Global IPSAS Adoption ‒ A snapshot of GAAP differences between IPSAS and IFRS
Thomas Müller-Marqués Berger, IPSASB Member
November 26, 2013,
PD Week 2013, Ottawa, Canada
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Who is with you today?
Thomas Müller-Marqués Berger,
Partner
Ernst & Young
Ernst & Young GPS EMEIA
Assurance Leader and GPS Global
Accounting Leader
IPSAS Board Member (since 2009)
Chair of FEE PSC
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Agenda
► Main differences of the public sector – impact on the accounting
► Global overview on public sector accounting
► Relationship between IFRS and IPSAS
► Snapshot of GAAP differences between IPSAS and IFRS
► Future developments in global public sector financial reporting
► Questions & Answers
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Main differences of the public sector – impact on the accounting
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Main differences of the public sector Key characteristics
► Volume and significance of non-exchange transactions such as
taxes and transfers, or the provision of goods and services in a non-
market environment
► Importance of the budget
► Nature of PP&E: Provision of goods/services in the forefront –
assets often very specific in nature
► Responsibility for heritage assets
► Longevity of public sector entities
► Regulatory role of government
► Statistical reporting (GFS)
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Main differences of the public sector Specific standards for the public sector are required
Involuntary Transfers and Non-Exchange
Transactions
Importance of the Approved Budget
Nature and Purpose of Assets
Longevity of the Public Sector and the Nature
of Public Sector Programs
Regulatory Role of Public Sector Entities
Importance of Statistical Bases of Accounting
IPSAS 23
IPSAS 24
IPSAS 1, 17, 21, 31, 32
Long-term Sustainability
(RPG 1)
Conceptual Framework
IPSAS and GFS, IPSAS 22
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Main differences of the public sector Service potential as a specific issue
► Assets and liabilities within the public sector are acquired or incurred
as a result of an entity’s service delivery mandate, e.g.
► Heritage assets, parks, public buildings, research facilities etc.
► Therefore not cash flows are in the focus, but service potential
connected with assets (or liabilities)
► Definition:
► Essential part of the elements definitions (i.e. assets, liabilities,
revenues, expenses)
► Part of measurement of the elements, i.e. criterion for the value in
use reg. impairment
“Service potential is the capacity of an asset to be used by the entity to provide goods
and services that contribute to achieving the entity’s objectives. Service potential
enables an entity to achieve its objectives without necessarily generating net cash
inflows.” (cf. CF ED Phase 2)
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting
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Global overview on public sector accounting Status of public sector accounting around the globe
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting Basis of accounting and accounting systems in use
► Accrual accounting is used by the majority of the countries at the
federal level
► National public sector accounting systems are still predominant
19
7
1
3
0 2 4 6 8 10 12 14 16 18 20
Own accounting system
IPSAS-like standards
IPSAS cash basis
IPSAS accrual basis
Which accounting system is in use?
Total 30 answers
21.4%
21.4%
14.3%
42.9%
The current accounting system is based on…
Cameralistic/cash accounting Modified cash accounting
Modified accrual accounting Accrual accounting
Source: Ernst & Young, Toward transparency, A comparative study on the challenges of reporting for governments
and public bodies around the world, 2011
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Direct vs. indirect adoption
► Same can be observed for IFRS
Global overview on public sector accounting Legal adoption of IPSAS
IPSAS
Legislation refers
to IPSAS
Jurisdictional standards
based on IPSAS
Legislation refers
to jurisdictional
standards
Accounting
manual
Source: Bergmann, A: Public Sector Financial Management. FT Prentice Hall, 2009.
