IPSAS – Standards Designed for Government

IPSAS – Standards Designed

for Government

HENNING DIEDERICHS – ACA

About me

• Public Sector Financial Reporting, part of Financial Reporting Faculty

• ICAEW Chartered Accountant

• 3 years Barclays Group Accounts

• 5 years UK Ministry of Finance, Whole of Government Accounts (WGA)

• Current focus on International Public Sector Accounting

ICAEW and international financial reporting

• Champion of global accounting standards

• Close engagement with IASB and the development of IFRS

• Contributor to International Public Sector Accounting Standards

Content

• IPSAS – An overview

• Importance of accruals accounting

• Choice of accounting standards

• Conceptual Framework

• IPSAS 12 – Inventories

• IPSAS 23 – Revenue from non-exchange transactions

• IPSAS 13 – Leases

• IPSAS 32 – Service concession arrangements

International Public Sector Accounting Standards

(IPSASs) – overview

• Established 1996

• Operate under IFAC

• 35 accruals based standards, 1 cash standard

• 18 board members

• Based in Toronto

• IFRS-based

Growing importance of accruals accounting

resources – more

efficient and cost Better reporting of

Choice of accounting standards

• Extensive usage

• Designed primarily for private sector

IFRS

• Designed for public sector

• Not wide usage

IPSAS

Does public sector need specific standards?

Relationship with Government Finance Statistics

Non-exchange transactions

Importance of budgets

Ability to change law and act as a regulator

Long term nature of governments – intergenerational aspects

Conceptual Framework

• What is it

• Qualitative characteristics

- Relevance

- Faithful representation

- Understandability

- Timeliness

- Comparability

- Verifiability

Conceptual Framework

• Provides definition of the elements:

- Assets: A resource presently controlled by the entity as a result of a past event.

- Liability: A present obligation of the entity for an outflow of resources that results from a past event.

- Revenue: Increases in the net financial position of the entity, other than increases arising from ownership contributions.

- Expense: Decreases in the net financial position of the entity, other than decreases arising from ownership distributions.

IPSAS 12 – Inventories

Objectives: IPSAS 12 describes the accounting treatment for inventories

including cost determination and expense recognition, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Definition: Inventories are assets in the from of materials or supplies that are either to be consumed in the production process, or to be consumed or

IPSAS 12 – Recognition

Control over the asset

Probable that future economic benefits or service potential will

flow to the entity

Cost can be reliably measured

IPSAS 12 – Measurement

IPSAS 12 – Cost formulas

• Non-interchangeable inventories (unique) or ring-fenced for specific projects: specific costs allocated.

• Interchangeable inventories: cost determined on either a ‘First-in, First-out’ or weighted-average basis.

• Entity shall use the same cost formula for similar items – similar nature and use.

IPSAS 12 – Disclosures

• Main disclosures are:

- Accounting policies such as the cost formula;

- Total carrying amount of inventories and carrying amount in classifications appropriate to the entity;

- Amount of inventories recognised as an expense during the period;

IPSAS 23 – Revenue from Non-Exchange

Transactions (Taxes and Transfers)

Objectives: To prescribe requirements for the financial reporting of revenue arising from non-exchange transactions, other than non-non-exchange transactions that give rise to an entity

combination.

Key Definitions:

- Revenue is the gross inflow of economic benefits or service potential that results in an increase in net assets/equity, other than on relating to contributions from owners.

- Exchange transactions are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange.

IPSAS 23 – Application

• An entity shall recognise an asset in respect of taxes when the taxable event occurs and the asset recognition criteria are met.

• Examples of tax and the taxable event:

- Income tax: earning of assessable income during the taxation period

- Value-added tax: undertaking of taxable activity during the taxation period

- Customs duty: movement of dutiable goods and services across the customs boundary

• Challenging: tax assets are initially measured at fair value – best estimate of

IPSAS 23 – Concessionary Loans

• Need to be careful when a transaction contains both exchange and non-exchange elements.

• Concessionary loans is a loan with below market terms.

• The element that is repayable and the interest on that element that is the exchange portion.

IPSAS 23 – Disclosures

• Amount of revenue from non-exchange transactions by major classes showing separately taxes (split by major class) and transfers.

• Amount of receivables.

• Liabilities in relation to transactions subject to conditions and concessionary loans subject to conditions.

• Amount of assets subject to restrictions and the nature of those restrictions.

• Any advanced receipts.

