Paper presented by:

Ibrahim Hassan Dankwambo FCA,OONAccountant-General of the Federation of

Nigeria

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Transition to International Public sector Accounting Standards

(IPSAS)and their impact on Transparency , a case study

of Nigeria

Outline of Presentation

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IntroductionIPSAS RequirementsIPSAS StandardsConduct of IPSAS gap analysisBenefits of such transitionNigeria’s IPSAS gap analysisIdentified GapsWork programme to bridge the gaps.Preconditions for Migration to IPSAS based

StandardsTransition to IPSAS-issues and ChallengesImpact on TransparencyPrinciples of Fiscal transparencyConclusion

Introduction

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The users of financial statements have continued to increase greatly. Appropriately prepared financial statements present a barometer of the financial health of a country. It has been the endeavor of the office of Accountant-General of the Federation of Nigeria to develop a system for high quality financial statements capable of satisfying the requirements of all stakeholders.

As the world moves in a direction of a global village, we cannot remain isolated with our own systems and practices. We need to keep abreast with the latest developments in the international Community. Public sector accounting is witnessing some profound changes. While the commercial entities across the world are moving towards International Financial Reporting Standards (IFRS), Governments are harmonizing with International Public Sector Accounting Standards (IPSAS). International Public Sector Accounting Standards (IPSAS) issued by IPSAS Board constitute international framework for Government accounting..

Introduction Cond.

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The gap analysis study that was undertaken by the Federal Government of Nigeria is an attempt to benchmark Government Accounting in Nigeria with Cash IPSAS to identify the gaps. It is intended to identify the specific departure of Government Accounting system from cash basis IPSAS and chart a transition path for adoption of Accrual based IPSAS.

The study attempted to assess whether the country should adopt a limited version of the standards, as the processes of developing the standards have already considered any acceptable options that can be incorporated into the text of the standards.

With the conduct of this study by Nigeria and the necessary actions that were taken to bridge these gaps, it showed clearly that our adoption of IPSAS have supported developments in public sector financial reporting which are directed at improving decision making, financial management, and accountability.

It is therefore an integral element of reforms directed at promoting social and economic development.

International Public sector Accounting Standard (IPSAS)

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International Public Sector Accounting Standard (IPSAS) are a set of professionally developed, high quality, global Accounting Standards that require accounting on Cash or a ‘’full accruals’’ basis (i.e. all assets and liabilities are recorded).IPSAS generally encourages Governments to progress to the accrual basis of Accounting and harmonize national Requirements with the IPSASs prepared for application by entities adopting the accrual basis of Accounting.

IPSAS are tailored for the public sector and its use is considered best practice for public sector entities (Governments, Government business entities, non Governmental organizations and international organizations).

The international Public Sector Accounting Standards Board (IPSASB) is a standing Board of International Federation of Accountants (IFAC).The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting. The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees)

IPSAS adoption by countries

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IPSASs (cash or accrual) are gaining acceptance all over the world. Adoption of a uniform global standard would ensure understand ability of the financial statements on the part of international investors.The countries which have either adopted IPSAS or have undertaken the process to do so include: Afghanistan, Albania, Argentina, Bangladesh, China, Cyprus, East Timor, France, Gambia, Ghana, Hungary, India, Indonesia, Israel, Jamaica, Macedonia, Maldives, Malaysia, Nepal and Sri Lanka .

The adoption of IPSAS by Governments will improve the quality and comparability of Financial information reported by Public sector entities around the world. It will also strengthen domestic and international confidence in Public sector Financial Management .

Considerable number of countries have adopted the Accrual based International Public Sector Accounting Standards (IPSAS) this includes: United States of America, United Kingdom, Canada, New Zealand, Argentina, Bolivia, Brazil, Columbia, El-Salvador, Paraguay ,Peru, Chile, Ecuador, Honduras ,South Africa (with modifications) , Philippines, Romania, Russia etc

IPSAS Requirements

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Currently there are a total of 30 standards on the accrual basis of Accounting and one Standard on the cash basis of Accounting, issued by IPSAS. These are listed below:

IPSAS 1-Presentation of Financial Statements IPSAS 2-Cash flow Statement IPSAS 3-Acconting Policies, Changes in Accounting

estimate and errors IPSAS 4-The effects of changes in Foreign exchange rates IPSAS 5- Borrowing costs IPSAS 6- Consolidated and Separate Financial Statements IPSAS 7- Investments in Associates IPSAS 8- Interest in Joint Ventures IPSAS 9- Revenue from Exchange transactions IPSAS 10-Financial Reporting in Hyperinflationary

