The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:
- is transparent for users and comparable over all periods presented;
- provides a suitable starting point for accounting under International Financial Reporting Standards (IFRSs); and
- can be generated at a cost that does not exceed the benefits to users.
An entity’s first IFRS financial statements are the first annual financial statements in which the entity adopts IFRSs, by an explicit and unreserved statement in those financial statements of compliance with IFRSs.
An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRSs. This is the starting point for its accounting under IFRSs. An entity need not present its opening IFRS balance sheet in its first IFRS financial statements.
In general, the IFRS requires an entity to comply with each IFRS effective at the reporting date for its first IFRS financial statements. In particular, the IFRS requires an entity to do the following in the opening IFRS balance sheet that it prepares as a starting point for its accounting under IFRSs:
- recognise all assets and liabilities whose recognition is required by IFRSs;
- not recognise items as assets or liabilities if IFRSs do not permit such recognition;
- reclassify items that it recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRSs; and
- apply IFRSs in measuring all recognised assets and liabilities.
The IFRS grants limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed the benefits to users of financial statements. The IFRS also prohibits retrospective application of IFRSs in some areas, particularly where retrospective application would require judgements by management about past conditions after the outcome of a particular transaction is already known.
The IFRS requires disclosures that explain how the transition from previous GAAP to IFRSs affected the entity’s reported financial position, financial performance and cash flows.
Technical Summary This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.
IFRS 2 Share-based Payment
The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a sharebased payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.
The IFRS requires an entity to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to the IFRS, other than for transactions to which other Standards apply.
This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.
The IFRS sets out measurement principles and specific requirements for three types of share-based payment transactions:
- Equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options);
- Cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity; and
- Transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
For equity-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Furthermore:
- For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. The fair value of the equity instruments granted is measured at grant date.
- For transactions with parties other than employees (and those providing similar services), there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. That fair value is measured at the date the entity obtains the goods or the counterparty renders service. In rare cases, if the presumption is rebutted, the transaction is measured by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service.
- For goods or services measured by reference to the fair value of the equity instruments granted, the IFRS specifies that vesting conditions, other than market conditions, are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest. Hence, on a cumulative basis, no amount is recognised for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition (other than a market condition).
- The IFRS requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated, using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm’s length transaction between knowledgeable, willing parties.
- The IFRS also sets out requirements if the terms and conditions of an option or share grant are modified (eg an option is repriced) or if a grant is cancelled, repurchased or replaced with another grant of equity instruments. For example, irrespective of any modification, cancellation or settlement of a grant of equity instruments to employees, the IFRS generally requires the entity to recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted.
For cash-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in profit or loss for the period.
For share-based payment transactions in which the terms of the arrangement provide either the entity or the supplier of goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments, the entity is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.
The IFRS prescribes various disclosure requirements to enable users of financial statements to understand:
(a) the nature and extent of share-based payment arrangements that existed during the period; (b) how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and
(c) the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.
IFRS 3 Business Combinations
The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a business combination.
A business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination. This IFRS:
- requires all business combinations within its scope to be accounted for by applying the purchase method.
- requires an acquirer to be identified for every business combination within its scope. The acquirer is the combining entity that obtains control of the other combining entities or businesses.
- requires an acquirer to measure the cost of a business combination as the aggregate of: the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the combination.
- requires an acquirer to recognise separately, at the acquisition date, the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the following recognition criteria at that date, regardless of whether they had been previously recognised in the acquiree’s financial statements:
- in the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably;
- in the case of a liability other than a contingent liability, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably; and
- in the case of an intangible asset or a contingent liability, its fair value can be measured reliably.
- requires the identifiable assets, liabilities and contingent liabilities that satisfy the above recognition criteria to be measured initially by the acquirer at their fair values at the acquisition date, irrespective of the extent of any minority interest.
- requires goodwill acquired in a business combination to be recognised by the acquirer as an asset from the acquisition date, initially measured as the excess of the cost of the business combination over
the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities recognised in accordance with (d) above.
- prohibits the amortisation of goodwill acquired in a business combination and instead requires the goodwill to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, in accordance with IAS 36 Impairment of Assets.
- requires the acquirer to reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the business combination if the acquirer’s interest in the net fair value of the items recognised in accordance with (d) above exceeds the cost of the combination. Any excess remaining after that reassessment must be recognised by the acquirer immediately in profit or loss.
- requires disclosure of information that enables users of an entity’s financial statements to evaluate the nature and financial effect of:
- business combinations that were effected during the period;
- business combinations that were effected after the balance sheet date but before the financial statements are authorised for issue; and
- some business combinations that were effected in previous periods.
- requires disclosure of information that enables users of an entity’s financial statements to evaluate changes in the carrying amount of goodwill during the period.
A business combination may involve more than one exchange transaction, for example when it occurs in stages by successive share purchases. If so, each exchange transaction shall be treated separately by the acquirer, using the cost of the transaction and fair value information at the date of each exchange transaction, to determine the amount of any goodwill associated with that transaction. This results in a step-by-step comparison of the cost of the individual investments with the acquirer’s interest in the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities at each step.
