Chapter
5
Ch-5: Introduction to
IPSAS
Introduction
IPSAS: “International Public Sector Accounting Standards”
The International Public Sector Accounting Standards Board
(IPSASB) will apply these concepts in developing International
Public Sector Accounting Standards (IPSASs) and
Recommended Practice Guidelines (RPGs) applicable to the
preparation and presentation of general purpose financial
reports (GPFRs) of public sector entities.
International best practice for financial reporting, specifically
for the public sector
IPSAS is based on full accrual accounting which is the best
practice for financial reporting
What are IPSAS?
• Authoritative standards for preparation of general purpose financial
statements
• Designed to apply to public sector entities that
– are responsible for the delivery of services to benefit the public and/or
to redistribute income and wealth;
– mainly finance their activities, directly or indirectly, by means of taxes
and/or transfers from other levels of government, social contributions,
debt or fees; and
– do not have a primary objective to make profits.
Introduction
Aligned with IFRS where Appropriate
IFRS
(Private Sector)
• Technology
• Guidance for public sector
• Issues of the public sector
• Examples from the public sector
IPSAS
(Public Sector)
Introduction
Why adopt the accrual basis?
• Reports all
– economic resources controlled by entity
– claims against economic resources
– full cost of goods and services
• Improves transparency and accountability
• Provides better information for decision making
• Improves consistency and comparability of reporting
Introduction
IPSAS (Accrual Basics)
IPSAS is based on full accrual accounting which is the best
practice for financial reporting
– Current assets (e.g. Inventory)
• IPSAS - Reported as assets when acquired;
expensed when consumed, sold or distributed.
– Non-current assets (e.g. vehicles)
• IPSAS - Reported as assets and depreciated over
useful lives.
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IPSAS (Accrual Basics)
Reporting Differences:
– Non-current liabilities (e.g. employee benefits)
• IPSAS - Obligation to pay in the future is reported in the
Financial Statements when entitlements to benefits occur.
– Commitments (e.g. purchase orders and other “obligations”)
• IPSAS - Not reported on the face of the Financial
Statements (contractual commitments e.g. for PP&E are
disclosed in the Notes).
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Benefits of Accrual Accounting (IPSAS)
– Support better accountability and provide better information for
decisions on investments and management of assets and liabilities.
– Provide more meaningful and comprehensive information to fully cost
the goods and services provided by the organization.
– Provide better information for choices between different options with
respect to service delivery.
– Reduce scope to report expenses that may never occur such as
unliquidated obligations.
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Benefits of Accrual Accounting (IPSAS)
Provide a better basis for evaluating an organization’s
performance in terms of resource management.
Better support results based management.
Improve consistency, comparability and reliability of financial
statements which strengthens overall confidence in the financial
information for both external and internal users.
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Conceptual Framework for General
Purpose Financial Reporting by Public
Sector Entities
Conceptual Framework
Role of the Conceptual Framework
• The Conceptual Framework for General Purpose
Financial Reporting by Public Sector Entities (the
Conceptual Framework) establishes the concepts
that underpin general purpose financial reporting
(financial reporting) by public sector entities that
adopt the accrual basis of accounting.
Conceptual Framework
Objectives and Users of General-Purpose Financial Reporting
• Objectives of Financial Reporting
– Provide information about entity useful to users of GPFRs
– Useful for accountability purposes and decision-making purposes
• Reflects service delivery objective and nature of funding
– Respond to information needs of users
• Users of GPFRs
– Primary users: service recipients and resource providers
Conceptual Framework
Qualitative Characteristics
• Relevance
• Faithful Representation
• Understandability
• Timeliness
• Comparability
• Verifiability
Conceptual Framework
Relevance
Financial and non-financial information is
relevant if it is capable of making a
difference in achieving the objectives of
financial reporting.
Financial and non-financial information is
capable of making a difference when it
has confirmatory value, predictive value,
or both.