Economics IPSAS 11-Construction Contracts

IPSAS Standards

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IPSAS 12-InventoriesIPSAS 13-LeasesIPSAS 14-Events after Reporting dateIPSAS 15-Financial instruments:

Disclosure and PresentationIPSAS 16-Investment PropertyIPSAS 17-Property,Plant and

EquipmentIPSAS 18-Segment ReportingIPSAS19-Provisions,Contingent

Liabilities and Contingent Assets

IPSAS Standards

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IPSAS 20-Related Party disclosures IPSAS 21-Impairment of Non-Cash Generating Assets IPSAS 22-Disclosures of information about the General

Government sector IPSAS 23-Revenue from Non-Exchange Transactions-Taxes and

Transfer IPSAS 24-Presentation of Budget information in Financial

Statements IPSAS 25-Employee Benefits IPSAS 26-Impairment of Cash Generating Assets IPSAS 27-Agriculture IPSAS 28-Financial Instruments: Presentation IPSAS 29-Financial Instruments: Recognition and measurement IPSAS 30-Financial Instruments: Disclosures ED 40 Intangible assets ED 41 Entity combinations for exchange transactions. Cash basis IPSAS-Financial Reporting under the cash basis

of Accounting

Nigeria's IPSAS Gap Analysis

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In line with the Federal Government of Nigeria’s goal to significantly strengthen Governance and Accountability, reduce corruption and deliver services more effectively and efficiently, the Government received a credit from the international Development Association under the Economic Reform and Governance Project (ERGP) to conduct a Gap analysis between the International Public sector Accounting Standard (IPSAS) and relevant National Standard and Reporting System with a view of improving the state of Public Financial Management and Reporting.

The specific objective of the assessment is to develop a report for the countries authorities which will among other includes:

Conduct of IPSAS gap Analysis contd.

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Provide the Government and other stakeholders with a common well based knowledge as to where the country stands against the internationally developed norms of Public sector Financial Reporting;

Assess the consequences of the prevailing variances;

Provide a basis for measuring interim compliance Chart paths for improved compliance with IPSAS

cash basis . Provide a road map for migration to accrual based

IPSAS.

The adoption of a firmly based Accounting,reportingand auditing framework is no doubt a solid value proposition as it provides for competent Financial Reporting and transparency.

Benefits of the Transition

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With IPSAS gap analysis and the bridging of the identified gaps in Nigeria, the users of Financial information will be able to benefit from a common set of Public sector accounting and Auditing standards issued by International Federation of Accountants and International Organization of supreme Audit institutions that are consistent, coherent and understandable.

Migration to IPSAS based Standards will enable us to provide more meaningful information for decision makers and Improved consistency, quality and credibility of our Financial Reporting System

Strategic plans and reports we prepared became more meaningful as increased transparency provides a basis for our development partners and legislature to access whether resources are being used effectively and efficiently. Thus Enhancing Accountability, transparency and harmonization

The implementation of IPSAS based Standards makes it possible for efficient internal controls and results based management.

Its adoption has provided us with a unified approach to managing all funds and it has also ensured benchmarking with similar institutions and forecasting future flows of all resources to the organization.

Strategies adopted

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Collection of background information relating to the various laws and documents relevant for the work of the committee.

Collection of information relating to assessment of cash basis diagnostic tool 1 and 2 which led to the designed questionnaire 1 and 2.

There was a review of the questionnaire and interviews with the major stakeholders.

The filled questionnaires and diagnostic tools were analyzed and brain storming sessions were held to discuss the findings.

The committee tested the application of cash IPSAS to the Federal Government Financial Statement.

Based on this, the committee then put up an interim draft report pending the out-country analytical work and international study tour to some countries that are fully compliant to cash basis IPSAS and have successfully migrated to Accrual based IPSAS.

Already the 2009 Consolidated Financial statements have been presented and consolidated based on the requirements of IPSAS cash basis.

Strategies adopted Contd.

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A sensitization workshop was held with the major stakeholders like the Nigerian Accounting Standards Board, Accountants-General and Auditors-General of the states in Nigeria, members of the Finance and Public Accounts Committees of the two chambers of the National Assembly, office of the Auditor-General for the Federation, Budget office of the Federation, Fiscal Responsibility Commission, the Directors Finance and Accounts ,Heads of Account departments and relevant designated officials in the Ministries, Departments and Agencies. The recommendations made at the end of the workshop helped to ensure a hitch free programme to bridge the identified gaps.

