Developing the Public Sector Conceptual Framework

1. Developing the Public Sector Conceptual Framework David Loweth UK Accounting Standards Board OECD Public Sector Accruals Symposium 4 March 2008

2. Introduction: about the ASB • ASB is an operating body of the Financial Reporting Council (FRC), the UK’s independent regulator for corporate reporting and governance. • The ASB is the body recognised under the companies legislation to issue accounting standards. • Accounting standards responsibilities impacted by move to International Financial Reporting Standards (IFRS). • Focus moved to influencing the development of IFRS and their adoption in the EU, as well as developing strategy for convergence of UK standards with IFRS. • Views expressed in this presentation are my own and do not represent positions of the ASB or any of the other bodies referred to.

3. Coverage • The joint conceptual framework project of the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB). • The work of the National Standard Setters (NSS) Group of 4. • The International Public Sector Accounting Standards Board (IPSASB) conceptual framework project. • Progress to date on the above and issues arising. • Where to from now.

4. IASB/FASB Joint Project • Objective: “To develop an improved and common conceptual framework that will provide a sound foundation for the development of accounting standards”. • IASB current framework dates from 1989, FASB first concepts statement 1978. • Important to IPSASB: many International Public Sector Accounting Standards (IPSAS) are based on IFRS and so, with public sector modifications, draw on concepts and definitions in the IASB framework.

5. IASB/FASB: Project Plan The project is being conducted in eight phases: A. Objectives of financial reporting and qualitative characteristics (QCs) of financial reporting information B. Elements of financial statements and recognition C. Measurement D. Reporting entity E. Presentation and disclosure, including reporting boundaries F. Purpose and status in GAAP hierarchy G. Applicability to the not-for-profit sector H. Entire framework, remaining issues Currently, the first four phases are active.

6. IASB/FASB: Project Plan and Status • The project is: • Focusing on changes in the environment since the original frameworks were issued and omissions in the original frameworks. • Giving priority to conceptual issues that cross-cut with standard-setting projects and are likely to yield benefits in the short-term. • Initially considering concepts applicable to business entities in the private sector.

7. IASB/FASB: Phase A • Discussion Paper issued July 2006. • Led to significant comment. • Major concerns over proposed objective of financial reporting: resource allocation decision-usefulness. What about stewardship? • Users and user needs. • Lack of definition of what the Boards mean by financial reporting. • QCs: why replace ‘reliability’ with ‘faithful representation’? Reliance on ‘verifiability’.

8. IASB/FASB: Phase A update - objectives • Redeliberations by Boards. Exposure Draft (ED) almost ready for issue. • On objectives, financial reporting should: • Focus on general purpose reporting to present and potential equity investors, lenders, and other creditors (capital providers). • Provide information: • Useful in making the decisions equity investors, lenders, and other creditors make in their capacity as capital providers (to meet stewardship concerns); • About an entity’s economic resources, claims to those resources, and effects of events that change those resources and claims. • Information useful to those making decisions in their capacity as capital providers is also useful to other stakeholders.

9. IASB/FASB: Phase A update - QCs • Fundamental QCs: • Relevance. • Faithful representation. • Enhancing QCs: • Comparability. • Verifiability. • Timeliness. • Understandability. • Pervasive constraints: • Cost. • Materiality.

10. IASB/FASB: Phase B progress (1) • Focus to date on elements. Current working definitions: An asset of an entity is a present economic resource to which the entity, through an enforceable right or other means, has access or can limit the access of others. A liability of an entity is a present economic obligation that is enforceable against the entity.

11. IASB/FASB: Phase B progress (2) • Testing current working definitions of asset and liability. • Defining other elements. • Unit of account issues. • Recognition/derecognition: • Boards' current frameworks contain recognition criteria, some of which are similar and others that are different. • Boards plan to revise the concepts for recognition to eliminate differences and provide a framework for resolving derecognition issues. • Boards plan to begin analyzing these issues during 2008. • DP scheduled 2009.

