Interpretation and Application of IPSAS

By Caroline Aggestam-Pontoppidan and Isabelle Andernack

Clear, practical IPSAS guidance, explanation, and examples

Interpretation and Application of IPSAS provides practical guidance on the implementation and application of the International Public Sector Accounting Standards. This book brings readers up to date on the standards, and describes their proper interpretation and real-world application. Examples and mini-case studies clarify the standards' roles throughout, giving readers a better understanding of complex processes, especially where the IPSAS deviate from IFRS. Readers also gain insight into smoothly navigating the transition for a public sector entity, which is moving to either IPSAS under accrual basis of accounting or to cash accounting IPSAS, plus an overview of IPSAS adoption status and methods around the world.

Global public sector accounting is highly diversified, resulting in ongoing moves to harmonise standards worldwide. The IPSAS are international standards that largely follow the IFRS model, but differ in some key areas and include standards in places where IFRS has none. This book provides complete guidance to IPSAS, with clear explanation and expert insight.

• Understand the meaning and role of each standard
• Apply the standards to real-world scenarios
• Manage the process of transition to IPSAS

These standards are meant to be followed by all public sector entities, including national and regional governments and local authorities. They've been adopted by the UN, NATO, the European Commission, and others, and either have been or soon will be adopted in Malaysia, Switzerland, Spain, and more.

• Language: English
• Publisher: Wiley
• Release date: Nov 30, 2015
• ISBN: 9781119010302

Book preview

FOREWORD

It is with pleasure that I am writing this foreword to Interpretation and Application of IPSAS, which has been authored by Caroline Aggestam-Pontoppidan and Isabelle Andernack.

International Public Sector Accounting Standards (IPSASs) are issued by the IPSAS Board (IPSASB) for use by public sector entities around the world in the preparation of their financial statements, and are intended to improve the quality of financial reporting.

However, although an entirely accurate picture is difficult to obtain, it would appear that adoption and implementation of IPSAS around the world has been slower than expected. It is hopefully the case that the next few years will see many more public sector organizations on all continents embracing IPSAS, and thereby upgrading the reporting, the accountability and the transparency of their organizations.

Relatively few publications dealing with the practical adoption of IPSAS have been available to implementers and other interested parties so far, and it is to everybody's benefit to see this work, entitled Interpretation and Application of IPSAS, being published.

In particular, I am pleased to see a text that includes examples and mini-case studies that help to illustrate how IPSAS is applied – this will be very helpful for training and education purposes. This book also provides useful insights into navigation of the transition to IPSAS, either under the accrual basis or cash basis of accounting.

I am confident that this important work will be of significant benefit to the relevant communities, and congratulate the authors on their achievement.

By Marc Gardiner BSc (Econ) CPA, Chief Executive

Officer of IASeminars Ltd., London

IASeminars is an independent global financial training company specialising in international accounting seminars (IFRS & US GAAP & IPSAS) and other financial training events.

ACKNOWLEDGEMENTS

The process of writing this book has been enabled by the inspiration and support of a number of individuals from the global IPSAS-community, who have taken time out to help us.

Firstly, we are sending our sincere appreciation to the commissioning team at John Wiley & Sons Ltd. We have had the pleasure of being supported by wonderful, encouraging and helpful people, such as Stephen Mullaly, Gemma Valler and Tessa Allen.

Secondly, we would like to thank the knowledgeable IPSAS practitioners who have granted us permission to use IPSAS compliant financial statements. We are particularly thankful to Ms. Nutan Wozencroft (UNESCO) and Mr. Uday Dayal (formerly at the IAEA). We send special appreciation to Melissa Dias Buerbaumer, Ph.D., CPA, and Chief of Accounts at the OSCE, who has lent us her expertise and has let us include two practical case studies, based on her experiences of adopting IPSAS. For this we are grateful.

In addition to those who have directly contributed to this book, we would like to mention that a number of organizations, such as the CIPFA and IASeminars, have been valuable resources in the writing of this book. We are also thankful to the well-maintained website of the IPSASB, which allows any public sector accountant to stay fully abreast of the developments in IPSAS and other work related to the IPSASB.

