global ipsas adoption ‒ a snapshot of gaap differences ... müller-marqués berger en.pdf · some...

Global IPSAS Adoption ‒ A snapshot of GAAP differences between IPSAS and IFRS

Thomas Müller-Marqués Berger, IPSASB Member

November 26, 2013,

PD Week 2013, Ottawa, Canada

Who is with you today?

Thomas Müller-Marqués Berger,

Partner

Ernst & Young

Ernst & Young GPS EMEIA

Assurance Leader and GPS Global

Accounting Leader

IPSAS Board Member (since 2009)

Chair of FEE PSC

Agenda

► Main differences of the public sector – impact on the accounting

► Global overview on public sector accounting

► Relationship between IFRS and IPSAS

► Snapshot of GAAP differences between IPSAS and IFRS

► Future developments in global public sector financial reporting

► Questions & Answers

Main differences Global

overview Relationship

Snapshot of GAAP

differences

Future developments

Questions & Answers

Main differences of the public sector – impact on the accounting

Main differences of the public sector Key characteristics

► Volume and significance of non-exchange transactions such as

taxes and transfers, or the provision of goods and services in a non-

market environment

► Importance of the budget

► Nature of PP&E: Provision of goods/services in the forefront –

assets often very specific in nature

► Responsibility for heritage assets

► Longevity of public sector entities

► Regulatory role of government

► Statistical reporting (GFS)



Snapshot of GAAP

differences

Future developments

Questions & Answers

Main differences of the public sector Specific standards for the public sector are required

Involuntary Transfers and Non-Exchange

Transactions

Importance of the Approved Budget

Nature and Purpose of Assets

Longevity of the Public Sector and the Nature

of Public Sector Programs

Regulatory Role of Public Sector Entities

Importance of Statistical Bases of Accounting

IPSAS 23

IPSAS 24

IPSAS 1, 17, 21, 31, 32

Long-term Sustainability

(RPG 1)

Conceptual Framework

IPSAS and GFS, IPSAS 22



Snapshot of GAAP

differences

Future developments

Questions & Answers

Main differences of the public sector Service potential as a specific issue

► Assets and liabilities within the public sector are acquired or incurred

as a result of an entity’s service delivery mandate, e.g.

► Heritage assets, parks, public buildings, research facilities etc.

► Therefore not cash flows are in the focus, but service potential

connected with assets (or liabilities)

► Definition:

► Essential part of the elements definitions (i.e. assets, liabilities,

revenues, expenses)

► Part of measurement of the elements, i.e. criterion for the value in

use reg. impairment

“Service potential is the capacity of an asset to be used by the entity to provide goods

and services that contribute to achieving the entity’s objectives. Service potential

enables an entity to achieve its objectives without necessarily generating net cash

inflows.” (cf. CF ED Phase 2)



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting

Global overview on public sector accounting Status of public sector accounting around the globe



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting Basis of accounting and accounting systems in use

► Accrual accounting is used by the majority of the countries at the

federal level

► National public sector accounting systems are still predominant

19

7

1

3

0 2 4 6 8 10 12 14 16 18 20

Own accounting system

IPSAS-like standards

IPSAS cash basis

IPSAS accrual basis

Which accounting system is in use?

Total 30 answers

21.4%

21.4%

14.3%

42.9%

The current accounting system is based on…

Cameralistic/cash accounting Modified cash accounting

Modified accrual accounting Accrual accounting

Source: Ernst & Young, Toward transparency, A comparative study on the challenges of reporting for governments

and public bodies around the world, 2011



Snapshot of GAAP

differences

Future developments

Questions & Answers

Direct vs. indirect adoption

► Same can be observed for IFRS

Global overview on public sector accounting Legal adoption of IPSAS

IPSAS

Legislation refers

to IPSAS

Jurisdictional standards

based on IPSAS

Legislation refers

to jurisdictional

standards

Accounting

manual

Source: Bergmann, A: Public Sector Financial Management. FT Prentice Hall, 2009.