Continued
information will be relevant for accountability and decision making
purposes if it confirms expectations about such matters as the extent to
which managers have discharged their responsibilities for the efficient
and effective use of resources, the achievement of specified service
delivery objectives, and compliance with relevant budgetary, legislative
and other requirements
Predictive Value
GPFRs may present information about an entity’s anticipated
future service delivery activities, objectives and costs, and the
amount and sources of the resources that are intended to be
allocated to providing services in the future. Such future
oriented information will have predictive value and be relevant
for accountability and decision-making purposes.
Faithful Representation
To be useful in financial reporting, information must be a
faithful representation of the economic and other phenomena
that it purports to represent.
Faithful representation is attained when the depiction of the
phenomenon is complete, neutral, and free from material
error. Information that faithfully represents an economic or
other phenomenon depicts the substance of the underlying
transaction, other event, activity or circumstance―which is
not necessarily always the same as its legal form.
Understandability
Understandability is the quality of information that enables
users to comprehend its meaning.
Information should be written in plain language, and presented
in a manner that is readily understandable by users.
Understandability is enhanced when information is classified,
characterized, and presented clearly and concisely.
Comparability also can enhance understandability.
Timeliness
Timeliness means having information available for users before it
loses its capacity to be useful for accountability and decision-
making purposes.
Having relevant information available sooner can enhance its
usefulness as input to assessments of accountability and its
capacity to inform and influence decisions that need to be made.
A lack of timeliness can render information less useful.
Comparability
Comparability is the quality of information that enables users to
identify similarities in, and differences between, two sets of
phenomena. Comparability is not a quality of an individual item
of information, but rather a quality of the relationship between
two or more items of information.
Continued
The usefulness of such information is enhanced if it can be
compared with, for example:
• Prospective financial and non-financial information
previously presented for that reporting period or
reporting date;
• Similar information about the same entity for some
other period or some other point in time; and
• Similar information about other entities (for example,
public sector entities providing similar services in
different jurisdictions) for the same reporting period.
Verifiability
Verifiability is the quality of information that helps assure users that
information in GPFRs faithfully represents the economic and other
phenomena that it purports to represent.
The characteristic implies that different knowledgeable and
independent observers could reach general consensus, although not
necessarily complete agreement, that either:
• The information represents the economic and other
phenomena that it purports to represent without material error or bias;
or
• An appropriate recognition, measurement, or representation
method has been applied without material error or bias.
Constraints on Information Included in GPFRs
• Materiality: Information is material if its omission or misstatement could
influence the discharge of accountability by the entity
• Cost-Benefit :Assessing whether the benefits of providing information
justify the related costs
• Balance between Qualitative Characteristics (QCs): The qualitative
characteristics work together to contribute to the usefulness of
information. The aim is to achieve an appropriate balance among the
characteristics in order to meet the objectives of financial reporting.
Conceptual Framework
The Reporting Entity
• Government or other public sector organization, program or
identifiable area of activity that prepares GPFRs
• Key characteristics
• Raising & Use of Resources; and
• Service recipients or resource providers dependent on GPFRs
• May comprise two or more separate entities
• Separate legal identity not essential
Conceptual Framework
Elements in Financial Statements
Ownership
Asset Revenue
Contributions
Ownership
Liability Expense
Distributions
Conceptual Framework
Recognition in Financial Statements
• Item satisfies definition of an element
• Can be measured in a way that:
• Achieves qualitative characteristics; and
• Takes account of constraints
• Recognition criteria are not incorporated in element definitions
Conceptual Framework
Measurement Bases for Assets
Historical
Current Value
Cost
Replacement Net Selling
Market Value Value in Use
Cost Price
Conceptual Framework
Market Value
The amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction
At acquisition market value and historical cost will be the same,
if transaction costs are ignored and the transaction is an
exchange transaction.
Replacement Cost
The most economic cost required for the entity to replace the
service potential of an asset (including the amount that the
entity will receive from its disposal at the end of its useful life) at
the reporting date.
Net Selling Price
The amount that the entity can obtain from sale of the asset,
after deducting the costs of sale
Value in Use
The present value to the entity of the asset’s remaining service
potential or ability to generate economic benefits if it continues
to be used, and of the net amount that the entity will receive
from its disposal at the end of its useful life.