Implementation
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting Technical adoption – selection of the right conversion approach
Motivation Starting
point Conversion approach
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting Technical adoption – potential motivations for accounting reforms
Motiva-tions
Finance Statistics
Donor-driven Peer
comparison
Better PFM-infrastructure
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting Technical Adoption – Starting Points for Reforms
(Modified)
Cash
Basis
(Modified)
Accrual
Basis
Non-IPSAS-Compliance IPSAS-Compliance
Cash
Basis
Accrual
Basis
Cash
Basis
Accrual
Basis
Cash
Basis
Accrual
Basis
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting Technical adoption – overview on conversion approaches
► Africa ► Diverse picture (e.g. South Africa vs. Nigeria)
► Some African countries first move/moved to Cash Basis IPSAS
► Asia ► China pursues pilot projects for the provinces, staged approach
► Malaysia on the way to accrual until 1.1.2015 (federal and states) via Cash Basis IPSAS
► Europe ► Discussion: development of accrual-based European Public Sector Accounting Standards (EPSAS)
► Would cover all layers of administration (federal, states, agencies and municipalities)
► Phased approach; gradual adoption planned, exemptions for smaller entities
► Quality improvement of statistical data (for EDP purposes) as main driver of the reform
► MENA - United Arab Emirates ► “Best in Class”
► Focus on first IPSAS financial statements
► Russia ► Russia urges to adopt and implement IPSASs to strengthen global financial stability under its G20-
presidency; supported by World Bank
► South America - Brazil ► Direct move to accrual; “big bang” with Opening Balance as per 1.1.2015
► Reform covers all three stages of the public sector (federal, states and municipalities)
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global overview on public sector accounting Public sector accounting in Europe – Current status
European Public Sector
Accounting Standards (EPSAS)
Accrual accounting
Harmonized financial reporting
Alignment with GFS (ESA95)
Governance
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Global Overview on Public Sector Accounting IPSAS-compliance – the European landscape
Source: Ernst & Young, Overview and comparison of public accounting and auditing practices in the 27 EU Member States, prepared for
Eurostat, Final Report, 19 December 2012, page 230
Country (federal level) IPSAS-compliance
United Kingdom 95 %
Sweden 93 %
France 88 %
Spain 77 %
Italy 47 %
Netherlands 37 %
Ireland 36 %
Germany 34 %
Cyprus 21 %
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Relationship between IFRS and IPSAS
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Relationship between IFRS and IPSAS Overview
► IPSASs are largely based on the principles of IFRS
► In principle IPSASB follows a “Transaction neutral approach”
► Rationale: ensures greater comparability between private and public sector
reporting when accounting for similar types of transactions
► IPSASB typically takes an IFRS as a starting basis and follows the
“rules of the road”-approach
► But: significant gaps in IASB’s literature from a government point of
view, e.g.
► Impairment of non-cash generating assets
► Accounting for non-exchange transactions
► Presentation of budget information
► “Alignment” with Government Finance Statistics (GFS) gained more
and more of importance in recent years
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Relationship between IFRS and IPSAS Phases of IPSASB’s work program
Current work program of the IPSASB
► Through financial support of international institutions development
of a first set of accounting standards
(“Core Set”: IPSAS 1 – IPSAS 20)
Phase 1
(1997-2002)
Phase 3
(since 2010)
Phase 2
(2003-2010)
► Where relevant for the public sector, convergence with IAS/IFRS
as of 31.12.2008 was achieved
► Issuance of first standards to specific issues of the public sector
(IPSAS 21 – IPSAS 24)
► Development of a Conceptual Framework for the public sector
► Focus on specific issues of the public sector as well as further
development of existing standards (IFRSs convergence)
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Relationship between IFRS and IPSAS Rationale of IPSASB for deviating from IFRS
Process for reviewing and modifying IASB documents
No
1. Are there
public sector
issues that warrant
departure?
2. Should a
seperate public
sector project be
initiated?