Implementation



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting Technical adoption – selection of the right conversion approach

Motivation Starting

point Conversion approach



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting Technical adoption – potential motivations for accounting reforms

Motiva-tions

Finance Statistics

Donor-driven Peer

comparison

Better PFM-infrastructure



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting Technical Adoption – Starting Points for Reforms

(Modified)

Cash

Basis

(Modified)

Accrual

Basis

Non-IPSAS-Compliance IPSAS-Compliance

Cash

Basis

Accrual

Basis

Cash

Basis

Accrual

Basis

Cash

Basis

Accrual

Basis



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting Technical adoption – overview on conversion approaches

► Africa ► Diverse picture (e.g. South Africa vs. Nigeria)

► Some African countries first move/moved to Cash Basis IPSAS

► Asia ► China pursues pilot projects for the provinces, staged approach

► Malaysia on the way to accrual until 1.1.2015 (federal and states) via Cash Basis IPSAS

► Europe ► Discussion: development of accrual-based European Public Sector Accounting Standards (EPSAS)

► Would cover all layers of administration (federal, states, agencies and municipalities)

► Phased approach; gradual adoption planned, exemptions for smaller entities

► Quality improvement of statistical data (for EDP purposes) as main driver of the reform

► MENA - United Arab Emirates ► “Best in Class”

► Focus on first IPSAS financial statements

► Russia ► Russia urges to adopt and implement IPSASs to strengthen global financial stability under its G20-

presidency; supported by World Bank

► South America - Brazil ► Direct move to accrual; “big bang” with Opening Balance as per 1.1.2015

► Reform covers all three stages of the public sector (federal, states and municipalities)



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global overview on public sector accounting Public sector accounting in Europe – Current status

European Public Sector

Accounting Standards (EPSAS)

Accrual accounting

Harmonized financial reporting

Alignment with GFS (ESA95)

Governance



Snapshot of GAAP

differences

Future developments

Questions & Answers

Global Overview on Public Sector Accounting IPSAS-compliance – the European landscape

Source: Ernst & Young, Overview and comparison of public accounting and auditing practices in the 27 EU Member States, prepared for

Eurostat, Final Report, 19 December 2012, page 230

Country (federal level) IPSAS-compliance

United Kingdom 95 %

Sweden 93 %

France 88 %

Spain 77 %

Italy 47 %

Netherlands 37 %

Ireland 36 %

Germany 34 %

Cyprus 21 %



Snapshot of GAAP

differences

Future developments

Questions & Answers

Relationship between IFRS and IPSAS

Relationship between IFRS and IPSAS Overview

► IPSASs are largely based on the principles of IFRS

► In principle IPSASB follows a “Transaction neutral approach”

► Rationale: ensures greater comparability between private and public sector

reporting when accounting for similar types of transactions

► IPSASB typically takes an IFRS as a starting basis and follows the

“rules of the road”-approach

► But: significant gaps in IASB’s literature from a government point of

view, e.g.

► Impairment of non-cash generating assets

► Accounting for non-exchange transactions

► Presentation of budget information

► “Alignment” with Government Finance Statistics (GFS) gained more

and more of importance in recent years



Snapshot of GAAP

differences

Future developments

Questions & Answers

Relationship between IFRS and IPSAS Phases of IPSASB’s work program

Current work program of the IPSASB

► Through financial support of international institutions development

of a first set of accounting standards

(“Core Set”: IPSAS 1 – IPSAS 20)

Phase 1

(1997-2002)

Phase 3

(since 2010)

Phase 2

(2003-2010)

► Where relevant for the public sector, convergence with IAS/IFRS

as of 31.12.2008 was achieved

► Issuance of first standards to specific issues of the public sector

(IPSAS 21 – IPSAS 24)

► Development of a Conceptual Framework for the public sector

► Focus on specific issues of the public sector as well as further

development of existing standards (IFRSs convergence)



Snapshot of GAAP

differences

Future developments

Questions & Answers

Relationship between IFRS and IPSAS Rationale of IPSASB for deviating from IFRS

Process for reviewing and modifying IASB documents

No

1. Are there

public sector

issues that warrant

departure?

2. Should a

seperate public

sector project be

initiated?

