1. INTERNATIONAL PUBLIC SECTORACCOUNTING STANDARDSTRAINING NOTES FORSHIFTING FROM IFRS TO THEACCRUAL BASED IPSASPart 1 ..By Sako Mayrick EMACSako Mayrick 1

2. International Standards Governments have diverse financial reportingpractices Difficult on making international comparison At central government two main accounting systems Micro Level Government Accounting Individual governments organizations draw up budgets and financialreports for managing organizations Macro Level National Accounting National accounts, statistical, macroeconomic financial data of thenational economy Public Sector Accounting Standard complementsINTOSAI StandardsSako Mayrick 2 3. International Accounting Standards Developed by International Federation of Accountants(IFAC) through Public Sector Committee (PSC) now knownas International Public Sector Standards Board ( IPSASB) IFAC develops International Public Sector AccountingStandards (IPSAS) that are based on InternationalAccounting Standards (IAS). IPSAS are authoritative requirements established by IPSASB Help to improve quality of financial reporting in the publicsector around the world. IPSAS only pertain to financial accounts IPSASB is more broad and intends to address BudgetingSako Mayrick 3 4. International StandardsBasis of Accounting International Organization of Supreme Audit Institutions(INTOSAI) Accounting Standards Framework has fourfinancial reporting systems Fully Cash Accounting Records transactions when funds are paid out of an appropriationauthority or when funds are received Modified Cash Accounting Recognizes transactions of cash basis during the year and the setup ofunpaid accounts and/or receivables at years end Modified Accrual Accounting Records expenditure when resources are received and revenues whenthey are measurable and available within the accounting period orshortly afterward Full Accrual Accounting Recognizes expenses as incurred, records revenues as earned, andcapitalizes fixed assetsSako Mayrick 4 5. Cash Vs Accrual Represents two end on a spectrum of possibleaccounting and financial reporting bases INTOSAI requires the performance reports anddepartmental reports should be based on full accrual. The general purpose financial statements should bebased on either full accrual or modified accrualdepending on a particular governments circumstances. The INTOSAI Accounting Standards and IPSAS are largelycomparable; both are based on the IASSako Mayrick 5 6. Need for IPSAS Stands for International Public Sector AccountingStandards Accounting standards are rules and disclosurerequirements for the preparation and presentationof financial statements Given the increasing importance of internationalharmonization of financial reporting, it seemsreasonable to expect that the role of the IPSAS willgain significance in budgeting and financial reportingin the public sectorSako Mayrick 6 7. BUDGETING AND FINANCIALREPORTING Budgets are future oriented financial plans forallocating resources among alternative uses Financial reports retrospectively describe the resultsof an organizations financial transactions and eventsin terms of its financial position and performance. In the private sector, budgets are targets rather thanplans, while budgets reflect what the organizationhopes to achieve rather than what it actually bringsabout.Sako Mayrick 7 8. Budgets and Financial Reporting Companies and other private organizationsare not obliged to draw up a budget even theyusually do. However, they rarely publish theirbudgets For governments, it is not only mandatory todraw the budgets but also to publish them Governments must allocate resources bothwithin the public sector and between thepublic sector and the rest of the economy.Sako Mayrick 8 9. Accrual Based budgets Types of appropriations system Cash based appropriations gives the government rights to make cash payments over alimited period of time Commitment based appropriations gives the government authority to make commitmentsand make cash payments according to these commitments without predetermined timelimits Accrual based appropriations gives the government rights to make cashpayments over a limited period of time. Commitment based appropriations giver the government authority to makecommitments and