Interpretation andApplication of IPSAS

Interpretation andApplication of IPSAS

Caroline Aggestam-PontoppidanIsabelle Andernack

This edition first published 2016© 2016 Caroline Aggestam-Pontoppidan and Isabelle Andernack

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Library of Congress Cataloging-in-Publication Data

Names: Aggestam-Pontoppidan, Caroline, 1975– Andernack, Isabelle, 1972–Title: Interpretation and application of IPSAS / Caroline Aggestam-Pontoppidan.Description: Hoboken : Wiley, 2016. Series: Wiley regulatory reporting

Includes bibliographical references and index.Identifiers: LCCN 2015037506 (print) ISBN 9781119010296 (paperback)Subjects: LCSH: Finance, Public–Accounting–Standards. International public sector accountingstandard.Classification: LCC HJ9733 .A34 2016 (print) LCC HJ9733 (ebook) DDC

657/.8350218–dc23LC record available at http://lccn.loc.gov/2015037506

A catalogue record for this book is available from the British Library.

ISBN 978-1-119-01029-6 (pbk) ISBN 978-1-119-01031-9 (ebk)ISBN 978-1-119-01030-2 (ebk) ISBN 978-1-119-17032-7 (ebk)

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Set in 11/12pt Times by Aptara Inc., New Delhi, IndiaPrinted in Great Britain by TJ International Ltd, Padstow, Cornwall, UK

CONTENTS

Foreword vii

Acknowledgements ix

About the Authors xi

List of IPSAS with Corresponding IFRS xiii

List of IPSAS with Brief Description xv

Disclaimer xix

Part 1 Introducing Public Sector Accounting

1 Introduction 3

2 Why Converge Public Sector Accounting Practices? 11

3 The IPSASB 17

Part 2 Accrual-Based IPSAS

4 The IPSASB Conceptual Framework and Key AccrualAccounting Concepts 35

5 Financial Statements 55

6 Disclosure Standards 109

7 Long-Term (Non-Current) Assets 123

8 Current Assets 167

9 Service Concession Arrangements: Grantor 175

10 Leases and Leasing Arrangements 187

11 Revenues and Expenses 207

12 Employee Benefits, Social Benefits, and Other Liabilities 243

13 Provisions and Contingencies 257

14 Budget Reporting 271

15 Financial Instruments 285

16 Consolidations and Strategic Investments 307

17 Specific Standards: Accounting for Agriculture and Accounting inHyperinflation Economies 327

18 Recommended Practice Guidelines (RPGs) 339

Part 3 Cash-Based IPSAS

19 Cash Basis IPSAS 351

v

vi Contents

Part 4 Making the Transition to IPSAS and Closing

20 Making the Transition to IPSAS 375

Conclusion 407

Annex 1: Brief Description of IPSAS 409

Annex 2: Key Characteristics of Public Sector Entities 413

Annex 3: Employee Benefits: An Overview of the Key Principles 415

Annex 4: Appendix to Chapter 21. Transition to IPSAS. Case Example:Iceland IPSAS Implementation Plan 417

Bibliography 425

Index 431

FOREWORD

It is with pleasure that I am writing this foreword to Interpretation and Applicationof IPSAS, which has been authored by Caroline Aggestam-Pontoppidan and IsabelleAndernack.

International Public Sector Accounting Standards (IPSASs) are issued by theIPSAS Board (IPSASB) for use by public sector entities around the world in thepreparation of their financial statements, and are intended to improve the quality offinancial reporting.

However, although an entirely accurate picture is difficult to obtain, it wouldappear that adoption and implementation of IPSAS around the world has been slowerthan expected. It is hopefully the case that the next few years will see many morepublic sector organizations on all continents embracing IPSAS, and thereby upgradingthe reporting, the accountability and the transparency of their organizations.

Relatively few publications dealing with the practical adoption of IPSAS havebeen available to implementers and other interested parties so far, and it is to every-body’s benefit to see this work, entitled Interpretation and Application of IPSAS,being published.

In particular, I am pleased to see a text that includes examples and mini-case stud-ies that help to illustrate how IPSAS is applied – this will be very helpful for trainingand education purposes. This book also provides useful insights into navigation of thetransition to IPSAS, either under the accrual basis or cash basis of accounting.

