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INTERNATIONAL PUBLIC SECTOR ACCOUNTING …

INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards : conceptual AND INSTITUTIONAL ISSUES. James L. Chan ABSTRACT. In the current global revolution in government ACCOUNTING , INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards (IPSAS) are proposed for adoption by governments around the world. After describing the nature of IPSAS, the paper discusses conceptual issues concerning system capability and internal accountability, conceptual framework, emulation of business standards , accrual basis of ACCOUNTING and consolidated financial statements. The institutional issues regarding the representation on the IPSAS board and the sole oversight by the INTERNATIONAL Federation of Accountants (IFAC) are also analyzes. Setting standards is a first step on the long road of fundamentally reforming government ACCOUNTING practices around the world. Keywords: INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards , IPSAS, globalization, financial reform, standard setting INTRODUCTION. INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards (IPSAS) is the centerpiece of the global revolution in government ACCOUNTING (Heald, 2003) in response to calls for greater government financial accountability and transparency.

INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS: CONCEPTUAL AND INSTITUTIONAL ISSUES James L. Chan ABSTRACT In the current “global revolution in government accounting,” International Public

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Transcription of INTERNATIONAL PUBLIC SECTOR ACCOUNTING …

1 INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards : conceptual AND INSTITUTIONAL ISSUES. James L. Chan ABSTRACT. In the current global revolution in government ACCOUNTING , INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards (IPSAS) are proposed for adoption by governments around the world. After describing the nature of IPSAS, the paper discusses conceptual issues concerning system capability and internal accountability, conceptual framework, emulation of business standards , accrual basis of ACCOUNTING and consolidated financial statements. The institutional issues regarding the representation on the IPSAS board and the sole oversight by the INTERNATIONAL Federation of Accountants (IFAC) are also analyzes. Setting standards is a first step on the long road of fundamentally reforming government ACCOUNTING practices around the world. Keywords: INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards , IPSAS, globalization, financial reform, standard setting INTRODUCTION. INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards (IPSAS) is the centerpiece of the global revolution in government ACCOUNTING (Heald, 2003) in response to calls for greater government financial accountability and transparency.

2 IPSAS refers to the recommendations made by the IPSAS Board under the auspices of the INTERNATIONAL Federation of Accountants. IPSAS are accepted for ACCOUNTING for funds provided under World Bank Programs. Developing countries are urged to adopt IPSAS by INTERNATIONAL organizations which provide financial assistance to developing countries. Other countries, regardless of their political and economic systems, are encouraged to harmonize their national standards with IPSAS. Thus, IPSAS have become de facto INTERNATIONAL benchmarks for evaluating government ACCOUNTING practices worldwide. For these reasons, IPSAS deserves the attention of ACCOUNTING policy-makers, practitioners and scholars alike. (When individual or multiple standards are discussed, the phrase IPSAS. are is used; when a whole set of standards is referred to, IPSAS is appears instead.). This paper critically examines conceptual and institutional issues in setting IPSAS. The conceptual issues are problem areas or debatable points on the substance of IPSAS.

3 Institutional issues, on the other hand, relate to the governance and process of setting IPSAS. A brief introduction to IPSAS precedes the analysis of issues. This is the latest in a series of papers the author has written on IPSAS over a period of several years, during which IPSAS and its institutional structure have expanded. These papers describe, explain and critique IPSAS in the belief that a scholar should independently examine even the authoritative literature and the authorities that practitioners are obliged to comply with. THE NATURE OF IPSAS. In order to familiarize the reader with the IPSAS, this section identifies their characteristics, explains their structure, and briefly describes the IPSAS specific to the PUBLIC SECTOR , on the basis of information primarily from the IPSAS Board's website. ipsas A distinction may be made between lower-case ipsas INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards and upper-case IPSAS, INTERNATIONAL PUBLIC SECTOR ACCOUNTING standards .

4 The ipsas refers to the norms for reporting government finance required or recommended by (1) INTERNATIONAL treaties, agreements, and contracts; and (2). INTERNATIONAL organizations of an official nature. The first category includes, for example, the definitions of deficit and debt used in calculating the financial ratios under the Maastricht Treaty, and in meeting the conditionality requirements of the INTERNATIONAL Monetary Fund (IMF). The second category includes the government financial reporting requirements in the United Nations (UN) and European System of National Accounts (SNA), the IMF's Government Finance Statistics (GFS) and Fiscal Transparency (FT), the Organization for Economic Cooperation and Development (OECD) Budget Transparency projects. Due to the close relationships between these ipsas and IPSAS, the organizations concerned have worked on their harmonization. General Characteristics There are several ways to characterize IPSAS: as an INTERNATIONAL version of national standards ; as a government version of business ACCOUNTING standards ; and as a professional version of laws and regulations.