Also, we send our special thanks to Gary Bandy for his review of the manuscript and invaluable suggestions for improvements hereof.

Thirdly, we want to thank former and present colleagues, both in the academic and the practice communities, who, through conversations about public sector accounting and IPSAS, have provided insight and inspiration that has helped to shape this book. Specifically, we thank our respective departments at the Copenhagen Business School and Sorbonne University for supporting us with the writing of this book.

Finally, we both thank our respective families, who have endured us spending many long days and nights in front of our computers.

Any errors or flaws in the book remain the authors' responsibility.

ABOUT THE AUTHORS

CAROLINE AGGESTAM PONTOPPIDAN

Caroline Aggestam Pontoppidan (Ph.D) works as an Associate Professor at the Department of Accounting and Auditing at the Copenhagen Business School (CBS). She earned her Ph.D in auditing in 2005. Caroline is an experienced educator and researcher who today specializes in International Public Sector Accounting Standards (IPSAS) and other international accounting and auditing issues in the public sector as well as the education of public sector accountants.

Since completing her Ph.D, she has carried out research on the development of public sector accounting at the global level as well as providing training services for various public sector entities on International Standards of Auditing (ISA) as well as on the interpretation and application of IPSAS.

Caroline previously spent three years in Japan teaching and researching emerging accounting and auditing issues. In addition, she has practical work experience from having served a number of United Nations agencies for more than eight years in total. Her work within international organizations has included, for example, business process re-engineering and the provision of technical advice on accounting and internal control systems.

ISABELLE ANDERNACK

Isabelle Andernack is a French Chartered Accountant (Diplômée d'expertise comptable) and Financial Auditor (Commissaire aux comptes), and a Member of the French financial analysts' institution (Société française des analystes financiers, SFAF).

She has nearly 20 years of professional experience in both the private and public sectors, including training, accounting, managing transitions to new accounting systems, planning and implementation. and specifically International Financial Reporting Standards (IFRS) and International Public Sector Accounting Standards (IPSAS).

She has worked on many high-profile accounting and audit training and consulting engagements, both in the public as well as in the private sector. Recently Isabelle has been implementing an ERP (enterprise resource planning) system for an international organization that she had previously converted from cash accounting to the accrual basis of accounting under IPSAS, in order to improve its management and long-term financial and business strategy.

Isabelle is a lecturer at Paris I Panthéon-Sorbonne University and at CFAF (Training Centre for French Financial Analysts). To follow the work of Caroline and Isabelle on IPSAS please visit www.ipsasapplied.com.

LIST OF IPSAS WITH CORRESPONDING IFRS

FULL LISTING OF ALL IPSAS AND IFRS EQUIVALENT AS AT 2 MARCH 2015

LIST OF IPSAS WITH BRIEF DESCRIPTION

IPSAS 1 Presentation of Financial Statements sets out the overall considerations for the presentation of financial statements, guidance for their structure and minimum requirements for the content of financial statements prepared under the accrual basis of accounting.

IPSAS 2 Cash Flow Statements requires the provision of information about the changes in cash and cash equivalents during the financial period from operating, investing and financing activities.

IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors specifies the accounting treatment for changes in accounting estimates, changes in accounting policies and the correction of material errors.

IPSAS 4 The Effects of Changes in Foreign Exchange Rates deals with accounting for foreign currency transactions and foreign operations, sets out the requirements for determining which exchange rate to use for the recognition of certain transactions and balances, and prescribes how to recognize the financial effect of changes in exchange rates within the financial statements.

IPSAS 5 Borrowing Costs prescribes the accounting treatment for borrowing costs and requires either the immediate expensing of borrowing costs or, as an allowed alternative treatment, the capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset.

IPSAS 6 Consolidated and Separate Financial Statements requires all controlling entities to prepare consolidated financial statements, which consolidate all controlled entities on a line-by-line basis.

IPSAS 7 Investments in Associates requires all such investments to be accounted for in the consolidated financial statements using the equity method of accounting.

IPSAS 8 Interests in Joint Ventures requires proportionate consolidation to be adopted as the benchmark treatment, and the equity method of accounting as an allowed alternative to account for joint ventures.