make cash payments according to the these commitmentswithout predetermined time limit. Accrual based appropriations cover the full costs of the operations of thegovernment and increases in liabilities or decreases in assets. This kind ofappropriations requires special mechanism of controlling cash. The accrual accounting does not abolish the cash based appropriations.Sako Mayrick 9 10. Accrual based critics An accrual budgeting system cannot be the system fora government the two reasons Budgetary laws often requires the legislature to authorizethe cash payments Accrual system is tailored to income formation: It matchrevenue and costs. In public sector, however, it isimpossible to match tax revenues with production costs. It implies that the governments have to value their assetsat market value and include them in their balance sheets. Local authorities, for example will have to value theirroads, bridges, tunnels at market value, even thoughmarket values for these assets do not exist. Making aninventory of these assets as well as the valuation is a costlyprocess.Sako Mayrick 10 11. Accrual basis - issues There is a wide spectrum of possible accounting bases ranging fromcash to full accrual. Cash based accounting measures the flow of cash resources andrecognizes transactions and events only when cash is received orpaid. Accrual accounting recognizes stocks and flows. Stocks refer to theholding of assets and liabilities. Assets can be financial ( such ascash), physical (such as property), or intangible ( such as copyrights). The difference between the total assets and total value of liabilitiesis the net worth Flow reflect the creation, transformation, exchange, or transfer ofeconomic value and , thus, either an increase or decrease in net -worth. Revenues increase net-worth whereas expenses decreasesnet-worth.Sako Mayrick 11 12. Accrual basis - issues In practice, most countries system are mixture of both extremes.Insofar as accrual accounting system are used, they differ acrosscountries. A cash based system recognizes investment at the date of spendingwhereas an accrual based system spreads the costs of investmentover time ( in the form of depreciation of assets) The fact that a growing part of public sector applied acash/commitment system. And the central government applied twodifferent accounting system was confusing and therefore, it hasbeen criticized. The IPSAS requires items to be valued at historic cost ( the cost as atthe date an item is acquired). However, where an asset is acquiredat no or nominal cost, the IPSAS determine its cost as its fair value (the amount for which an asset could be exchanged or a liabilitysettled) Sako Mayrick 12 13. Goals of shifting to IPSAS Complementing performance management Facilitating better financial management; Improving understanding of program costs; Expanding and improving information forresource allocation; Improving financial reporting; Facilitating improved asset and cashmanagement.Sako Mayrick 13 14. Main statements Operating statement reflecting revenues andexpenses; A statement of assets and liabilities of theentity; A cash flow statement related to operating,investment, and financing activities A statement presenting additional informationof a disaggregated basisSako Mayrick 14 15. Variation in implementation Some countries have designed and implemented theaccrual system. Some countries have valued assets at their historic costs Some countries have valued them at historic cost lessaccumulated depreciation Other countries have revalued their fixed assets periodically. The other category apply a charge for the use ofcapital, whereas other countries do NOT apply any capitalcharge The last category account differently for the consumptionof fixed assets by applying a liner depreciation method ora free one.Sako Mayrick 15 16. ACCOUNTING BASICS What is accounting? A system of recording and summarizing businessand financial transactions, and Analyzing, verifying, and reporting the resultsBUSINESS AND FINANCIAL TRANSACTIONS(ECONOMIC EVENT)RECORD THAT EVENT(RECOGNITION AND MEASUREMENT)REPORT THE EVENT(DISCLOSURE)Sako Mayrick 16 17. OUTLINE OF IPSASOBJECTIVESCOPEDEFINITIONSRECOGNITIONMEASUREMENTDERECOGNITIONPRESENTATION AND DISCLOSUREBUSINESS