Measurement Bases for Liabilities
Historical
Current Value
Cost
Cost of Market Cost of Assumption
Fulfillment Value Release Price
Conceptual Framework
Historical
The consideration received to assume an obligation, which is
the cash or cash equivalents, or the value of the other
consideration received at the time the liability is incurred.
Cost of Fulfillment
The costs that the entity will incur in fulfilling the obligations
represented by the liability, assuming that it does so in the least
costly manner.
Market Value
The amount for which a liability could be settled between
knowledgeable, willing parties in an arm’s length transaction
Cost of Release
Cost of Release
Cost of release refers to the amount of an immediate exit from
the obligation.
Cost of release is the amount that either the creditor will accept
in settlement of its claim, or a third party would charge to accept
the transfer of the liability from the obligor.
Assumption Price
Assumption price is the term used in the context of liabilities to
refer to the same concept as replacement cost for assets
Just as replacement cost represents the amount that an entity
would rationally pay to acquire an asset, so assumption price is
the amount which the entity would rationally be willing to
accept in exchange for assuming an existing liability.
Exchange transactions carried out on arms-length terms will
provide evidence of assumption price—this is not the case for
non-exchange transactions.
Presentation in General Purpose
Financial Reports
Presentation is the selection, location and organization of
information that is reported in the GPFRs.
Presentation aims to provide information that contributes
towards the objectives of financial reporting and achieves the
qualitative characteristics while taking into account the
constraints on information included in GPFRs.
Decisions on selection, location and organization of information
are made in response to the needs of users for information
about economic or other phenomena.
Elements of the financial statements
The elements of the financial statements are the major
groupings of items that are presented on the face of the
financial statements; the elements of the financial statements
are the building blocks of financial reporting.
– The elements of accrual based financial
statements prepared in accordance with IPSAS are:
• assets
• liabilities
• net assets/equity
• revenues
• expenses
Continued
ASSETS - resources controlled by an organization as result of a past
event, from which future economic benefits or service potential are
expected to flow to the organization.
– Current Assets (expected to be used within 12 months):
• Inventories - examples: fuel, spare parts, vaccines, supplies
• Receivables (current)
• Cash
– Non-current Assets (expected to last more than 12 months):
• Property, Plant and Equipment - examples: land, buildings,
vehicles, IT & communication equipment
• Intangible Assets - examples: software, copyrights
• Receivables (non-current)
• Investments (non-current).
Elements of Financial Statements
LIABILITIES - present obligations of an organization arising from past
events, the settlement of which is expected to result in an outflow of
resources from the organization.
– Current or non-current Liabilities:
• Payables
• Employee benefit liabilities
• Provisions.
NET ASSETS/EQUITY - residual interest in the assets of an organization
after deducting all of its liabilities.
• Reserves
• Accumulated surplus/deficit.
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Unit 3: Elements Of
Financial Reporting
Elements of Financial Statements
REVENUE – Inflow of economic benefit or service potential that result in
an increase in net assets/equity. There are two major classes of revenue
in IPSAS:
– Revenue from exchange transactions - value received is equal to or greater than
value given:
• Selling merchandise.
• Rendering services.
• Interest earned.
– Revenue from non-exchange transactions - value received without giving
approximately equal value in exchange:
• Assessments.
• Voluntary funding agreements.
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Elements of Financial Statements
EXPENSES – Decreases in economic benefit or service potential
resulting from use/consumption of assets or incurrence of
liabilities that result in a decrease in net assets/equity.
– Depreciation of Property, Plant and Equipment.
– Consumption of Inventory.
– Travel expense.
– Amortization of Intangible assets.
– Employee Benefit expenses.
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General Purpose Financial Statements
Statement of Statement Assets, Liabilities
Comparison of of Financial and Net
Budget and Actual Position Assets/Equity
Amounts Revenues and
Statement Expenses
of Financial
Performance
All Changes in Net
Change in Net Assets/Equity
Assets/Equity
Cash Inflows &
Cash Flow Outflows from
Statement Operating,
Financing, &
Investing Activities
Notes to the
Financial Significant
Statements Accounting Policies
& Explanatory Notes
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