International Public Sector Accounting Standards (IPSASs)
Recent years have seen ongoing efforts to codify a set of accounting standards that can be applied specifically to the public sector. Most of these have focused on variations of private sector accounting based on the IFRS regime. In some countries, such as the United Kingdom, New Zealand and Australia a national version of the IFRSs for the public sector has been prepared. However a set of international –public sector standards have also been developed, the IPSASs, and these are gaining increasing credibility across the globe. They have been adopted by a number of countries, including Rwanda, in theory although there is still a considerable amount of practical work to be done before they may be considered to be practically implemented. They have also been adopted by some leading international organisations such as the United Nations and the World Food Programme.
IPSASs have been in existence from 2000 but a major updating process on them took place in 2009. Recognising that cash accounting is still in place for the public sectors of many countries, there is a Cash-Basis IPSAS. There are also 32 accruals-based IPSASs in existence as at the end of 2011. Recognising that there are many countries that plan to transition from a cash to an accruals based method of accounting in the public sector, there is also a section of the IPSAS devoted to disclosures that could be made under a modified cash basis, which essentially provides guidance on the data that could be collected and disclosed as part of an interim step from one to the other.
The IPSAS are published by the IPSAS Board (IPSASB) which is part of the IFAC (International Federation of Accountants) organisation based in New York. In the same way as would be the case with an IFRS there will be a consultation process involving the issuance of an Exposure Draft for public comment before publication.
The 32 accruals-based IPSAS are:
IPSAS 1—Presentation of Financial Statements
IPSAS 2—Cash Flow Statements
IPSAS 3—Accounting Policies, Changes in Accounting Estimates and Errors IPSAS 4—The Effects of Changes in Foreign Exchange Rates
IPSAS 5—Borrowing Costs
IPSAS 6—Consolidated and Separate Financial Statements
IPSAS 7—Investments in Associates
IPSAS 8—Interests in Joint Ventures
IPSAS 9—Revenue from Exchange Transactions
IPSAS 10—Financial Reporting in Hyperinflationary Economies
IPSAS 11—Construction Contracts IPSAS 12—Inventories
IPSAS 14—Events after the Reporting Date
IPSAS 15—Financial Instruments: Disclosure and Presentation
IPSAS 16—Investment Property
IPSAS 17—Property, Plant, and Equipment
IPSAS 18—Segment Reporting
IPSAS 19—Provisions, Contingent Liabilities and Contingent Assets
IPSAS 20—Related Party Disclosures
IPSAS 21—Impairment of Non-Cash-Generating Assets
IPSAS 22—Disclosure of Financial Information about the General
IPSAS 23—Revenue from Non-Exchange Transactions
(Taxes and Transfers)
IPSAS 24—Presentation of Budget Information in Financial Statements
IPSAS 25—Employee Benefits
IPSAS 26—Impairment of Cash-Generating Assets
IPSAS 28—Financial Instruments: Presentation
IPSAS 29—Financial Instruments: Recognition and Measurement
IPSAS 30—Financial Instruments: Disclosures IPSAS 31—Intangible Assets
IPSAS 32 – Service Concessions
There is an increasing recognition that good accounting is good accounting whether it be in the private or public sector, though there is also an understanding that the uses for which financial information is used is often different in each case. For example, financial information in the private sector is frequently prepared with the aim of meeting the needs of investors including shareholders whereas in the public sector it is more an aid to assisting in holding spenders of public funds accountable for their actions.
There are though many similarities in good practice. As a result, most of the accruals-based IPSASs are derived from an IFRS (the sequencing of this is important: normally an IFRS will come first and will be followed by an IPSAS that is derived from it). Whilst there will be some redrafting to take account of the specific needs of the public sector in a number of cases the most marked difference between an IFRS and its connected IPSAS is one of terminology (for example whereas an IFRS will talk about an Statement of Comprehensive Income an IPSASs will discuss a Statement of Financial Position or an IFRS will mention equity whereas an IPSAS will discuss net assets). Each IPSAS will explain how it is different in any material way from the IFRS from which it is derived. In common with IFRS, the IPSAS regime is an accounting and reporting tool, explaining both how to account for various transactions and also the level of disclosures that are required.
The exceptions to the general rule that an IPSAS is normally linked to an IFRS are as follows:
IPSAS 21: Impairment of Non-Cash Generating Assets – non-cash-generating assets are those which are not used for a commercial purpose, which covers many in the public sector IPSAS 22: Disclosure of Financial Information about the General Government Sector IPSAS 23: Revenue from non-exchange transactions, which gives guidance on how to account for taxes and transfers as revenues
IPSAS 24: Presentation of budget information in financial statements, which recognises that budgeting is an important method of ensuring accountability in the public sector whereas in the private sector it is more a method of internal control
Presentation of Financial Statements – IPSAS 1
IPSAS 1 (“Presentation of Financial Statements”) gives general guidance as to the types of financial statements to be prepared in the public sector (along with IPSAS 2 on the cash flow statement). It is drawn primarily from IAS 1. It should be applied to all general purpose financial statements prepared and presented under the accrual basis of accounting in accordance with IPSASs. In common with most IPSASs, it applies to all public sector entities other than Government Business Enterprises which use IFRSs for their financial reporting.