If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognise any adjustments to those provisional values as a result of completing the initial accounting:
(a) within twelve months of the acquisition date; and (b) from the acquisition date.
IFRS 4 Insurance Contracts
The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts. In particular, this IFRS requires:
- limited improvements to accounting by insurers for insurance contracts.
- disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.
An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Furthermore, it does not address accounting by policyholders.
The IFRS exempts an insurer temporarily from some requirements of other IFRSs, including the requirement to consider the Framework in selecting accounting policies for insurance contracts. However, the IFRS:
- prohibits provisions for possible claims under contracts that are not in existence at the reporting date (such as catastrophe and equalisation provisions).
- requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets.
- requires an insurer to keep insurance liabilities in its balance sheet until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against related reinsurance assets.
The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce any of the following practices, although it may continue using accounting policies that involve them:
- measuring insurance liabilities on an undiscounted basis.
- measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services.
- using non-uniform accounting policies for the insurance liabilities of subsidiaries.
The IFRS permits the introduction of an accounting policy that involves remeasuring designated insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer so elects, other current estimates and assumptions). Without this permission, an insurer would have been required to apply the change in accounting policies consistently to all similar liabilities. The IFRS requires disclosure to help users understand:
- the amounts in the insurer’s financial statements that arise from insurance contracts.
- the amount, timing and uncertainty of future cash flows from insurance contracts.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations. In particular, the IFRS requires:
- assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; and
- assets that meet the criteria to be classified as held for sale to be presented separately on the face of the balance sheet and the results of discontinued operations to be presented separately in the income statement.
- adopts the classification ‘held for sale’.
- introduces the concept of a disposal group, being a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction.
- classifies an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation.
An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
For this to be the case, the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable.
For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, except as permitted by paragraph 9, and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and
- represents a separate major line of business or geographical area of operations,
- is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or
- is a subsidiary acquired exclusively with a view to resale.
A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In other words, a component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use.
An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned. This is because its carrying amount will be recovered principally through continuing use.
IFRS 6 Exploration for and Evaluation of Mineral Resources
The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation of mineral resources.
Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration for and evaluation of mineral resources is the search for mineral resources, including minerals, oil, natural gas and similar nonregenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.
Exploration and evaluation assets are exploration and evaluation expenditures recognised as assets in accordance with the entity’s accounting policy.
- permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8. Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies.
- requires entities recognising exploration and evaluation assets to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount.
- varies the recognition of impairment from that in IAS 36 but measures the impairment in accordance with that Standard once the impairment is identified.
An entity shall determine an accounting policy for allocating exploration and evaluation assets to cashgenerating units or groups of cash-generating units for the purpose of assessing such assets for impairment. Each cash-generating unit or group of units to which an exploration and evaluation asset is allocated shall not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.
Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount exceeds the recoverable amount, an entity shall measure, present and disclose any resulting impairment loss in accordance with IAS 36.
One or more of the following facts and circumstances indicate that an entity should test exploration and evaluation assets for impairment (the list is not exhaustive):
- the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed.
- substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.
- exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area.
- sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.
An entity shall disclose information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources.
IFRS 7 Financial Instruments: Disclosures
The objective of this IFRS is to require entities to provide disclosures in their financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.
The IFRS applies to all entities, including entities that have few financial instruments (eg a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (eg a financial institution most of whose assets and liabilities are financial instruments).
When this IFRS requires disclosures by class of financial instrument, an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet.
The principles in this IFRS complement the principles for recognising, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 8 Operating Segments
Core principle—An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
This IFRS shall apply to:
(a) the separate or individual financial statements of an entity:
- whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
- that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
(b) the consolidated financial statements of a group with a parent:
- whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
- that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.
The IFRS specifies how an entity should report information about its operating segments in annual financial statements and, as a consequential amendment to IAS 34 Interim Financial Reporting, requires an entity to report selected information about its operating segments in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major customers.
The IFRS requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.
The IFRS requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires an entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.
The IFRS requires an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions. However, the IFRS does not require an entity to report information that is not prepared for internal use if the necessary information is not available and the cost to develop it would be excessive.
The IFRS also requires an entity to give descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity’s financial statements, and changes in the measurement of segment amounts from period to period.
SUMMARIES OF INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSASs)
INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSASs)
IPSASs are issued by the IPSAS Board of the international federation of Accountants. IPSASs board focuses on accounting and financial reporting needs of the public sector, whether it be a national, local government or an intergovernmental organization IFRSs are issued by International Accounting Standards Board (IASB).
There are currently 26 accrual based IPSASs and one cash based IPSASs out of the 26 IPSASs based on accrual basis, 23 are directly based on IFRSs while three are not. An example of an IPSAs 24, presentation of budget information in financial statements. This standard requires a comparison of budget amount and the actual amounts arising from execution of the budget to be included in the financial statements of entities that make publicly available their approved budget, and for which they are held publicly accountable. There is no equivalent of IPRS standard to IPSAs 24, because organizations in the private sector do not usually make their budget publicly available, since it would reveal too much to their strategy to competitors.