12. IASB/FASB: Phase C progress (1) • The measurement phase is being conducted in three milestones: • Milestone 1: Inventory and define properties of potential measurement bases. • Milestone 2: Evaluate measurement basis candidates. • Milestone 3: Draw conceptual conclusions and address practical issues.

13. IASB/FASB: Phase C progress (2) • Potential measurement bases from Milestone 1: • Past entry price -Current Equilibrium Price • Past exit price -Value in Use • Modified past amount -Future Entry Price • Current entry price -Future Exit Price • Current exit price

14. IASB/FASB: Phase C progress (3) • Milestone 2 topics: • Measurement concepts, principles, and terms • Evaluating an ranking the measurement basis candidates using the QCs and a decision tool. • The Boards will discuss initial evaluation of the measurement basis candidates in March 2008. • The Boards plan to issue a DP by the end of 2008.

15. IASB/FASB: Phase D progress (1) • The Boards have decided that: • The reporting entity concept should focus on determining the boundaries of the reporting entity for both an individual entity and a group of entities. • A reporting entity is a circumscribed area of business activity of interest to present and potential equity investors, lenders and other capital providers. • Legal existence can help establish the boundaries of the reporting entity, but legal existence is not a necessary condition.

16. IASB/FASB: Phase D progress (2) • Boards have decided that the composition of a group entity should be based on control. • Views differ on whether parent-only financials should be a required part of general purpose financial reports. • DP just about ready for issue. • But implications for DP and Phase A ED of whether Boards should first consult on adopting the entity perspective for the framework as a whole.

17. NSS Group of 4: introduction • IASB/FASB project focused on business entities in the private sector. • Implications for private sector not-for-profit entities only scheduled for Phase G; public sector (other than Government Business Entities) not at all. • Concern at this led the standard-setting bodies of Australia, Canada, New Zealand and the UK to monitor the IASB/FASB project from the perspective of public benefit entities (PBES). • IPSASB an observer of the monitoring group.

18. NSS Group of 4: what it does • The purpose of the group is to: • monitor all IASB/FASB discussions on the project and any consultation documents published; • identify any ramifications/issues for public benefit entities; • consider and, where appropriate, suggest amendments to address those issues and put them to the IASB/FASB; and • enable each body with responsibilities for standard-setting for public sector and other non-profit entities to proactively consider the implications of the emerging revised framework for its own standard-setting activity. • Work led by consultant (Kevin Simpkins). • Positive and constructive relationship with IASB/FASB project team.

19. NSS Group of 4: output to date • Many ‘internal’ reports, but only one public report, as a comment on the IASB/FASB Phase A DP. • Report highlights three main issues relating to the proposed objective in the DP: • an insufficient emphasis on stewardship (accountability); • a need to broaden the identified users and establish an alternative primary user group; • the inappropriateness of the pervasive cash flow focus. • Some of these issues are also pertinent to the proposed QCs.

20. IPSASB Project: introduction • Initial focus of IPSASB (and before it the PSC) has been to develop a credible core set of IPSAS, and build in its knowledge of concepts in conjunction with development of specific standards. • July 2006 agreement made that IPSASB would lead a project to develop a public sector conceptual framework in collaboration with a number of NSS and other bodies. • November 2006 IPSASB agreed to a project brief, subject to final review and comment by the NSS participants. Updated version issued on website December 2006. • IPSASB also agreed on proposals for the membership of a subcommittee to coordinate and contribute to the development of consultative papers for review by the IPSASB.

21. IPSASB project: objective • Project brief states that: “The objective of this project is 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.”

22. IPSASB Project: Framework Subcommittee • Chaired by IPSASB Chairman. • Five other IPSASB members (Argentina, Japan, New Zealand, Norway, USA). • Three representatives from Ministries of Finance (China, France and Italy). • Three NSS representatives (Australia, South Africa and UK). • IMF representative.