It outlines that there are six basic components of financial statements namely a Statement of Financial Position, a Statement of Financial Performance, a statement of changes in net assets/equity, a cash flow statement, a comparison of budget and actual amounts (only if the budget is made publicly available) and the notes to the financial statements. It is important to emphasise that the disclosures in the notes are considered a fundamental part of the financial statements – but detailed guidelines on what should go into the notes for specific elements of the financial statements are found in individual IPSASs on the topics involved and not in IPSAS 1, which sets out high level contents only.
Many of these financial statements are similar to those in use within the private sector. One important difference however is the comparison of budget and actual amounts. This reflects the fact that in the public sector the budget has a greater and different significance than it does in the private sector. In particular it is a tool to help ensure accountability of those responsible for the control of resources and their effective, efficient and economic use. IPSAS 1 does not give detailed guidance on the budget v actual comparison statement which is covered in more detail within IPSAS 24, “Presentation of Budget Information in Financial Statements” (this is one of the few IPSASs for which there is no equivalent IFRS).
Entities are encouraged to present other information than that included in the financial statements to assist users in assessing the performance of the entity, its stewardship of assets and making an informed evaluation about decisions on the allocation of resources. Such information might include performance indicators, statements of service performance, program reviews and other reports by management. These areas will be further covered in the “Conceptual Framework” which is currently being prepared by IFAC to provide a framework within which future IPSASs will be prepared and current IPSASs possibly revised.
IPSAS 1 states that financial statements shall present fairly the financial position, financial performance, and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, revenue, and expenses set out in IPSASs. The application of IPSASs, with additional disclosures when necessary, is presumed to result in financial statements that achieve a fair presentation.
An entity whose financial statements comply with IPSASs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IPSASs unless they comply with all the requirements of IPSASs – in other words selective application of IPSASs is not permitted.
In addition to the over-arching consideration of ‘fair presentation’ other important concepts are included, for example;
- that the financial statements are prepared on the basis that the entity is a ‘going concern’
- that there is in normal circumstances consistency of presentation from one reporting period to the next
- the concept of materiality and aggregation of large numbers of transactions into classes for reporting purposes
- that the offsetting of assets and liabilities, or revenue and expenses, is not permitted unless specifically allowed or required by an IPSAS
- that comparative information for previous periods will be included in the financial statements unless an IPSAS allows or requires its non-inclusion (e.g. in the first reporting period for a new entity)
Much of the detailed guidance in IPSAS 1 replicates that found in IAS 1 and is therefore not replicated here. The main differences between the two are shown below:
- Commentary additional to that in IAS 1 has been included in IPSAS 1 to clarify the applicability of the Standard to accounting by public sector entities, e.g., discussion on the application of the going concern concept has been expanded.
- IAS 1 allows the presentation of either a statement showing all changes in net assets/equity, or a statement showing changes in net assets/equity, other than those arising from capital transactions with owners and distributions to owners in their capacity as owners. IPSAS 1 requires the presentation of a statement showing all changes in net assets/equity.
- IPSAS 1 uses different terminology, in certain instances, from IAS 1. The most significant examples are the use of the terms “statement of financial performance,” and “net assets/equity” in IPSAS 1. The equivalent terms in IAS 1 are “income statement,” and “equity”.
- IPSAS 1 does not use the term “income,” which in IAS 1 has a broader meaning than the term “revenue.”
- IPSAS 1 contains commentary on timeliness of financial statements, because of the lack of an equivalent Framework in IPSASs (paragraph 69). However this may be revised once the Conceptual Framework is finalised.
- IPSAS 1 contains an authoritative summary of qualitative characteristics (based on the IASB framework) in Appendix A. Again, this may be revised once the Conceptual Framework is finalised.
Cash Flow Statements – IPSAS 2
IPSAS 2 is drawn primarily from International Accounting Standard (IAS) 7, Cash Flow Statements. You should note that although cash flow statements are discussed in detail in IPSAS 2, IPSAS 1 on the presentation of financial statements also makes reference to them.
In practice, there are no significant differences between IPSAS 2 and IAS 7. However there are some differences in the detail, namely:
- Commentary additional to that in IAS 7 has been included in IPSAS 2 to clarify the applicability of the standards to accounting by public sector entities. IPSAS 2 uses different terminology, in certain instances, from IAS 7. The most significant examples are the use of the terms “revenue,” “statement of financial performance,” and “net assets/equity” in IPSAS 2. The equivalent terms in IAS 7 are “income,” “income statement,” and “equity.”