I am confident that this important work will be of significant benefit to the relevantcommunities, and congratulate the authors on their achievement.

By Marc Gardiner BSc (Econ) CPA, Chief ExecutiveOfficer of IASeminars Ltd., London

IASeminars is an independent global financial training company specialising ininternational accounting seminars (IFRS & US GAAP & IPSAS) and other financialtraining events.

vii

ACKNOWLEDGEMENTS

The process of writing this book has been enabled by the inspiration and support ofa number of individuals from the global “IPSAS-community”, who have taken timeout to help us.

Firstly, we are sending our sincere appreciation to the commissioning team atJohn Wiley & Sons Ltd. We have had the pleasure of being supported by wonder-ful, encouraging and helpful people, such as Stephen Mullaly, Gemma Valler andTessa Allen.

Secondly, we would like to thank the knowledgeable IPSAS practitioners whohave granted us permission to use IPSAS compliant financial statements. We areparticularly thankful to Ms. Nutan Wozencroft (UNESCO) and Mr. Uday Dayal(formerly at the IAEA). We send special appreciation to Melissa Dias Buerbaumer,Ph.D., CPA, and Chief of Accounts at the OSCE, who has lent us her expertise andhas let us include two practical case studies, based on her experiences of adoptingIPSAS. For this we are grateful.

In addition to those who have directly contributed to this book, we would liketo mention that a number of organizations, such as the CIPFA and IASeminars, havebeen valuable resources in the writing of this book. We are also thankful to the well-maintained website of the IPSASB, which allows any public sector accountant to stayfully abreast of the developments in IPSAS and other work related to the IPSASB.

Also, we send our special thanks to Gary Bandy for his review of the manuscriptand invaluable suggestions for improvements hereof.

Thirdly, we want to thank former and present colleagues, both in the academic andthe practice communities, who, through conversations about public sector accountingand IPSAS, have provided insight and inspiration that has helped to shape this book.Specifically, we thank our respective departments at the Copenhagen Business Schooland Sorbonne University for supporting us with the writing of this book.

Finally, we both thank our respective families, who have endured us spendingmany long days and nights in front of our computers.

Any errors or flaws in the book remain the authors’ responsibility.

ix

ABOUT THE AUTHORS

CAROLINE AGGESTAM PONTOPPIDAN

Caroline Aggestam Pontoppidan (Ph.D) works as an Associate Professor at theDepartment of Accounting and Auditing at the Copenhagen Business School (CBS).She earned her Ph.D in auditing in 2005. Caroline is an experienced educator andresearcher who today specializes in International Public Sector Accounting Standards(IPSAS) and other international accounting and auditing issues in the public sector aswell as the education of public sector accountants.

Since completing her Ph.D, she has carried out research on the development ofpublic sector accounting at the global level as well as providing training services forvarious public sector entities on International Standards of Auditing (ISA) as well ason the interpretation and application of IPSAS.

Caroline previously spent three years in Japan teaching and researching emergingaccounting and auditing issues. In addition, she has practical work experience fromhaving served a number of United Nations agencies for more than eight years in total.Her work within international organizations has included, for example, business pro-cess re-engineering and the provision of technical advice on accounting and internalcontrol systems.

ISABELLE ANDERNACK

Isabelle Andernack is a French Chartered Accountant (Diplomee d’expertisecomptable) and Financial Auditor (Commissaire aux comptes), and a Member ofthe French financial analysts’ institution (Societe francaise des analystes financiers,SFAF).

She has nearly 20 years of professional experience in both the private and publicsectors, including training, accounting, managing transitions to new accounting sys-tems, planning and implementation. and specifically International Financial ReportingStandards (IFRS) and International Public Sector Accounting Standards (IPSAS).

She has worked on many high-profile accounting and audit training and consultingengagements, both in the public as well as in the private sector. Recently Isabelle hasbeen implementing an ERP (enterprise resource planning) system for an internationalorganization that she had previously converted from cash accounting to the accrualbasis of accounting under IPSAS, in order to improve its management and long-termfinancial and business strategy.

