International Federation of Accountants Government Financial Reporting World Bank January 2005

Government Financial Reporting International Federation of Accountants Worldwide body for professional accountantsWorldwide body for professional accountants 163 Member Bodies in 119 countries163 Member Bodies in 119 countries –International Public Sector Accounting Standards Board –International Auditing and Assurance Standards Board –Education Committee –Ethics Committee –Professional Accountants in Business –Small/Medium Practice Permanent Task Force –Compliance Advisory Panel

Government Financial Reporting International Public Sector Accounting Standards Board Established 1986 as Public Sector Committee, renamed 2004Established 1986 as Public Sector Committee, renamed 2004 Members 2005: France (Chair), UK (Deputy Chair), Australia, Argentina, Canada, Germany, India, Israel, Japan, Malaysia, Mexico, New Zealand, Norway, South Africa, USAMembers 2005: France (Chair), UK (Deputy Chair), Australia, Argentina, Canada, Germany, India, Israel, Japan, Malaysia, Mexico, New Zealand, Norway, South Africa, USA Observers: ADB, EU, IASB, IMF, INTOSAI, OECD, World Bank, UN, UNDPObservers: ADB, EU, IASB, IMF, INTOSAI, OECD, World Bank, UN, UNDP

Government Financial Reporting IPSAS Setting Program Established late 1996 to develop a comprehensive set of financial reporting standards for public sectorEstablished late 1996 to develop a comprehensive set of financial reporting standards for public sector Funded by World Bank, IFAC, ADB, UNDP, IMFFunded by World Bank, IFAC, ADB, UNDP, IMF IPSASs set appropriate minimum benchmarksIPSASs set appropriate minimum benchmarks –For discharge of accountability, transparency, complete and relevant financial reporting IPSASs provide a framework against which audit is undertakenIPSASs provide a framework against which audit is undertaken IPSASs are a resource for national standard-settersIPSASs are a resource for national standard-setters

Government Financial Reporting IPSASB’s Approach Develop standards that can be applied by any public sector entity, including the whole of governmentDevelop standards that can be applied by any public sector entity, including the whole of government Promote the adoption of the Accrual BasisPromote the adoption of the Accrual Basis Acknowledge wide use of cash basisAcknowledge wide use of cash basis –Cash Basis IPSAS Study 14 “Transition to the Accrual Basis of Accounting”.Study 14 “Transition to the Accrual Basis of Accounting”.

Government Financial Reporting Purpose of Financial Reporting Provide information about the the financial position, performance and cash flows of an entity useful to a wide range of users.Provide information about the the financial position, performance and cash flows of an entity useful to a wide range of users. Accountability, transparency, compliance with budget,Accountability, transparency, compliance with budget, Financial statements should be understandable, relevant, reliable, comparableFinancial statements should be understandable, relevant, reliable, comparable Contraints: timeliness, cost/benefit,Contraints: timeliness, cost/benefit,

Government Financial Reporting Necessity for Financial Reporting If information is not collated for external reporting purposes it is unlikely to be collated for management purposes.If information is not collated for external reporting purposes it is unlikely to be collated for management purposes. Good information is necessary for good decision makingGood information is necessary for good decision making Financial reporting reform is part of a broader public sector financial management improvement process.Financial reporting reform is part of a broader public sector financial management improvement process. Managing public sector assets and liabilities is essential if public sector cash flows are to be managedManaging public sector assets and liabilities is essential if public sector cash flows are to be managed

Government Financial Reporting Cash Basis IPSAS Issued in January 2003 after extended development and consultationIssued in January 2003 after extended development and consultation Requires the presentation of Statement of Cash Receipts and PaymentsRequires the presentation of Statement of Cash Receipts and Payments –Includes cash payments made by 3 rd parties on behalf of entity –Includes disclosure of accounting policies Encourages additional disclosure of assets/liabilitiesEncourages additional disclosure of assets/liabilities

Government Financial Reporting Advantages of Cash Basis Comprehensive presentation of cash informationComprehensive presentation of cash information Relatively straightforwardRelatively straightforward Usually easily reconciled with Budget InformationUsually easily reconciled with Budget Information –Provided budget covers whole of government VerifiableVerifiable Less prone to subjective decisions on accounting policyLess prone to subjective decisions on accounting policy