IPSAS 9 Revenue from Exchange Transactions establishes the conditions for the recognition of revenue arising from exchange transactions, and requires such revenue to be measured at the fair value of the consideration received or receivable.

IPSAS 10 Financial Reporting in Hyperinflationary Economies describes the characteristics of a hyperinflationary economy and requires financial statements of entities that operate in such economies to be restated so that the financial information provided is meaningful.

IPSAS 11 Construction Contracts defines construction contracts and establishes requirements for the recognition of revenues and expenses arising from such contracts.

IPSAS 12 Inventories establishes the measurement requirements for inventories (including those held for distribution at no or nominal charge), and provides guidance on the assignment of costs.

IPSAS 13 Leases establishes requirements for the accounting treatment of operating and finance leases by lessees and lessors.

IPSAS 14 Events After the Reporting Date establishes requirements for the treatment of certain events that occur after the reporting date, and distinguishes between adjusting and non-adjusting events.

IPSAS 15 Financial Instruments: Disclosure and Presentation has been superseded by IPSAS 28 Financial Instruments: Presentation, IPSAS 29 Financial Instruments: Recognition and Measurement, and IPSAS 30 Financial Instruments: Disclosures.

IPSAS 16 Investment Property establishes the accounting treatment and related disclosures for investment property, providing for application of either a fair value or historical cost model.

IPSAS 17 Property, Plant and Equipment (PPE) establishes the accounting treatment for property, plant and equipment, including the basis and timing of their initial recognition, and the determination of their ongoing carrying amounts and related depreciation.

IPSAS 18 Segment Reporting establishes requirements for the disclosure of financial information of the distinguishable activities of reporting entities.

IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets establishes requirements for the recognition and measurement of provisions, and the disclosure of contingent liabilities and contingent assets.

IPSAS 20 Related Party Disclosures establishes requirements for the disclosure of transactions with parties that are related to the reporting entity.

IPSAS 21 Impairment of Non-Cash-Generating Assets prescribes the procedures that apply to determine whether a non-cash-generating asset is impaired and to ensure that impairment losses are recognized.

IPSAS 22 Disclosure of Financial Information About the General Government Sector prescribes disclosure requirements for governments that elect to present information about the general government sector in their consolidated financial statements.

IPSAS 23 Revenue from Non-Exchange Transactions deals with issues that need to be considered in recognizing and measuring revenue from non-exchange transactions.

IPSAS 24 Presentation of Budget Information in Financial Statements sets out the requirement for a comparison of budget amounts and the actual amounts arising from execution of the budget to be included in the financial statements, and a reconciliation of the actual amounts in the budget to actual amounts in the financial statements.

IPSAS 25 Employee Benefits prescribes the accounting treatment and disclosure requirements of employee benefits, including the timing of recognition of liabilities and expenses.

IPSAS 26 Impairment of Cash-Generating Assets prescribes the procedures that apply to determine whether a cash-generating asset is impaired and to ensure that impairment losses are recognized.

IPSAS 27 Agriculture prescribes the accounting treatment and disclosures for biological assets and agricultural produce at the point of harvest when they relate to agricultural activity.

IPSAS 28 Financial Instruments: Presentation establishes principles for presenting financial instruments as liabilities or net assets/equity and for offsetting financial assets and financial liabilities.

IPSAS 29 Financial Instruments: Recognition and Measurement establishes principles for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

IPSAS 30 Financial Instruments: Disclosures requires entities to provide disclosures in their financial statements that enable users to evaluate (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

IPSAS 31 Intangible Assets prescribes the accounting treatment for recognizing and measuring intangible assets.

IPSAS 32 Service Concession Arrangements prescribes the accounting for service concession arrangements by the grantor, a public sector entity.

IPSAS 33 First-Time Adoption of Accrual Basis IPSASs. An entity shall apply those amendments for annual financial statements covering periods beginning on or after 1 January 2017.

IPSAS 34 Separate Financial Statements. An entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2017.

IPSAS 35 Consolidated Financial Statements. An entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2017.

IPSAS 36 Investments in Associates and Joint Ventures. An entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2017.

IPSAS 37 Joint Arrangements. An entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2017.

IPSAS 38 Disclosure of Interests in Other Entities. An entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2017.

