Go Global with knowledge of IPSAS- Internationally accepted Accounting Language for Governmental Accounting
International Public Sector Accounting Standards (IPSASs) are a set of accounting standards issued by the IPSAS Board (IPSASB) for use by public sector entities around the world in the preparation of financial statements. These standards are based on International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). These standards are used by the national governments, regional (e.g., state, provincial, territorial) governments, local (e.g., city, town) governments, and related governmental entities (e.g., agencies, boards, and commissions). IPSASs are widely used by intergovernmental organizations or institutions. Presently, financial statements of the 24 UN System Organizations like United Nations (UN), the World Health Organization (WHO), the World Food Programme (WFP), the European Commission (EC), the Organization for Economic Co-Operation and Development (OECD), etc are based on the IPSAS. Earlier, UN System Organizations have been doing their financial reporting on what is called a modified cash basis for many years. This modified cash system was commonly referred to as UNSAS. Arguably, the UNSAS were modified cash or modified accrual, but the UN itself classified them as modified cash, because UNSAS fell short of the accrual principle
However, IPSASs does not apply to government business enterprises. The primary aim of IPSASs are to improve the quality of general purpose financial reporting by public sector entities, leading to better-informed assessments of the resource allocation decisions made by governments, thereby increasing transparency and accountability. It will also enable consistency of practice throughout the world.
International Federation of Accountants
The International Federation of Accountants (IFAC) is the global advocacy organization for the accountancy profession; mainly for the financial accounting and auditing professions. Founded in 1977, IFAC has more than 175 members and associates in more than 130 countries and jurisdictions, representing more than 3 million accountants employed in public practice, industry and commerce, government, and academe. The organization supports the development, adoption, and implementation of international standards for accounting education, ethics, and the public sector as well as audit and assurance. It supports four independent standard-setting boards, which establish international standards on ethics, auditing and assurance, accounting education, and public sector accounting. It also issues guidance to encourage high-quality performance by professional accountants in small and medium business accounting practices.
To ensure the activities of IFAC and the independent standard-setting bodies supported by IFAC are responsive to the public interest, an international Public Interest Oversight Board (PIOB) was established in February 2005 by the Monitoring Group, which was formed when it became apparent that governance reform of the IFAC was needed.
IFAC is not an accreditation organization. Membership of IFAC is not obtained via an accreditation process, but instead, IFAC membership is obtained via an application process that must be sponsored by at least two current IFAC member organizations.
IFAC has four Standard-Setting Boards:
The IPSASB sets International Public Sector Accounting Standards (IPSASs™) and Recommended Practice Guidelines (RPGs), IPSASB has so far issued a Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities, 42 standards on accrual basis accounting (of which 5 have been repealed). So, effectively there are 37 standards based on the accrual basis of accounting. Besides, there is also 1 standard on the cash basis of accounting along with the introduction to the international public sector accounting standard under the cash basis of accounting. IPSASs relate to the general purpose financial statements (financial statements) and are authoritative. The IPSASs issued so far can be classified for facilitating studies as follows:
Consolidation and Public Sector Combination
First-time Adoption of IPSAS
IPSAS 33—FIRST-TIME ADOPTION OF ACCRUAL BASIS INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSASs)
Besides, IPSASB has also issued 3 Recommended Practice Guidelines and an Introduction to Recommended Practice Guidelines. RPGs are pronouncements that provide guidance on good practice in preparing general purpose financial reports (GPFRs) that are not financial statements. Unlike IPSAS, RPGs do not establish requirements. Currently, all pronouncements relating to GPFRs that are not financial statements are RPGs. RPGs do not provide guidance on the level of assurance (if any) to which information should be subjected. The RPGs issued so far are:
Also, there is a Glossary of Defined Terms. All these materials are freely downloadable from the site of IPSASB.
Applicability of IPSAS
It applies to general purpose financial reports of national, regional, state/provincial, and local governments. It also applies to a wide range of other public sector entities including:
Uses of General Purpose Financial Statements of Public Sector Entities
Most public sector entities operate to deliver services to the public, rather than to make profits and generate a return on equity to investors. Therefore, the performance of such entities cannot be fully evaluated by examination of financial position, financial performance, and cash flows. The general purpose financial reports (GPFRs) provide information to users for accountability and decision-making purposes. They provide information in respect to matters as:
Characteristics of the Public Sector Reporting Entities
A public sector reporting entity is a government or other public sector organization, program or identifiable area of activity (hereafter referred to as an entity or public sector entity) that prepares GPFRs. A public sector reporting entity may comprise two or more separate entities that present GPFRs as if they are a single entity—such a reporting entity is referred to as a group reporting entity.