3. Modify IASB
documents
4. Make IPSASB style and terminology changes
5. Seperate public
sector project
6. IPSASB document
Yes Yes
No
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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A snapshot of GAAP differences between IPSAS and IFRS
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GAAP differences between IPSAS and IFRS Reasons for the differences
Reasons for GAAP differences
(New) IFRS but
no IPSAS (so far)
IASB revised
IFRS, but IPSASB did not so far
There is an IFRS- equivalent IPSAS
but IPSASB revised the
underlying IFRS
There is an
IPSAS, but there is no IFRS equivalent
e.g. IFRS 12 or
IFRS 13
e.g. IFRS 10-11
e.g. IPSAS 17 or
IPSAS 25
e.g. IPSAS 21-24
Convergence issues Conceptual reasons
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual Differences IPSASB’s Conceptual Framework Project
Public Sector Conceptual Framework
IPSASs and RPGs
Phase 2
► Elements
and
Recognition
Phase 3
► Measure-
ment
Phase 4
► Presenta-
tion
Phase 1
► Role
► Objectives
and Users
► QCs
► Reporting
Entity
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Status/Papers ► Phase 1: Approved at December 2012 meeting, four final
chapters of Conceptual Framework published January 2013
► Phase 2 and 3: EDs approved in September 2012 meeting
► Phase 4: ED approved at March 2013 meeting
Objective and
major issues
Objectives: to develop a Public Sector Conceptual Framework
which is applicable to the preparation and presentation of
general purpose financial reports of public sector entities,
including but not necessarily limited to financial statements and
notes thereto.
Major issues:
► Primarily for public sector entities other than GBEs
► No simple interpretation of the IASB’s Framework
► Address specific circumstances of the public sector
Approval Approval of whole Conceptual Framework envisaged for June
2014
Conceptual Differences Current status of the Framework
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Comparison of the Conceptual Frameworks – Objective and Users
IPSASB‘s Conceptual
Framework
IASB‘s Conceptual Framework
Objective „to provide information about the
entity that is useful to users of
general purpose financial reports
(GPFRs) for accountability
purposes and for decision-making
purposes”
“provide information about the
reporting entity that is useful to
existing and potential investors,
lenders and other creditors in
making decisions about providing
resources to the entity”
Users Primary users: service recipients
and resource providers and their
representatives
Other users: analysts, media,
financial advisors, public interest
and lobby groups
Primary users: existing and
potential investors, lenders and
other creditors
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Comparison of the Conceptual Frameworks – Elements and Recognition
IPSASB (CF-ED2) IASB (DP 2013)
Elements ► Assets
► Liabilities
► Revenue
► Expenses
► Deferred inflows (under discussion)
► Deferred outflows (under discuss.)
► Ownership contributions and
► Ownership distributions
► Assets
► Liabilities
► Equity
► Income
► Expense
► (Cash receipts)
► (Cash payments)
► (Contributions of equity)
► (Distributions of equity)
► (Transfers between classes of equity)
Deferred inflows/outflows as elements: Four options
► Define deferred inflows/outflows as elements in a manner that does not predetermine presentation of the elements
► Derive the definitions of revenues and expenses from the asset and liability definitions
► Broaden the asset and liability definition
► Accept that certain economic phenomena do not meet the definition of any element
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Comparison of the Conceptual Frameworks – Measurement
IPSASB (CF-ED3) IASB (DP 2013)
► Historical cost
► Current values:
► Replacement cost
► Market value
► Net selling price
► Value in use
► Cost-based measurements
► Current market prices including fair value
► Other cash flow-based measurements
Major decisions of the IPSASB re. measurement:
► Definition of a measurement objective based on the objectives of financial reporting, including the provision of information on (a) operational capacity, (b) financial capacity and (c) the cost of services
► Fair value as defined in IFRS 13, Fair Value Measurement will likely not be adopted as a measurement basis for the public sector largely because of the specific meaning of the term “fair value”’ in IFRS 13
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Comparison of the Conceptual Frameworks – Presentation
IPSASB (CF-ED4) IASB (DP 2013)
Presentation Presentation is the selection, location and
organization of information that is displayed and
disclosed in the GPFRs.
Disclosure of financial information on the face
of an entity’s primary financial statements.
Display ► Displayed information communicates the key
messages in a GPFR.