DISCLAIMER

This book should not be used as a substitute for obtaining professional advice and input when adopting either cash based or accrual based IPSAS. The brief summaries of IPSAS requirements and principles provided in this book should be read in conjunction with the IPSASs and other guidance materials as promulgated by the IPSASB, which are copyrighted by the IFAC. The IPSASB website will provide a reader with updates on all new developments.

It should also be noted that this book does not contain advice on accounting treatments and does not consider the particular legal or other regulatory requirements of specific countries.

Readers of this book who are working on the implementation of IPSAS are encouraged to contact IPSAS specialists to obtain advice and support specific to their circumstances and requirements.

Part 1

Introducing Public Sector Accounting

1 Introduction

International Public Sector Accounting Standards (IPSAS) are gaining increasing acceptance globally (see Table 1.1 for a full listing of all IPSAS). Public administrators are today encountering important challenges in reducing the distance between accounting systems within countries as well as across borders. This entails a move towards harmonization1 of accounting practices in the public sector and thus requires choosing an appropriate set of accounting and financial reporting standards (see also Caperchione, 2015).

Table 1.1 Full listing of all IPSAS and IFRS equivalent as at 1 March 2015

The focus on creating one common set of standards at the global level is relatively new, in comparison to what we have witnessed for the private sector, with the global spread and institutionalization of International Financial Reporting Standards (IFRS) (see also for example Ball, 2012).

Many governments across the globe operate on a cash basis (or modified cash basis2) and do not account for many significant items, such as liabilities for public sector pensions and financial instruments. Accrual accounting is a fundamental tenet of strong accounting and reporting for public companies, and so it should be for governments as well. This is why the adoption of accrual accounting by public sector entities should result in a more comprehensive and accurate view of the financial position, and help to ensure that governments and other public sector entities are transparent and accountable. It should also be noted, however, that in some cases, governments do not have standardized practices for applying cash-basis accounting and, in such cases, applying cash-basis IPSAS could be a first step towards transparency and accountability.

The International Public Sector Accounting Standards Board (IPSASB) and the IPSAS that it establishes have increasingly become a point for international standardization and reference within the area of public sector accounting. The IPSASB is, today, an independent standard-setting board under the auspices of the International Federation of Accountants (IFAC). It has been said that the issuing of the complete Conceptual Framework in 2014 has served as a landmark document that firmly places IPSASB alongside its private sector counterpart, the International Accounting Standards Board (IASB), as an international standard setter (Cain, 2014).

Aim of the Book

The aim of this book is to provide the reader with an overview of IPSAS with a focus on their practical application and interpretation. With this in mind, the book includes numerous examples of their application by governments and public sector entities that are issuing IPSAS-compliant financial statements. By drawing on examples, practice highlights on specific accounting and reporting issues, and IPSAS, this book seeks to be a comprehensive guide on how to apply accrual-based IPSAS as well as cash basis. The book thus aims to serve as a practical implementation guide for IPSAS for practitioners, policy makers, academics, and students. Nevertheless, we would like to emphasize that this book is not a replacement for reading the standards themselves. We therefore recommend reading this book in conjunction with the full suite of IPSAS3 in order to ensure that knowledge of all aspects of IPSAS is gained.

Readers will be able to find the answers to questions such as:

What is the role and history of IPSASB?

What is the scope of accrual-based IPSAS?

What is prescribed in the suite of IPSAS for accrual basis accounting?

What options do accrual-based IPSAS provide for measurement and recognition for each of the standards?

What are some of the key practical implementation issues when preparing IPSAS-compliant financial statements?

What options are provided within IPSAS when determining key accounting policy issues?

What is prescribed in cash-basis IPSAS?

How does one prepare a transition to cash-basis IPSAS or to accrual-based IPSAS?

IPSAS and Public Sector Entities

International Public Sector Accounting Standards (IPSAS) apply to public sector entities. Public sector entities can seem to be an obvious concept, but it is worth defining the key characteristics of public sector entities (see also Annex 2 at the end of this book).

As with applying any set of accounting standards, the first issue is to ensure that the scope is well defined and the preselected set of standards is really the one adapted to the current situation and entity.