Government Financial Reporting Disadvantages of Cash Basis Does not report assets and liabilitiesDoes not report assets and liabilities –If not reported, can users have confidence that they’re being appropriately managed? End of year “gaming” quite commonEnd of year “gaming” quite common Most governments report at least the outstanding government debt – moving to some accrual conceptsMost governments report at least the outstanding government debt – moving to some accrual concepts

Government Financial Reporting Accrual Basis IPSASs 21 IPSASs currently on issue21 IPSASs currently on issue Require presentation of:Require presentation of: –Statement of Financial Position (net assets) –Statement of Financial Performance (net surplus/deficit) –Statement of Cash Flows (increase/decrease in cash held) –Statement of Changes in Net Assets/Equity –Notes to the above statements

Government Financial Reporting Advantages of Accrual Basis In addition to the cash flow information, users have additional information about assets and liabilities.In addition to the cash flow information, users have additional information about assets and liabilities. If assets and liabilities are reported, there is a greater probability that they will be appropriately managed.If assets and liabilities are reported, there is a greater probability that they will be appropriately managed. Comparable to the financial reporting governments require of corporate entities.Comparable to the financial reporting governments require of corporate entities. More information available to capital markets should lead to better pricing of government debt securities.More information available to capital markets should lead to better pricing of government debt securities.

Government Financial Reporting Disadvantages of Accrual Basis Relatively complex.Relatively complex. Can provide information overload, particularly for small entities.Can provide information overload, particularly for small entities. Few governments report on this basis – not easy to compare one government to another (cash flows can be compared)Few governments report on this basis – not easy to compare one government to another (cash flows can be compared)

Government Financial Reporting Modified Bases of Accounting Modified cash – closer to cash than accrual, includes limited accrual informationModified cash – closer to cash than accrual, includes limited accrual information Modified accrual – closer to accrual than cash, includes more extensive accrual information, excludes some assets and liabilitiesModified accrual – closer to accrual than cash, includes more extensive accrual information, excludes some assets and liabilities Most governments report on some modified basisMost governments report on some modified basis IPSASB’s constituents recommended against developing IPSASs for modified basesIPSASB’s constituents recommended against developing IPSASs for modified bases

Government Financial Reporting Who is on Accrual? New Zealand – National and LocalNew Zealand – National and Local Australia – National, most states/territories, localAustralia – National, most states/territories, local USA – Federal, State, LocalUSA – Federal, State, Local UK – National and LocalUK – National and Local Switzerland – local, Cantons and Federal movingSwitzerland – local, Cantons and Federal moving Canada – moving toward accrualCanada – moving toward accrual Netherlands – moving to accrualNetherlands – moving to accrual IFAC, NATO, OECD and Cayman Is use IPSASsIFAC, NATO, OECD and Cayman Is use IPSASs

Government Financial Reporting Questions for Discussion Is financial reporting an end in itself?Is financial reporting an end in itself? Would you invest your life savings in a company that only produced a cash flow statement? What if that cash flow statement was unaudited or received a qualified audit opinion?Would you invest your life savings in a company that only produced a cash flow statement? What if that cash flow statement was unaudited or received a qualified audit opinion? Is there evidence that improved financial reporting leads to improved financial management?Is there evidence that improved financial reporting leads to improved financial management?

Government Financial Reporting Questions for Discussion What resources are available to assist governments in the financial reform process?What resources are available to assist governments in the financial reform process? Can non-accountants understand financial reports?Can non-accountants understand financial reports? Can non-accountants prepare financial reports?Can non-accountants prepare financial reports? What about countries with low education levels?What about countries with low education levels? How can IFAC and IPSASB assist the World Bank in its mission?How can IFAC and IPSASB assist the World Bank in its mission?

Government Financial Reporting Summary Cash and Accrual IPSASsCash and Accrual IPSASs Financial Reporting reform and financial management reform complement each otherFinancial Reporting reform and financial management reform complement each other An independent audit opinion provides assurance that financial statements are reliableAn independent audit opinion provides assurance that financial statements are reliable An entity that does not report appropriately is not accountable or transparentAn entity that does not report appropriately is not accountable or transparent They’re your tax dollars they’re playing withThey’re your tax dollars they’re playing with

Government Financial Reporting Visit IFAC Online All IPSASB and most IFAC publications can be downloaded free of charge.All IPSASB and most IFAC publications can be downloaded free of charge. Printed copies of IPSASB Handbooks, standards and Study 14 are available free of charge, shipping costs are recovered.Printed copies of IPSASB Handbooks, standards and Study 14 are available free of charge, shipping costs are recovered.

International Federation of Accountants