International Public Sector Accounting Standards (IPSAS) are gaining increasing acceptance globally (see Table 1.1 for a full listing of all IPSAS). Public administrators are today encountering important challenges in reducing the distance between accounting systems within countries as well as across borders. This entails a move towards harmonization¹ of accounting practices in the public sector and thus requires choosing an appropriate set of accounting and financial reporting standards (see also Caperchione, 2015).

The focus on creating one common set of standards at the global level is relatively new, in comparison to what we have witnessed for the private sector, with the global spread and institutionalization of International Financial Reporting Standards (IFRS) (see also for example Ball, 2012).

Many governments across the globe operate on a cash basis (or modified cash basis²) and do not account for many significant items, such as liabilities for public sector pensions and financial instruments. Accrual accounting is a fundamental tenet of strong accounting and reporting for public companies, and so it should be for governments as well. This is why the adoption of accrual accounting by public sector entities should result in a more comprehensive and accurate view of the financial position, and help to ensure that governments and other public sector entities are transparent and accountable. It should also be noted, however, that in some cases, governments do not have standardized practices for applying cash-basis accounting and, in such cases, applying cash-basis IPSAS could be a first step towards transparency and accountability.

The International Public Sector Accounting Standards Board (IPSASB) and the IPSAS that it establishes have increasingly become a point for international standardization and reference within the area of public sector accounting. The IPSASB is, today, an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC). It has been said that the issuing of the complete Conceptual Framework in 2014 has served as a “landmark document that firmly places IPSASB alongside its private sector counterpart, the International Accounting Standards Board (IASB), as an international standard setter” (Cain, 2014).

Aim of the Book

The aim of this book is to provide the reader with an overview of IPSAS with a focus on their practical application and interpretation. With this in mind, the book includes numerous examples of their application by governments and public sector entities that are issuing IPSAS-compliant financial statements. By drawing on examples, practice highlights on specific accounting and reporting issues, and IPSAS, this book seeks to be a comprehensive guide on how to apply accrual-based IPSAS as well as cash basis. The book thus aims to serve as a practical implementation guide for IPSAS for practitioners, policy makers, academics, and students. Nevertheless, we would like to emphasize that this book is not a replacement for reading the standards themselves. We therefore recommend reading this book in conjunction with the full suite of IPSAS³ in order to ensure that knowledge of all aspects of IPSAS is gained.

Readers will be able to find the answers to questions such as:

• What is the role and history of IPSASB?
• What is the scope of accrual-based IPSAS?
• What is prescribed in the suite of IPSAS for accrual basis accounting?
• What options do accrual-based IPSAS provide for measurement and recognition for each of the standards?
• What are some of the key practical implementation issues when preparing IPSAS-compliant financial statements?
• What options are provided within IPSAS when determining key accounting policy issues?
• What is prescribed in cash-basis IPSAS?
• How does one prepare a transition to cash-basis IPSAS or to accrual-based IPSAS?

IPSAS and Public Sector Entities

International Public Sector Accounting Standards (IPSAS) apply to public sector entities. Public sector entities can seem to be an obvious concept, but it is worth defining the key characteristics of public sector entities (see also Annex 2 at the end of this book).

As with applying any set of accounting standards, the first issue is to ensure that the scope is well defined and the preselected set of standards is really the one adapted to the current situation and entity.

The Conceptual Framework of IPSAS states that it applies to financial reporting by public sector entities, i.e.:

• National, state/provincial and local governments;
• Government ministries, departments, programs, boards, commissions, and agencies;
• Public sector social security funds, trusts, and statutory authorities; and
• International governmental organizations. (Conceptual Framework § 1.8).

The Conceptual Framework states: “The objectives of financial reporting by public sector entities are to provide information about the entity that is useful to users of GPFR (general purpose financial reporting) for accountability purposes and for decision-making purposes (hereafter referred to as “useful for accountability and decision-making purposes”)” (Conceptual Framework, § 2.1).

It also states that “the primary objective of governments and other public sector entities is to deliver services to constituents rather than to generate profits” (Conceptual Framework, BC 2.18), which constitutes a major difference with entities (usually companies) the purpose of which is to generate profits. In fact, governments around the world are entrusted by their populations with managing their financial resources in a sensible and cost-effective way. They collect revenues, largely through taxation, and in return are expected to deliver a wide range of public services such as education, health, infrastructure, and social transfers for the benefit of current and future generations. It is not a matter of profitability.