Isabelle is a lecturer at Paris I Pantheon-Sorbonne University and at CFAF(Training Centre for French Financial Analysts). To follow the work of Carolineand Isabelle on IPSAS please visit www.ipsasapplied.com.

xi

LIST OF IPSAS WITH CORRESPONDING IFRS

FULL LISTING OF ALL IPSAS AND IFRS “EQUIVALENT” AS AT 2MARCH 2015

IPSASIFRS “equivalent”

(if applicable)

IPSAS 1—Presentation of Financial Statements IAS 1IPSAS 2—Cash Flow Statements IAS 7IPSAS 3—Accounting Policies, Changes in Accounting Estimatesand Errors

IAS 8

IPSAS 4—The Effects of Changes in Foreign Exchange Rates IAS 21IPSAS 5—Borrowing Costs IAS 23IPSAS 6—Consolidated and Separate Financial Statements1 IAS 27 (replaced)IPSAS 7—Investments in Associates2 IAS 28 (replaced)IPSAS 8—Interests in Joint Ventures3 IAS 31 (replaced)IPSAS 9—Revenue from Exchange Transactions IAS 18IPSAS 10—Financial Reporting in Hyperinflationary Economies IAS 29IPSAS 11—Construction Contracts IAS 11IPSAS 12—Inventories IAS 2IPSAS 13—Leases IAS 17IPSAS 14—Events after the Reporting Date IAS 10IPSAS 15— (withdrawn)4

IPSAS 16—Investment Property IAS 40IPSAS 17—Property, Plant, and Equipment IAS 16IPSAS 18—Segment Reporting IAS 14 (replaced)IPSAS 19—Provisions, Contingent Liabilities and Contingent Assets IAS 37IPSAS 20—Related Party Disclosures IAS 24IPSAS 21—Impairment of Non-Cash-Generating Assets N/A5

IPSAS 22—Disclosure of Information about the General Government Sector N/AIPSAS 23—Revenue from Non-Exchange Transactions (Taxes andTransfers)

N/A

IPSAS 24—Presentation of Budget Information in Financial Statements N/AIPSAS 25—Employee Benefits IAS 19IPSAS 26—Impairment of Cash-Generating Assets IAS 36IPSAS 27—Agriculture IAS 41IPSAS 28—Financial Instruments: Presentation IAS 32IPSAS 29—Financial Instruments: Recognition and Measurement IAS 39

1To be replaced by IPSAS 34 and IPSAS 35.2To be replaced by IPSAS 36.3To be replaced by IPSAS 37.4Replaced by IPSAS 28, IPSAS 29, and IPSAS 30 for accounting periods beginning on or after 1 January2013.5N/A: not applicable.

xiii

xiv List of IPSAS with Corresponding IFRS

IPSAS 30—Financial Instruments: Disclosures IFRS 7IPSAS 31—Intangible Assets IAS 38IPSAS 32—Service Concession Arrangements: grantor N/A

IPSAS 33—First-Time Adoption of Accrual Basis IPSASsAn entity shall apply those amendments for annual financial statementscovering periods beginning on or after 1 January 2017. Earlier applicationis permitted. If an entity applies IPSAS 33 for a period beginning before 1January 2017, the amendments shall also be applied for that earlier period.

IFRS 1

IPSAS 34—Separate Financial StatementsAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 35, IPSAS 36,IPSAS 37, and IPSAS 38 at the same time.

IAS 27 (2011)

IPSAS 35—Consolidated Financial StatementsAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 34, SeparateFinancial Statements, IPSAS 36, IPSAS 37, and IPSAS 38 at the same time.

IFRS 10

IPSAS 36—Investments in Associates and Joint VenturesAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 34, IPSAS 35,IPSAS 37, and IPSAS 38, Disclosure of Interests in Other Entities, at thesame time.

IAS 28 (2011)

IPSAS 37—Joint ArrangementsAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 34, IPSAS 35,IPSAS 36, and IPSAS 38, Disclosure of Interests in Other Entities, at thesame time.

IFRS 11

IPSAS 38—Disclosure of Interests in Other EntitiesAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged.

IFRS 12

LIST OF IPSAS WITH BRIEF DESCRIPTION

IPSAS 1 Presentation of Financial Statements sets out the overall considerations forthe presentation of financial statements, guidance for their structure and minimumrequirements for the content of financial statements prepared under the accrual basisof accounting.

