IFRS is IPSAS 24 Presentation of Budget Information in Financial Statements. This standard 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 that make publicly available their approved budget, and for which they are held publicly accountable. In fact, one of the reasons that the Swedish government chose to embrace accrual accounting was that it was a means to facilitate the linking of budgets to outputs. The Swedish government referred to this as “results based budgeting”; under IPSAS 24 the linking of budgets and outturn in the financial statements is transparently presented. There is no equivalent IFRS standard to IPSAS 24, because organisations in the private sector do not usually make their budget publicly available, since it would reveal too much of their strategy to competitors.
What are the benefits of IPSASs?
The United Nations General Assembly, which adopted IPSAS in 2006, considered the following to be the main benefits of IPSASs:
- Improved internal control and transparency in respect of assets and liabilities generally.
- The alignment with best accounting practices through the application of credible, independent accounting standards on a full accrual basis.
- More comprehensive information about costs that will better support results-based management.
- The integration of non-expendable equipment into the accounting system, with resulting improvements in the accuracy and completeness of non-expendable equipment records.
- Improved consistency and comparability of financial statements as a result of the detailed requirements and guidance provided in each standard.
Benefits: Improved allocation of capital
Many public sector organisations see the improved management and allocation of infrastructure assets as one of the major benefits of IPSASs and accrual accounting. This can be illustrated by way of the following simple example:
A government wants to build a bridge and the bridge will take two years to complete. The government pays the contractor 50 per cent of the costs upfront and the remaining 50 per cent of costs on delivery. The bridge is expected to last 100 years and will cost Rand 20 million. Under cash accounting Rand 10 million hits the statement of financial performance in both years 1 and 2 while, under accrual accounting, only Rand 200,000 hits the statement of financial performance for 100 years. Cash accounting reflects the cash flows of the transactions while accrual accounting reflects the usage of the asset.
In a governmental (and therefore political) setting the different results under cash and accrual accounting matter. A politician may be more likely to invest in building a bridge in an election year if the government’s financial statements reflect the accruals based usage of the bridge rather than cash flows of the purchase; one method has a far greater impact on the bottom line, which may prove significant in an election year. One of the reasons why Canada adopted accrual accounting was that it thought that it would positively influence infrastructure investment decisions.
IPSASs and the developing world
Many developing countries are also in the process of adopting IPSASs. Many of these countries are currently implementing the cash-based IPSASs which are seen as a stepping stone towards the future adoption of accrual accounting.
Many countries have projects that are being funded by international donor organisations, such as the World Bank and the International Monetary Fund, while in the case of southern and eastern Africa, it is the Swedish Development Agency (SIDA) that is providing financial assistance to the process. The World Bank has been a promoter and sponsor of the IPSASB since its inception.
The adoption of IPSASs is viewed as a means towards improving accountability in those countries and it is a move that should be supported. The adoption by developing countries should not be underestimated, because the move towards an effective and transparent accounting system will hopefully lead to better resource allocation and less wastage (i.e. corruption) in public sector finances. Such a development will hopefully also lead to improved investor confidence and an improved economic outlook.
IPSASs must go hand in hand with a strong audit framework
The risk of corruption in developing countries will diminish further as the cash based IPSASs are gradually superseded by the accruals based IPSAS. However, the risk of corruption can only be mitigated by sufficient checks and balances in the system to reduce the temptation to steal (i.e. the risk of being caught) such as a strong audit framework.
In many developing countries there are moves towards strengthening the audit function in government, and many donors are supporting their efforts to improve accountability through IPSASs by working to strengthen the technical capacity in the respective countries’ government auditing professions.
We note a significant rise in the number of qualified chartered accountants working for the South African Auditor-General and an even higher number in training. It is clear that the Auditor-General and his staff will play a critical role in working with the public sector in the move towards accrual accounting, and we would anticipate that the South African accounting profession will have a substantial role in providing leadership and guidance to their colleagues in the rest of southern and eastern Africa as they embrace the challenge of implementing IPSASs and setting up an effective audit framework.
IPSAS – The future
We are delighted with the way that IPSASs are taking hold and how they are being embraced. There appears to be genuine hope that sometime in the not too distant future most of the world will embrace similar and comparable financial statements through IFRSs, IPSASs or similar standards.
The IPSAS Board is currently working on establishing, amongst other things, a standard for Financial Instruments, and a conceptual framework for government accounting. In the future, it will approach the subject of accounting for intangible assets in the public sector. At the times when no IPSAS exists, users must defer to other accounting standards, such as IFRSs.
We are working in many countries at the moment and with a number of international organisations as they move towards adopting IPSASs. There are many issues that are proving challenging for organisations in the public sector, such as how to account for controlled entities and grants that have been made. This demonstrates that there is still much work to be done. We look forward in future issues to sharing more observations on IPSASs and the issues they are raising.
Ian Sanderson CA(SA), works in the field of international development for Deloitte in Geneva, Switzerland and Professor Frans van Schaik CA(SA), is a member of the IPSAS Board of the International Federation of Accountants and works for Deloitte in The Hague, Netherlands.