- IPSAS 2 contains a different set of definitions of technical terms from IAS 7 (paragraph
- In common with IAS 7, IPSAS 2 allows either the direct or indirect method to be used to present cash flows from operating activities. Where the direct method is used to present cash flows from operating activities, IPSAS 2 encourages disclosure of a reconciliation of surplus or deficit to operating cash flows in the notes to the financial statements (paragraph 29).
Inventories – IPSAS 12
IPSAS 12 (“Inventories”) is drawn substantially from IAS 2. As the name suggests, its objective is to prescribe the accounting treatment for inventories. Specifically it provides guidance on the calculation of cost and the subsequent recognition of inventories as expenses when they are consumed or sold. They also provide guidance on the write-down of inventories to their Net Realisable Value (in the case of inventories held for re-sale, defined as the future sales proceeds of any inventory less any future costs that would be incurred to make that sale happen).
The IPSAS outlines a number of situations where the rules outlined do not apply, for example:
- Work-in-progress on construction contracts (specific rules are in IPSAS 11)
- Financial instruments (see IPSASs 28 and 29)
- Biological assets (IPSAS 27)
The basic rule, as it is in IAS 2, is that inventories should be carried in the Statement of Financial Position (sometimes known as the Balance Sheet) until it is used or sold, at which point the inventory will be charged to the Statement of Financial Performance. The accounting is quite simple as the following example shows:
Entity X, a public sector education establishment buys 20,000,000 RwF of fuel oil in December 2012, which it does not plan to use until 2013:
In the financial statements, the double entry for this transaction (assuming it is paid for in cash when purchased is):
DEBIT Inventories (Statement of Financial Position) 20,000,000
CREDIT Cash (20,000,000)
When it is then used in 2013, the double entry would be:
DEBIT Expenses (Statement of Financial Performance) 20,000,000
CREDIT Inventories (20,000,000)
Inventories in the public sector may take a number of different forms, some of them quite unusual. These include:
- Consumable stores
- Maintenance materials
- Energy reserves
- Stocks of unissued currency
The cost of inventories shall comprise all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Costs of purchase includes any non-reclaimable taxes and import duties. If there are any conversion costs, such as would be the case with a publicly-owned manufacturing environment which takes raw materials and turns them into finished goods then any attributable overheads may also be added to the cost as long as these overhead costs are allocated in a systematic fashion.
The accounting treatment in IPSAS 12 is similar to that in IAS 2. Basically, when inventories are sold, exchanged, or distributed, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. If there is no related revenue, the expense is recognized when the goods are distributed or the related service is rendered.
There are only a few differences between IPSAS 12 and IAS 2. IPSAS 12 requires that where inventories are provided at no charge or for a nominal charge, they are to be valued at the lower of cost and current replacement cost (in the public sector it is not as unusual for inventories to move from one organisation to another on a free-of-charge basis as it is in the private sector). In addition the financial statement known as the ‘Statement of Financial Performance’ is known as the ‘Income Statement’ in IAS 2, which also uses the term ‘income’ rather than ‘revenue’.
Accounting Policies, Changes in Accounting Estimates and Errors – IPSAS 3
IPSAS 3 (“Accounting Policies, Changes in Accounting Estimates and Errors”) is drawn from IAS 8. The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies, together with the (a) accounting treatment and disclosure of changes in accounting policies, (b) changes in accounting estimates, and (c) the corrections of errors. This Standard is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.
In the public, as in the private, sector an entity has some discretion as to the accounting policies it adopts to most fairly represent the financial transactions of the business. Therefore it is important that there is some guidance laid out to ensure that there is an appropriate methodology for the adoption of accounting policies and also around how they are changed. Equally, mistakes will from time to time be made in the preparation of financial statements and they may not always be picked up in the audit subsequently. Therefore guidance is also required to ensure that if errors are not discovered until after the financial statements have been formally approved then there are appropriate measures adopted to react to the situation.
It should be noted that one of the allowable reasons for changing an accounting policy is the publication of a new IPSAS. Entities will always have a transition period during which they may move from the existing accounting treatment to that which is required by the new IPSAS. On the other hand the management of the entity may feel that a different policy is required because of changes that have taken place within the entity itself. Changes of accounting policy, which usually require restatement of comparative figures and opening balances should not be confused with changes in accounting estimate, which do not.
Estimates may often be used in government accounting for example estimated amounts of tax revenues, estimated bad debt provisions for uncollected debts or the obsolescence of inventory. When these estimates turn out to be in need of correction – and remember that an estimate is almost certain to be incorrect to some extent because the outcome is uncertain. These estimates should be corrected in the current financial period and not previous ones.
Errors can arise in respect of the recognition, measurement, presentation, or disclosure of elements of financial statements. Financial statements do not comply with IPSASs if they contain either material errors, or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance, or cash flows. Nevertheless some financial statements may inadvertently contain material errors which are not picked up. If they do and the financial statements have not yet been finalised then the drafts of these should of course be collected before publication. However if they are only picked up once the financial statements are approved then the correct accounting treatment is to adjust the comparative figures in the next year’s financial statements and adjust the opening balances accordingly.
