International Federation of Accountants

1. International Federation of Accountants Government Financial Reporting World Bank January 2005

2. International Federation of Accountants • Worldwide body for professional accountants • 163 Member Bodies in 119 countries • International Public Sector Accounting Standards Board • International Auditing and Assurance Standards Board • Education Committee • Ethics Committee • Professional Accountants in Business • Small/Medium Practice Permanent Task Force • Compliance Advisory Panel

3. International Public Sector Accounting Standards Board • Established 1986 as Public Sector Committee, renamed 2004 • Members 2005: France (Chair), UK (Deputy Chair), Australia, Argentina, Canada, Germany, India, Israel, Japan, Malaysia, Mexico, New Zealand, Norway, South Africa, USA • Observers: ADB, EU, IASB, IMF, INTOSAI, OECD, World Bank, UN, UNDP

4. IPSAS Setting Program • Established late 1996 to develop a comprehensive set of financial reporting standards for public sector • Funded by World Bank, IFAC, ADB, UNDP, IMF • IPSASs set appropriate minimum benchmarks • For discharge of accountability, transparency, complete and relevant financial reporting • IPSASs provide a framework against which audit is undertaken • IPSASs are a resource for national standard-setters

5. IPSASB’s Approach • Develop standards that can be applied by any public sector entity, including the whole of government • Promote the adoption of the Accrual Basis • Acknowledge wide use of cash basis • Cash Basis IPSAS • Study 14 “Transition to the Accrual Basis of Accounting”.

6. Purpose of Financial Reporting • Provide information about the the financial position, performance and cash flows of an entity useful to a wide range of users. • Accountability, transparency, compliance with budget, • Financial statements should be understandable, relevant, reliable, comparable • Contraints: timeliness, cost/benefit,

7. Necessity for Financial Reporting • If information is not collated for external reporting purposes it is unlikely to be collated for management purposes. • Good information is necessary for good decision making • Financial reporting reform is part of a broader public sector financial management improvement process. • Managing public sector assets and liabilities is essential if public sector cash flows are to be managed

8. Cash Basis IPSAS • Issued in January 2003 after extended development and consultation • Requires the presentation of Statement of Cash Receipts and Payments • Includes cash payments made by 3rd parties on behalf of entity • Includes disclosure of accounting policies • Encourages additional disclosure of assets/liabilities

9. Advantages of Cash Basis • Comprehensive presentation of cash information • Relatively straightforward • Usually easily reconciled with Budget Information • Provided budget covers whole of government • Verifiable • Less prone to subjective decisions on accounting policy

10. Disadvantages of Cash Basis • Does not report assets and liabilities • If not reported, can users have confidence that they’re being appropriately managed? • End of year “gaming” quite common • Most governments report at least the outstanding government debt – moving to some accrual concepts

11. Accrual Basis IPSASs • 21 IPSASs currently on issue • Require presentation of: • Statement of Financial Position (net assets) • Statement of Financial Performance (net surplus/deficit) • Statement of Cash Flows (increase/decrease in cash held) • Statement of Changes in Net Assets/Equity • Notes to the above statements

12. Advantages of Accrual Basis • In addition to the cash flow information, users have additional information about assets and liabilities. • If assets and liabilities are reported, there is a greater probability that they will be appropriately managed. • Comparable to the financial reporting governments require of corporate entities. • More information available to capital markets should lead to better pricing of government debt securities.

13. Disadvantages of Accrual Basis • Relatively complex. • Can provide information overload, particularly for small entities. • Few governments report on this basis – not easy to compare one government to another (cash flows can be compared)

14. Modified Bases of Accounting • Modified cash – closer to cash than accrual, includes limited accrual information • Modified accrual – closer to accrual than cash, includes more extensive accrual information, excludes some assets and liabilities • Most governments report on some modified basis • IPSASB’s constituents recommended against developing IPSASs for modified bases

15. Who is on Accrual? • New Zealand – National and Local • Australia – National, most states/territories, local • USA – Federal, State, Local • UK – National and Local • Switzerland – local, Cantons and Federal moving • Canada – moving toward accrual • Netherlands – moving to accrual • IFAC, NATO, OECD and Cayman Is use IPSASs

16. Questions for Discussion • Is financial reporting an end in itself? • Would you invest your life savings in a company that only produced a cash flow statement? What if that cash flow statement was unaudited or received a qualified audit opinion? • Is there evidence that improved financial reporting leads to improved financial management?

17. Questions for Discussion • What resources are available to assist governments in the financial reform process? • Can non-accountants understand financial reports? • Can non-accountants prepare financial reports? • What about countries with low education levels? • How can IFAC and IPSASB assist the World Bank in its mission?

18. Summary • Cash and Accrual IPSASs • Financial Reporting reform and financial management reform complement each other • An independent audit opinion provides assurance that financial statements are reliable • An entity that does not report appropriately is not accountable or transparent • They’re your tax dollars they’re playing with

19. Visit IFAC Online • www.ipsasb.org • www.ifac.org • All IPSASB and most IFAC publications can be downloaded free of charge. • Printed copies of IPSASB Handbooks, standards and Study 14 are available free of charge, shipping costs are recovered.

20. International Federation of Accountants