What are the Benefits of IPSASs?
- Improve accountability, transparency and disclosure of government activities and resources to the public.
- Will enable the government and the public at large to assess performance of public sector entities, i.e. will facilitate measurement of efficiency and effectiveness of utilization of resources and generation of surpluses for the future use.
- Will improve reliability of accounts and boost the confidence of external agencies such as donors on dependability of accounts, for example in credit worthiness analysis.
- Use of IPSASs across public sector entities and even government will enhance comparability among the entities and governments.
- With reduced misuse of public funds, increased emphasis on performance management and transparency, resources will be put to their intended use. Ultimately, this will yield improved standards of living and sustainability economic development.
- IPSAS will improve consistency in preparation and reporting of financial information. This will in turn enable users to draw consistent conclusions given similar sets of financial statements.
- Adoption of IPSASs will improve the audit of public institutions. This will translate into timely audit report.
Types of IPSAS
They are two types of IPSAS
- Cash basis
Allow for transparent financial reporting of cash receipts payments and balances under the cash basis of accounting.
- Accrual accounting
Focuses on revenue, cost, assets, liability and equity, instead of cash flow only.
International Public Sector Accounting Standards (IPSASs)
Enhancing accountability and transparency in the public sector
International Public Sector Accounting Standards (IPSASSs) are global financial reporting a standard for application by public sector entities other than government business enterprises (parastatals). Government business enterprises are required to apply International Financial Reporting Standards (IFSs) just as private sector entities.
IPSASs are developed by the International Federation of Accountants (IFAC) through the International Public Sector Accounting Standards Board (IPSASB). The standards set out requirements elating to the recognition, measurement, presentation and disclosure of transactions and events in the general purpose financial statements of public sector entities.
IPSASs are aimed at enhancing the quality and transparency of public sector financial reporting and improving the comparability of financial information reported by public sector entities around the world.
Definition of key terms
The following are some of the key terminologies use in relation to IPSASs:-
- General purpose financial statements
These are financial statements that are intended to meet the needs of users who are not in a position to demand reports tailored to meet their specific information needs.
These financial statements comprise;
- A statement of financial position.
- A statement of financial performance.
- A statement of changes in net assets/equity.
- A cash flow statement.
- When the entity makes publicly available its approved budget, a comparison of budget and actual amounts.
- Government business enterprise (GBE)
This is an entity that has all the following characteristics:
- Is an entity with the power to contract in its own name.
- Has been assigned the financial and operational authority to carry on a business.
- Sells goods and services, in the normal course of business, to other entities at a profit or full cost recovery.
- Is not reliant on continuing government funding to be a going concern. Is controlled by a public sector entity. iii. Cash basis. This is a basis of accounting that recognizes transactions and other events only when cash is received or paid.
- Accrual basis: This means a basis of accounting under which transactions and other events are recognized when they occur and not when cash or its equivalent is received or paid.
- Net asset/equity: This is the residual interest in the assets of the entity after deduction all its liabilities.
- Economic entity: This means a group of entities comprising a controlling entity and one or more controlled entities.
IPSASs issued to date
To date, IPSASB has issued 26 accrual based IPSASs and 1 cash based IPSAS. The accrual based
IPSASs are drawn primarily from the International Accounting Standards (IASs) and International Financial Reporting Standards where the requirements of the IASs and IFRSs are applicable to the public sector. These IPSASs also deal with public sector specific financial reporting issues that are not covered by existing IASs and IFRSs.
The cash based IPAS is a transitional standard for public sector entities that have not switched to accrual basis of accounting. This IPSAS is titled “Financial reporting under the cash basis of accounting” and became effective on 1January 2004. It is not based on any existing IAS or IFRS.