IPSAS 2 Cash Flow Statements requires the provision of information about thechanges in cash and cash equivalents during the financial period from operating,investing and financing activities.

IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors specifiesthe accounting treatment for changes in accounting estimates, changes in accountingpolicies and the correction of material errors.

IPSAS 4 The Effects of Changes in Foreign Exchange Rates deals with accountingfor foreign currency transactions and foreign operations, sets out the requirements fordetermining which exchange rate to use for the recognition of certain transactions andbalances, and prescribes how to recognize the financial effect of changes in exchangerates within the financial statements.

IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowing costsand requires either the immediate expensing of borrowing costs or, as an allowedalternative treatment, the capitalization of borrowing costs that are directly attributableto the acquisition, construction, or production of a qualifying asset.

IPSAS 6 Consolidated and Separate Financial Statements requires all controllingentities to prepare consolidated financial statements, which consolidate all controlledentities on a line-by-line basis.

IPSAS 7 Investments in Associates requires all such investments to be accounted forin the consolidated financial statements using the equity method of accounting.

IPSAS 8 Interests in Joint Ventures requires proportionate consolidation to be adoptedas the benchmark treatment, and the equity method of accounting as an allowedalternative to account for joint ventures.

IPSAS 9 Revenue from Exchange Transactions establishes the conditions for therecognition of revenue arising from exchange transactions, and requires such revenueto be measured at the fair value of the consideration received or receivable.

IPSAS 10 Financial Reporting in Hyperinflationary Economies describes the charac-teristics of a hyperinflationary economy and requires financial statements of entitiesthat operate in such economies to be restated so that the financial information providedis meaningful.

xv

xvi List of IPSAS with Brief Description

IPSAS 11 Construction Contracts defines construction contracts and establishesrequirements for the recognition of revenues and expenses arising from such con-tracts.

IPSAS 12 Inventories establishes the measurement requirements for inventories(including those held for distribution at no or nominal charge), and provides guidanceon the assignment of costs.

IPSAS 13 Leases establishes requirements for the accounting treatment of operatingand finance leases by lessees and lessors.

IPSAS 14 Events After the Reporting Date establishes requirements for the treat-ment of certain events that occur after the reporting date, and distinguishes betweenadjusting and non-adjusting events.

IPSAS 15 Financial Instruments: Disclosure and Presentation has been supersededby IPSAS 28 Financial Instruments: Presentation, IPSAS 29 Financial Instruments:Recognition and Measurement, and IPSAS 30 Financial Instruments: Disclosures.

IPSAS 16 Investment Property establishes the accounting treatment and related dis-closures for investment property, providing for application of either a fair value orhistorical cost model.

IPSAS 17 Property, Plant and Equipment (PPE) establishes the accounting treatmentfor property, plant and equipment, including the basis and timing of their initialrecognition, and the determination of their ongoing carrying amounts and relateddepreciation.

IPSAS 18 Segment Reporting establishes requirements for the disclosure of financialinformation of the distinguishable activities of reporting entities.

IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets establishesrequirements for the recognition and measurement of provisions, and the disclosureof contingent liabilities and contingent assets.

IPSAS 20 Related Party Disclosures establishes requirements for the disclosure oftransactions with parties that are related to the reporting entity.

IPSAS 21 Impairment of Non-Cash-Generating Assets prescribes the procedures thatapply to determine whether a non-cash-generating asset is impaired and to ensure thatimpairment losses are recognized.

IPSAS 22 Disclosure of Financial Information About the General Government Sectorprescribes disclosure requirements for governments that elect to present informationabout the general government sector in their consolidated financial statements.

IPSAS 23 Revenue from Non-Exchange Transactions deals with issues that need tobe considered in recognizing and measuring revenue from non-exchange transactions.

IPSAS 24 Presentation of Budget Information in Financial Statements sets out therequirement for a comparison of budget amounts and the actual amounts arising from

List of IPSAS with Brief Description xvii

execution of the budget to be included in the financial statements, and a reconciliationof the actual amounts in the budget to actual amounts in the financial statements.

IPSAS 25 Employee Benefits prescribes the accounting treatment and disclosurerequirements of employee benefits, including the timing of recognition of liabilitiesand expenses.

IPSAS 26 Impairment of Cash-Generating Assets prescribes the procedures thatapply to determine whether a cash-generating asset is impaired and to ensure thatimpairment losses are recognized.