3. Modify IASB

documents

4. Make IPSASB style and terminology changes

5. Seperate public

sector project

6. IPSASB document

Yes Yes

No



Snapshot of GAAP

differences

Future developments

Questions & Answers

A snapshot of GAAP differences between IPSAS and IFRS

GAAP differences between IPSAS and IFRS Reasons for the differences

Reasons for GAAP differences

(New) IFRS but

no IPSAS (so far)

IASB revised

IFRS, but IPSASB did not so far

There is an IFRS- equivalent IPSAS

but IPSASB revised the

underlying IFRS

There is an

IPSAS, but there is no IFRS equivalent

e.g. IFRS 12 or

IFRS 13

e.g. IFRS 10-11

e.g. IPSAS 17 or

IPSAS 25

e.g. IPSAS 21-24

Convergence issues Conceptual reasons



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual Differences IPSASB’s Conceptual Framework Project

Public Sector Conceptual Framework

IPSASs and RPGs

Phase 2

► Elements

and

Recognition

Phase 3

► Measure-

ment

Phase 4

► Presenta-

tion

Phase 1

► Role

► Objectives

and Users

► QCs

► Reporting

Entity



Snapshot of GAAP

differences

Future developments

Questions & Answers

Status/Papers ► Phase 1: Approved at December 2012 meeting, four final

chapters of Conceptual Framework published January 2013

► Phase 2 and 3: EDs approved in September 2012 meeting

► Phase 4: ED approved at March 2013 meeting

Objective and

major issues

Objectives: to develop a Public Sector Conceptual Framework

which is applicable to the preparation and presentation of

general purpose financial reports of public sector entities,

including but not necessarily limited to financial statements and

notes thereto.

Major issues:

► Primarily for public sector entities other than GBEs

► No simple interpretation of the IASB’s Framework

► Address specific circumstances of the public sector

Approval Approval of whole Conceptual Framework envisaged for June

2014

Conceptual Differences Current status of the Framework



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Comparison of the Conceptual Frameworks – Objective and Users

IPSASB‘s Conceptual

Framework

IASB‘s Conceptual Framework

Objective „to provide information about the

entity that is useful to users of

general purpose financial reports

(GPFRs) for accountability

purposes and for decision-making

purposes”

“provide information about the

reporting entity that is useful to

existing and potential investors,

lenders and other creditors in

making decisions about providing

resources to the entity”

Users Primary users: service recipients

and resource providers and their

representatives

Other users: analysts, media,

financial advisors, public interest

and lobby groups

Primary users: existing and

potential investors, lenders and

other creditors



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Comparison of the Conceptual Frameworks – Elements and Recognition

IPSASB (CF-ED2) IASB (DP 2013)

Elements ► Assets

► Liabilities

► Revenue

► Expenses

► Deferred inflows (under discussion)

► Deferred outflows (under discuss.)

► Ownership contributions and

► Ownership distributions

► Assets

► Liabilities

► Equity

► Income

► Expense

► (Cash receipts)

► (Cash payments)

► (Contributions of equity)

► (Distributions of equity)

► (Transfers between classes of equity)

Deferred inflows/outflows as elements: Four options

► Define deferred inflows/outflows as elements in a manner that does not predetermine presentation of the elements

► Derive the definitions of revenues and expenses from the asset and liability definitions

► Broaden the asset and liability definition

► Accept that certain economic phenomena do not meet the definition of any element



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Comparison of the Conceptual Frameworks – Measurement


► Historical cost

► Current values:

► Replacement cost

► Market value

► Net selling price

► Value in use

► Cost-based measurements

► Current market prices including fair value

► Other cash flow-based measurements

Major decisions of the IPSASB re. measurement:

► Definition of a measurement objective based on the objectives of financial reporting, including the provision of information on (a) operational capacity, (b) financial capacity and (c) the cost of services

► Fair value as defined in IFRS 13, Fair Value Measurement will likely not be adopted as a measurement basis for the public sector largely because of the specific meaning of the term “fair value”’ in IFRS 13



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Comparison of the Conceptual Frameworks – Presentation


Presentation Presentation is the selection, location and

organization of information that is displayed and

disclosed in the GPFRs.