Once more the major differences between IPSAS 3 and IAS 8 mainly revolve around terminology. IPSAS 3 uses the terms ‘Statement of Financial Performance’, accumulated surplus or deficit and net assets/equity whereas in IAS 8 these are termed ‘income statement’, ‘retained earnings’ and ‘equity’. Also IPSAS 3 talks of ‘revenue’, which is called ‘income’ in IAS 8. In addition, unlike IAS 8 IPSAS 3 does not require disclosures about earnings per share, which are not normally relevant in a public sector context.
Events after the reporting date – IPSAS 14
IPSAS 14, “Events after the reporting date”, is drawn from IAS 10, “Events after the balance sheet date”. Its objective is to prescribe;
- When an entity should adjust its financial statements for events after the reporting date; and
- The disclosures that an entity should give about the date when the financial statements were authorized for issue, and about events after the reporting date.
It also requires that an entity should not prepare its financial statements on a going concern basis if events subsequent to the reporting date mean that this is not appropriate.
Events after the reporting date may be analysed into adjusting and non-adjusting in nature. Adjusting events occur when information is received after the reporting date which gives more evidence about a condition that already existed at the reporting date. One example would be when a court case has been commenced against the entity where, say, a provision of 30,000,000 RwF has been established. If the court case is decided after the reporting date but before the financial statements are organised and the court finds that the entity is liable to make payments of 40,000,000 RwF then the financial statements should be adjusted accordingly.
Non-adjusting events are those which occur after the reporting date and, although significant, do not normally give evidence of a condition existing at the balance sheet date. Examples given by IPSAS 14 include a major fire after the reporting date that destroys a substantial asset, a major acquisition or disposal, changes in tax rates or tax laws, large falls in asset values or big foreign exchange losses. These non-adjusting events do not require the financial statements to be re-stated but they should be disclosed in the notes to the financial statements if they are material.
There are no major differences in principle between IPSAS 14 and IAS 10, although some extra guidance is given in the former to explain better how it applies to the private sector. Other than that the differences are once more largely in terminology.
Property, Plant and Equipment – IPSAS 17 IPSAS 17 (“Property, Plant and Equipment”) is drawn primarily from IAS 16, which has the same name. It provides one of the major challenges when public sector accounting moves from a cash to an accruals basis for the first time. It is often a major exercise to assemble all the information required to accurately state an entity’s Property, Plant and Equipment (PPE) values for the first time. It is also necessary to establish policies on depreciation, that is allocating the cost of the asset over the period in which it is expected to have a useful life and amortisation, which is effectively a write-down that must be made when an asset suffers a permanent diminution in value.
The objective of IPSAS 17 is to prescribe the accounting treatment for property, plant, and equipment so that users of financial statements can discern information about an entity’s investment in this and the changes in such investment. The principal issues in accounting for property, plant, and equipment are (a) the recognition of the assets, (b) the determination of their carrying amounts (a carrying amount is the value that the asset has in the Statement of Financial Position), and (c) the depreciation charges and impairment losses to be recognized in relation to them.
The Standard applies to all assets (except some which are specifically dealt with by other IPSAS) including some that are quite specific to the public sector such as specialist military equipment and infrastructure assets (these would be for example roads or bridges). It does not however apply to mining activities when mineral reserves such as oil or gas are depleted by uses. It does not apply either to biological assets (these include animals kept for resale or slaughter or crops grown for harvesting) which are dealt with by IPSAS 27. Other IPSAS also deal with assets in specific situations, such as IPSAS 16, which deals with properties held for investment purposes, or IPSAS 13 on leased assets.
As in private sector accounting, the general rules are that the cost of an item of property, plant, and equipment shall be recognized as an asset if, and only if:
- It is probable that future economic benefits or service potential associated with the item will flow to the entity; and
- The cost or fair value of the item can be measured reliably (fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction).
The cost of an item of property, plant, and equipment comprises:
- Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
- Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
- The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired, or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Only directly attributable costs may be capitalised as part of the asset value. IPSAS 17 says that these include:
- The costs of employee benefits (as defined in the relevant international or national accounting standard dealing with employee benefits – the IPSAS dealing with this is IPSAS 25) arising directly from the construction or acquisition of the item of property, plant, and equipment;
- Costs of site preparation;
- Initial delivery and handling costs;
- Installation and assembly costs;
- Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and (f) Professional fees.
An important element of IPSAS 17 is that entities that are making the transition to accruals accounting based on IPSAS for the first time have a five-year period to make that transition as far as the recognition of plant, property and equipment under this particular Standard is concerned.
Further, an entity that adopts accrual accounting for the first time in accordance with IPSASs shall initially recognize property, plant, and equipment at cost or fair value. For items of property, plant, and equipment that were acquired at no cost, or for a nominal cost, cost is the item’s fair value as at the date of acquisition (this might be the case if for example an asset was gifted as part of a legacy or was transferred at no cost from another government department).