IPSAS 27 Agriculture prescribes the accounting treatment and disclosures for bio-logical assets and agricultural produce at the point of harvest when they relate toagricultural activity.

IPSAS 28 Financial Instruments: Presentation establishes principles for presentingfinancial instruments as liabilities or net assets/equity and for offsetting financialassets and financial liabilities.

IPSAS 29 Financial Instruments: Recognition and Measurement establishes principlesfor recognizing and measuring financial assets, financial liabilities, and some contractsto buy or sell non-financial items.

IPSAS 30 Financial Instruments: Disclosures requires entities to provide disclosuresin their financial statements that enable users to evaluate (a) the significance offinancial instruments for the entity’s financial position and performance; and (b) thenature and extent of risks arising from financial instruments to which the entity isexposed during the period and at the end of the reporting period, and how the entitymanages those risks.

IPSAS 31 Intangible Assets prescribes the accounting treatment for recognizing andmeasuring intangible assets.

IPSAS 32 Service Concession Arrangements prescribes the accounting for serviceconcession arrangements by the grantor, a public sector entity.

IPSAS 33 First-Time Adoption of Accrual Basis IPSASs. An entity shall apply thoseamendments for annual financial statements covering periods beginning on or after 1January 2017.

IPSAS 34 Separate Financial Statements. An entity shall apply this Standard forannual financial statements covering periods beginning on or after 1 January 2017.

IPSAS 35 Consolidated Financial Statements. An entity shall apply this Standardfor annual financial statements covering periods beginning on or after 1 January2017.

IPSAS 36 Investments in Associates and Joint Ventures. An entity shall apply thisStandard for annual financial statements covering periods beginning on or after 1January 2017.

xviii List of IPSAS with Brief Description

IPSAS 37 Joint Arrangements. An entity shall apply this Standard for annual financialstatements covering periods beginning on or after 1 January 2017.

IPSAS 38 Disclosure of Interests in Other Entities. An entity shall apply this Standardfor annual financial statements covering periods beginning on or after 1 January2017.

DISCLAIMER

This book should not be used as a substitute for obtaining professional advice andinput when adopting either cash based or accrual based IPSAS. The brief summaries ofIPSAS requirements and principles provided in this book should be read in conjunctionwith the IPSASs and other guidance materials as promulgated by the IPSASB, whichare copyrighted by the IFAC. The IPSASB website will provide a reader with updateson all new developments.

It should also be noted that this book does not contain advice on accountingtreatments and does not consider the particular legal or other regulatory requirementsof specific countries.

Readers of this book who are working on the implementation of IPSAS areencouraged to contact IPSAS specialists to obtain advice and support specific to theircircumstances and requirements.

xix

PART 1INTRODUCING PUBLIC SECTORACCOUNTING

1 INTRODUCTION

Aim of the Book 4IPSAS and Public Sector Entities 4

Structure of the Book 6

International Public Sector Accounting Standards (IPSAS) are gaining increasingacceptance globally (see Table 1.1 for a full listing of all IPSAS). Public adminis-trators are today encountering important challenges in reducing the distance betweenaccounting systems within countries as well as across borders. This entails a movetowards harmonization1 of accounting practices in the public sector and thus requireschoosing an appropriate set of accounting and financial reporting standards (see alsoCaperchione, 2015).

The focus on creating one common set of standards at the global level is relativelynew, in comparison to what we have witnessed for the private sector, with the globalspread and institutionalization of International Financial Reporting Standards (IFRS)(see also for example Ball, 2012).

Many governments across the globe operate on a cash basis (or modified cashbasis2) and do not account for many significant items, such as liabilities for pub-lic sector pensions and financial instruments. Accrual accounting is a fundamentaltenet of strong accounting and reporting for public companies, and so it should befor governments as well. This is why the adoption of accrual accounting by publicsector entities should result in a more comprehensive and accurate view of the finan-cial position, and help to ensure that governments and other public sector entities aretransparent and accountable. It should also be noted, however, that in some cases, gov-ernments do not have standardized practices for applying cash-basis accounting and,in such cases, applying cash-basis IPSAS could be a first step towards transparencyand accountability.