5 IPSAS is substantively the Anglo-American model of government ACCOUNTING elevated to the INTERNATIONAL level. The similarity is so great that the United States and the advanced British Commonwealth countries Australia, Canada, New Zealand, and the United Kingdom are regarded as de facto adopters of IPSAS. Despite their variations, governments in these countries now routinely issue consolidated financial statements produced by their accrual ACCOUNTING systems in accordance with standards set by boards largely independent of government authorities. IPSAS is the government version of the INTERNATIONAL Financial Reporting standards (IFRS). IFRS are set by the INTERNATIONAL ACCOUNTING standards Board (IASB) and its predecessor for multinational corporations. From the outset, convergence with IFRS has been the modus operandi of the IPSAS Board and its predecessor, the PUBLIC SECTOR Committee. In their view, unless there is a reason for government to be different from business, IFRS applies to government.

6 Finally, IPSAS is the professional version of laws and regulations on government ACCOUNTING and financial reporting. IPSAS are developed by an expert group appointed by a global federation of the ACCOUNTING professional bodies in over 100 countries. IPSAS. are not constrained or enforceable by either the ipsas mentioned above or by national laws and regulations enacted through legislative and administrative processes. Scope IPSAS address issues on financial measurement and financial reporting to the PUBLIC . Specifically, they define the form and content of the so-called general purpose financial 2. statements and related financial disclosures in a government's annual report. These financial statements consist of a statement of financial position and a statement of financial performance produced by an accrual financial ACCOUNTING system, as well as a statement of cash flows produced by a cash ACCOUNTING system. This self-imposed scope limitation has a number of implications. IPSAS do not deal with the financial measures used in budgeting.

7 IPSAS do not address the contents of reports produced to demonstrate compliance with laws and regulations, including budget execution. These reports are regarded as special purpose reports outside of the scope of IPSAS. Premises IPSAS are more comprehensible if one is aware of their underlying assumptions. The first assumption is that there are so many common transactions in the private and PUBLIC sectors that it is possible, and indeed preferable, to have one set of generally accepted ACCOUNTING principles for both sectors. Most IPSAS can therefore be set by making modest changes to the standards promulgated by the INTERNATIONAL [Business] ACCOUNTING standards Board (IASB). Additionally, the IPSAS Board would establish standards for transactions and events unique to the PUBLIC SECTOR . The second assumption is that since business firms annually prepare consolidated financial statements under the accrual basis, governments should do the same. Consolidated financial statements cover a primary organization and its subsidiaries in which the primary organization has a majority ownership interest.

8 The accrual basis used by business firms regards sale (not production) of goods and services as the criterion for judging financial performance. The third assumption is that ACCOUNTING standards are more objective and of a higher quality if they are set by an expert group independent of the organizations obliged to follow the standards . For the PUBLIC SECTOR , independence can be achieved or at least enhanced by giving the task to a private- SECTOR body, an advisory board, or increase the number of PUBLIC (non-government) members. Finally, ACCOUNTING standards should be produced through a due process. Due process means that research and deliberation should precede decisions. Furthermore, adequate opportunities are provided for interested parties to provide inputs before standards are finalized. Structure On the basis of the above premises, the IPSAS Board and its predecessor have gone through two phases of standard setting. The first phase from 1996 to 2002 produced a score of standards by modifying the corresponding IFRS.

9 Since 2002, the second phase has focused on PUBLIC - SECTOR specific issues. (Interested readers can obtain up-to-date information about the board's standard-setting activities, and can freely download the text of its documents.) General standards are listed ahead of specific standards , and the PUBLIC - SECTOR specific standards are noted in italics. (Short titles are used as necessary.). Cash-basis and Accrual-basis standards . The board issued one comprehensive cash- basis standard, presumably for countries, such as many developing countries, that are not ready to adopt the accrual basis. All the other IPSAS adhere to the accrual basis. 3. General standards on ACCOUNTING Recognition and Measurement. There are only three standards in this category, namely: No. 4: The effects of changes in foreign currency exchange rates No. 9: Revenue from exchange transactions No. 23: Revenue from non-exchange transactions (taxes and transfers). General standards on Reporting. There are eleven standards in this category, namely: No.

10 1: Presentation of financial statements No. 2: Cash flow statements No. 3: Fundamental errors and changes in ACCOUNTING policies No. 6: Consolidated financial statements and ACCOUNTING for controlled entities No. 8: Interest in joint ventures No. 10: Financial reporting in hyperinflationary economies No. 14: Events after the reporting date No. 18: Segment reporting No. 20: Related party disclosures No. 22: Disclosure about General Government SECTOR No. 24: Budget information . standards on Specific Elements of Financial Statements. There are 13 standards in this category, namely: No. 3: Net surplus or deficit for the period No. 5: Borrowing costs No. 7: Investments in associates No. 11: Construction contracts No. 12: Inventories No. 13: Leases No. 15: Financial instruments No. 16: Investment property No. 17: Property, plant, and equipment No. 19: Provisions, contingent liabilities and contingent assets No. 21: Impairment of non-cash-generating assets No. 25: Employee benefits No.


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