23. IPSASB Project: scope and focus • Conceptual framework for: • General purpose financial reporting (GPFR) – • current IPSAS relate to general purpose financial statements • By public sector entities – • not GBEs • nor not-for-profit entities in the private sector.

24. IPSASB Project: relationship to IASB/FASB • Most, if not all, components of IASB framework likely to be relevant for IPSASB framework, but… • Project brief makes clear that objective is not simply to interpret IASB framework, but to develop IPSASB’s own framework using the work of IASB and others as appropriate. • May result in divergence from IASB framework to reflect necessary public sector differences. • May result in different timings of issues for consideration eg considering scope of financial reporting sooner. • Also need to consider relationship to concepts in System of National Accounts (SNA).

25. IPSASB: project components • Group 1 (Consultation Paper, CP, 2008) • Scope of financial reporting • Objectives of financial reporting • Qualitative characteristics • Reporting entity • Group 2 (CP 2008/2009) • Definition and recognition of elements • Implications of scope for elements • Group 3 (CP 2009/2010) • Measurement • Presentation and disclosure • Group 4 (CP 2010) • Implications for cash basis framework.

26. IPSASB project: timing • After CPs, timing could be: • 2011 – ED of full accrual framework • 2012 – ED of cash framework • 2012 – Accrual framework • Question marks over timings • 2012 sounds a long way off, but timing ambitious.

27. IPSASB Group 1 CP: scope of financial reporting Key issues: • Relationship to Objectives. • Budget presentation – a GPFR? • compliance reporting (IPSAS 24) • prospective financial information. • Performance reporting (service achievements) • Financial characteristics only or non-financial? • Narrative reporting/management commentary. • Long-term fiscal sustainability. • Sustainability/Environmental reporting. • How to establish GPFR boundary? Is it necessary to do so?

28. IPSASB Group 1 CP: objectives of financial reporting Key issues: • Who are the users of public sector GPFRs? • Should a primary user group be identified? • What are the information needs of users? • reporting on financial performance, position, condition • compliance with budgets • performance reporting • inter-period equity. • Objectives – decision-usefulness and accountability/stewardship. • Meaning of accountability.

29. IPSASB Group 1 CP: QCs Key Issues: • are the QCs proposed by IASB/FASB relevant for public sector GPFRs, or should the public sector have different QCs? • are there other QCs not in current IPSAS 1 or IASB/FASB DP/ED that should be reflected? • are QCs the same for financial statements as for wider financial reporting, eg • performance reporting, MC, etc • verifiability?

30. IPSASB Group 1 CP: reporting entity (1) Key Issues: • what constitutes an entity? • legal identity. • other administrative or fiduciary arrangements able to deploy resources. • what is a reporting entity? • any entity that chooses to prepare a GPFR • as specified by legislative framework in each jurisdiction • where users dependent on GPFRs for information , and • entity has political /economic importance; • financial characteristics; • other characteristics.

31. IPSASB Group 1 CP: reporting entity (2) • what is presented in the GPFR of a reporting entity? (establishing the boundary of the financial reporting entity) • financial resources controlled by the entity • how define control • financial resources the entity is accountable for • how establish what accountable for • those financial resources subject to a public budget • other eg risks and rewards, similar functions • consider if any implications for: • determining boundary of a group reporting entity • definition of assets, liabilities, revenues, expenses • differential reporting.

32. Next steps • IASB/FASB project: • Phase A ED expected issue Q2 2008 • Phase D DP expected issue Q2 2008 • Comment periods for both 120 days. • NSS Group of 4: • continue monitoring IASB/FASB project • probable public reports commenting on above consultations. • IPSASB March 2008 meeting • approve Group 1 CP.

33. Where to find out more • On the IASB/FASB project: • www.iasb.org • www.fasb.org • On the NSS Group of 4: • www.aasb.com.au • www.cica.ca and www.psab-ccsp.ca • www.nzica.com • www.frc.org.uk/asb • On the IPSASB project: • www.ifac.org/publicSector