Disclosure of financial information on the face

of an entity’s primary financial statements.

Display ► Displayed information communicates the key

messages in a GPFR.

► It is kept to a concise, understandable level, so

that users can focus on the key messages

► Displayed information is presented prominently,

using appropriate presentation techniques

Currently no equivalent in the IASB’s

Framework.

Disclosure ► Disclosed information makes displayed

information more useful

► Provides detail that will help users to under-stand

the displayed information, including

► (a) the basis for the displayed information

► (b) disaggregations of displayed information,

and,

► (c) items that share many but not all of the

aspects of displayed information.

► Disclosure is the process of providing

useful financial information about the

reporting entity to users.

► The financial statements, including the

amounts and descriptions presented in

the primary financial statements and the

information included in the notes to the

financial statements, are, as a whole, a

form of disclosure.



Snapshot of GAAP

differences

Future developments

Questions & Answers



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Overview of GAAP differences (1)

Difference in content

(IFRS as at 1.1.2013)



Snapshot of GAAP

differences

Future developments

Questions & Answers



(IFRS as at 1.1.2013)



(IFRS as at 1.1.2013)



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Selected differences between IFRS and IPSAS (1)

IPSAS IFRS

(New) IFRS but no IPSAS (so far)

Fair value IPSASB has no equivalent to IFRS 13.

However, fair value is used in several IPSASs (e.g.

IPSAS 9, Revenue from Exchange Transactions,

IPSAS 12, Inventories, IPSAS 13, Leases etc.)

IASB has issued IFRS 13, Fair value measurement.

IASB revised IFRS, but IPSASB did not so far

Concept of control IPSAS 6.21 currently allows an exemption from

consolidation for temporarily controlled entities.

According to ED 48-52 this will not be able in the

future.

IAS/IFRS do no longer allow such an exemption.

Consolidation ‒

Investment entities

Currently, IPSAS 6-8 do not know the concept of

an investment entity. ED 48-52 also covers the

issue of consolidation of investment entities.

On 31 October 2012 the IASB published “Investment Entities”

(Amendments to IFRS 10, IFRS 12 and IAS 27), providing an

exception to the consolidation requirements in IFRS 10 for

investment entities (effective January 1, 2014).

Consolidation ‒

Jointly controlled

entities

According to IPSAS 8.35 and 8.43 a venturer shall

recognize its interest in a jointly controlled entity

using proportionate consolidation or the equity

method. According to ED 51 only the equity

method will be allowed in the future.

According to IFRS 11.24 a joint venturer shall recognise its

interest in a joint venture as an investment and shall account for

that investment using the equity method.

Employee benefits IPSAS 25.105 requires only to recognize actuarial

gains and losses as they exceed certain thresholds

(corridor approach)

According to IAS 19 (rev.) the corridor approach is no longer

allowed.



Snapshot of GAAP

differences

Future developments

Questions & Answers



Snapshot of GAAP

differences

Future developments

Questions & Answers


IPSAS IFRS

There is an IFRS-equivalent IPSAS but IPSASB revised the underlying IFRS

IPSAS 1, Presentation of financial statements IAS 1, Presentation of financial statements

Presentation IPSAS 1 does not require the separate

presentation of other comprehensive income either

on the face or as additional statements

IAS 1.81A requires the separate presentation of profit and loss

and total other comprehensive income

IPSAS 5, Borrowing costs IAS 28, Borrowing costs

Capitalization IPSAS 5 allows entities the option of expensing

borrowing costs even if those borrowings costs are

directly attributable to the acquisition of a qualifying

asset (cf. IPSAS 5.17)

IAS 28.8 requires entities to capitalize borrowing costs that are

directly attributable to the acquisition, construction or production of

a qualifying asset as part of the cost of that asset.