Qualitative Characteristics of Information in GPFRs
GPFRs present financial and non-financial information about economic and other phenomena. The qualitative characteristics of information included in GPFRs are the attributes that make that information useful to users and support the achievement of the objectives of financial reporting. The qualitative characteristics of information included in GPFRs of public sector entities are
Constraints on Information in GPFRs
Pervasive constraints on information included in GPFRs are
Users of General Purpose Financial Statements
General-purpose financial statements are developed primarily to respond to the information needs of service recipients and resource providers and representatives of these users including:
Elements of Financial Statements
Elements are the building blocks from which financial statements are constructed. They are broad classes that share common economic characteristics. The 6 elements that are relevant for GFPR by Public Sector Entities are:
1. Assets: An asset is a resource presently controlled by the entity as a result of a past
2. Liabilities: A liability is a present obligation of the entity for an outflow of resources that results from a past
3. Revenue: Revenue increases in the net financial position of the entity, other than increases arising from ownership
4. Expense: Expense is decreased in the net financial position of the entity, other than decreases arising from ownership distributions
5. Ownership contributions: Ownership contributions are inflows of resources to an entity, contributed by external parties in their capacity as owners, which establish or increase interest in the net financial position of the entity.
6. Ownership distributions: Ownership distributions are outflows of resources from the entity, distributed to external parties in their capacity as owners, which return or reduce interest in the net financial position of the
Net Financial Position, Other Resources, and Other Obligations: In some circumstances, to ensure that the financial statements provide information that is useful for a meaningful assessment of the financial performance and financial position of an entity, recognition of economic phenomena that are not captured by the elements as defined above may be necessary. In these cases, the IPSASs may require or allow these resources or obligations to be recognized as other resources or other obligations, which are items added to the six elements defined above. Net financial position is the difference between assets and liabilities after adding other resources and deducting other obligations recognized in the statement of financial position.
Surplus or Deficit for the Period: The entity’s surplus or deficit for the period is the difference between revenue and expense reported on the statement of financial performance.
Recognition and Derecognition
Recognition is the process of incorporating and including in amounts displayed on the face of the appropriate financial statement an item that meets the definition of an element and can be measured in a way that achieves the qualitative characteristics and takes account of the constraints on information included in GPFRs. All items that satisfy the recognition criteria are recognized in the financial statements. The recognition criteria are that:
The failure to recognize items that meet the definition of an element and the recognition criteria is not rectified by the disclosure of accounting policies, notes or other explanatory detail. However, disclosure can provide information about items that meet many, but not all the characteristics of the definition of an element. Disclosure can also provide information on items that meet the definition of an element but cannot be measured in the way it is required.
Derecognition is the process of evaluating whether changes have occurred since the previous reporting date that warrants removing an element that has been previously recognized from the financial statements, and removing the item if such changes have occurred. In evaluating uncertainty about the existence of an element the same criteria are used for derecognition as at initial recognition.
The objective of measurement is to select those measurement bases that most fairly reflect the cost of services, operational capacity, and financial capacity of the entity in a manner that is useful in holding the entity to account, and for decision-making purposes.
There is no single measurement basis (or combination of bases) for all transactions, events, and conditions.
Measurement Bases for Assets
The commonly used measurement bases for assets are:
Measurement Bases for Liabilities
The commonly used measurement bases for liabilities are:
Components of Financial Statements
A complete set of financial statements prepared in line with IPSASA comprises of:
A statement of financial performance;
A cash flow statement;
Comparative information in respect of the preceding period.
General Features of Financial Statements under IPSAS
An entity whose financial statements comply with IPSASs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of all the IPSASs.
An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material.
In the extremely rare circumstances in which management concludes that compliance with a requirement in an IPSAS would be so misleading that it would conflict with the objective of financial statements, the entity shall depart from that requirement by giving proper disclosures, if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.
When an entity has departed from a requirement of an IPSAS in a prior period, and that departure affects the amounts recognised in the financial statements for the current period.
Going Concern: When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.
An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless:
IPSAS under The Cash Basis Of Accounting
The cash basis of accounting recognizes transactions and events only when cash or cash equivalents is received or paid by the entity. Financial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date. The measurement focus in the financial statements is balances of cash and changes therein. Notes to the financial statements may provide additional information about liabilities, such as payables and borrowings, and some non-cash assets, such as receivables, investments and property, plant and equipment.
Besides the IPSASs on an accrual basis, the IPSASB issues IPSAS dealing with financial reporting under the cash basis of accounting and the accrual basis of accounting to improve both the quality and comparability of financial information reported by public sector entities around the world. It is an important step forward in improving the consistency and comparability of financial reporting under the cash basis of accounting and encourages the adoption of the Standard. The Cash Basis IPSAS has been developed as an intermediate step to assist in the transition to the accrual basis of financial reporting and adoption of accrual IPSAS. The Cash Basis standard is in two parts. Part 1 is mandatory whereas Part 2 identifies additional accounting policies and disclosures that a public sector entity is encouraged to adopt. Financial statements should be described as complying with this IPSAS only if they comply with all the requirements of Part 1 of the IPSAS under Cash Basis issued by IPSASB.