The Conceptual Framework of IPSAS states that it applies to financial reporting by public sector entities, i.e.:

National, state/provincial and local governments;

Government ministries, departments, programs, boards, commissions, and agencies;

Public sector social security funds, trusts, and statutory authorities; and

International governmental organizations. (Conceptual Framework § 1.8).

The Conceptual Framework states: The objectives of financial reporting by public sector entities are to provide information about the entity that is useful to users of GPFR (general purpose financial reporting) for accountability purposes and for decision-making purposes (hereafter referred to as useful for accountability and decision-making purposes) (Conceptual Framework, § 2.1).

It also states that the primary objective of governments and other public sector entities is to deliver services to constituents rather than to generate profits (Conceptual Framework, BC 2.18), which constitutes a major difference with entities (usually companies) the purpose of which is to generate profits. In fact, governments around the world are entrusted by their populations with managing their financial resources in a sensible and cost-effective way. They collect revenues, largely through taxation, and in return are expected to deliver a wide range of public services such as education, health, infrastructure, and social transfers for the benefit of current and future generations. It is not a matter of profitability.

Another key characteristic is that: [c]itizens and other eligible residents are dependent on governments and other public sector entities to provide a wide range of services on an ongoing basis over the long term. The activities of, and decisions made by, governments and other public sector entities in a particular reporting period can have significant consequences for future generations of service recipients and future generations of taxpayers and other involuntary resource providers (Conceptual Framework, BC 2.18). In other words, the timescale of public sector entities is much longer than the timescale of companies preoccupied by their year-end result. In public sector entities, decisions can have impacts on the long run, even on future generations of taxpayers.

Most governments and other public sector entities operate within spending mandates and financial constraints established through the budgetary process. Monitoring implementation of the approved budget is the primary method by which the legislature exercises oversight, and citizens and their elected representatives hold the government's management financially accountable (Conceptual Framework, BC 2.18). Budget is another characteristic of public sector entities.

All these specificities make public sector entities different from private sector entities.

At the same time, though, there are entities where it is not so easy to distinguish whether they are public or private sector entities. Following IPSAS, government business enterprises (GBEs) are not included within the scope of IPSAS. The scope section of each standard within IPSAS specifically excludes GBEs and includes a reference to the Preface to International Public Sector Accounting Standards (Preface), which states that GBEs apply International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Currently the term GBE is defined in IPSAS 1, Presentation of Financial Statements. A GBE is defined as an entity that has all of the following characteristics:

Is an entity with the power to contract in its own name;

Has been assigned the financial and operational authority to carry on a business;

Sells goods and services, in the normal course of its business, to other entities at a profit or full cost recovery;

Is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm's length); and

Is controlled by a public sector entity (IPSAS 1.7).

In substance GBEs are no different from entities carrying out similar activities in the private sector.4 GBEs typically operate to make a profit. GBEs may however also have limited community service obligations under which they are required to provide some individuals and organizations in the community with goods and services either at no charge or at a significantly reduced charge (IPSAS 1.12).

There is a wide range of entities being described as GBEs. In some cases, entities clearly do not meet the IPSASB definition of a GBE. In other cases there are different interpretations of the components of the definition of a GBE. In order to clarify the definition of a GBE, the IPSASB issued the Consultation Paper The Applicability of IPSASs to Government Business Enterprises and Other Public Sector Entities in August 2014, in which they sought comments by 31 December 2014.

In this Consultation Paper, the IPSASB acknowledges the role of regulators and other relevant authorities in each jurisdiction in determining which entities should be required to prepare general purpose financial statements (GPFSs) and the suite of accounting standards to be applied. In its role as the international standard setter for the public sector, the IPSASB considers that it has a responsibility to be transparent about the types of public sector entities for which it is developing IPSAS.

This ongoing debate shows how important it is to define the scope of the application of IPSAS in the public sector, and illustrates some of the complexities that can be identified in the debate on financial information within the public sector.

Structure of the Book

This book is divided into four key parts. The first part provides an introduction to global developments within public sector accounting more broadly as well as IPSAS. It introduces the IPSASB and its expanding role.

The second part provides an overview of cash-basis IPSAS. It addresses the key technical issues and provides practical examples of the application of cash-basis IPSAS.

