Transition to the Accrual Basis of Accounting: Guidance ...

1 Study 14 December 2003 Public Sector Committee Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities (Second Edition) International Federation of Accountants 545 Fifth Avenue, 14th Floor New York, New York 10017 United States of America Copyright December 2003 International Federation of Accountants. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the International Federation of Accountants.

2 Information about the International Federation of Accountants and copies of this Study can be found at its website, The approved text of this Study is that published in the English language. This Study includes discussion of International Public Sector Accounting Standards, Exposure Drafts and Invitation to Comments issued as of late November 2003. ISBN: 1-931949-19-0 Acknowledgment The Public Sector Committee is developing a set of International Public Sector Accounting Standards (IPSASs). The IPSASs in the initial core set are based on International Accounting Standards (IASs) published by the International Accounting Standards Committee (IASC).

3 The International Accounting Standards Board (IASB) and the International Accounting Standards Committee Foundation (IASCF) were established in 2001 to replace the IASC. The IASs issued by the IASC remain in force until they are amended or withdrawn by the IASB. IASs, Exposure Drafts and other publications of the IASC are copyright of the IASCF. IAS , IASB , IASC , IASCF and International Accounting Standards are registered Trade Marks of the IASCF and should not be used without the approval of the IASCF. Limited quotes and extracts from the IASs are reproduced in this publication of the Public Sector Committee of the International Federation of Accountants with the permission of the IASB.

4 The approved text of the International Accounting Standards is that published by the IASB in the English language, and copies may be obtained directly from IASB Publications Department, 1st Floor, 30 Cannon Street, London EC4M 6XH, United Kingdom. E-mail: Internet: December 2003 Study 14 IFAC PUBLIC SECTOR COMMITTEE Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities ISSUED BY THE INTERNATIONAL FEDERATION OF ACCOUNTANTS ii Acknowledgment The first edition of the Study was prepared by Public Sector Performance (NZ) Ltd ( ) on behalf of the Public Sector Committee of the International Federation of Accountants.

5 Disclaimer While every effort has been made to ensure accuracy, neither Public Sector Performance (NZ) Ltd nor any principal or employee of Public Sector Performance (NZ) Ltd nor IFAC shall be liable on any ground whatsoever to any party in respect of decisions or actions they may take as a result of using this Study. The information contained in this publication should not be treated as a substitute for advice concerning individual situations or circumstances. iii FOREWORD Many of the International Federation of Accountants Public Sector Committee s (PSC s) constituents, including some currently reporting on a cash Basis , have expressed support for the application of the Accrual Basis of accounting to governmental financial reporting.

6 This support is based on the view that Accrual information includes, supplements and enhances the cash information currently provided and benefits both internal and external users. Many of these constituents also sought Guidance from the PSC on the process of Transition from the cash to the Accrual Basis . This Study has been prepared in response to that request. It identifies key issues to be addressed in the migration from the cash to the Accrual Basis of accounting. It also identifies alternate approaches that can be adopted in implementing the Accrual Basis of accounting in an efficient and effective manner in the public sector.

7 This Study will be updated periodically to reflect newly issued IPSASs and other additional implementation issues and experiences. Readers are encouraged to confirm with the PSC the status of the latest version available. The PSC has developed a core set of Accrual -based International Public Sector Accounting Standards (IPSASs) and a comprehensive IPSAS on the cash Basis of accounting. These IPSASs establish an authoritative set of independent international financial reporting standards for governments and others in the public sector organizations. Application of the IPSASs will support developments in public sector financial reporting directed at improving decision-making, financial management, and accountability.

8 The PSC considers the IPSASs to be an integral element of reforms directed at promoting social and economic development. The PSC believes governments and government entities will find the Study useful as they deal with the many and complex technical, systems and cultural issues necessary to implement an Accrual system. The Study identifies key requirements of IPSASs. It also identifies other sources of useful Guidance on issues not dealt with by IPSASs. However, readers should note this Study does not establish new or additional authoritative requirements and should not be considered a substitute for the IPSASs themselves.

9 Ian Mackintosh Chairman Public Sector Committee International Federations of Accountants December 2003 iv v Transition TO THE Accrual Basis OF ACCOUNTING: Guidance FOR GOVERNMENTS AND GOVERNMENT ENTITIES CONTENTS Page Part I CHAPTER 1 INTRODUCTION ..3 CHAPTER 2 MANAGING THE CHAPTER 3 SKILLS ASSESSMENT AND PART II GENERAL FINANCIAL REPORTING CHAPTER 4 ACCOUNTING POLICY CHAPTER 5 REPORTING ENTITY PART III FINANCIAL CHAPTER 6 CHAPTER 7 CHAPTER 8 REVENUES AND PART IV SPECIFIC CHAPTER 9 CHAPTER 10 INTANGIBLE CHAPTER 11 FINANCIAL CHAPTER 12 EMPLOYEE-RELATED CHAPTER 13 LIABILITIES ARISING FROM SOCIAL POLICY CHAPTER 14 NON-EXCHANGE CHAPTER 15 FOREIGN CHAPTER 16: SEGMENT CHAPTER 17: RELATED PARTY APPENDIX 1 SUMMARY OF PSC STANDARDS PROGRAM DOCUMENTS.

10 225 APPENDIX 2 IPSAS GLOSSARY OF DEFINED vi Part I Introduction 1 PART I INTRODUCTION This Study is intended to assist governments and government entities wishing to migrate to the Accrual Basis of accounting in accordance with International Public Sector Accounting Standards (IPSASs). It may also assist governments and government entities complying with the financial reporting requirements of the Cash Basis IPSAS Financial Reporting Under The Cash Basis of Accounting in making the additional encouraged disclosures. Study 14 includes a discussion of all IPSASs issued and certain topics not addressed by current IPSASs or Exposure Drafts.