The accrual base IPSASs are listed below;
|IPSAS 1:||Presentation of financial statements (Effective 1 January 2008).|
|IPSAS 2:||Cash flow statements (effective 1 July 2001).|
|IPSAS 3:||Accounting policies, changes in accounting estimates and errors (effective 1 January 2008).|
|IPSAS 4:||The effects of changes in foreign exchange rates (effective 1 January 2008).|
|IPSAS 5:||Borrowing costs (effective 1 July 2001).|
|IPSAS 6:||Consolidated and separate financial statements (effective 1 January 2008).|
|IPSAS 7:||Investments in associates (effective 1 January 2008).|
|IPSAS 8:||Interests in joint ventures (effective 1January 2008).|
|IPSAS 9:||Revenue from exchange transactions (effective 1 July 2002).|
|IPSAS 10:||Financial reporting in hyperinflationary economies (effective 1July 2002).|
|IPSAS 11:||Construction contacts (effective 1 July 2002).|
|IPSAS 12:||Inventories (effective 1 January 2008).|
|IPSAS 13:||Leases (effective 1 January 2008).|
|IPSAS 14:||Events after the reporting date (effective 1 January 2008).|
|IPSAS 15:||Financial instruments; disclosure and presentation (effective 1 January 2008).|
|IPSAS 16:||Investment property (effective 1 January 2008).|
|IPSAS 17:||Property, plant and equipment (effective 1 January 2008).|
|IPSAS 18:||Segment reporting (effective 1 July 2003).|
|IPSAS 19:||Provisions, contingent liabilities and contingent assets (effective 1 January 2004).|
|IPSAS 20:||Related party disclosures (effective 1 January 2004).|
|IPSAS 21:||Impairment of non-cash generating assets (effective 1 January 2006).|
|IPSAS 22:||Disclosure of information about the general government sector (effective 1 January 2008).|
|IPSAS 23:||Revenue from non-cash generating assets (taxes and transfers). (effective 30 June 2008).|
|IPSAS 24:||Presentation of budget information in financial statements (effective 1 January 2009).|
|IPSAS 25:||Employee benefits (effective 1 January 2011).|
|IPSAS 26:||Impairment of cash generating assets (effective 1 April 2009).|
Overview of IPSASs
A summary of the provision of each IPSAS is presented below.
Cash based IPSAS: Financial Reporting under the cash basis of accounting
This standard prescribes the manner in which general purpose financial statements should be presented under the cash basis of accounting. This basis of accounting is considered as transitional a public sector entities move towards adoption of accrual accounting.
Entities applying cash basis of accounting are required to prepare general purpose financial statements which include the following components:
- A statement of cash receipts and payments. This should indicate all cash receipts, cash payments and cash balances controlled by the entity. It should separately identify payments made by third parties on behalf of the entity. Cash balances held in a foreign currency should be translated using the exchange rate on the reporting date (closing rate).
- Accounting policies and explanatory notes. iii. When the entity makes publicly available its approved budget, a comparison of budget and actual amounts either as a separate statement or as a budget column in the statement of cash receipts.
Comparative information from the previous financial period is required to be disclosed in the financial statements.
IPSAS 1: Presentation of Financial Statements
The standard provides that an entity shall prepare a complete set of general purpose financial statements (as defined above) within six months of the reporting date. Entities are also required t6o disclose comparative information in respect of the previous period for all amounts reported tin the financial statements.
In addition, an entity is required to disclose by way of notes information about the key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date.
The terms “income statement”, “balance sheet” and “equity” as used in IAS 1 – Presentation of Financial Statements are replaced with “statement of financial performance”’ “statement of financial position” and “ net assets/equity” respectively in IPSAS 1.
IPSAS 2: Cash Flow Statements
The standard recognizes a cash flow statement as an integral part of the financial statements. The standard requires entities to classify cash flows into operating, investing and financing activities using either the direct or indirect method for presenting operating cash flows. With regard to cash flows raising from transactions in a foreign currency, the standard requires such cash flows to be translated into the entity’s functional (local) currency using the exchange rate existing at the date of the cash flow. The standard further provides that an entity shall disclose by way of a note the amount of significant cash balances held by the entity that are not available for use by the economic entity.
Unlike IAS 7 – Cash flow statements, IPSAS 2 encourages entities to disclose a reconciliation of surplus of deficit to operating cash flows in the notes to the financial statements where the direct method is used to present cash flows from operating activities.
IPSAS 3: Accounting Policies, Changes in Accounting Estimates and Errors
This IPSAS requires entities to select and apply its accounting policy, the standard requires the change to be applied retrospectively in the financial statements, adjusting the opening balance of each affected component of net assets/equity for the earliest prior period presented.
Where a change in accounting estimate gives rise to changes in the value of assets and liabilities, or relates to an item of net asset/equity, it shall be recognized by adjusting the carrying amount of the related assets, liabilities 0 net asset/equity.
Further, the standard stipulates that an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by restating the comparative amounts for prior period(s) in which the error occurred.
IPSAS 4: The Effects of Changes in Foreign Exchange Rates.
The main provisions of the standard are that, at each reporting date:
- Foreign currency monetary items (such as current assets, current liabilities and long term loans) shall be translated using the closing rate, which is the spot exchange rate on the reporting date.
- Non-monetary items (such as property, plant and equipment) that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of transaction. Where such assets are measured at fair value, they should be translated using the exchange rate at the date of transaction. Where such assets are measured at fair value, they should be translated suing the exchanged rate at the date when the fair value was determined.
- Exchange differences arising on translation of monetary items shall be recognized in the surplus or deficit for the period, while those exchange differences relating to non-monetary assets may be recognized either in the surplus/deficit or in the net asset/equity.
Unlike IAS 21 – The effects of changes in foreign exchange rates, IPSAS 4 contains an additional transitional provision allowing an entity, when first adopting IPSASs, to deem cumulative translation differences existing at the date of fist adoption of accrual IPSASs as zero.
