a snapshot of gaap differences between ipsas and ifrs

A snapshot of GAAP differences between IPSAS and IFRS

April 2013

1 A snapshot of GAAP differences between IPSAS and IFRS

Introduction The ongoing sovereign debt crisis in several countries around the world has demonstrated the challenges of maintaining financial stability for these governments. Many governments are exploring the adoption of accrual-based accounting frameworks in order to improve their decision-making ability to prevent and respond to these issues. International Public Sector Accountancy Standards (IPSAS) is considered the definitive set of accrual-based international accounting standards for the public sector.

There is a close relationship between IPSAS and International Financial Reporting Standards (IFRS) due to the fact that IPSAS standards are largely based on the principles of IFRS. The rationale for drawing from IFRS is to ensure greater comparability between private and public sector reporting when accounting for similar types of transactions. However, IFRSs are developed primarily for profit-oriented entities, whereas IPSASs are written for public sector entities that provide services to enhance and maintain the well-being of the citizens of a state. These differences between the two reporting frameworks stem primarily from the following three sources:

• Changes made by the IPSASB when developing an equivalent IPSAS based on an IFRS, to reflect differences between the public and private sectors

• Differences in the range of topics covered by the two sets of standards because of differences in the prevalence of particular types of transactions, such as non-exchange transactions

• Differences in the timing of when new or amended requirements are introduced into each set of standards

Process of setting IPSAS standards

IPSASB standard-setting process which considers

publicsectorspecificrequirements

through sector-focused research

An IASB standard

Issue an IPSAS

Due process through public consultation

2A snapshot of GAAP differences between IPSAS and IFRS

Key differences between IPSAS and IFRS1) Service potential as part of the definitions and recognition criteria Many of the assets and liabilities of entities within the public sector are acquired or incurred as a result of the entity’s service delivery

mandate, for example, heritage assets and parks maintained for public access. IPSAS introduces the concept of service potential1 into the definition of assets, liabilities, revenue and expenses. Service potential is also a supplementary recognition criterion to account for items that do not result in the inflow or outflow of economic benefits, where an item either contributes to or detract from the entity’s ability to deliver its services.

2) Exchange vs non-exchange transactions Non-exchange transactions are those transactions where an entity either receives value from another entity without directly giving

approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. Within the public sector non-exchange transactions are prevalent. IPSAS provides principles to guide the measurement and recognition of non-exchange transactions, whereas IFRS is generally silent on the matter.

3) Recognition of revenue from government grants IPSAS focuses on whether there is entitlement to the revenue from government grants (even though there may be restrictions on

how the funds are spent), or an obligation to meet certain conditions, which is recorded as liability. The distinction between restrictions and conditions is crucial in determining whether or not to recognize revenue from a non-exchange transaction. As a result, government grants are generally fully released to income earlier under IPSAS than under IFRS.

4) Income tax IPSAS presumes that entities that operate within the public sector are generally exempt from income taxes and therefore does not

cater for the accounting of income taxes. In the unlikely event that an entity reports using IPSAS but is liable for tax, reference should be made to IFRS (IAS 12 Income Taxes) for guidance.

5) Consolidations and interests in associates and joint ventures With the introduction of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of

Interests in Other Entities, there are significant differences between IFRS and IPSAS. IPSAS is still based on IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates and IAS 31 Interest in Joint Ventures. The main difference that arises with the introduction of IFRS 10, IFRS 11 and IFRS 12 is the manner in which control is determined for the purpose of consolidation. Until the IPSASB finalizes its project to consider these new developments in IFRS, this could become a major source of difference between the two frameworks.

6) Financial instruments classification and measurement With the introduction and ongoing development of IFRS 9 Financial Instruments, the classification and measurement of financial

instruments under IFRS is changing from IAS 39. Prior to IFRS 9, the recognition and measurement of financial instruments were similar under IFRS and IPSAS. Until the IPSASB finalizes its project to consider these new developments in IFRS, this could become a major source of difference between the two frameworks.

7) Reporting of budgets vs actual With the increased focus on stewardship, service delivery and budget management in the public sector, IPSAS requires a comparison

of the actual financial performance of an entity with the approved budget of that entity, where the budget is publicly available. There is no equivalent requirement in IFRS.

1 Service potential indicates the capacity of an asset to provide goods and services in accordance with an entity’s objectives, without necessarily generating any net cash in-flows.


8) Impairment of non-cash-generating assets In light of the assets recognized based purely on their service potential (as opposed to economic benefits), IPSAS also caters

specifically for impairment considerations for non-cash-generating assets. IFRS assumes that all assets will be cash-generating; whereas IPSAS assumes that the majority of a public sector entity’s assets are likely to be non-cash generating. IPSAS 21 Impairment of Non-cash-generating Assets provides specific guidance on how to determine the value-in-use of such assets.

9) Elimination of private sector specific concepts IFRS provides principles for certain economic phenomena that are irrelevant to the operations of a public sector entity, such as

accounting for share-based payments and earnings per share disclosures. IPSAS excludes such guidance and refers reporting entities back to IFRS if and when applicable.