In such situations, the entity shall recognize the effect of the initial recognition of property, plant, and equipment as an adjustment to the opening balance of accumulated surpluses or deficits for the period in which the property, plant, and equipment is initially recognized.
Although IPSAS 17 is drawn primarily from IAS 16, Property, Plant and Equipment, as amended by IAS 16 (part of the Improvements to IFRSs which was issued in May 2008) there are some differences between the private and public sector versions of the Standard. As one detailed example, at the time of issuing IPSAS 17, the IPSASB has not yet considered the applicability of IFRS 5, Non-current Assets Held for Sale andDiscontinued Operations to public sector entities; therefore, IPSAS 17 does not reflect amendments made to IAS 16 consequent upon the issue of IFRS 5.
However, the main differences between IPSAS 17 and IAS 16 (2003) are as follows:
- IPSAS 17 does not require or prohibit the recognition of heritage assets. An entity that recognizes heritage assets is required to comply with the disclosure requirements of this Standard with respect to those heritage assets that have been recognized and may, but is not required to, comply with other requirements of this Standard in respect of those heritage assets. IAS 16 does not have a similar exclusion. (A heritage asset is one which has particular historic or cultural significance, such as a Parliament building or an archaeological site which makes the use of conventional asset valuation rules of limited relevance)
- IAS 16 requires items of property, plant, and equipment to be initially measured at cost. IPSAS 17 states that where an item is acquired at no cost, or for a nominal cost, its cost is its fair value as at the date it is acquired.
- IAS 16 requires, where an enterprise adopts the revaluation model and carries items of property, plant, and equipment at revalued amounts, the equivalent historical cost amounts should be disclosed. This requirement is not included in IPSAS 17.
- Under IAS 16, revaluation increases and decreases may only be matched on an individual item basis. Under IPSAS 17, revaluation increases and decreases are offset on a class of asset basis (this could make a significant difference).
- IPSAS 17 contains transitional provisions for both the first time adoption and changeover from the previous version of IPSAS 17. IAS 16 only contains transitional provisions for entities that have already used IFRSs. Specifically, IPSAS 17 contains transitional provisions allowing entities to not recognize property, plant, and equipment for reporting periods beginning on a date within five years following the date of first adoption of accrual accounting in accordance with IPSASs. The transitional provisions also allow entities to recognize property, plant, and equipment at fair value on first adopting this Standard. IAS 16 does not include these transitional provisions. This is an important concession in that it can sometimes be very difficult to assemble all the necessary data to allow the transition to an accruals-based approach to asset accounting and it allows public sector entities a significant amount of time to do so.
- IPSAS 17 contains definitions of “impairment loss of a non-cash-generating asset” and “recoverable service amount.” IAS 16 does not contain these definitions. This is an important distinction. A non-cash generating asset is one that is not held for the generation of a commercial return and there are a number of these in use in the public sector which would not be the case in the private sector.
- IPSAS 17 uses different terminology, in certain instances, from IAS 16. The most significant examples are the use of the terms “statement of financial performance,” and “net assets/equity” in IPSAS 17. The equivalent terms in IAS 16 are “income statement” and “equity.” IPSAS 17 does not use the term “income,” which in IAS 16 has a broader meaning than the term “revenue.” INTANGIBLE ASSTS – IPSAS 31
This is one of the most recent IPSASs to be created and is based on International Accounting Standard (IAS) 38, Intangible Assets published by the International Accounting Standards Board (IASB). It also contains extracts from the Standing Interpretations Committee Interpretation 32 (SIC 32), Intangible Assets—Web Site Costs. It includes useful application guidance on how to deal with website costs and has a number of illustrative examples which show how accounting for intangible assets could be applied in various situations such as when a patent, copyright or license is acquired from a public sector entity.
The main differences between IPSAS 31 and IAS 38 are as follows:
- IPSAS 31 incorporates the guidance contained in the Standing Interpretation Committee’s Interpretation 32, Intangible Assets—Web Site Costs as Application Guidance to illustrate the relevant accounting principles.
- IPSAS 31 does not require or prohibit the recognition of intangible heritage assets (as is also the case with tangible assets dealt with by IPSAS 17). An entity that recognizes intangible heritage assets is required to comply with the disclosure requirements of this Standard with respect to those intangible heritage assets that have been recognized and may, but is not required to, comply with other requirements of this Standard in respect of those intangible heritage assets. IAS 38 does not have similar guidance.
- IAS 38 contains requirements and guidance on goodwill and intangible assets acquired in a business combination. IPSAS 31 does not include this guidance.
- IAS 38 contains guidance on intangible assets acquired by way of a government grant. Paragraphs 50–51 of IPSAS 31 modify this guidance to refer to intangible assets acquired through non-exchange transactions. IPSAS 31 states that where an intangible asset is acquired through a non-exchange transaction, the cost is its fair value as at the date it is acquired.