IPSAS 5: Borrowing costs
The standard defines borrowing costs as “interest and other expenses incurred by an entity in connection with the borrowing of funds”, The standard recognizes two alternative accounting treatments of borrowing costs, as follows:
- Alternative one: Borrowing costs shall be recognized as an expense in the period in which they are incurred.
- Alternative Two: Borrowing costs shall be recognized as an expense in the period in which they are incurred,, except to the extent that they are capitalized. Borrowing costs that are directly attributable to the acquisition, construction or production of anon-current asset shall be capitalized as pat of the cost of the asset.
IPSAS 6: Consolidated and Separate Financial Statements
The standard defines control as “the power to govern the financial operating polices of another entity so as to benefit from its activities”. Where control exists, the standard requires a controlling entity to prepare consolidated accounts in line with the provisions of the standard, unless control is temporary.
The standard provides the following guidelines for the consolidated process:
- The financial statements of the controlling entity and its controlled entities are combined on a line by line basis by adding together like items of assets, liabilities, revenues and expenses. Balances, transactions, revenues and expenses between entities within the economic entity shall be eliminated in full.
- The carrying amount of the controlling entity’s investments in each controlled entity and the controlling entity’s share of the net assets/equity of each controlled entity are eliminated.
- Minority interests in the surplus/deficit and net assets/ equity of the controlled entities are calculated and separately shown on the face of the financial statements.
IPSAS 7: Investments in Associates
An associate is defined by the standard as “an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a controlled entity nor an interest in a joint venture”. Significant influence is further defines as “the power to participate in the financial operating policy decisions of the investee but is not control or joint control over those policies.
The standard requires associates to be accounted for using the equity method. Under this method:
- The investment in the associate is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of surplus or deficit of the investee after the date of acquisition.
- Distribution received from the investee reduce the carrying amount of the investment.
IPSAS7 applies to all investments in associates where the investor holds an ownership interest in the form of shareholding or other formal equity structures. In contrast, IAS 28 – Investments in Associates does not contain similar ownership interest requirements.
IPSAS 8: Interests in Joint Ventures
The standard defines a joint venture as a binding arrangement whereby two or more parties are committed to undertake an activity that is subject to joint control”.
The standard identifies the following forms of joint ventures:
- Jointly controlled operations: This involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity. Each venture uses its own expenses and liabilities.
In respect of such operations, a venture shall recognize in its financial statements;
- The assets that it controls and the liabilities that it incurs; and
- The expenses that it incurs and its share of the revenue that is earned from the sale of
provision of goods 0 services by the joint venture.
- Jointly controlled assets: This involves the joint control, and often the joint ownership by, the venturers of one or more assets contributed to, or acquired for the purpose of the joint venture and dedicated to the purpose of the joint venture.
The standard requires that, in respect of its interest in jointly controlled assets, a venture shall recognize in its financial statements:
- Its share of the jointly controlled assets;
- Any liabilities that it has incurred;
- Its share of any liabilities incurred jointly with the other venturers;
- Any revenue from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture;
- Any expenses that it has incurred in respect of its interest in the joint venture.
- Jointly controlled entities: This involves the establishment of a corporation, partnership or other entity in which each venture has an interest.
The standard provides two alternatives for accounting for jointly controlled entities; the proportionate consolidation method and the equity method. Under the proportionate consolidation method;
- The statement of financial position of the venture includes it s share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible; and
- The statement of financial performance of the venture includes its share of the revenue and expenses of the jointly controlled entity.
The equity method is as described in IPSAS7: Investments in Associates.
IPSAS 9: Revenue from Exchange Transactions
The objective of this standard is to prescribe the accounting treatment of revenue rising from exchange transactions and events. Exchange transactions are those transactions in which one entity receives assets or services and directly gives approximately equal value to another party (primarily in form of cash, goods or services).
The basic provision of the standard is that revenue should be measured at the fair value of the consideration received. With regard to revenue arising from interest, royalties and dividends, the standard provides that:-
- Interest should be recognized on a time proportion basis that takes into account the effective yield on the asset.
- Royalties should be recognized as they are earned in accordance with the substance of the relevant agreement.
- Dividends or their equivalents should be recognized when the shareholders’ or the entity’s right to receive payment is established.
IPSAS 10: Financial Reporting in Hyperinflationary Economies
According to the standard, items in the statement of financial position, except monetary items, should be restated at the reporting date by applying a general price index. Monetary items are money held and assets and liabilities to be received 0 paid in determinable amounts of money.
Further, all items in the statement of financial performance are required to be expressed in terms of the measuring unit current at the reporting date. This is by applying a general price index from the dates when the items of revenue and expenses were initially recoded. The surplus or deficit on the net monetary position is included in the statement of financial performance.
IPSAS 11: Construction Contracts
The objective of this standard is to prescribe the accounting treatment of costs and revenue associated with construction contracts.
The standard requires that when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs should be recognized as revenue and expenses respectively by reference to the stage of completion at the reporting date. An expected loss on the contract should be recognized in full immediately.
