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

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Agenda

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Main differences of the public sector – impact on the accounting

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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

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Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Main differences of the public sector – impact on the accounting

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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 nonmarket 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)

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Main differences

Global overview

Relationship

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

IPSAS 23

Importance of the Approved Budget

IPSAS 24

Nature and Purpose of Assets

IPSAS 1, 17, 21, 31, 32

Longevity of the Public Sector and the Nature of Public Sector Programs

Long-term Sustainability (RPG 1)

Regulatory Role of Public Sector Entities

Conceptual Framework IPSAS and GFS, IPSAS 22

Importance of Statistical Bases of Accounting

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Main differences

Global overview

Relationship

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: “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)

►

►

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

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Global overview on public sector accounting

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

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Main differences

Global overview

Relationship

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 The current accounting system is based on…

Which accounting system is in use?

21.4%

IPSAS accrual basis

42.9%

3

IPSAS cash basis

21.4%

1

IPSAS-like standards

14.3%

7

Own accounting system

Cameralistic/cash accounting

Modified cash accounting

Modified accrual accounting

Accrual accounting

19

Total 30 answers 0

2

4

6

8

Source: Ernst & Young, Toward transparency, A comparative study on the challenges of reporting for governments and public bodies around the world, 2011 Page 10

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

10

12

14

16

18

20

Global overview on public sector accounting Legal adoption of IPSAS Direct vs. indirect adoption ►

Same can be observed for IFRS IPSAS

Legislation refers to IPSAS

Jurisdictional standards based on IPSAS Legislation refers to jurisdictional standards Accounting manual

Implementation Source: Bergmann, A: Public Sector Financial Management. FT Prentice Hall, 2009. Page 11

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Global overview on public sector accounting

Technical adoption – selection of the right conversion approach

Starting point

Motivation

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Conversion approach

Future developments

Questions & Answers

Global overview on public sector accounting

Technical adoption – potential motivations for accounting reforms

Peer comparison

Donor-driven

Better PFMinfrastructure

Finance Statistics

Motivations

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

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

Non-IPSAS-Compliance

IPSAS-Compliance Cash Basis

(Modified) Cash Basis Cash Basis

Cash Basis

Accrual Basis

Accrual Basis

Accrual Basis (Modified) Accrual Basis Page 14

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Global overview on public sector accounting

Technical adoption – overview on conversion approaches ►

Africa ► ►

►

Asia ► ►

►

► ► ►

►

“Best in Class” Focus on first IPSAS financial statements

Russia ►

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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 ►

►

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 ►

►

Diverse picture (e.g. South Africa vs. Nigeria) Some African countries first move/moved to Cash Basis IPSAS

Russia urges to adopt and implement IPSASs to strengthen global financial stability under its G20presidency; supported by World Bank

South America - Brazil ► ►

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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) Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

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

Harmonized financial reporting

Accrual accounting

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Alignment with GFS (ESA95)

Governance

European Public Sector Accounting Standards (EPSAS) Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

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

Country (federal level)

IPSAS-compliance

United Kingdom Sweden France Spain Italy Netherlands Ireland Germany Cyprus

95 % 93 % 88 % 77 % 47 % 37 % 36 % 34 % 21 %

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 Page 17

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Relationship between IFRS and IPSAS

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Relationship between IFRS and IPSAS Overview ► ►

IPSASs are largely based on the principles of IFRS In principle IPSASB follows a “Transaction neutral approach” ►

►

►

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. ► ► ►

►

Rationale: ensures greater comparability between private and public sector reporting when accounting for similar types of transactions

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

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

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

►

Through financial support of international institutions development of a first set of accounting standards (“Core Set”: IPSAS 1 – IPSAS 20)

►

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)

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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)

Phase 1

(1997-2002)

Phase 2

(2003-2010)

Phase 3

(since 2010)

Current work program of the IPSASB Page 20

Main differences

Global overview

Relationship

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

1. Are there public sector issues that warrant departure?

Yes

2. Should a seperate public sector project be initiated?

No 3. Modify IASB documents

No

Yes

5. Seperate public sector project

4. Make IPSASB style and terminology changes

6. IPSASB document

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

A snapshot of GAAP differences between IPSAS and IFRS

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GAAP differences between IPSAS and IFRS Reasons for the differences

Reasons for GAAP differences Conceptual reasons

Convergence issues

(New) IFRS but no IPSAS (so far)