- IAS 38 provides guidance on exchanges of assets when an exchange transaction lacks commercial substance. IPSAS 31 does not include this guidance.
- The examples included in IAS 38 have been modified to better address public sector circumstances.
- IPSAS 31 uses different terminology, in certain instances, from IAS 38. The most significant examples are the use of the terms “revenue,” “statement of financial performance,” “surplus or deficit,” “future economic benefits or service potential,” “accumulated surpluses or deficits,” “operating/operation,” “rights from binding arrangements (including rights from contracts or other legal rights),” and “net assets/equity” in IPSAS 31. The equivalent terms in IAS 38 are “income,” “statement of comprehensive income,” “profit or loss,” “future economic benefits,” “retained earnings,” “business,” “contractual or other legal rights,” and “equity.”
Investment Property – IPSAS 16
IPSAS 16 is drawn primarily from International Accounting Standard (IAS) 40 (Revised 2003), Investment Property. In common with some other IPSASs, there are some transitional arrangements that apply when an entity adopts accrual accounting for the first time in accordance with IPSASs. These state that in such circumstances the entity shall initially recognize investment property at cost or fair value. For investment properties that were acquired at no cost, or for a nominal cost, cost is the investment property’s fair value as at the date of acquisition. The entity should recognize the effect of the initial recognition of investment property as an adjustment to the opening balance of accumulated surpluses or deficits for the period in which accrual accounting is first adopted in accordance with IPSASs.
In terms of the comparison of IPSAS 16 to IAS 40 (2003), Investment Property, the IPSAS notes that the IPSASB has not yet considered the applicability of IFRS 4, Insurance Contracts, and IFRS 5, Non-current Assets
Held for Sale and Discontinued Operations, to public sector entities; therefore IPSAS 16 does not reflect amendments made to IAS 40 consequent upon the issue of those IFRSs.
The other main differences between IPSAS 16 and IAS 40 are as follows:
- IPSAS 16 requires that investment property initially be measured at cost and specifies that where an asset is acquired for no cost or for a nominal cost, its cost is its fair value as at the date of acquisition. IAS 40 requires investment property to be initially measured at cost.
- There is additional commentary to make clear that IPSAS 16 does not apply to property held to deliver a social service that also generates cash inflows. Such property is accounted for in accordance with IPSAS 17, Property, Plant, and Equipment.
- IPSAS 16 contains transitional provisions for both the first time adoption and changeover from the previous version of IPSAS 16. IAS 40 only contains transitional provisions for entities that have already used IFRSs.
- IFRS 1 deals with first time adoption of IFRSs. IPSAS 16 includes additional transitional provisions that specify that when an entity adopts the accrual basis of accounting for the first time and recognizes investment property that was previously unrecognized, the adjustment should be reported in the opening balance of accumulated surpluses or deficits.
- Commentary additional to that in IAS 40 has been included in IPSAS 16 to clarify the applicability of the standards to accounting by public sector entities.
- IPSAS 16 uses different terminology, in certain instances, from IAS 40. The most significant example is the use of the term “statement of financial performance” in IPSAS 16. The equivalent term in IAS 40 is “income statement.” In addition, IPSAS 16 does not use the term “income,” which in IAS 40 has a broader meaning than the term “revenue.”
Provisions, Contingent Liabilities and Contingent Assets – IPSAS 19
This International Public Sector Accounting Standard (IPSAS) is drawn primarily from International Accounting Standard (IAS) 37 (1998), Provisions, Contingent Liabilities and Contingent Assets. It includes guidance on what action should be taken when transitioning to using IPSAS 19 for the first time, namely that the effect of adopting this Standard shall be reported as an adjustment to the opening balance of accumulated surpluses/(deficits) for the period in which the Standard is first adopted. Entities are encouraged, but not required, to (a) adjust the opening balance of accumulated surpluses/(deficits) for the earliest period presented, and (b) to restate comparative information. If comparative information is not restated, this fact shall be disclosed.
There are some differences between IPSAS 19 and IAS 37 as follows:
- IPSAS 19 includes commentary additional to that in IAS 37 to clarify the applicability of the standards to accounting by public sector entities. In particular, the scope of IPSAS 19 clarifies that it does not apply to provisions and contingent liabilities arising from social benefits provided by an entity for which it does not receive consideration that is approximately equal to the value of the goods and services provided directly in return from recipients of those benefits (this is to take account of the fact that public sector entities often provide goods or services that are “free at the point of delivery” to the end user or at least provided in return for consideration that is below normal market values). However, if the entity elects to recognize provisions for social benefits, IPSAS 19 requires certain disclosures in this respect.
- The scope paragraph in IPSAS 19 makes it clear that while provisions, contingent liabilities, and contingent assets arising from employee benefits are excluded from the scope of the Standard, the Standard, however, applies to provisions, contingent liabilities, and contingent assets arising from termination benefits that result from a restructuring dealt with in the Standard.