The third, and main, part of the book is devoted to a full review and explanation of accrual-based IPSAS as well as the conceptual framework underlying these standards. This is currently a suite of 38 standards5(however IPSAS 35–37 will replace the existing IPSAS 6–8). A number of IPSAS have been updated, and as a result we will see some changes in IPSAS over the coming few years. These changes are highlighted where each standard subject to change is covered. In addition a specific chapter is devoted to describing and discussing IPSASB work-in-progress.

The fourth and final part of the book focuses on the practical aspects of transitioning to IPSAS. This section includes information on change management and governance of an accounting change project.

In addition, at the end of the book there is an annex that provides the readers with additional support information to the book as a whole.

All parts of the book are characterized by the inclusion of multiple examples and practice highlights borrowed from financial statements that are IPSAS-compliant. The inclusion of a number of real examples of how IPSAS is applied serve as a basis for enhancing our understanding of this.

Notes

1Harmonization refers to a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation (Nobes, 1991: 70).

2A modified cash accounting system recognizes transactions on a cash basis during the year, but it also incorporates the unpaid accounts and/or receivables at year's end (Christiaens, Reyniers, and Rollé, 2010: 539).

3The standards are available in full at IFACs website (www.ifac.org): see under the section on IPSASB. It should be noted that the approved text of IPSAS is that published in the English language by the IPSASB. The IPSASB Handbook has been translated from English into a number of languages, including French, Spanish, German, Russian, and Chinese. The Arab Society of Certified Accountants (ASCA) of Jordan has issued an Arabic version of the IPSASB Handbook.

4GBEs can comprise both trading enterprises, such as utilities, and financial enterprises, such as financial institutions.

5Please note that IPSAS 33–38 are only required to be applied as of 1 January 2017. See also Table 1.1 at the end of this chapter, which provides a full listing of the accrual-based IPSAS and the corresponding IFRS (where applicable).

6To be replaced by IPSAS 34 and IPSAS 35.

7To be replaced by IPSAS 36.

8To be replaced by IPSAS 37.

9Replaced by IPSAS 28, IPSAS 29, and IPSAS 30 for accounting periods beginning on/after 1 January 2013.

10N/A: not applicable.

2 Why Converge Public Sector Accounting Practices?

This chapter considers the trend of global convergence within the arena of public sector accounting. Convergence of accounting practices and systems across borders should establish a largely homogenous basis for underlying assumptions for accounting and financial reporting. IPSAS serves as a mechanism for enabling increased homogeneity between public sector financial reporting in different countries.

The adoption of IPSAS in a variety of different countries and standard-setting bodies has gained increasing attention on the part of nation states and some countries have initiated processes for adopting or converging with IPSAS (see for example Deloitte, 2013; Jensen and Smith, 2013). At the same time, academics, regulators, and policy makers are increasingly devoting attention to recent developments in the global convergence of public sector accounting (Ball, 2014; Brusca et al., 2015; Christiaens et al., 2010; Mason, 2012).

In debates on global, regional, and local convergence of accounting practices, accountability and transparency often stand out as critical components; in particular, during the last decade, where the impact of the global financial crisis on government funds has been seen to be significant, with squeezed budgets having to satisfy ever-increasing demands for public services (Bandy, 2015).

This chapter therefore looks at some of the key definitions of transparency and accountability, as these are two terms that recur when debating accrual accounting in the public sector. A link will then be provided between transparency and accountability and the current debates on financial transparency of nation states and the role of the global spread of IPSAS.

Transparency

Transparency can be defined in many ways depending on the context in which it is used. Transparency is a key concept, both in terms of getting the right information, and in enabling stakeholders to hold managers/decision makers accountable to their actions. Barth and Schipper (2008) do note that transparency is not well defined in a financial reporting context. Yet, in times of financial crisis, there are a growing number of calls for increased transparency in financial reporting for the public sector.

Transparency International1 state that one of the objectives of transparency is that it […] ensures that public officials, civil servants, managers, board members and businessmen act visibly and understandably, and report on their activities. And it means that the general public can hold them to account (Transparency International, 2014). Transparency International thus signals the critical link between transparency and accountability.