The International Public Sector Accounting Standards Board (IPSASB) and theIPSAS that it establishes have increasingly become a point for international standard-ization and reference within the area of public sector accounting. The IPSASB is,today, an independent standard-setting board under the auspices of the InternationalFederation of Accountants (IFAC). It has been said that the issuing of the completeConceptual Framework in 2014 has served as a “landmark document that firmly

1 Harmonization refers to a “process of increasing the compatibility of accounting practices by settingbounds to their degree of variation” (Nobes, 1991: 70).2 A modified cash accounting system recognizes transactions on a cash basis during the year, but it alsoincorporates the unpaid accounts and/or receivables at year’s end (Christiaens, Reyniers, and Rolle, 2010:539).

3

4 Interpretation and Application of IPSAS

places IPSASB alongside its private sector counterpart, the International AccountingStandards Board (IASB), as an international standard setter” (Cain, 2014).

AIM OF THE BOOK

The aim of this book is to provide the reader with an overview of IPSAS witha focus on their practical application and interpretation. With this in mind, the bookincludes numerous examples of their application by governments and public sectorentities that are issuing IPSAS-compliant financial statements. By drawing on exam-ples, practice highlights on specific accounting and reporting issues, and IPSAS, thisbook seeks to be a comprehensive guide on how to apply accrual-based IPSAS aswell as cash basis. The book thus aims to serve as a practical implementation guidefor IPSAS for practitioners, policy makers, academics, and students. Nevertheless, wewould like to emphasize that this book is not a replacement for reading the standardsthemselves. We therefore recommend reading this book in conjunction with the fullsuite of IPSAS3 in order to ensure that knowledge of all aspects of IPSAS is gained.

Readers will be able to find the answers to questions such as:� What is the role and history of IPSASB?� What is the scope of accrual-based IPSAS?� What is prescribed in the suite of IPSAS for accrual basis accounting?� What options do accrual-based IPSAS provide for measurement and recogni-

tion for each of the standards?� What are some of the key practical implementation issues when preparing

IPSAS-compliant financial statements?� What options are provided within IPSAS when determining key accounting

policy issues?� What is prescribed in cash-basis IPSAS?� How does one prepare a transition to cash-basis IPSAS or to accrual-based

IPSAS?

IPSAS AND PUBLIC SECTOR ENTITIES

International Public Sector Accounting Standards (IPSAS) apply to public sectorentities. Public sector entities can seem to be an obvious concept, but it is worthdefining the key characteristics of public sector entities (see also Annex 2 at the endof this book).

As with applying any set of accounting standards, the first issue is to ensure thatthe scope is well defined and the preselected set of standards is really the one adaptedto the current situation and entity.

3 The standards are available in full at IFACs website (www.ifac.org): see under the section on IPSASB. Itshould be noted that the approved text of IPSAS is that published in the English language by the IPSASB.The IPSASB Handbook has been translated from English into a number of languages, including French,Spanish, German, Russian, and Chinese. The Arab Society of Certified Accountants (ASCA) of Jordanhas issued an Arabic version of the IPSASB Handbook.

Chapter 1 / Introduction 5

The Conceptual Framework of IPSAS states that it applies to financial reportingby public sector entities, i.e.:

� National, state/provincial and local governments;� Government ministries, departments, programs, boards, commissions, and

agencies;� Public sector social security funds, trusts, and statutory authorities; and� International governmental organizations. (Conceptual Framework § 1.8).

The Conceptual Framework states: “The objectives of financial reporting bypublic sector entities are to provide information about the entity that is useful tousers of GPFR (general purpose financial reporting) for accountability purposes andfor decision-making purposes (hereafter referred to as “useful for accountability anddecision-making purposes”)” (Conceptual Framework, § 2.1).

It also states that “the primary objective of governments and other public sectorentities is to deliver services to constituents rather than to generate profits” (ConceptualFramework, BC 2.18), which constitutes a major difference with entities (usuallycompanies) the purpose of which is to generate profits. In fact, governments around theworld are entrusted by their populations with managing their financial resources in asensible and cost-effective way. They collect revenues, largely through taxation, and inreturn are expected to deliver a wide range of public services such as education, health,infrastructure, and social transfers for the benefit of current and future generations. Itis not a matter of profitability.