When the outcome of a construction contract cannot be estimated reliably, revenue should be recognized only to the extent of contract costs incurred that it is probable will be recoverable. Contract costs should be recognized as an expense in the period in which they are incurred.
Unlike IAS 11 – Construction Contracts, IPSAS 11 includes cost based and non-commercial contracts within the scope of the Standard. In addition, IPSAS 11 makes it clear that the requirement to recognize an expected deficit on a contract immediately it becomes probable applies only to contracts in which it is intended, an inception, that contract costs are to be fully recovered from the parties to the contract.
IPSAs 12: Inventories
The standard prescribes the accounting treatment for inventories, which are defined as assets held either; inn the form of materials for production, in the process of production or as finished goods meant for sale.
The standard provides that inventories shall be measured at the lower of cost and net realizable value. Where inventories are acquired through a non-exchange transaction, their cost shall be measured at their fair value as at the date of acquisition. Where held for distribution at no charge, inventories shall be measured at the lower of cost and current replacement cost (that is the cost the entity would incur to acquire the asset on the reporting date).
IPSAS 12 goes beyond the provisions of IAS2 – Inventories y stating that, for inventories acquired though a non-exchange transaction for their cost is their fair value as at the date of acquisition.
IPSAS 13: Leases
The objective of this standard, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership, otherwise it is classified as a finance lease.
Accounting for Finance Leases:
- Book of the lessee
At commencement of the lease; the lessee shall recognize the lease asset and the associated lease liability in the statement of financial position.
- The asset and liability shall be recognized at amounts equal to the fair value of the leased property, or, if lower, the present value of the minimum lease payments.
- The discount rate should be the interest rate implicit in the lease, if not determinable, the incremental borrowing rate.
- Books of the lessor
Lessors are required to recognize lease payments receivable under a finance lease as assets in their statements financial position. They shall present such assets as a receivable at an amount equal to the net investment in the lease.
Accounting for Operating Leases:
- Books of lessee
Lease payments under an operating lease are required to be recognized as an expense on a straight line basis over the lease term. The leased asset will not be recognized in the lessee’s books.
- Books of the lessor
Lessors are required to reflect the leased assets in their statement of financial position. Lease revenue from operating leases shall be recognized as revenue on a straight line basis over the lease term.
The standard has also included provisions relating to sale and leaseback transactions in the books of both lessors and lessees.
IPSAS 14: Events after the reporting date
The standard prescribes when an entity should adjust its financial statements for events after the reporting date together with the appropriate disclosures. An entity is required to adjust the amount recognized in its financial statements to reflect adjusting events after the reporting date.
The following examples are cited in the standard as examples of adjusting events:
- Settlement after the reporting date of a court case.
- The receipt of information after the reporting date indicating that an asset was impaired at the reporting date.
- Determination after reporting date of the cost of assets purchased before the reporting date.
- Discovery of fraud or errors that show that the financial statements were incorrect.
IPSAS 15: Financial Instruments – Disclosure and Presentation
The objective of this standard is to enhance the understanding by users of financial statements of the significance of financial instruments to a government’s or other public sector entity’s financial position, performance and cash flows.
Financial instruments in this context include both primary instruments such as receivables, payables and equity securities, and derivative instruments such as financial options, futures and forward contracts.
In brief, the standard requires that:
- The issuer of a financial instrument should classify the instrument as a liability or a net asset/equity in accordance with the substance of the contractual arrangement.
- Interest, dividends, losses and gains relating to a financial instrument classified as a financial liability should be reported in the statement of financial performance as expense or revenue. Distributions to holders of a financial instrument classified as an equity instrument should be debited by the issuer directly to net assets/equity.
- Disclosure should be made on the entity’s exposure to interest rate risk, credit risk and other forms of risk. In addition, disclosure is required on the fair value of the financial instruments as at the reporting date.
IPSAS 16: Investment Property
The objective of this standard is to prescribe the accounting treatment for investment property and related disclosure requirements. In the context of the standard, investment property is property (land or buildings) held to earn rentals or for capital appreciation and does not include property held for use in production, administration or for sale in the ordinary course of business.
The standard requires an investment property to be measured initially at cost. Where acquired through a non-exchange transaction, its cost shall be measured at its fair values at the date of acquisition.
After the initial recognition, an entity may choose to value the investment property using the fair value model or the cost model. An entity using the fair value model shall ensure that the value of investment property shall reflect market conditions at each reporting date.
Unlike IAS 40 – Investment Property, IPSAS 16 also provides that, where an asset is acquired for no cost or for a nominal cost, its cost is its value as at the date of acquisition.
IPSA 17: Property, Plant and Equipment
This standard is drawn primarily from IAS 16 – Property, Plant and Equipment for the public sector entities may include infrastructure assets.
Infrastructure assets usually display some or all of the following characteristics:
- They are part of a system or network
- They are specialized in nature and do not have alternative use. They are immovable
- They may be subject to constraints on disposal.
Property, plant and equipment are initially measured at cost or where acquired in a non-exchange transaction, at fair value. Subsequently, an entity may choose either the cost model 0 the revaluation model.