IPSAS 13 – Leases

Objectives: To prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases.

IPSAS 13 – Classification

• All leases must be classified at inception as either a finance lease or operating lease.

• Lease classification is based on the substance of the transaction, not the legal form.

• The key question is who bears substantially all the risks and rewards.

ISPAS 13 – Classification

• Standard gives comprehensive examples as to what would constitute a transfer of substantially all the risks and rewards.

• Examples include:

- Ownership is transferred at the end of the lease;

- Lessee has option to buy the asset at the end at a favourable prices so that it is likely to be bought;

- Lease term covers substantially all of the assets life;

- Present value of lease payments is substantially equal to the fair value of the asset.

IPSAS 13 – Finance Lease: Lessor Accounting

Derecognise the asset and recognise lease payments

receivable equal to the net investment in the lease.

Finance revenue – will include both interest and

capital.

IPSAS 13 – Operating Lease

Lessor – keeps the asset and records lease revenue on a

straight line basis

Lessee – records lease payments on a straight line basis

IPSAS 13 – Disclosures: Finance Lease

Lessees: carrying amount of asset; reconciliation between total

minimum lease payments and their present value; payments due in

bands of years (leases than 1; 1-5, >5); total future minimum lease

payments receivable under non-cancellable sub-leases.

Lessors: reconciliation between gross investment in the lease and

the present value of the minimum lease payments (also split by

IPSAS 13 – Disclosures: Operating Lease

Lessees:

total of non-cancellable minimum lease payments payable

(split by years); contingent rent, minimum lease and sublease

payments recognised as an expense; total future minimum lease

payments receivable under non-cancellable sub-leases.

Lessors: future minimum lease payments receivable under

IPSAS 32 – Service Concession Arrangements

• Objectives: To prescribe the accounting for service concession arrangements by the grantor, a public sector entity.

• Definitions: A service concession arrangement is a binding arrangement between a grantor and an operator in which the operator a) uses the service concession asset to provide a public service on behalf of the grantor for

IPSAS 32 – Recognition & Measurement of Asset

• The grantor recognises a service concession asset if:

a) The grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and

b) The grantor controls — through ownership, beneficial entitlement, or otherwise — any significant residual interest in the asset at the end of the term of the arrangement.

• For whole of life assets, only a) needs to be met.

IPSAS 32 – Recognition & Measurement of Liability

Obligation as a result of the binding arrangement to deliver cash or another financial

asset

Grant the right to earn revenue from 3rd parties. Economic substance is increase in net assets,

depends on how operator is compensated

IPSAS 32 – Disclosures

Present information in accordance with IPSAS 1

A description of the arrangement and its significant terms

Any changes in the arrangement during the period

IPSAS 35 – Consolidated Financial Statements

• Objectives: To establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

• Definitions:

- Consolidated financial statements: are the financial statements of an economic entity in which the assets, liabilities, net assets/equity, revenue, expenses and cash flows of the controlling entity and its controlled entities are presented as those of a single economic entity.

IPSAS 35 – Consolidated Financial Statements

• Consolidation process of presenting financial statements of all entities that make up an economic entity on a consolidated basis

Entity A

IPSAS 35 – Control

• have

power

over the other entity;

• have exposure, or rights, to variable

benefits from its involvement in the

other entity;

IPSAS 35 – Consolidation procedure

Align accounting policies and reporting dates

Line by line consolidation – add assets, liabilities, income,

expenditure together

Intra-group eliminations of transactions and balances – in full

Latest IPSAS developments

• Key public sector standards being created:

- Social Benefits

- Heritage Assets

- Non-Exchange Expenses (and Income)

- Public Sector Specific Financial Instruments

• Social Benefits

- 3 models proposed: Obligating event approach, Social contract, Insurance contract

- Consultation in July 2015, expecting exposure draft soon

• Public Sector Specific Financial Instruments

IFRS developments impact on IPSAS

• IFRS 15 hinges on commercial contracts being in place. This is not always the case in the public sector

• UK analysis shows IFRS 15 can be applied to government entities without adaptations

IFRS 15 – change in model to recognise income, away from

transactional model to contract model approach

• Issue for public sector: need to review all existing lease agreements and other commercial

agreements to identify finance lease arrangements • Symmetry of accounting is lost between lessor and

lessee

IFRS 16 – change in definition from transfer of risks and rewards to obtaining

substantially all economic benefits means that finance

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