The need for International Public Sector Accounting Standards

By Ma. Emilita L. Villanueva
(First of two parts)

First Published in Business World (11/11/2013)

In recent years, the various economic, financial and sovereign debt crises have highlighted the need for governments to not only improve the management of public sector assets and resources, but to also demonstrate this improvement by generating more transparent and comparable financial reports. To address this, more and more governments or public sector entities are adopting or harmonizing their local standards with the International Public Sector Accounting Standards (IPSAS) and are now practicing accrual-basis accounting in accordance with these standards.

Locally, the IPSAS are becoming a byword in public sector financial reporting. In fact, no less than Vice-President Jejomar Binay has called for its adoption. In January 2013, the Philippine Commission on Audit (COA) issued the Revised Chart of Accounts for National Government Agencies, providing new accounts for the adoption of PPSAS or Philippine Public Sector Accounting Standards, which were already harmonized with IPSAS.

The IPSAS were conceived and developed to help strengthen public sector accounting and financial reporting. The International Public Sector Accounting Standards Board (IPSASB) is the independent body tasked to develop not only IPSAS, but also the necessary guidance and resources that national, regional and local governments, as well as related entities, can use for general purpose financial reporting. The IPSASB’s main objective is to develop and establish a set of high-quality accounting standards that will improve the quality and transparency of public sector financial reports.

The IPSASB encourages countries and governments to use accrual-basis accounting and has already issued 32 accrual-based IPSAS. These include standards on presentation of financial statements, accounting for specific accounts (i.e., property, plant and equipment, inventories, intangible assets, investment property), accounting for financial instruments, accounting for long-term equity investments, and required disclosures (i.e., related parties).
Although it is pushing for accrual-based financial reporting, the IPSASB acknowledged that, at least for the interim, cash-based financial reporting may be a more realistic goal. Thus, it also released Cash-Basis IPSAS.

The strategy of the IPSASB is to converge IPSAS with International Financial Reporting Standards (IFRS) to the extent that the latter can be applied to public sector transactions and accounting.

However, since the IFRS were not developed for the public sector, the IPSASB is also developing its own conceptual framework.

Differences between IPSAS and IFRS may likewise arise if the IPSASB determine that changes are warranted for public sector budgeting and statistical reporting purposes.

With the ongoing convergence between IPSAS and IFRS, the IPSASB continues to look into improving existing standards and issuing new ones. In October 2013, the IPSASB issued six new Exposure Drafts (EDs):

• ED 48, Separate Financial Statements, which contains almost the same requirements in the accounting of investments in controlled entities, associates and joint ventures for separate financial statements under IPSAS 6, Consolidated and Separate Financial Statements. It allows public sector entities to account for their investments in their separate financial statements using either the equity method, the cost method or the fair value method under IPSAS 29, Financial Instruments: Recognition and Measurement. This ED also prescribes the accounting for investment entities, which is a new concept introduced under ED 49, in the separate financial statements.

• ED 49, Consolidated Financial Statements, separates the standards for consolidated financial statements, which were previously included in IPSAS 6. ED 49 lays out a new definition for control and how to assess control. It also introduced the concept of investment entities and how to identify and account for them.

• ED 50, Investments in Associates and Joint Ventures, which requires the application of the equity method of accounting not only for associates but also for joint ventures, in contrast with IPSAS 7, Investments in Associates which only covers the accounting for associates.

• ED 51, Joint Arrangements; under this ED, joint arrangements will be accounted for as either joint operations or joint ventures. It will supersede IPSAS 8, Interests in Joint Ventures, which referred to three types of joint arrangements: jointly controlled operations, jointly controlled asses and jointly controlled entities.

• ED 52, Disclosure of Interests in Other Entities, contains the disclosure requirements found in IPSAS 6, 7 and 8 plus new disclosure requirements.

• ED 53, First-time Adoption of Accrual Basis IPSAS, which provides certain transitional reliefs or exemptions when a public sector entity opts to apply accrual basis of accounting during its adoption of IPSAS.

In developing EDs 48 to 52, the IPSASB took into account the provisions of the relevant IFRS (i.e., IFRS 10 for consolidated financial statements, IFRS 11 for joint arrangements and IFRS 12 for the disclosure requirements), while at the same time, taking into consideration the peculiarities of public sector accounting and reporting.

For EDs 48 to 52, the IPSASB plans to issue the final standards in 2015 while, for ED 53, IPSASB plans to issue the final standard in 2014.

Other than the six abovementioned EDs, the IPSASB also issued its 2013-2015 Work Plan in June 2013. The work plan highlights the projects that the IPSASB is undertaking in its ongoing improvements of the IPSAS. Based on the work plan, the IPSASB is also looking into the improvements on the Conceptual Framework, particularly the chapters on the Preface, Elements and Recognition, Measurement and Presentation. The plan is to release the final chapters by the first quarter of 2014.

As can be seen, there is a significant amount of thought and effort being put into streamlining the IPSAS, highlighting the growing public demand for government accountability and transparency, not just in our own country but all over the world. In the second part of this article, we will look into the important benefits of adopting and applying the IPSAS.

Ma. Emilita L. Villanueva 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.