ANDFINANCIALTRANSACTIONS(ECONOMIC EVENT)RECORD THATEVENT(RECOGNITION ANDMEASUREMENT)REPORT THAT EVENT(DISCLOSURE)Sako Mayrick 17 18. BASIS OF IPSAS Frameworks for IPSAS Key IPSAS Practice StatementSako Mayrick 18 19. IPSAS OUTLINE Qualitative characteristics of financialinformation Fundamental Relevant Faithfull representation Enhancing Comparability Verifiability Timelines UnderstandabilitySako Mayrick 19 20. Structure of IPSASRules/application guidancePrinciplesConceptsRules (Exceptions) Rules (interpretation)Application guidance to give effect to the principleIPSASFrameworkIPSASSako Mayrick 20 21. GENERAL IMPLICATION OF IPSASADOPTION Currently the organization is using IFRSs; Does not take into account all elements of IPSASbasis It shifts from being a Government BusinessEnterprise Difficult for comparison purposes The entire government (s) are adopting accrual basedIPSAS Prevent consolidationSako Mayrick 21 22. Are we GBE? IPSASs are high quality global financial reportingstandards for application by public sector entities otherthan Government Business Enterprises (GBEs) The IPSASs are designed to apply to the general purposefinancial statements of all public sector entities. Publicsector entities include national governments, regionalgovernments (forexample, state, provincial, territorial), local governments(for example, city, town) and their component entities(forexample, departments, agencies, boards, commissions),unless otherwise stated. The Standards do not apply to GBEs. GBEs applyInternational Financial Reporting Standards (IFRSs) whichare issued by the International Accounting StandardsBoard (IASB).Sako Mayrick 22 23. Are we GBE? The IPSASB develops IPSASs which apply to theaccrual basis of accounting and IPSASs whichapply to the cash basis of accounting. IPSASs set out recognition, measurement,presentation and disclosure requirementsdealing with transactions and events in generalpurpose financial statements.Sako Mayrick 23 24. Are we GBE? GBEs include both trading enterprises, such as utilities, andfinancial enterprises, such as financial institutions. GBEs are, insubstance, no different from entities conducting similar activities inthe private sector. GBEs generally operate to make a profit, although some may havelimited community service obligations under which they are requiredto provide some individuals and organizations in the community withgoods and services at either no charge or a significantly reducedcharge. IPSAS 6 provides guidance on determining whether control existsfor financial reporting purposes, and should be referred to indetermining whether a GBE is controlled by another public sectorentitySako Mayrick 24 25. Are we GBE?Government Business Enterprise means an entity that hasall the following characteristics:(a) Is an entity with the power to contract in its ownname;(b) Has been assigned the financial and operationalauthority to carry on a business;(c) Sells goods and services, in the normal course of itsbusiness, to other entities at a profit or full cost recovery;(d) Is not reliant on continuing government funding to bea going concern (other than purchases of outputs at armslength); and(e) Is controlled by a public sector entity.Sako Mayrick 25 26. What is our answer?YesNoSako Mayrick 26 27. Benefits of adopting IPSAS It standardize the definitions, measurement criteria andreporting requirements towards providing more meaningfulinformation for decision-makers MTEF and reports become more meaningful as increasedtransparency provided a basis for assessment of whetherresources are being used effectively and efficiently It supports efficient internal controls and result basedmanagement Helps to benchmark with similar institutions andforecasting future flow of resources in the organization Assets and liabilities that were previously un-quantified orunder-reported will now be reflected in the financialstatementsSako Mayrick 27 28. Benefits of adopting IPSASAccrual accounting means that the Organization for the first time will recognizepast, present and future obligations of Organizational resources. There isnothing new here. These are not new obligations but under the IFRSs they werelargely quantified, rendering them invisible and or under reportedSako Mayrick 28 29. What