IPSAS vs. IFRS: How do they differ?

SUITS THE C-SUITE By Lloyd Kenneth S. Chua

First Published in Business World (06/02/2014)

THIS column’s articles on Nov. 11, 2013 and Nov. 18, 2013 highlighted the importance of adopting International Public Sector Accounting Standards (IPSAS) to foster transparency and promote public trust. Applicable to public sector accounting and financial reporting, the IPSAS are, for the most part, based on the International Financial Reporting Standards (IFRS). It is hoped that, as much as possible, IPSAS will be eventually converged with IFRS. This is to ensure that the financial reports generated by the private and the public sectors are comparable in terms of accounting for similar types of transactions.

However, it is expected that there will be differences between these two standards since IFRS are developed for profit-oriented entities while the IPSAS are geared towards public sector entities and those that provide public services. One key difference is that one standard, IPSAS 24, requires a public sector entity to present the comparison between budgeted amounts and the actual amounts that arise from executing the said budget, in the public entity’s financial statements, as long as the said entity makes public its approved budget. Additional disclosures are also required to explain the reasons behind the significant differences between these two amounts. In showing such a comparison and making the required disclosures, the public entity can demonstrate how well it manages public funds and provides services, for which it is publicly accountable. There is no equivalent standard under IFRS.

Another major difference is in the area of income taxes. Public sector entities are assumed to be generally exempt from income taxes; thus, International Accounting Standards (IAS) 12, Income Taxes, has no equivalent in IPSAS. However, the latter provides that if the public sector entity is liable for tax (which is considered an unlikely event), the entity can refer to the guidance in IAS 12 in accounting for the tax.

The third major difference is in determining control. IFRS 10, Consolidated Financial Statements; IFRS 11, Joint Arrangements; and IFRS 12, Disclosures of Interests in Other Entities, took effect in 2013. However, IPSAS is still based on the previous standards of IAS 27, Consolidated and Separate Financial Statements; IAS 28, Investments in Associates; and IAS 31, Interest in Joint Ventures. The definition of control under IFRS 10 is very different from the one in IAS 27; thus, the manner of determining control may be different for a profit-oriented entity applying IFRS from that of a public sector entity applying IPSAS. It is worth noting that such a difference has been recognized and, as a result, the IPSAS Board (IPSASB) issued four Exposure Drafts in October 2013 with the aim of eliminating this significant difference.

The concept of “service potential” as a recognition criterion is another point of difference between IFRS and IPSAS. This concept is not referred to in the IFRS, which considers “economic benefit” as a major recognition criterion. The service potential concept is incorporated in the definition of the public sector entity’s assets, liabilities, income and expenses and is an indicator of an asset’s capacity to provide goods and services to the public, in accordance with the entity’s mandate. With this concept, a public sector entity may recognize assets, liabilities, income and expenses differently from that of a private entity.

Corollary to the above difference, another difference also arises from the accounting for the impairment of non-cash generating assets. Since the IPSAS consider the service potential of an asset, these standards recognize that a major part of the public sector entity’s assets may actually be non-cash generating; thus, the IPSAS also provide guidance on how to impair such assets. On the other hand, the impairment provisions under IFRS consider that assets subject to impairment testing are cash-generating ones.

Lastly, IPSAS eliminated the concepts that are considered peculiar in the private sector, such as accounting for share-based payments and the requirement to disclose earnings per share. In cases that such concepts are applicable to the public sector entities, these entities should refer to the relevant IFRS.

This article highlights some of the key differences between the IFRS and IPSAS. Other differences also arise due to the difference in the timing of the adoption of the two standards. To illustrate, IPSAS have yet to introduce the equivalent standards to the new IFRS 10, 11 and 12 and to the revised IAS 19, Employee Benefits.

The convergence between IPSAS and IFRS continues. However, it is worth noting that there will always be differences between the two as the IPSAS cater not only to general purpose financial information, but also to the public’s need for information on the public sector entity’s service performance and stewardship. An understanding of the key differences between IPSAS and IFRS not only enables the public to understand the performance of the government/public entity, but also allows businesses to evaluate the thrust of the government on certain functions that could have potential risks or impact on their businesses.

Lloyd Kenneth S. Chua is a senior director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.