► It is kept to a concise, understandable level, so
that users can focus on the key messages
► Displayed information is presented prominently,
using appropriate presentation techniques
Currently no equivalent in the IASB’s
Framework.
Disclosure ► Disclosed information makes displayed
information more useful
► Provides detail that will help users to under-stand
the displayed information, including
► (a) the basis for the displayed information
► (b) disaggregations of displayed information,
and,
► (c) items that share many but not all of the
aspects of displayed information.
► Disclosure is the process of providing
useful financial information about the
reporting entity to users.
► The financial statements, including the
amounts and descriptions presented in
the primary financial statements and the
information included in the notes to the
financial statements, are, as a whole, a
form of disclosure.
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
Conceptual differences Overview of GAAP differences (1)
Difference in content
(IFRS as at 1.1.2013)
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overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
Conceptual differences Overview of GAAP differences (2)
Difference in content
(IFRS as at 1.1.2013)
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Conceptual differences Overview of GAAP differences (3)
Difference in content
(IFRS as at 1.1.2013)
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Selected differences between IFRS and IPSAS (1)
IPSAS IFRS
(New) IFRS but no IPSAS (so far)
Fair value IPSASB has no equivalent to IFRS 13.
However, fair value is used in several IPSASs (e.g.
IPSAS 9, Revenue from Exchange Transactions,
IPSAS 12, Inventories, IPSAS 13, Leases etc.)
IASB has issued IFRS 13, Fair value measurement.
IASB revised IFRS, but IPSASB did not so far
Concept of control IPSAS 6.21 currently allows an exemption from
consolidation for temporarily controlled entities.
According to ED 48-52 this will not be able in the
future.
IAS/IFRS do no longer allow such an exemption.
Consolidation ‒
Investment entities
Currently, IPSAS 6-8 do not know the concept of
an investment entity. ED 48-52 also covers the
issue of consolidation of investment entities.
On 31 October 2012 the IASB published “Investment Entities”
(Amendments to IFRS 10, IFRS 12 and IAS 27), providing an
exception to the consolidation requirements in IFRS 10 for
investment entities (effective January 1, 2014).
Consolidation ‒
Jointly controlled
entities
According to IPSAS 8.35 and 8.43 a venturer shall
recognize its interest in a jointly controlled entity
using proportionate consolidation or the equity
method. According to ED 51 only the equity
method will be allowed in the future.
According to IFRS 11.24 a joint venturer shall recognise its
interest in a joint venture as an investment and shall account for
that investment using the equity method.
Employee benefits IPSAS 25.105 requires only to recognize actuarial
gains and losses as they exceed certain thresholds
(corridor approach)
According to IAS 19 (rev.) the corridor approach is no longer
allowed.
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
Conceptual differences Selected differences between IFRS and IPSAS (2)
IPSAS IFRS
There is an IFRS-equivalent IPSAS but IPSASB revised the underlying IFRS
IPSAS 1, Presentation of financial statements IAS 1, Presentation of financial statements
Presentation IPSAS 1 does not require the separate
presentation of other comprehensive income either
on the face or as additional statements
IAS 1.81A requires the separate presentation of profit and loss
and total other comprehensive income
IPSAS 5, Borrowing costs IAS 28, Borrowing costs
Capitalization IPSAS 5 allows entities the option of expensing
borrowing costs even if those borrowings costs are
directly attributable to the acquisition of a qualifying
asset (cf. IPSAS 5.17)
IAS 28.8 requires entities to capitalize borrowing costs that are
directly attributable to the acquisition, construction or production of
a qualifying asset as part of the cost of that asset.
IPSAS 9, Revenue from Exchange transaction,
IPSAS 13, Leases, IPSAS 17, PP&E, IPSAS 19,
Provisions, Contingent Liabilities and Contingent
Assets, IPSAS 31, Intangible Assets
IAS 18, Revenues, IAS 17, Leases, IAS 16, PP&E, IAS 37,
Provisions, Contingent Liabilities and Contingent Assets, IAS 38,
Intangible Assets
Service potential The concept of service potential is included in the
definition of elements (assets, liabilities, revenues,
expenses, ..) and is part of the measurement basis
(e.g. determination of depreciation period or
impairment of non-cash generating assets)
IFRSs do not know the concept of service potential.