- IPSAS 19 uses different terminology, in certain instances, from IAS 37. The most significant examples are the use of the terms “revenue” and “statement of financial performance” in IPSAS 19. The equivalent terms in IAS 37 are “income” and “income statement.”
- The Implementation Guidance included in IPSAS 19 has been amended to be more reflective of the public sector.
- IPSAS 19 contains an Illustrated Example that illustrates the journal entries for recognition of the change in the value of a provision over time, due to the impact of the discount factor (the discount factor measures the way that time affects the value of money and is built into the calculations of long-term provisions).
IPSASs 9 and 23
Accounting for revenues in the public sector (IPSASs 9 and 23)
There are two IPSASs in particular that focus on accounting for revenues in the public sector. IPSAS 9 deals with accounting for what is known as exchange transactions and IPSAS 23 deals with accounting for non-exchange transactions, especially taxes and transfers. As IPSAS 23 has no IFRS equivalent it will be necessary to discuss this in more detail than some other IPSASs.
What is the difference between exchange and a non-exchange transactions?
Exchange transactions are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange. This might be thought of as being equivalent to a commercial transactions which explains why this IPSAS is based on an IFRS (IAS 18, Revenue). So when, for example, a public sector provides goods and/or services for which it receives in return a payment that is related to their market value then it should apply IPSAS 9 in its accounting treatment.
If on the other hand there is no exchange of approximately equal value then IPSAS 23 will apply – such transactions will be described as ‘non-exchange’ in nature. This will be the case for many public sector transactions. For example when governments raise taxation revenues, there is no direct correlation between them and consequent expenditures. Although the taxpayer will rightly expect ‘value’ from their tax contributions, it is not normally possible to directly match their individual contributions to say expenditures on health, education, defence or many other public services.
IPSAS 9 – Exchange Transactions
As already mentioned these have a similar nature to commercial transactions and are therefore based on IAS 18. IPSAS 9 reminds us that revenue is recognised when it is probable that future economic benefits or service potential will flow to the entity and when such benefits can be measured reliably.
There are no significant variations between IPSAS 9 and IAS 18, with the differences in detail being as follows:
- The title of IPSAS 9 differs from that of IAS 18, and this difference clarifies that IPSAS 9 does not deal with revenue from non-exchange transactions.
- The definition of “revenue” adopted in IPSAS 9 is similar to the definition adopted in IAS 18. The main difference is that the definition in IAS 18 refers to ordinary activities (IPSAS 9 makes no such distinction).
- Commentary additional to that in IAS 18 has also been included in IPSAS 9 to clarify the applicability of the standards to accounting by public sector entities.
- IPSAS 9 uses different terminology, in certain instances, from IAS 18. The most significant example is the use of the term “net assets/equity” in IPSAS 9. The equivalent term in IAS 18 is “equity.”
IPSAS 23 – Non-Exchange Transactions
The introduction to IPSAS 23 notes that the majority of government revenues is generated in the form of taxes and transfers but that, until the passing of the Standard, there was no specific guidance in how to deal with transactions involving such items.
In summary, IPSAS 23:
- Takes a transactional analysis approach whereby entities are required to analyse inflows of resources from non-exchange transactions to determine if they meet the definition of an asset and the criteria for recognition as an asset, and if they do, determine whether a liability is also required to be recognized;
- Requires that assets recognized as a result of a non-exchange transaction initially be measured at their fair value as at the date of acquisition;
- Requires that liabilities recognized as a result of a non-exchange transaction be
recognized in accordance with the principles established in IPSAS 19, Provisions, Contingent
Liabilities and Contingent Assets;
- Requires that revenue equal to the increase in net assets associated with an inflow of resources be recognized;
- Provides specific guidance that addresses:
- Taxes; and
- Transfers, including:
- Debt forgiveness and assumption of liabilities;
- Gifts and Donations, including goods in-kind;
- Services in-kind;
- Permits, but does not require, the recognition of services in-kind; and
- Requires disclosures to be made in respect of revenue from non-exchange transactions.
An entity will recognize an asset arising from a non-exchange transaction when it gains control of resources that meet the definition of an asset and satisfy the recognition criteria. Contributions from owners do not give rise to revenue, so each type of transaction is analysed, and any contributions from owners are accounted for separately. Consistent with the approach set out in this Standard, entities will analyse non-exchange transactions to determine which elements of general purpose financial statements will be recognized as a result of the transactions.
Two kinds of revenue transaction are relevant within the framework of IPSAS 23. The first is when an asset comes under the control of an entity without an approximately equivalent exchange taking place in return. This would be the case when for example an asset is transferred to an organisation free of charge (or, if there is a charge, it is significantly below market value). In such circumstances a simple yes/no decision tree needs to be followed which is illustrated below.