10) Growing divergence in the conceptual framework of the IPSASB and IASB The IPSASB is in the process of developing its own conceptual framework, proposing concepts that may be more suitable in the

public sector context. We may see further differences in the outlook and focus of the IPSASB and IASB in the future.

Similarities between IPSAS and IFRSThe table below provides an overview of IPSAS and IFRS topics. This table indicates whether the topics are addressed by the two frameworks. Furthermore, the table provides an indication of the extent to which the principles and requirements (for the topic) are similar between the two frameworks.

The following legend is used to indicate the degree of similarity between the two frameworks for each of the topics:

Symbol Meaning

The two frameworks have minor differences that mostly result from terminology differences and public sector specific additional guidance.

The frameworks are moderately different in this respect and encompass differences in classification, recognition, measurement and/or disclosure requirements.

Significant differences noted in the classification, recognition, measurement and/or disclosure requirements.

No equivalent standard in the comparative framework and therefore an entity may need to refer to other frameworks or pronouncements for guidance.


2 This comparison takes into consideration those IFRSs and IPSASs that are effective as at 1 January 2013 and does not consider IPSAS or IFRS projects currently under development. For more information on current IPSASB Projects, see our newsletter, IPSAS Outlook, available at www.ey.com/ipsas.

3 New IFRSs refers to IFRS 9 (effective 1 January 2015), IFRS 10, IFRS 11, IFRS 12 and IFRS 13 (effective 1 January 2013).4 IFRS only considers government grants and does not address the broader range of non-exchange transactions covered in IPSAS.

Similarities between IPSAS and IFRS continued

Topic Adressed in Prior to new IFRSs being effective 3

After new IFRSs are effective 3IPSAS IFRS 2

Presentation of financial statements

Presentation of financial statements P P

Cash flow statements P P Accounting policies, changes in accounting estimates and errors P P Presentation of budget information in financial statements P X Non-current assets held for sale and discontinued operations X P Accounting of retirement benefit plans X P Interim financial reporting X P The effects of changes in foreign exchange rates P P

Revenue and expenses

Revenue P P

Construction contracts P P Revenue from non-exchange transactions (taxes, transfers and government grants)

P P4

Income taxes X P Leases P P

Borrowing costs P P

Non-financial assets

Inventories P P

Investment property P P

Property, plant and equipment P P

Intangible assets P P

Agriculture P P

Impairment of cash-generating assets P P

Impairment of non-cash-generating assets P X Exploration for and evaluation of mineral resources X P Non-financial liabilities

Employee benefits P P

Provisions, contingent liabilities and contingent assets P P


Financial instruments

Financial instruments: presentation P P

Financial instruments: recognition and measurement P P

Financial instruments: disclosures P P

Share-based payment X P Insurance contracts X P Fair value measurement

Fair value measurement X P

Disclosure-only standards

Segment reporting P P

Related party disclosures P P

Disclosure of financial information about the general government sector

P X

Earnings per share X P Adjustments to financial statements

Events after the reporting date P P Financial reporting in hyperinflationary economies P P

Topic Adressed in Prior to new IFRSs being effective 3

After new IFRSs are effective 3IPSAS IFRS1

Group accounting

Consolidated and separate financial statements P P

Investments in associates P P

Interests in joint ventures P P

Disclosure of interests in other entities P P

Business combinations X P

Similarities between IPSAS and IFRS continued


Similarity between IPSAS and IFRS by topicBased on the table above, the following graph compares the degree of differences (minor, moderate or significant) between IPSAS and IFRS by topic, prior to and after the new IFRSs become effective.5

Prior to the new IFRSs becoming effective

After the new IFRSs become effective and before IPSASB concludes on whether to adopt the changes

Significant

Degree of difference

Number of topics

Moderate

Minor

5

5

5

4

10

10

15

14

20

20

The graph above shows that prior to the new IFRSs becoming effective, four out of 29 topics are significantly different between IPSAS and IFRS. The number of topics with significant differences between the two GAAPs increases after the new IFRSs become effective.

Going forwardThis publication highlights the key differences between IPSAS and IFRS, amongst the many other differences between the two frameworks. Although the IPSASB has not yet considered many of the more recent new or amended IFRSs, as a result of its focus on completing the conceptual framework project, it has started to look at some of the new IFRSs, for example IFRS 10, IFRS 11 and IFRS 12. It is worth noting that the IPSASB sees, as part of its role, the need to also address issues outside the boundaries of general purpose financial statements, including the presentation of long-term fiscal sustainability information and service performance information.

We encourage you to refer to our quarterly newsletter, IPSAS Outlook, which provides regular update on the activities and progress of the IPSASB’s projects. This newsletter and other IPSAS-related publications are available on www.ey.com/IPSAS.

5 New IFRSs refers to IFRS 9 (effective 1 January 2015), IFRS 10, IFRS 11, IFRS 12 and IFRS 13 (effective 1 January 2013).

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About Ernst & Young’s International Public Sector Accounting Standards Group

The move to International Public Sector Accounting Standards (IPSAS) is an important initiative in public sector accounting, the impact of which stretches far beyond accounting to affect every key decision you make, not just how you report it. We have developed the global resources — people and knowledge — to support our client teams. And we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide. It’s how Ernst & Young makes a difference.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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a snapshot of gaap differences between ipsas and ifrs

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