IPSAS 17, PP&E IAS 16, PP&E
Heritage assets IPSAS 17 includes heritage assets within its
scope.
IAS 16 does not address heritage assets.
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Conceptual differences Selected differences between IFRS and IPSAS (3)
IPSAS IFRS
There is an IPSAS, but there is no IFRS equivalent
IPSAS 21, Impairment of Non-Cash-Generating Assets No IFRS equivalent
Service Potential An impairment is a loss in the future economic benefits or service
potential of an asset, over and above the systematic recognition of the
loss of the asset’s future economic benefits or service potential
through depreciation (cf. IPSAS 21.14).
N.A.
IPSAS 22, Disclosure of Financial Information about the General
Government Sector
No IFRS equivalent
GFS IPSAS 22 prescribes disclosure requirements for governments that
elect to present information about the general government sector
(GGS) in their consolidated financial statements
N.A.
IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and
Transfers)
No IFRS equivalent
Non-exchange
transactions
IPSAS 23 prescribes requirements for the financial
reporting of revenue arising from non-exchange transactions (taxes
and transfers)
N.A.
IPSAS 24, Presentation of Budget Information in Financial Statements No IFRS equivalent
Presentation An entity is required to present a comparison of budget and actual
amounts either as a separate additional financial statement or as a
budget column in the financial statements (only when the entity makes
publicly available its approved budget, cf. IPSAS 1.21(e))
Entities are not required to present budget and
actual amounts.
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Service potential as a specific issue
Carrying amount: Amount at which an
asset is recognized after deducting
any accumulated depreciation and
accumulated impairment losses.
Recoverable service amount: Higher of a
non-cash-generating asset’s fair value less
costs to sell and its value in use.
Carrying amount >
recoverable service
amount?
Value in use: Present value of the asset’s
remaining service potential. Fair value
Impairment of non-cash-generating assets
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Non-exchange revenue
Revenue Recognition
Major types of non-exchange
transactions
Taxes Transfers
Timing of revenue
recognition (taxable event) Revenue recognition
depending on stipulations
(conditions versus
restrictions)
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Conceptual differences Presentation of budget information in financial statements
The differences between the final budget figures and the
corresponding actual amounts show how an entity was able to
comply with the budget.
IPSAS 24 requires a comparison of budget amounts and the
actual amounts arising from execution of the budget to be
included in the financial statements of entities that are required to,
or elect to, make publicly available their approved budget(s).
Comparison of budget and actual amounts contributes to
transparency and accountability.
Original
budget
Final
budget
Actual amounts
(accounts) on
comparable
basis
Differences
between final
budget and
actual
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
Questions & Answers
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Future developments in global public sector financial reporting
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Future developments in global public sector financial reporting
► Harmonization of public sector accounting as global trend
► Set of IPSAS standards will gain increasing global acceptance the
more the IPSASB focuses on public sector specifics
► IPSAS implementation will strengthen public sector financial
management
► Not only convergence with IFRS, but also convergence with GFS
(“Alignment”) => “Grand convergence” (including budgeting)?
Main differences Global
overview Relationship
Snapshot of GAAP
differences
Future developments
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Questions & Answers
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Publications of EY
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Thank your for your attention!
Thomas Müller-Marqués Berger Wirtschaftsprüfer ● Steuerberater
Partner
Phone: +49 711 9881 15844
Mobil: +49 160 939 15844
Fax: +49 181 3943 15844
thomas.mueller-marques.berger
@de.ey.com
Ernst & Young GmbH
Wirtschaftsprüfungsgesellschaft
Mittlerer Pfad 15
70499 Stuttgart
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