and why IPSAS IPSAS are set of independently developed, highquality, global accounting standards that requiresaccounting on full accruals basis (i.e. all assets andliabilities are recorded IPSAS are issued by international Standards Board ofthe International Federation of Accountants (IFAC) IPSAS are tailored for the public sector and its use isconsidered best practice for the public sector entities(governments, governmental business entities, non-governmental organizations, and internationalorganizations)Sako Mayrick 29 30. Modified Cash vs. Accrual AccountingExample: Expense recognition Contracting servicesModified Cash (Current) Y1 Y2 Y3 Y4 Y5 Y6Obligation/Expense Shs. 12,000 0.00 0.00 0.00 0.00 0.00Accrual Basis (IPSAS) Y1 Y2 Y3 Y4 Y5 Y6Obligation/Expense Shs. 2,000 2,000 2,000 2,000 2,000 2,000 Economic events being recognized is the signing of contract not the performancePeriod of PerformancePeriod of PerformanceAt time of signinga contract Costs are matched to the period of the performanceSako Mayrick 30 31. Modified Cash vs. Accrual AccountingLiability Recognition: Employee Termination BenefitsModified Cash (Current) Y1 Y2 Y3 Y4 Y5 Y6Employee hired for 6 years 0.00 0.00 0.00 0.00 0.00 12,000.00Accrual Basis (IPSAS) Y1 Y2 Y3 Y4 Y5 Y6Employee is hired for 6 years 2,000 2,000 2,000 2,000 2,000 2,000 Cost is recognized upon separation, not as the employee earns the benefitPeriod of PerformancePeriod of Performance Costs is matched to employee servicesSako Mayrick 31 32. The way forward Conduct the GAP analysis between the IFRS standard and IPSAS Preparing opening statement of Financial position Preparing the comparative financial information for the last year Preparing baseline accounting policies Valuation of current years financial transactions for significantchanges( Recommended for valuation model or cost model) Proper definition of controlled entities and non controlled entitiesfor consolidation purposes (General review of each entity) Detailed schedule for employee benefits Schedules for first time adoption line by line Rehearsing on format of FSSako Mayrick 32 33. Gap AnalysisAreas with impactIPSASEmployeeBenefits(termination,annual leave)Plant, Propertyand Equipment(Capitalization/Depreciation)Revenue(Quotas/Pledges/specificagreements)Investment(Fair Value)FinancialStatements(Cash flow,disclosures,budget reports)UnexpendedAdvances(travel/accountable advances)ExpenseRecognition(Obligations)Sako Mayrick 33 34. KEY IPSAS IPSAS 1/ IAS 1 Presentation of Financial Statements IPSAS 2/IAS 7 - Cash Flow Statements IPSAS 3/IAS 3 - Accounting Policies, Changes in Accounting Estimates and Errors IPSAS 4/IAS 21 The Effects of Changes in Foreign Exchange Rates IPSAS 5/IAS 23 Borrowing Costs IPSAS 6/IAS 27 Consolidated and Separate Financial Statements IPSAS 7/IAS 28 Investments in Associates IPSAS 8/IAS 31 Interest in Joint Ventures IPSAS 9/IAS 18 Revenue from Exchange Transactions IPSAS 10/IAS 29 Financial Reporting in Hyperinflationary Economies IPSAS 11/IAS 11 - Construction Contracts IPSAS 12/IAS 2 Inventories IPSAS 13/IAS 17 Leases IPSAS 14/IAS 10 Events After the Reporting Date IPSAS 15/ - Financial Instruments Disclosure and Presentation, superseded by IPSAS 28 IPSAS 30 IPSAS 16 /IAS 40 Investment Property IPSAS 17 /IAS 16 - Property, Plant and EquipmentSako Mayrick 34 35. KEY IPSAS IPSAS 17 /IAS 16 - Property, Plant and Equipment IPSAS 18/IAS 14 Segment Reporting IPSAS 19 / IAS 37 Provisions, Contingent Liabilities and Contingent Assets IPSAS 20/ IAS 24 Related Party Disclosures IPSAS 21 / IAS 36 Impairment of Non Cash Generating Assets IPSAS 22 / IAS NA - Disclosure of Financial Information about the GeneralGovernment Sector IPSAS 23/IAS NA - Revenue from Non Exchange Transactions (Taxes and Transfers) IPSAS 24 / IAS NA - Presentation of Budget Information in Financial Statements IPSAS 25 / IAS 19 - Employee Benefits IPSAS 26/ IAS 36 - Impairment of Cash Generating Assets IPSAS 27/IAS 41 Agriculture IPSAS 28/ IAS 32 Financial Instruments: Presentation IPSAS 29/ IAS 39 Financial Instruments: Recognition and Measurement IPSAS 30 / IFRS 7 Financial Instruments : Disclosures IPSAS 31/ IAS 38 -- Intangible Assets IPSAS 32 /IFRIC 12 Service Concession Arrangement: GrantorSako Mayrick 35