Other definitions of transparency in terms of financial reporting include:2

[…] the extent to which financial reports reveal an entity's underlying economics in a way that is readily understandable by those using the financial reports. (Barth and Schipper, 2008: 173)

a standard that requires transparency mandates statements that reveal the events, transactions, judgments and estimates underlying financial statements, and their implications. (Pownall and Schipper, 1999: 262)

There is agreement in the literature that the key elements of transparency enable accountability (see also Bovens, 2007).

The accounting literature highlights the importance not only of transparency, but also that the information provided shall be readily understandable. This very much depends on who is reading the financial report. Professional accountants and regular users of financial reports have a much greater knowledge and understanding of financial reporting information, whereas the individual without accounting knowledge has only a limited ability to understand an annual report (Norton and Porter, 2011: 61). Consequently, it is essential that the reporting entity considers who the users of their financial reports are and what their knowledge of accounting is.

Many examples of increased transparency can be found when studying the financial statements of public sector entities that have adopted IPSAS. Below is an example from the first set of IPSAS-compliant financial statements of the World Food Programme (WFP).

Under IPSAS, all purchases of food commodities and in-kind donations are added to inventory, together with the cost of transportation to the country where the food becomes distributable and any other relevant costs, such as milling or bagging. In 2008, the value of food and associated costs added to existing stock of US$ 0.5 billion was US$ 2.7 billion. When commodities are issued for beneficiaries, the value of the inventory issued is expensed through the statement of financial performance. In 2008 the total value of food commodities issued was US$ 2.2 billion. At the year end, the inventory in warehouses controlled by the WFP was valued at US$ 1.0 billion and has been reported in the financial statements for the first time. This new information gives the Board visibility on the value of inventories. (WFP, 2008: 74)

The Financial Reporting in Practice 2.1 highlight from WFP illustrates the change in the value of their inventory in their statement of financial position at the time of first adoption of IPSAS.3

IPSAS Financial Reporting in Practice 2.1 WFP Statement of Financial Position etc.

Accountability

At the most basic level, accountability is based on the notion of authorization. There is an actor in authority (a principal), who delegates to a subordinate actor (an agent) the responsibility for carrying out specific tasks, with the expectation that the agent will achieve the goals defined by the principal (Elgie, 2001: 3).

It is difficult to make governments and other public sector entities accountable for their actions if there is no transparency. Consequently, transparency is a crucial element of accountability (Bovens, 2007). The (IPSASB) has highlighted this importance on several occasions. They have stated, for example, that: "[s]trong and transparent financial reporting has the potential to improve public sector decision making and make governments more accountable to their constituents" (International Federation of Accountants, 2013). The concept of accountability can thus be understood as an umbrella consisting of several aspects, where transparency is one of the key elements (cf. Bovens, 2007). It is important to note that accountability is more complex in the public sector than it is in the private sector (Parker and Gould, 1999; Mulgan, 1997; Sinclair, 1995).

Important questions to ask when reflecting on accountability are: (a) accountability to whom and (b) accountability for what? (cf. Valentinov, 2011). Lack of clarity on both these questions can highlight the absence of blueprints or even general guidelines on how public sector and nonprofit accountability mechanism should be designed and implemented.

UN General Assembly Elaboration on Accountability within the United Nations

Accountability is the obligation of the Secretariat and its staff members to be answerable for all decisions made and actions Accountability in the United Nations taken by them, and to be responsible for honouring their commitments, without qualification or exception. Accountability includes achieving objectives and high-quality results in a timely and cost-effective manner, in fully implementing and delivering on all mandates to the Secretariat approved by the United Nations intergovernmental bodies and other subsidiary organs established by them in compliance with all resolutions, regulations, rules and ethical standards; truthful, objective, accurate and timely reporting on performance results; responsible stewardship of funds and resources, all aspects of performance, including a clearly defined system of rewards and sanctions; and with due recognition to the important role of oversight bodies and in full compliance with accepted recommendations. (emphasis added) (UN, 2010)

One can distinguish between two different forms of accountability, both of which are relevant when considering the move towards IPSAS. One form is process accountability, or compliance. The focus here is on how a public sector entity accomplishes something rather than on what is actually accomplished. Process accountability involves traditional conceptions of accountability, such as adhering to rules and regulations, including principles of due process.

