Adopting international reporting standards to enhance transparency and support fiscal policy

1. Adopting international reporting standards to enhance transparency and support fiscal policy Abdul Khan Fiscal Affairs Department Presentation at the Regional Workshop on Financial Reporting and Management of Fiscal Risks in Astana, Republic of Kazakhstan, May 21-23, 2014

2. Topics of this presentation Japan IMF Sub Acc Why use international standards? What does it mean to introduce international standards like IPSAS or IFRS? Examples of countries that have introduced IPSAS or IFRS. Lessons from other countries and other factors to keep in mind during introduction of IPSAS

3. Why use international standards?(1/2) • Support transparency and oversight of public finances and policy decisions : • Consolidated “whole-of-government” statements would support policy making through fuller information on assets, liabilities, revenues, expenses, and cash controlled by government • Reporting assets more fully would improve transparency and provide basis for investment policies • Reports more credible, readily understood, and comparable world-wide

4. Why use international standards?(2/2) • Savings from avoidance of need to issue and maintain own standards • Benefits from international expertise • Synergies in the preparation, audit, and analysis of financial reports • accounting professionals from private sector can be used to help with transition • Mobility between private and public sector

5. What does it mean to introduce IPSAS? • IPSAS provides standards for financial statements, including for specific transactions or assets and liabilities: • Tax revenues, PPPs, government guarantees etc • Implementation of IPSAS would involve • GAP analysis - “where we are?” Vs “where do we wish to be?” • Preparing a plan to implement • Management of implementation including change management

6. IPSAS implementation: Some issues to be aware of …. • International Vs national • Some IPSAS activities may be seen to driven by issues that are not a concern in a particular country • Issues that may be important for a country may not be a global priority • To address these issues, countries (standard setters, MoF) should actively participate in IPSASB deliberations • attend meetings, review and comment on papers etc.

7. Costs of IPSAS implementation – data should be interpreted with caution • Cost information often includes costs of other reforms besides accrual accounting • Cost estimates for EU Member States fall within the range of 0.02-0.1 percent of GDP • Likely to vary according to the state of existing framework

8. Examples of countries that have introduced IPSAS or IFRS • Switzerland and Austria introduced IPSAS with some exceptions • U.K., Australia, and New Zealand adopted IFRS with some exceptions • New Zealand decided to adopt IPSAS from 2014

9. Switzerland - IPSAS • New Accounting Model introduced 2007 • Based on IPSAS • Budgeting and accounting on the same basis • Main exceptions to IPSAS • Employee pension liabilities not recognized, but disclosed as contingent liabilities • Consolidated financial statements of all controlled entities: phased approach adopted

10. SwitzerlandOverview of financial statements

11. Austria: IPSAS • IPSAS mentioned in Organic BL (2009) • Part of comprehensive reform of budget framework • Budgeting and accounting on same basis • Main exceptions to IPSAS • Pension liabilities not recognized, but disclosed • Consolidated financial statements for controlled entities intended to be done in future

12. The United Kingdom: IFRS • Adopted IFRS from 2009-10 • IPSAS also used where appropriate. • Produces whole-of government consolidated financial statements; consolidates • Bank of England • some 1500 entities, including sub-national government entities • Main departure from IFRS • State-owned banks not consolidated • Network Rail not consolidated – in line with statistical, but not accounting standards

13. The U.K: Reconciliation of WGA and National Accounts - Public Sector Net Debt

14. The U.K.: Reconciliation between the WGA and National Accounts: Current Deficit

15. Australia: IFRS (plus govt.-specific enhancements) • Whole of government accounts • Consolidates all controlled entities including “independent” entities (e.g., central bank, courts) • Harmonization of accounting and statistics: reduces confusion • Enhancements where IFRS does not deal with not-for-profit entity issues • non- exchange income (Tax) recognition

16. Australia: GFS sector information in Financial Statements

17. Australia: Cash reporting is integral to accrual accounting

18. The U.S. example Uses highly developed FASAB standards Cash budgeting and accrual financial statements Innovative and simplified presentation to improve communication of complex information

19. USA: Nation by the numbersA Snapshot of the Government's Financial Position & Condition

20. U.S.A: Cash Budget and Accrual Accounts

21. U.S.A.: Reconciliation of Cash Budget and Accrual Accounts

22. Lessons from international experience: A phased approach to implementation (1/2) • May adopt some IPSAS during first phase, others during subsequent phases; for example • Financial assets and liabilities may be done in Phase 1, nonfinancial assets in Phase 2 • Financial assets and liabilities can also be recognized progressively in phases • For example, tax revenue recognition may pose some challenges – therefore can defer it to Phase 2 • Consolidated financial statements may be implemented in phases • Separate financial statements of central government can be done in Phase 1, partial consolidation can be done in Phase 2, and full consolidated statements can be done in Phase 3

23. Lessons from international experience: A phased approach to implementation (2/2) • Pilot implementation with some agencies may be considered • Helps identify issues and challenges before launching intro full implementation • IPSAS based financial statements may initially be produced on a trial basis • SAI can review but not audit trial statements; • Full audit during a subsequent “official” phase

24. Lessons from international experience: Change management is important Need a well thought out strategy, including objectives, conceptual framework, implementation phases Communication with key stakeholders, including parliament, ministers, and other key executives/officials. Training Systems changes Detailed plan of implementation