IPSAS 9, Revenue from Exchange transaction,

IPSAS 13, Leases, IPSAS 17, PP&E, IPSAS 19,

Provisions, Contingent Liabilities and Contingent

Assets, IPSAS 31, Intangible Assets

IAS 18, Revenues, IAS 17, Leases, IAS 16, PP&E, IAS 37,

Provisions, Contingent Liabilities and Contingent Assets, IAS 38,

Intangible Assets

Service potential The concept of service potential is included in the

definition of elements (assets, liabilities, revenues,

expenses, ..) and is part of the measurement basis

(e.g. determination of depreciation period or

impairment of non-cash generating assets)

IFRSs do not know the concept of service potential.

IPSAS 17, PP&E IAS 16, PP&E

Heritage assets IPSAS 17 includes heritage assets within its

scope.

IAS 16 does not address heritage assets.


IPSAS IFRS

There is an IPSAS, but there is no IFRS equivalent

IPSAS 21, Impairment of Non-Cash-Generating Assets No IFRS equivalent

Service Potential An impairment is a loss in the future economic benefits or service

potential of an asset, over and above the systematic recognition of the

loss of the asset’s future economic benefits or service potential

through depreciation (cf. IPSAS 21.14).

N.A.

IPSAS 22, Disclosure of Financial Information about the General

Government Sector

No IFRS equivalent

GFS IPSAS 22 prescribes disclosure requirements for governments that

elect to present information about the general government sector

(GGS) in their consolidated financial statements

N.A.

IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and

Transfers)

No IFRS equivalent

Non-exchange

transactions

IPSAS 23 prescribes requirements for the financial

reporting of revenue arising from non-exchange transactions (taxes

and transfers)

N.A.

IPSAS 24, Presentation of Budget Information in Financial Statements No IFRS equivalent

Presentation An entity is required to present a comparison of budget and actual

amounts either as a separate additional financial statement or as a

budget column in the financial statements (only when the entity makes

publicly available its approved budget, cf. IPSAS 1.21(e))

Entities are not required to present budget and

actual amounts.



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Service potential as a specific issue

Carrying amount: Amount at which an

asset is recognized after deducting

any accumulated depreciation and

accumulated impairment losses.

Recoverable service amount: Higher of a

non-cash-generating asset’s fair value less

costs to sell and its value in use.

Carrying amount >

recoverable service

amount?

Value in use: Present value of the asset’s

remaining service potential. Fair value

Impairment of non-cash-generating assets



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Non-exchange revenue

Revenue Recognition

Major types of non-exchange

transactions

Taxes Transfers

Timing of revenue

recognition (taxable event) Revenue recognition

depending on stipulations

(conditions versus

restrictions)



Snapshot of GAAP

differences

Future developments

Questions & Answers

Conceptual differences Presentation of budget information in financial statements

The differences between the final budget figures and the

corresponding actual amounts show how an entity was able to

comply with the budget.

IPSAS 24 requires a comparison of budget amounts and the

actual amounts arising from execution of the budget to be

included in the financial statements of entities that are required to,

or elect to, make publicly available their approved budget(s).

Comparison of budget and actual amounts contributes to

transparency and accountability.

Original

budget

Final

budget

Actual amounts

(accounts) on

comparable

basis

Differences

between final

budget and

actual



Snapshot of GAAP

differences

Future developments

Questions & Answers

Future developments in global public sector financial reporting

Future developments in global public sector financial reporting

► Harmonization of public sector accounting as global trend

► Set of IPSAS standards will gain increasing global acceptance the

more the IPSASB focuses on public sector specifics

► IPSAS implementation will strengthen public sector financial

management

► Not only convergence with IFRS, but also convergence with GFS

(“Alignment”) => “Grand convergence” (including budgeting)?



Snapshot of GAAP

differences

Future developments

Questions & Answers

Questions & Answers

Publications of EY

Thank your for your attention!

Thomas Müller-Marqués Berger Wirtschaftsprüfer ● Steuerberater

Partner

Phone: +49 711 9881 15844

Mobil: +49 160 939 15844

Fax: +49 181 3943 15844

thomas.mueller-marques.berger

@de.ey.com

Ernst & Young GmbH

Wirtschaftsprüfungsgesellschaft

Mittlerer Pfad 15

70499 Stuttgart

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