The main difference between the fair value model in IPSAS 16 and the revaluation model in IPSAS 17 is that in the former, fair value has to be determined annually while in the latter, this need not be the case. However, under IPSAS 17, revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date.
If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which the asset belongs shall be revalued. Revaluation gains are recoded in the revaluation account. Revaluation losses are charged in the statement of financial performance except where a revaluation reserve exists for that particular class of assets, in which case he loss is charged in the revaluation account.
The main points of difference between IPSAS 17 and IAS 16 – Property, Plant and Equipment are that:
- IPSAS 17 does not require or prohibit the recognition of heritage assets
- IPSAS 17 does not require the disclosure of historical costs for assets carried at revalued amounts.
- Under IPSAS 17, revaluation increases and decreases are offset on a class of asset basis. Under IAS 16, revaluation increases and decreases may only be matched on an individual item basis.
IPSAS 18: Segment Reporting
The objective of the standard is to establish principles for reporting financial information by segments. A segment is viewed as a distinguishable activity or group of activities of an entity for which it is appropriate to separately report financial information for the purpose of evaluating the entity’s past performance.
An entity should disclosure the following for each segment:
- Segment revenue and segment expense.
- Total carrying amount of segment liabilities for each segment.
- Total cost incurred during the period to acquire segment assets that are expected to be used during more than one period for each segment.
IPSAS 18 and IAS 14 – Segment differently from IAs 14. IPSAS 18 requires entities to report segments on a basis appropriate for assessing past performance and making decisions on allocation of resources. IAS 14 requires business and geographical segments to be reported.
IAS 14 requires disclosure of segment results. IPSAS 18 does not require disclosure of segment results.
IPSAS 18 does not specify quantitative thresholds that must be applied in identifying reportable segments.
IPSAS 19: Provision, Contingent Assets and Contingent Liabilities.
The standard gives the following definitions
- A provision is a liability of uncertain timing or amount
- A contingent asset/liability is a possible asset/obligation that arises from past events and whose existence will be confirmed by uncertain future events not wholly within the control of the entity.
The standard also provides that:
- A provision should only be recognized when an entity has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
- An entity should not recognize a contingent asset/liability but should only disclose in the notes a brief description of the nature of the contingent asset/liability together with an estimate of its financial effect.
Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources has become probable, in which case a provision is recognized in the financial statements.
IPSAS 20: Related Party Disclosures
The standard considers parties to be related in one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties include individuals owning an interest, directly or indirectly, in the entity that gives them significant influence over the entity, key management personnel(directors/board members and other persons having the authority and responsibility for planning, directing and controlling the activities of the entity) and close family member of such individuals and management personnel.
Disclosure should always be made of related party relationships where control exists. In addition, where transactions are not at arm’s length, the nature of the relationship, the types and elements of the transactions should be disclosed. As relates to key management personnel, disclosure is required on aggregate remuneration, other compensation paid and loans advanced whose availability is not widely known by members of the public.
Unlike IAs 24 – Related Party Disclosures, IPSAS 20 does not require of information about transactions between related parties which occur on normal terms and conditions, except for limited disclosures on remuneration of key management personnel.
IPSAS 21: Impairment of Non-Cash Generating Assets
The objective of this standard is to prescribe the procedures that an entity applies to determine whether a non-cash generating asset is impaired and to ensure that impairment losses are recognized. Unlike IAS 36 – Impairment of Assets, IPSAS 21 does not apply to non-cash generation assets carried at revalued amounts.
Impairment is the loss of the future economic benefits or service potential of an asset over and above the loss due to depreciation.
(To illustrate impairment, consider a purpose built storage facility owned by a military unit that is no longer needed although it is functional and not fully depreciated. Because of its specialized nature, it cannot be leased out or disposed off. Since it is no longer capable of providing the entity with service potential, it is considered to be impaired).
An entity shall assess at each reporting date whether there is any indication that an asset maybe impaired.
An impaired loss arises if the recoverable amount of an asset is less than the carrying value of the asset and is recognized immediately in surplus or deficit.
Impairment loss = Carrying value –recoverable value.
- Carrying value is the current net book value of the asset.
- Recoverable amount is the higher of the fair value of an asset (less costs to sell) and its value in use (present value of the asset’s remaining service potential).
It is noteworthy that IPSAS 21 measures the value in use of a non-cash generating assets the present value of the asset’s remaining service potential using a number of approaches. In contrast, IAs 36 measures this value for a cash generating asset as the present value of future cash flows from the asset. IPSAS 21 also only deals with the impairment of individual assets and does not include cash generating units.
IPSAS 22: Disclosure of Financial Information about the General Government Sector
The general government sector comprises all organizational entities of the general government consisting of all resident central and local government units, social security funds at each level of government, and non-market non-profit institutions controlled by government units.
Disclosures made in respect of the general government sector shall include:
- Assets by major class.
- Liability by major class.
- Net assets/equity.
- Total revaluation increments and decrements.
