International Public Sector Accounting Standards (IPSAS)
The Best Way for Public Institutions
Public sector, including government units, departments, inter-governmental agencies, non-profit organizations, and other public service agencies have always relied on the use of the cash basis accounting as opposed to the accrual basis accounting. Even entities that chose to move to the accrual basis have done so at a cautious pace and sometimes ending up with a two-dimensional basis; a mix of the “old school” one based on cash accounting, and a modern one based on accrual accounting picking pieces of each. The cash based system for a long time has been considered more appropriate in the public sector, because there is a lot of emphasis on compliance with rules and regulations. However, the modern trend is tending more and more towards efficiency in public resource management, which the accrual based accounting processes enable. Arising out of the increased need to present a true and fair view of financial statements, well-meaning agencies are shifting to accrual based accounting; through the implementation of the IPSAS based framework.
The International Public Sector Accounting Standards (IPSAS) are a set of accounting standards issued by the International Public Sector Accounting Standards Board (IPSASB) for preparation of financial statements by public sector entities around the world. These standards are based on International Financial Reporting Standards.
Public agencies and especially governments all over the world find implementing accrual accounting based on IPSAS or other accounting frameworks challenging. It is true first-time adoption of IPSAS (accrual-basis) is a challenging task that often requires comprehensive guidance. However, the IPSASB has issued IPSAS 33 First-time Adoption of Accrual Basis IPSAS to help agencies navigate the transition challenges.
IPSAS 33 addresses the transition to accrual basis from either a cash basis, or an accrual basis under another reporting framework, or a modified version of either the cash or accrual basis of accounting. IPSAS 33 grants transitional exemptions to entities adopting accrual basis IPSASs for the first time, providing a major tool to help entities along their journey to implement IPSASs. It allows first-time adopters three years to recognize specified assets and liabilities. This provision allows sufficient time to develop reliable models for recognizing and measuring assets and liabilities during the transition period.
This Standard is applied from the date on which a first-time adopter adopts accrual basis IPSASs and during the period of transition. This Standard permits a first-time adopter to apply transitional exemptions and provisions that may affect fair presentation. Where these transitional exemptions and provisions are applied, a first-time adopter is required to disclose information about the transitional exemptions and provisions adopted, and progress towards fair presentation and compliance with accrual basis IPSASs. At the end of the transitional period, a first-time adopter must comply with the recognition, measurement, presentation and disclosure requirements in the other accrual basis IPSAS in order to assert compliance with accrual basis IPSASs as required in IPSAS 1, Presentation of Financial Statements.
IPSAS requires the capture and presentation of more details of the assets, liabilities, revenue, and expenses of an organization. To this end, IPSAS requires the presentation in the financial statements of all assets acquired, including property, equipment and intangible assets, and their gradual depreciation or amortization over their period of use; such detailed requirements necessitate improved stewardship of the organizations’ assets. IPSAS adoption also leads to a more accurate recognition of liabilities resulting from past transactions and events, including a comprehensive recognition of all employee benefit liabilities. These changes always require improvements in a public entity’s control framework, which allows for enhanced management of resources, and improved decision-making. Keeping an account of comprehensive information about revenue and expenses supports better strategic planning and enhances objectives results‐based management.
Financial statements of an organization prepared under the detailed requirements of IPSAS allows for improved comparability over financial periods as well as with the financial statements of other peer organisations applying IPSAS. Overall, the application of independent, internationally accepted accounting standards certainly lends increased credibility of the financial statements of user entities.
While cash accounting is a simpler way to keeps track of financial resources in the books of accounts, accrual accounting allows organisations to recognize revenue and expenses as they are incurred. Rather than waiting for a cash transaction to occur, accrual accounting can easily tell an entity how well it is performing. The choice of accounting method (cash-basis or accrual-basis) determines when and how to report income and expenses in the books: Under the cash method the income is not counted until cash is actually received, neither are expenses recognized until cash is actually paid. The ease of managing this has always proved a luring trap for agencies to remain stuck in a cash basis accounting method, thereby missing the benefits of accrual based accounting.
In East Africa, the adaptation of IPSAS has not taken firm root and nations are at different levels of implementation. The heads of state of the East African countries (Kenya, Uganda, Tanzania, Rwanda, Burundi), signed the East African Monetary Protocol on 30 November 2013, which meant that there was need to harmonize financial reporting across the region.