Simplistically summarised, the flowchart shows that in certain circumstances when a nonexchange transaction takes place then it creates both an asset and also revenue. For example, if an entity were given an asset for which they paid nothing but its market value was worth 5,000,000 RwF then the double entry for this would be to create an asset of 5,000,000 RwF and to recognise revenue (as a credit entry) also of 5,000,000 RwF. However, if the entity incurs a liability for that asset which is below its market value then the revenue should be reduced to the extent of that liability.
Revenue from taxes
The general rule is that an entity shall recognize an asset in respect of taxes when the taxable event occurs and the asset recognition criteria are met. The definition of an asset is met when the entity controls the resources as a result of a past event (the taxable event) and expects to receive future economic benefits or service potential from those resources. In addition, it must be probable that the inflow of resources will occur and that their fair value can be reliably measured.
Taxation revenue arises only for the government that imposes the tax, and not for other entities. For example, where the Rwandan government imposes a tax that is collected by the RRA, assets and revenue accrue to the government, not the taxation agency which is effectively acting as a collection agency on behalf of government.
Taxes do not satisfy the definition of contributions from owners, because the payment of taxes does not give the taxpayers a right to receive distributions of future economic benefits or service potential by the entity during its life, or (b) distribution of any excess of assets over liabilities in the event of the government being wound up. Nor does the payment of taxes provide taxpayers with an ownership right in the government that can be sold, exchanged, transferred, or redeemed.
On the other hand, taxes satisfy the definition of a non-exchange transaction because the taxpayer transfers resources to the government, without receiving approximately equal value directly in exchange. While the taxpayer may benefit from a range of social policies established by the government, these are not provided directly in exchange as consideration for the payment of taxes.
Recognition of taxation revenue is based on the time at which the taxable event takes place, examples of which are when:
Income tax is the earning of assessable income during the taxation period by the taxpayer; (b) Value-added tax is the undertaking of taxable activity during the taxation period by the taxpayer;
- Goods and services tax is the purchase or sale of taxable goods and services during the taxation period;
- Customs duty is the movement of dutiable goods or services across the customs boundary; (e) Property tax is the passing of the date on which the tax is levied, or the period for which the tax is levied, if the tax is levied on a periodic basis.
Other types of non-exchange revenue
Fines are economic benefits or service potential received or receivable by a public sector entity, from an individual or other entity, as determined by a court or other law enforcement body, as a consequence of the individual or other entity breaching the requirements of laws or regulations.
Fines normally require an entity to transfer a fixed amount of cash to the government, and do not impose on the government any obligations which may be recognized as a liability. As such, fines are recognized as revenue when the receivable meets the definition of an asset and satisfies the criteria for recognition as an asset which have already been discussed. Where an entity collects fines in the capacity of an agent, the fine will not be revenue of the collecting entity. Assets arising from fines are measured at the best estimate of the inflow of resources to the entity.
Sometimes a bequest may be made to a government entity. A bequest is a transfer made according to the provisions of a deceased person’s will. The past event giving rise to the control of resources embodying future economic benefits or service potential for a bequest occurs when the entity has an enforceable claim, for example on the death of the person making the bequest.
.Bequests that satisfy the definition of an asset are recognized as assets and revenue when it is probable that the future economic benefits or service potential will flow to the entity, and the fair value of the assets can be measured reliably. Determining the probability of an inflow of future economic benefits or service potential may be problematic if a period of time elapses between the death of the testator and the entity receiving any assets.
The entity will need to determine if the deceased person’s estate is sufficient to meet all claims on it, and satisfy all bequests. If the will is disputed, this will also affect the probability of assets flowing to the entity. Therefore it can be seen that asset and revenue recognition is not always a straightforward situation with bequests. It is necessary to obtain an estimate of the fair value of bequeathed assets, for example by obtaining the latest market values for assets bequeathed.
Both IFRSs and IPSASs are as much about disclosure as they are about accounting treatment. IPSAS 23 has a list of disclosure requirements that apply specifically to non-exchange transactions. These include a requirement to disclose the following details:
- Either on the face of, or in the notes to, the general purpose financial statements:
The amount of revenue from non-exchange transactions recognized during the period by major classes showing separately:
- Taxes, showing separately major classes of taxes; and
- Transfers, showing separately major classes of transfer revenue.
The amount of receivables recognized in respect of non-exchange revenue; (c) The amount of liabilities recognized in respect of transferred assets subject to conditions
- The amount of assets recognized that are subject to restrictions and the nature of those restrictions; and
- The existence and amounts of any advance receipts in respect of non-exchange transactions.
- An entity shall disclose in the notes to the general purpose financial statements:
- The accounting policies adopted for the recognition of revenue from non-exchange transactions;
- For major classes of revenue from non-exchange transactions, the basis on which the fair value of inflowing resources was measured;
For major classes of taxation revenue that the entity cannot measure reliably during the period in which the taxable event occurs, information about the nature of the tax; and
The nature and type of major classes of bequests, gifts, and donations.