IASB revised IFRS, but IPSASB did not so far

e.g. IFRS 12 or IFRS 13

e.g. IFRS 10-11

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Main differences

Global overview

Relationship

There is an IFRSequivalent IPSAS but IPSASB revised the underlying IFRS

e.g. IPSAS 17 or IPSAS 25

Snapshot of GAAP differences

Future developments

Questions & Answers

There is an IPSAS, but there is no IFRS equivalent

e.g. IPSAS 21-24

Conceptual Differences

IPSASB’s Conceptual Framework Project

IPSASs and RPGs

Phase 1

Phase 2 ► Elements

► Role

and Users ► QCs ► Reporting Entity

Phase 4

► Measure-

and Recognition

► Objectives

Phase 3

► Presenta-

ment

tion

Public Sector Conceptual Framework

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual Differences Current status of the Framework

Status/Papers

► ► ►

Objective and major issues

Approval

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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

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 of whole Conceptual Framework envisaged for June 2014 Main differences

Global overview

Relationship

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

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences

Comparison of the Conceptual Frameworks – Elements and Recognition

IPSASB (CF-ED2) Elements

► ► ► ► ► ► ► ►

IASB (DP 2013)

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

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences

Comparison of the Conceptual Frameworks – Measurement

IPSASB (CF-ED3) ► ►

IASB (DP 2013)

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

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences

Comparison of the Conceptual Frameworks – Presentation

IPSASB (CF-ED4)

IASB (DP 2013)

Presentation

Presentation is the selection, location and organization of information that is displayed and disclosed in the GPFRs.

Display

► ► ►

Disclosure

► ►

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Disclosure of financial information on the face of an entity’s primary financial statements.

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.

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.

►

Main differences

Global overview

Relationship

Snapshot of GAAP differences

►

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.

Future developments

Questions & Answers

Conceptual differences Overview of GAAP differences (1) Difference in content (IFRS as at 1.1.2013)

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences Overview of GAAP differences (2) Difference in content (IFRS as at 1.1.2013)

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences Overview of GAAP differences (3) Difference in content (IFRS as at 1.1.2013)

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Main differences

Global overview

Relationship

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

Consolidation ‒ Investment entities

Consolidation ‒ Jointly controlled entities

Employee benefits

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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. 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.

IAS/IFRS do no longer allow such an exemption.

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). 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.

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. IPSAS 25.105 requires only to recognize actuarial According to IAS 19 (rev.) the corridor approach is no longer gains and losses as they exceed certain thresholds allowed. (corridor approach)

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences Selected differences between IFRS and IPSAS (2) IPSAS

IFRS

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

Capitalization

Service potential

Heritage assets

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IPSAS 1, Presentation of financial statements

IAS 1, Presentation of financial statements

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

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) 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 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)

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 17, PP&E

IAS 16, PP&E

IPSAS 17 includes heritage assets within its scope.

IAS 16 does not address heritage assets.

Main differences

Global overview

Relationship

IAS 18, Revenues, IAS 17, Leases, IAS 16, PP&E, IAS 37, Provisions, Contingent Liabilities and Contingent Assets, IAS 38, Intangible Assets IFRSs do not know the concept of service potential.

Snapshot of GAAP differences

Future developments

Questions & Answers

Conceptual differences Selected differences between IFRS and IPSAS (3) IPSAS

IFRS

There is an IPSAS, but there is no IFRS equivalent Service Potential

GFS

Non-exchange transactions

Presentation

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IPSAS 21, Impairment of Non-Cash-Generating Assets

No IFRS equivalent

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). IPSAS 22, Disclosure of Financial Information about the General Government Sector IPSAS 22 prescribes disclosure requirements for governments that elect to present information about the general government sector (GGS) in their consolidated financial statements IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers) 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

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.

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

No IFRS equivalent N.A.

No IFRS equivalent N.A.

Questions & Answers

Conceptual differences Service potential as a specific issue

Impairment of non-cash-generating assets

Carrying amount > recoverable service amount?

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.

Value in use: Present value of the asset’s remaining service potential.

Fair value

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Main differences

Global overview

Relationship

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)

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Main differences

Global overview

Relationship

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 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). The differences between the final budget figures and the corresponding actual amounts show how an entity was able to comply with the budget. Comparison of budget and actual amounts contributes to transparency and accountability.

Original budget

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Actual amounts (accounts) on comparable basis

Final budget

Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Differences between final budget and actual

Future developments in global public sector financial reporting

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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)?

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Main differences

Global overview

Relationship

Snapshot of GAAP differences

Future developments

Questions & Answers

Questions & Answers

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Publications of EY

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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

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