The need for International Public Sector Accounting Standards

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

First Published in Business World (11/18/2013)

IN LAST WEEK’s article, we talked about how various sectors all over the world are pushing for the adoption of the International Public Sector Accounting Standards (IPSAS) in an effort to strengthen public confidence in governments. Given the successive economic, fiscal and sovereign debt crises that have been impacting the global economy, the public is demanding greater transparency and accountability in the use and management of public sector assets and resources. By applying the IPSAS, governments can generate better and more transparent financial reports. We also discussed the Exposure Drafts (EDs) that were issued in October 2013 by the IPSAS Board (IPSASB) in an effort to further streamline and converge IPSAS with International Financial Reporting Standards (IFRS). These EDs covered various areas such as separate and consolidated financial statements; joint arrangements and joint ventures; disclosure of interest in other entities; and guidelines for first-time application of accrual IPSAS.

Given all this effort, it would be beneficial for us to gain a deeper understanding of how adopting IPSAS can benefit government sectors as well as interested members of the general public.

Adopting and ensuring full compliance with IPSAS may provide the following benefits to public sector entities and the users of the financial reports:

• IPSAS-compliant financial statements are considered relevant and useful to the readers of such financial statements.

• Users are in a better position to assess how well the public sector entity utilized its available resources and to make better decisions on providing the entity with the needed resources.

• Financial reports will become more transparent, making it easier for the users to have a more comprehensive view of the financial position, performance and cash flows of the entity for any given period of time.

• The comparability and consistency of these financial statements will be improved.

Public sector entities adopting IPSAS may face quite a few challenges as they transition to these new standards.

One challenge is the cost of implementing these new standards, as costs will be relative to the degree of changes that will be made on the current accounting system and the pace of implementation. The more changes required in the current system (i.e., cash accounting to accrual basis of accounting) and the faster the pace of implementation, the higher the costs. Connected to this challenge is the need to properly plan the initial implementation process since the costs have to be estimated and included in the budget at the onset of the project.

Another challenge is reaching the level of expertise required to transition from the current standards to IPSAS and to continuously apply IPSAS. As the IPSAS are, more or less, based on IFRS, which may be quite different from the current accounting system, public sector entities need to ensure that, internally, they have people who are experts (or whom they can develop as experts) on IFRS and who can bridge the gap between current accounting systems and the new standards. Having these internal experts will make it easier for public sector entities to overcome the learning curve that is almost always present whenever new standards are adopted and implemented.

Lastly, there is also the challenge of determining, in the first place, just how different the current accounting and reporting system is compared with IPSAS. Public sector entities need to pin down how similar or dissimilar these standards are to what they are currently applying, as this will ensure proper identification of all the changes or adjustments (i.e., information system, budgets, reporting, people, etc.) that need to be made during the transition process.

At first glance, adopting IPSAS may seem like a daunting task. However, these challenges do not outweigh the public’s needs for more transparent and quality financial reports. Thus, it’s not surprising that numerous government entities and institutions around the world have already adopted these standards, with more looking into doing the same.

Locally, the adoption of IPSAS could not have come at a better time, in the face of escalating calls from the public for better management of public resources and for more transparency in reporting the consequences of fiscal policies and even reforms. It is to be hoped that, by adopting IPSAS, our government will be in a better position to meet the expectations of the public as far as transparent financial reporting is concerned.

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.