Another key characteristic is that: “[c]itizens and other eligible residents aredependent on governments and other public sector entities to provide a wide rangeof services on an ongoing basis over the long term. The activities of, and decisionsmade by, governments and other public sector entities in a particular reporting periodcan have significant consequences for future generations of service recipients andfuture generations of taxpayers and other involuntary resource providers” (ConceptualFramework, BC 2.18). In other words, the timescale of public sector entities is muchlonger than the timescale of companies preoccupied by their year-end result. In publicsector entities, decisions can have impacts on the long run, even on future generationsof taxpayers.

“Most governments and other public sector entities operate within spending man-dates and financial constraints established through the budgetary process. Monitoringimplementation of the approved budget is the primary method by which the legisla-ture exercises oversight, and citizens and their elected representatives hold the gov-ernment’s management financially accountable” (Conceptual Framework, BC 2.18).Budget is another characteristic of public sector entities.

All these specificities make public sector entities different from private sectorentities.

At the same time, though, there are entities where it is not so easy to distinguishwhether they are public or private sector entities. Following IPSAS, governmentbusiness enterprises (GBEs) are not included within the scope of IPSAS. The scopesection of each standard within IPSAS specifically excludes GBEs and includes areference to the Preface to International Public Sector Accounting Standards (Preface),

6 Interpretation and Application of IPSAS

which states that GBEs apply International Financial Reporting Standards (IFRS)issued by the International Accounting Standards Board (IASB).

Currently the term GBE is defined in IPSAS 1, Presentation of Financial State-ments. A GBE is defined as an entity that has all of the following characteristics:

(a) Is an entity with the power to contract in its own name;(b) Has been assigned the financial and operational authority to carry on a busi-

ness;(c) Sells goods and services, in the normal course of its business, to other entities

at a profit or full cost recovery;(d) Is not reliant on continuing government funding to be a going concern (other

than purchases of outputs at arm’s length); and(e) Is controlled by a public sector entity (IPSAS 1.7).

In substance GBEs are no different from entities carrying out similar activities inthe private sector.4 GBEs typically operate to make a profit. GBEs may however alsohave limited community service obligations under which they are required to providesome individuals and organizations in the community with goods and services eitherat no charge or at a significantly reduced charge (IPSAS 1.12).

There is a wide range of entities being described as GBEs. In some cases, entitiesclearly do not meet the IPSASB definition of a GBE. In other cases there are differentinterpretations of the components of the definition of a GBE. In order to clarify thedefinition of a GBE, the IPSASB issued the Consultation Paper “The Applicabilityof IPSASs to Government Business Enterprises and Other Public Sector Entities” inAugust 2014, in which they sought comments by 31 December 2014.

In this Consultation Paper, the IPSASB acknowledges the role of regulators andother relevant authorities in each jurisdiction in determining which entities shouldbe required to prepare general purpose financial statements (GPFSs) and the suite ofaccounting standards to be applied. In its role as the international standard setter forthe public sector, the IPSASB considers that it has a responsibility to be transparentabout the types of public sector entities for which it is developing IPSAS.

This ongoing debate shows how important it is to define the scope of the applica-tion of IPSAS in the public sector, and illustrates some of the complexities that canbe identified in the debate on financial information within the public sector.

STRUCTURE OF THE BOOK

This book is divided into four key parts. The first part provides an introduction toglobal developments within public sector accounting more broadly as well as IPSAS.It introduces the IPSASB and its expanding role.

The second part provides an overview of cash-basis IPSAS. It addresses thekey technical issues and provides practical examples of the application of cash-basisIPSAS.

4 GBEs can comprise both trading enterprises, such as utilities, and financial enterprises, such as financialinstitutions.

Chapter 1 / Introduction 7

The third, and main, part of the book is devoted to a full review and explanation ofaccrual-based IPSAS as well as the conceptual framework underlying these standards.This is currently a suite of 38 standards5 (however IPSAS 35–37 will replace theexisting IPSAS 6–8). A number of IPSAS have been updated, and as a result we willsee some changes in IPSAS over the coming few years. These changes are highlightedwhere each standard subject to change is covered. In addition a specific chapter isdevoted to describing and discussing IPSASB work-in-progress.