- Revenue and expenses (by major class), surplus and deficit.
- Cash flows from operating, investing and financing activities.
IPSAS 23: Revenue from Non-Exchange Transactions (taxes and transfers)
In a non-exchange transaction, an entity received value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange.
Transfers in the context of the standard are inflows of future economic benefits or service potential from non-exchange transactions, other than taxes. Transfers include grants, debt forgiveness, fines, bequests, gifts, donations and goods and services in kind.
With regard to taxes, the standard stipulates that:
- An entity is required to recognize an asset in respect of taxes when the taxable event occurs and the asset recognition criteria are met. Tax revenue arises for the government, and not for other entities. For example, where the tax is collected by an agency, the revenue accrues to
the government and not the agency. Items such as fines and penalties are not considered as part of taxes.
- Tax revenue shall be determined at a gross amount and it shall not be reduced for expenses paid through the tax system. These are amounts payable by the government whether or not individuals pay taxes.
- Taxation revenue shall not be grossed up for the amount of tax expenditures. For example, hoe owners may be provided with mortgage interest relief, insurance payers may be provided with insurance relief and so on. If a taxpayer does not pay tax, he does not access the concession. These types of concessions/reliefs are called tax expenditures.
As relates to transfers, an entity is required to recognize an asset in respect of transfers when the transferred resources meet the definition of an asset and satisfy the criteria for recognition as an asset.
With reference to fines and penalties, they are recognized as revenue by the government and not the collecting agency, when the receivable meets the definition of an asset.
For payments received in kind (such as in the form of services), entities may, but are not required, to recognize such payments as revenue and as assets.
IPSAS 24: Presentation of Budget Information in Financial Statements
This standard requires that financial statements of public sector entities that make their approved budgets publicly available include a comparison of actual amounts with amounts in the original and final budget, together with an explanation of material differences between budget and actual amounts.
The disclosure of comparative information in respects of the previous period is not required.
IPSAS 25: Employee Benefit
The standard prescribes the accounting and disclosure by public sector entities for employee benefits.
The four types of benefits identified in the standard are presented below, with a brief description of the accounting treatment for each.
- Short term employment benefits. These include wages, salaries and social security contributions. These are expensed in the period of service to which they elate.
- Post employment benefits (pensions). There are the defined contribution plans and defined benefit plans.
An entity should recognize contribution to define contributions schemes as expenses when an employee has rendered the services for which the contribution relate.
For defined benefit plans, entities are required to determine the present value of defined benefits obligations and the fair value of plan assets. The fair value of assets is deducted from the carrying value of the obligation. The projected unit credit method is required to be used to measure plan obligations and costs.
- Other long term benefits (such as sabbatical leave and long term service benefits). Actuarial gains and loses and past service costs are recognized immediately.
- Termination benefits. These shall be recognized only when the entity is demonstrably committed to terminating the employment of an employee before normal retirement date, or as a result of an offer made to encourage voluntary redundancy. The standard provides requirements for the identification of assets that may be impaired and the accounting for the impairment. Cash generating assets held with primary objective of generating a commercial return. The standard also deals with cash generating units. A cash generating unit is the smallest identifiable group of assets held with the primary objective of generating a commercial return.
IPSAS 26: impairment of cash Generating Assets
The standard requires the impairment loss be recognized immediately in the surplus o deficit. After the recognition of the impairment loss, the depreciation (amortization) charge for the asset shall be adjusted in future period to allocate the asset’s revised carrying amount less its residual value on a systematic basis over its remaining useful life.
In this standard, the value in use of an asset is determined by reference to the expected cash flows from the asset.
One major difference between IPSAS 26 and IAS 36 – Impairment of Assets is that IPSAS 26 does not apply to cash generating units carried at a fair value. In addition, goodwill is outside the scope of IPSAS 26.
Implementation of IPSASAs
A number of countries have adopted accrual based IPSASs. These include; Philippines, Russia, South Africa (partially), Switzerland, Uganda and Peru. In addition a number of countries already apply full accrual accounting standards that are broadly consistent with IPSASs requirements. These countries are Australia, Canada, New Zealand, United Kingdom and the United States of America.
Among the countries adoption the cash abased IPSASs are France, Ghana, Malaysia, Sri Lanka, Zambia and Cyprus.
A significant number of countries are preparing to adopt IPSAS in the very near future. These include Algeria, Argentina, Bangladesh, China, India, Nigeria and Pakistan.
Kenya has made significant strides in the implementation of IPSASs. Already, the Ministry of Local Government has adopted a Financial Reporting template that provides useful guidelines on compliance with IPSASs, including the required format and context of financial statements prepared by the local authorities. The central government has also recognized the importance of IPSASs in improving accountability and transparency in the public sector.
In addition, Kenya is a member of the East and Southern Africa Association of Accountants General (ESAAG) whose aim includes adoption of IPSAs by member countries. In this connection, ESAAG held a workshop in Kenya in August 2007 to create awareness of IPSASs and their application in central government accounting.