The Partner States in principle adopted the use of International Public Sector Accounting Standards (IPSAS), accrual basis for central and local governments and non-trading State Owned Enterprises and regulatory bodies. However, implementation across partner states is at varying levels.
In Tanzania beginning effectively with Fiscal Year 2014/15, all general government agencies are required to apply accrual basis of accounting.
The Government of Rwanda has put in place a road map aiming at achieving full compliance to accrual based IPSAS by 30 June 2020.
In Uganda, a legal framework adopting IPSAS as the financial reporting framework has not yet been adopted. However, the Public Finance Management Act 2015 gives the Accountant General the powers to decide the accounting framework to be used in the meantime. The country is, however, in the process of developing a road map aiming at achieving full compliance to accrual based IPSAS..
In 2006, the Institute of Certified Public Accountants of Uganda (ICPAU), the country’s Professional Accountancy Organisation (PAO) adopted IPSAS as the accounting framework suitable for public sector in order to streamline financial reporting in that sector. This however depends on the implementing agency for the government – the Accountant General and Ministry of Finance.
In Kenya In July 2014, the board adopted IPSAS cash basis of accounting as the financial reporting framework for National Government (Ministries, Departments, and Agencies) and County Governments.
The situation in East Africa therefore shows that full time adoption of IPSAS is still a long way but the intention is made.
Notable Benefits of Reporting through the IPSAS Framework
• IPSAS due to alignment to the International Financial Reporting Standards (IFRS) enables entities to adhere to the highest international standards of financing reporting, which are duly aligned to global best practices; thereby providing room for greater consistency and comparability.
• Preparation of financial statements through IPSAS, Improves prediction especially of future cash-flow and asset needs of an entity;
• A lot of improvement can be achieved in providing accountability to organisational stakeholders, by way of providing a complete and accurate view of the entity’s business and performance. This in a way leads to better overall management and planning.
• Organisations that care for results-based management find the application of IPSAS fitting since it provides more comprehensive information on revenues and costs; IPSAS provides more precise estimates of income and expenditure
• Provides a better appreciation and understanding of revenues and expenses and enables improved management of commitments, risks and uncertainties;
• Greater transparency and credibility over the use of resources given to donor funded agencies by donors and ascertains a correct reflection of outstanding liabilities
IPSASB believes that adoption of IPSASs by governments will improve both the quality and comparability of financial information reported by public sector entities around the world. However, the IPSASB also recognizes the right of governments and national standard-setters to establish accounting standards and guidelines for financial reporting in their jurisdictions. The IPSASB encourages the adoption of IPSASs and the harmonization of national requirements with IPSASs. Financial statements should be described as complying with IPSASs only if they comply with all the requirements of each applicable IPSAS.
Based on the implementation of IPSAS 25 (Employee Benefits), the United Nations Programme on HIV/AIDS (UNAIDS) has reported a significant change in the recording of the value of future staff-related liabilities (i.e. accumulated annual leave, termination repatriation grants, after-service health insurance, etc.) that UNAIDS staff have accrued over the period of their service and have not been paid out. In previous financial statements, these types of benefits were shown as an expense only when paid, and the liabilities were only disclosed in the notes. This treatment was noted to understate employee benefit liabilities. Having adopted IPSAS, this has significantly changed and demonstrates an improvement in accuracy in reporting outstanding liabilities
Another example is the African Union that recently adopted accrual based IPSASs in its continued effort to modernise its accounting and financial management policies, operational systems and processes.
It is of note that many public agencies especially in East Africa demonstrate profligate tendencies. In acknowledgement of the existence of these tendencies, President Kenyatta declared corruption a major threat to the country’s security and directed all security agencies, the Ethics and Anti- Corruption Commission (EACC), the Asset Recovery Agency and the Financial Reporting Centre to take cognizance of this and rally around the path of transformation.
President Museveni of Uganda while speaking during a function in Rwanda in 2011 said Uganda had “so many thieves” who have frustrated government programmes that should have benefitted its citizens. In addition, President Magufuli of Tanzania has been hounding off bureaucrats for corruption. I believe full IPSAS Adaption by public agencies; will go a long way in reducing opportunities for these tendencies,
CPA Apollo Ekelot
Project Control Officer
The United Nations High Commissioner for Refugees