Table 1.1 Full listing of all IPSAS and IFRS “equivalent” as at 1 March 2015

IPSASIFRS “equivalent”

(if applicable)

IPSAS 1—Presentation of Financial Statements IAS 1IPSAS 2—Cash Flow Statements IAS 7IPSAS 3—Accounting Policies, Changes in Accounting Estimates andErrors

IAS 8

IPSAS 4—The Effects of Changes in Foreign Exchange Rates IAS 21IPSAS 5—Borrowing Costs IAS 23IPSAS 6—Consolidated and Separate Financial Statements6 IAS 27 (replaced)IPSAS 7—Investments in Associates7 IAS 28 (replaced)IPSAS 8—Interests in Joint Ventures8 IAS 31 (replaced)IPSAS 9—Revenue from Exchange Transactions IAS 18IPSAS 10—Financial Reporting in Hyperinflationary Economies IAS 29IPSAS 11—Construction Contracts IAS 11IPSAS 12—Inventories IAS 2IPSAS 13—Leases IAS 17IPSAS 14—Events after the Reporting Date IAS 10IPSAS 15— (withdrawn)9

IPSAS 16—Investment Property IAS 40IPSAS 17—Property, Plant, and Equipment IAS 16IPSAS 18—Segment Reporting IAS 14 (replaced)IPSAS 19—Provisions, Contingent Liabilities and Contingent Assets IAS 37IPSAS 20—Related Party Disclosures IAS 24IPSAS 21—Impairment of Non-Cash-Generating Assets N/A10

IPSAS 22—Disclosure of Information about the General Government Sector N/AIPSAS 23—Revenue from Non-Exchange Transactions (Taxes andTransfers)

N/A(continued)

5 Please note that IPSAS 33–38 are only required to be applied as of 1 January 2017. See also Table 1.1at the end of this chapter, which provides a full listing of the accrual-based IPSAS and the correspondingIFRS (where applicable).

6 To be replaced by IPSAS 34 and IPSAS 35.7 To be replaced by IPSAS 36.8 To be replaced by IPSAS 37.9 Replaced by IPSAS 28, IPSAS 29, and IPSAS 30 for accounting periods beginning on/after 1 January

2013.10 N/A: not applicable.

8 Interpretation and Application of IPSAS

Table 1.1 (Continued)

IPSASIFRS “equivalent”

(if applicable)

IPSAS 24—Presentation of Budget Information in Financial Statements N/AIPSAS 25—Employee Benefits IAS 19IPSAS 26—Impairment of Cash-Generating Assets IAS 36IPSAS 27—Agriculture IAS 41IPSAS 28—Financial Instruments: Presentation IAS 32IPSAS 29—Financial Instruments: Recognition and Measurement IAS 39IPSAS 30—Financial Instruments: Disclosures IFRS 7IPSAS 31—Intangible Assets IAS 38IPSAS 32—Service Concession Arrangements: grantor N/AIPSAS 33—First-Time Adoption of Accrual Basis IPSASsAn entity shall apply those amendments for annual financial statementscovering periods beginning on or after 1 January 2017. Earlier applicationis permitted. If an entity applies IPSAS 33 for a period beginning before 1January 2017, the amendments shall also be applied for that earlier period.

IFRS 1

IPSAS 34—Separate Financial StatementsAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 35, IPSAS 36,IPSAS 37, and IPSAS 38 at the same time.

IAS 27 (2011)

IPSAS 35—Consolidated Financial StatementsAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 34, SeparateFinancial Statements, IPSAS 36, IPSAS 37, and IPSAS 38 at the same time.

IFRS 10

IPSAS 36—Investments in Associates and Joint VenturesAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 34, IPSAS 35,IPSAS 37, and IPSAS 38, Disclosure of Interests in Other Entities, at thesame time.

IAS 28 (2011)

IPSAS 37—Joint ArrangementsAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged. If an entity applies this Standard for a period beginning before1 January 2017, it shall disclose that fact and apply IPSAS 34, IPSAS 35,IPSAS 36 and IPSAS 38, Disclosure of Interests in Other Entities, at thesame time.

IFRS 11

IPSAS 38—Disclosure of Interests in Other EntitiesAn entity shall apply this Standard for annual financial statements coveringperiods beginning on or after 1 January 2017. Earlier application isencouraged.

IFRS 12