Some of the identified gaps in the IPSAS Gap analysis that was conducted is briefly summarized below.

Identified Gap-Legal framework for Cash basis Accounting

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Legal basis for cash basis Accounting : The prevailing laws in Nigeria that guides the operations of Public Sector accounting did not specifically state the Accounting basis to be adopted. There is no specific mention in the authoritative documents relating to ‘cash basis’ of budgeting and accounting. ‘cash’ basis is presumed for budgeting and accounting. Federation Accounts Allocation Committee(FAAC) on standardization of Federal, States and local Government accounts merely made a pronouncement that accounting for government may continue on ‘cash’ basis.

This is merely a pronouncement on harmonized format of reporting which is however not legally enforceable .Not withstanding the absence of specific mention relating to cash basis, the financial statements of Federation are prepared on cash basis. There are no non-cash items in the statement of receipts and payments (Cash flow statement).

Identified Gap-Accounting for External Assistance

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Accounting for External Assistance (IPSAS 1.10.8 to 1.10.11). These sections require entity to disclose on the

face of the Financial Statement of Cash Receipts and Payments

External Assistance received during the reporting period. The requirements

can be summarized as: Disclosure of all External Assistance to

the reporting Entity; Disclosure of External Assistance paid by

Third Parties to settle obligations or purchase goods and services of the reporting Entity;

Details of the providers of the External Assistance to be disclosed; and

External assistance in form of Loans and Grants to be reported.

Accounting for External Assistance. Contd.

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Loans and borrowings are disclosed in financial statements if the loans pass through treasury. If the loans do not pass through treasury, they are not disclosed. Some external assistance (grants) are directly given to implementing agencies and are not reflected in financial statements of Federal Government. There are also loans received by implementing agencies directly. Such loans are not reflected in financial statements of federal government. However, they are to be eventually paid by Federal government. Committee for Accounting for Aid and Grants (2007) recommended that assistance received in kind should be valued and reflected in the financial statements.

Identified gap: Consolidation of the Accounts of Controlled entities

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IPSAS envisages recognition of all cash receipts, cash payments and cash balances controlled by the entity. This control may imply that Government will have to add the cash flows of the entities that it controls i.e., for example, para-statals like Government Companies, Corporations, Autonomous bodies etc. The cash flows does not mean merely the investments and dividends, but all cash flows through sales, purchases, receipts and payments of controlled entities, the net of which has to be consolidated with the entity.

The Consolidated Financial Statement of the Federal Government financial statements does not include all cash receipts, cash payments and cash balances of entities controlled by the Federal Government. There are many agencies which are primarily of the nature of Federal Government, but are operated as separate entities. The cash flows of these entities are not brought into the financial statements of Federation.

Identified gap-Cash out of Control

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IPSAS requires that an entity should disclose in the notes to the financial statements together with a commentary, the nature and amount of:

Significant cash balances that are not available for use by the entity;

cash balances that are subject to external restrictions; andSignificant Undrawn borrowing facilities that may be available

for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities.

The Government Accounting practices in Nigeria does not require such disclosures. Federal government did not encounter such situations till now since external borrowings themselves are not recorded in accounts of federal government. Generally all cash balance of Federal government is treated as available unrestricted for use.

Identified gaps-Correction of errors

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IPSAS provides that when an error arises in relation to a cash balance reported in the financial statements, the amount of the error that relates to prior periods should be reported by adjusting the cash at the beginning of the period. Comparative information should be restated, unless it is impracticable to do so.

An entity should disclose in the notes to the financial statements the following:

The nature of the error;The amount of the correction; andThe fact that comparative information has been

restated or that it is impracticable to do so.  

.

 

Correction of errors. Contd.

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The Government Accounting practices do not require the presentation of the restated information in case of prior period errors. The Treasury clearance account which is the transitory account for prior period errors depicts the amount of correction distinctly.

However, nature of error and comparatives are not mentioned in the financial statements. This information is available in the working sheets of the Office of the Accountant-General of the Federation (OAGF) and can be summarized in the financial statements as well.

It is however necessary that the additional information relating to correction of prior period errors is disclosed in the financial statements to be consistent with cash IPSAS

Identified Gap-Reporting date- Timeliness of report

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Timeliness of report submission. An entity should be in a position to issue its financial statements within six months of the reporting date, although a timeframe of no more than three months is strongly encouraged by IPSAS.