Component of Financial Statement under Cash Basis
An entity shall prepare and present financial statements which include the following components:
Statement of Cash Receipts and Payments
The statement of cash receipts and payments shall present the following amounts for the reporting period:
Accounting Policies and Explanatory Notes
The notes to the financial statements of an entity shall:
Opportunities for Chartered Accountants in IPSAS
Implementation of accrual accounting in the public sector is a significant priority across many jurisdictions. Accrual accounting promotes more transparency, improves accountability and provides better information for decision-making purposes. According to the International Public Sector Financial Accountability Index, in 2018 only 25% of governments in the 150 jurisdictions included in the Index reported on an accruals basis, but these are projected to increase to 65% by 2023. Therefore, the knowledge of IPSASs presents following opportunity for Chartered Accountants:
Governmental Accounting in India
The Government accounting system in India is rule-based and follows primarily cash basis accounting. The Comptroller and Auditor General of India (CAG) has constituted Government Accounting Standards Advisory Board (GASAB) with the support of the Government of India (GoI) to formulate and recommend Indian Government Accounting Standards (IGASs) and ‘Indian Government Financial Reporting Standards (IFRS)’ with a view to improving standards of Governmental accounting and financial reporting. Where IGAS are based on Cash Basis of accounting as are currently in vogue in India, IGFRS are on an accrual basis and futuristic in nature.
Indian Government Accounting Standards (IGASs)
So far, GASAB has approved 6 IGASs of which 3 has been implemented and other three are under consideration by the Government. These Standards are based on internationally recognized IPSAS for Cash basis of accounting (popularly known as Cash IPSAS) issued by the International Public Sector Accounting Board (IPSASB), constituted by the International Federation of Accountants (IFAC). The three IGASs notified by the GoI are:
IGAS 1: Guarantees given by Governments: Disclosure Requirements
IGAS 2: Accounting and classification of Grants-in-Aid; and
IGAS 3: Loans and Advances made by Governments
Following IGASs approved by GASAB are under consideration by GoI:
IGAS 7: Foreign Currency and Loss/ Gain by Exchange Rate Variations;
IGAS 9: Government Investments in Equity; and
IGAS 10: Public Debt and Other Liabilities of Governments: Disclosure Requirements.
‘Indian Government Financial Reporting Standards (IGFRSs)
Though traditionally, cash based accounting system is followed in India for budgeting, accounting and financial reporting as cash based system is simple and recognizes a transaction when cash is paid or received. It requires less skilled personnel and is geared to cash management needs. It has also served the basic requirements of financial accountability of Government to Parliament. However, cash based system of accounting is not the most informative way of presenting government account and much need is being felt for accounting framework and accounting standards on accrual basis to keep in pace with the global best practices and to facilitate pilot studies and research efforts on migration to accrual accounting at Union and State level. GASAB has also taken a decision to develop accrual basis accounting standards alongside cash basis standards. The accrual basis standards are issued under the title ‘Indian Government Financial Reporting Standards (IGFRSs)’. So far, GASAB has approved 5 IGFRS and all are under consideration of the Government. These are:
GASAB has also developed an operational framework of the accrual system that will prevail in Government. The operational framework would provide overall architecture of the accounting model that would prevail in Government while conforming to the national and constitutional reporting needs. This important document is also under consideration of the Government.
Accounting Standards for Local Bodies (ASLB)
Accounting Standards issued by GASAB are applicable to accounting by central and state governments. They do not deal with accounting aspects of Local Bodies. The term ‘Local Body’ may be defined as local self-government at the third tier of governance in an administrative and geographical vicinity, e.g., a municipal corporation, a municipality, or a panchayat. In many cases, the Local Bodies delegate their functions such as the building of schools, city roads, parks, running transport services, providing water supply etc., to some other bodies that may or may not be controlled by the Local Bodies, e.g. development authorities, boards, parastatals. Such bodies may be constituted, in partnership with the private sector or otherwise, directly or indirectly by or on behalf of a Local Body to promote or carry out some specific objective(s) or function(s) of the Local Bodies. Such bodies may be constituted under a statute. The term ‘Local Body’ would also encompass such bodies too.
The Committee on Accounting Standards for Local Bodies (CASLB) set up by the Council of the Institute of Chartered Accountants of India issues Accounting Standards for Local Bodies (ASLB) to fill this gap. These Standards are based on IPASAS. So far it has issued the following:
Analyzing data captured by IFAC International Public Sector Financial Accountability Index, in 2020 Status Report analyzes information from 165 jurisdictions across the globe to develop an understanding of public sector financial reporting. 49 jurisdictions (30% of the jurisdictions included in the 2020 Index) reported on accrual in their 2020 published financial statements. 40% already had some element of accrual in their financial reports – categorized in the 2020 Index as ‘Partial Accrual’. 30% of governments still reported on a cash basis. The results paint a positive picture for future accrual and adoption efforts globally as compared to the report of 2018. The greatest opportunities for accrual reform during this time will be across Africa, Asia, and Latin America, and the Caribbean. By the end of 2023, nearly three-quarters (73%) of governments that report on accrual will use International Public Sector Accounting Standards (IPSAS) in one of three ways.
Of the 49 jurisdictions that reported on accrual in 2020, 28 (57%) are using IPSASs in one of these three ways: 4 jurisdictions adopted IPSASs with no modifications; 8 modified IPSASs for the local context; and 16 referred to IPSASs to develop their own national standards.
The data above confirms that the knowledge of the IPSASs is going to be a great opportunity for accounting professionals worldwide. So it is time to gear up and acquire knowledge in this relatively new domain.
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