A second form is performance accountability, which is of more recent vintage and focuses not on the how but on the what: results, outputs, and outcomes. Performance accountability has been central to the new public management reforms (NPM) that have been undertaken within the public sector arena over the last decades.

Why is there an Interest in Global Convergence of Public Sector Accounting?

Concerns over the financial transparency of nation states, globally, have been increasing during the last decade. This strong critique has been echoed in regards to governments' financial reporting, and in 2012 Ian Ball (former Chief Executive Officer of IFAC) published an article entitled: Government Accounting – Making Enron look good. In this article he argues strongly for strengthened public sector financial reporting, disclosure, and financial management. Transparency and accountability in the public sector have increasingly become a matter of global concern. Accounting and financial reporting are increasingly looked upon as a part of the solution for better management of public money.4

The financial and sovereign debt crises that we have witnessed over the last decade have accentuated the need for better financial reporting by governments worldwide, and for improvements in the management of public sector resources (see for example Ball and Pflugrath, 2012; EC, 2013; Müller-Marques Berger, 2012). As argued by the European Commission, the crisis has highlighted the need for a clear demonstration by governments of their financial stability and a more rigorous and transparent account of their balance sheet data5 (EC, 2013).

[…] it is time for sovereign debt issues to be addressed and considered from an accounting perspective, as well as the more traditional economic and political perspectives […] (Ball and Pflugrath, 2012: 17)

In a similar vein, Soll (2015)6 linked concerns on weaknesses in the transparency of the financial reporting of governments to the case of Greece:

Greece is back as a focal point of the world financial crisis. While coming elections are spooking the markets, the supposed cause of the crisis has not changed. Greece has a declared debt of 319 billion euros, or about $369 billion, 175 percent of its 182-billion-euro ($210 billion) gross domestic product. This sounds like a nearly impossible task for any government: to govern effectively, spur economic growth and avoid default. The shackles of the declared Greek debt have effectively paralyzed the country. Yet maybe all of this debt drama is unnecessary.

The brutal and counterproductive response has been austerity.

[…] Without real accounting, we also can't evaluate the claims of Prime Minister Antonis Samaras's government – as well as those of numerous commentators – that Greece has made improvement in its fiscal position over the last two years. If the European Commission, the International Monetary Fund and the European Central Bank (known as the troika) are giving Greece 283 billion euros ($327 billion) of financing in return for good economic indicators – and credit ratings agencies like Moody's shake Greek and Eurozone economies with pronouncements made on these numbers – one would think they would want to verify the numbers, using IPSAS, which would be much more transparent and something people outside the troika could realistically evaluate.[…]

Nevertheless, despite harsh criticism of government financial reporting, it should be highlighted that we have, during last two decades, witnessed significant developments in public sector accounting and accountability systems. In a number of countries such developments have culminated in the implementation and/or consideration of advanced accounting ideas such as that of preparing accruals based public sector financial reports. Accounting practices that result in comprehensive and reliable reporting of the financial performance as well as the financial position of the government, and that are audited, enhance accountability and transparency.

Today there is a rather broad consensus in debates on public sector financial reporting and management that better transparency and accountability require robust financial information in the public sector.

Conclusion

The financial crises of a number of nation states, which we have witnessed during the last decade, have forced the role of financial reporting of the public sector into the spotlight. Financial crises have placed increasing importance on the role of transparency and accountability, which act as two key drivers in the global spread of IPSAS. The implementation of accrual-based IPSAS is thus seen as one of the stepping stones towards enabling better accountability across nation states.

This move is keenly pursued by international standard setter, the International Public Sector Accounting Standards Board (IPSASB), which is the issuer of IPSAS. The International Federation of Accountants (IFAC) issued a series of recommendations for consideration by the G20 countries at their meeting in June 2010. IFAC specifically points out that:

… many governments adhere to the cash basis of accounting, IFAC and the [IPSASB] encourage the adoption of accrual-based accounting as it reinforces the principles of transparency and accountability. Under the accrual basis of accounting, transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, transactions and events are recognized and reported in the financial statements of the periods to which