This is to ensure that such Financial Statements are useful to the users. Secondly the date the Financial Statement are authorized to be issued should be disclosed.

The authorization date is given as the date which the Financial Statement have received approval from the individual or body with the authority to Finalize the Statements. If there is a rare circumstances in which a body or authority have the power to amend the Financial Statement after issuance, this should be disclosed.

Section 49 (2) of the Fiscal Responsibility Act 2007 provides that the Federal Government shall not later than 7 months following the end of each Financial Year consolidate and publish in the mass media its audited Accounts for the previous year. The Accountant-General of the Federation in the Finance (Control & Management) Act is given 6 months to submit his consolidated Accounts to the Auditor-General, who have a total of 90 days to look into the Account before submitting to the National Assembly

Timeliness of report. Contd.

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As per the requirements of the laws indicated above, the Treasury has been able to issue the Consolidated Financial Statements with in the time required by the Fiscal Responsibility Act and the Finance (Control and Management) Act.

However, this falls short of the requirement of IPSAS.The accounts are not placed at the National Assembly within six months of the reporting period. This timeliness of submission of report as per the requirement of IPSAS is being pursued with vigor for realization for Government Accounting in Nigeria. This would substantially improve the timeliness and availability of accounting information to all the stakeholders.

Work programme to bridge gaps

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Itemized action plan

The office of the Accountant-General of the Federation of Nigeria (OAGF) has worked out an itemized action plan on various items discussed above as the identified gaps. The most significant issues are entity consolidation and timeliness of Account submission.

The Federal Government would need to consolidate the cash flows of all entities that it controls (including GBEs) with its financial statements. For practical convenience the consolidation of GBEs will be taken up in the long run while consolidation of all other entities is being immediately embarked upon.

For improving the timeliness, the time taken in Ministries, Departments and Agencies of Government including at the office of the Accountant-General of the Federation of Nigeria for finalization of Financial statements has been be crashed significantly. This is being facilitated through the use of Information Technology, the Government Integrated Financial Management Information System (GIFMIS) .

Preconditions for successful migration to IPSAS based Standards

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From Nigeria’s experience in the implementation of IPSAS based Accounting standards, we strongly believe that the following are preconditions for successful migration.

• An acceptable cash accounting based system - A sound accounting system that can generate reliable cash based data is an essential basis from which to start the move to an accrual framework.

Political ownership - It is critical that the planned introduction of IPSAS based Standard of Accounting is supported at the highest levels of the executive.

Technical capacity - International experience suggests that a lack of adequate technical resources can be a major impediment to successful implementation of IPSAS based accounting Standard. It is essential that a government considering such migration has either a core of officials with required technical (accounting, IT, etc.) skills, or the capacity to recruit such people for its key positions.

Automated Information Systems -- Although, in theory, cash or accrual accounting can be implemented with either a manual or an electronic system, in practice, it would be inadvisable for a government to attempt to implement full accrual accounting without the aid of a modern government financial management information system (GIFMIS) with proven functionality in areas such as general ledger, accounts payable, purchases, assets management, etc.

Preconditions Contd.

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To ensure seamless transition to IPSAS based standards there is the need to first take up pilot studies in select departments and offices to migrate IPSAS accounting requirements (Cash or Accrual) . The pilot studies may be based on IPSAS accrual. Accrual accounting does not necessarily mean a ‘full accrual’. Many nations across the world, targets a unique model of accrual accounting or modified accrual. The extent of accrual accounting appropriate for any country can be decided through pilot studies.

However this will entail some challenges that must be overcome.

Transition to IPSAS basis-issues and challenges

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Standardization of Accounts of the three tiers of Government like in the case of Nigeria that operates three tiers of Government,Federal,States and local Governments.

Seamless consolidation of the Accts of the three tiers of Govt. with uniform reporting format of having the same Chart of Accounts.

Need for the right staffing skills and levels Relevant enabling legislations need to be changed in line

with reality of the requirements of IPSAS. IT Hardware and Software development to automate the

process. Relevant Accounting manuals be reviewed and rewritten. Training and retraining of Accounting personnel. Central guidance is critical Automation of the Business Process is very critical. Change Management

Transition to IPSAS -issues and challenges (Contd.)

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Accounting curricula need to systematically convey IPSAS to students of Accountancy.