Another key characteristic is that: “[c]itizens and other eligible residents are dependent on governments and other public sector entities to provide a wide range of services on an ongoing basis over the long term. The activities of, and decisions made by, governments and other public sector entities in a particular reporting period can have significant consequences for future generations of service recipients and future generations of taxpayers and other involuntary resource providers” (Conceptual Framework, BC 2.18). In other words, the timescale of public sector entities is much longer than the timescale of companies preoccupied by their year-end result. In public sector entities, decisions can have impacts on the long run, even on future generations of taxpayers.

“Most governments and other public sector entities operate within spending mandates and financial constraints established through the budgetary process. Monitoring implementation of the approved budget is the primary method by which the legislature exercises oversight, and citizens and their elected representatives hold the government's management financially accountable” (Conceptual Framework, BC 2.18). Budget is another characteristic of public sector entities.

All these specificities make public sector entities different from private sector entities.

At the same time, though, there are entities where it is not so easy to distinguish whether they are public or private sector entities. Following IPSAS, government business enterprises (GBEs) are not included within the scope of IPSAS. The scope section of each standard within IPSAS specifically excludes GBEs and includes a reference to the Preface to International Public Sector Accounting Standards (Preface), which states that GBEs apply International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Currently the term GBE is defined in IPSAS 1, Presentation of Financial Statements. A GBE is defined as an entity that has all of the following characteristics:

1. Is an entity with the power to contract in its own name;
2. Has been assigned the financial and operational authority to carry on a business;
3. Sells goods and services, in the normal course of its business, to other entities at a profit or full cost recovery;
4. Is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm's length); and
5. Is controlled by a public sector entity (IPSAS 1.7).

In substance GBEs are no different from entities carrying out similar activities in the private sector.⁴ GBEs typically operate to make a profit. GBEs may however also have limited community service obligations under which they are required to provide some individuals and organizations in the community with goods and services either at no charge or at a significantly reduced charge (IPSAS 1.12).

There is a wide range of entities being described as GBEs. In some cases, entities clearly do not meet the IPSASB definition of a GBE. In other cases there are different interpretations of the components of the definition of a GBE. In order to clarify the definition of a GBE, the IPSASB issued the Consultation Paper “The Applicability of IPSASs to Government Business Enterprises and Other Public Sector Entities” in August 2014, in which they sought comments by 31 December 2014.

In this Consultation Paper, the IPSASB acknowledges the role of regulators and other relevant authorities in each jurisdiction in determining which entities should be required to prepare general purpose financial statements (GPFSs) and the suite of accounting standards to be applied. In its role as the international standard setter for the public sector, the IPSASB considers that it has a responsibility to be transparent about the types of public sector entities for which it is developing IPSAS.

This ongoing debate shows how important it is to define the scope of the application of IPSAS in the public sector, and illustrates some of the complexities that can be identified in the debate on financial information within the public sector.

Structure of the Book

This book is divided into four key parts. The first part provides an introduction to global developments within public sector accounting more broadly as well as IPSAS. It introduces the IPSASB and its expanding role.

The second part provides an overview of cash-basis IPSAS. It addresses the key technical issues and provides practical examples of the application of cash-basis IPSAS.

The third, and main, part of the book is devoted to a full review and explanation of accrual-based IPSAS as well as the conceptual framework underlying these standards. This is currently a suite of 38 standards⁵(however IPSAS 35–37 will replace the existing IPSAS 6–8). A number of IPSAS have been updated, and as a result we will see some changes in IPSAS over the coming few years. These changes are highlighted where each standard subject to change is covered. In addition a specific chapter is devoted to describing and discussing IPSASB work-in-progress.

The fourth and final part of the book focuses on the practical aspects of transitioning to IPSAS. This section includes information on change management and governance of an accounting change project.

In addition, at the end of the book there is an annex that provides the readers with additional support information to the book as a whole.

All parts of the book are characterized by the inclusion of multiple examples and practice highlights borrowed from financial statements that are IPSAS-compliant. The inclusion of a number of real examples of how IPSAS is applied serve as a basis for enhancing our understanding of this.