Continuing Professional Education on Ethics and Professional Responsibility

The profession needs to make commitment to producing IPSAS specialist. Such experts will be available as resource persons in cases where IPSAS is in use. IPSAS specialist should be knowledgeable about available resources that can help answer professional responsibility question. An IPSAS specialist should work to maintain an environment that stresses the importance of IPSAS adoption and implementation

Impact on transparency

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Fiscal transparency can be defined as public openness about the structure and functions of Government, Fiscal policy intentions, Public sector Accounts and Fiscal projections. Such openness is essential if discipline is to be imposed on Governments by making policy makers accountable for the design and implementation of fiscal policy.

Adherence to the requirements of IPSAS have made this possible for the Governments to comply to this.

The expected benefits from Fiscal transparency is shown below:

Impact on transparency Contd.

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Following the worldwide global Financial crisis, it is now widely recognized that the availability of timely and complete information is crucial in order to avoid these kinds of Economic crisis.

It is no surprise, therefore, that M. Camdessus, the Managing Director of the IMF, thinks of transparency as the "golden rule" of the new international financial system.

Transparency has been proposed for the agenda of multilateral negotiations such as those in the OECD, and pursued as a powerful objective of influential non-governmental organizations such as Transparency International.

Transparency Contd.

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Transparency in economic policy-making now also figures as an important condition for lending by international financial institutions. In sum, "transparency" has become the "buzz-word" of modern politics and economics.

Fiscal transparency can be defined as public openness about the structure and functions of Government, Fiscal policy intentions, Public sector Accounts and Fiscal projections. Such openness is essential if discipline is to be imposed on Governments by making policy makers accountable for the design and implementation of fiscal policy.

Adherence to the requirements of IPSAS based Standards have made this possible for the Governments to comply to easily to the requirements of IPSAS.

Fiscal transparency -benefits

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Fiscal transparency allows for better-informed debate by both policymakers and the public about the design and results of fiscal policy, and establishes accountability for its implementation.

In strengthening credibility and public understanding of macroeconomic policies and choices, fiscal transparency fosters more favourable access to domestic and international capital markets.

It also helps to highlight potential risks to the fiscal outlook, resulting in an earlier and smoother fiscal policy response to changing economic conditions and thereby reducing the incidence and severity of crises.

It provides benefits in terms of fiscal discipline and transparency

Principles for Fiscal Transparency

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For Fiscal transparency to be achieved the following principles should be adopted:

Clarity of roles and responsibilities. There should be a clear distinction between government and commercial activities, and there should be a clear legal and institutional framework governing fiscal administration and relations with the private sector. Policy and management roles within the public sector should be clear and publicly disclosed.

Open budget processes. Budget information should be presented in a way that facilitates policy analysis and promotes accountability. Budget documentation should specify fiscal policy objectives, the macroeconomic assumptions used in formulating the budget, and major fiscal risks. Procedures for collecting revenue and for monitoring approved expenditures should be clearly specified.

Public availability of information. The public should be provided with complete information on the past, current, and projected fiscal activity of government and on major fiscal risks. This should be readily accessible. Countries should commit to the timely publication of fiscal information.

Assurances of integrity. Fiscal data and practices should meet accepted quality standards and should be subjected to independent scrutiny.

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CONCLUSION

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The purpose of International Public Sector Accounting Standards (IPSAS) – cash or accrual – is to prescribe the manner in which general purpose financial statements should be presented. IPSAS apply to all public sector entities, from supra- national organisations, such as the UN, through sovereign or national governments to the smallest public sector entities, and only excluding Government Business Enterprises (which should report according to International Financial Reporting Standards – IFRS).

The paper examines the path towards transition to International Public sector Accounting Standards (IPSAS) and their impact on transparency using Nigeria as a case study with the conduct of the IPSAS gap analysis. It revealed a number of very useful findings. Financial reporting by sovereign or national governments is an increasingly important issue, and will become more so as the impact of the financial crisis on governments across the world becomes apparent. Government financial statements should provide critical information on the health of government finances which is useful and understandable by all citizens. Transiting to IPSAS(Cash or accrual ) basis enhances transparency, accountability and comparability.

Thank you.

The End QUESTIONS & ANSWERS

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References

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Accounting in Central Government.. NIGERIA, Public sector Accounting, A Comparison to International

Standards –Report of the Gap analysis Committee Practical Challenges in the Implementation of IPSAS in Nigeria-Paper

delivered by the Accountant-General of the Federation of Nigeria.