UNCLASSIFIED
Response to questions raised by Eurostat Task Force IPSAS
1) Participants were requested to carry out a quick review of all 32 IPSAS standards, into order to classify them according to 3 categories:
- standards that might be implemented immediately (a core)
- standards that need adaption, or for which a selective approach would be needed
- standards that are seen as too problematic to implement
Whilst some of the 32 IPSAS standards will be more difficult to implement than others, the UK does not believe that there are any standards that are too problematic to implement, especially if a selective approach is adopted. Nevertheless, given the level of change that we expect would be required in the UK, an implementation timescale of at least 1-2 years would be needed for preparation and change over activities.
In taking a selective approach, the standards may be distinguished as: those relating to income, expenditure and pensions (IPSAS 4, 9, 11, 12, 19, 23, 25, 27), those relating to non-current assets (IPSAS 5,13,16,17,21,26, 31,32); those relating to the presentation of accounts (IPSAS 1,2,3,10, 14,18 and 20), and those relating to financial instruments (IPSAS 28, 29 and 30 (IPSAS 15 having been withdrawn)).
IPSAS 22 regarding the disclosure of financial information about the General Government Sector could only apply at the consolidated (whole of government) level and IPSAS 24 regarding the presentation of budget information in Financial Statements may cause issues as some bodies, as a statutory requirement, are required to budget on a different basis to their accounts.
From the UK’s perspective, the problematic standards are IPSAS 6, and to a lesser extent IPSAS 7 and 8, as the UK draws its boundary for the public sector and produces its consolidated accounts based on bodies classified to the public sector by the Office for National Statistics (ONS), using ESA 95. The UK has previously decided to draw its boundary on this basis to enable consistency with national accounts and UK fiscal measures. The application of IPSAS 6, 7 and 8 in their current form is likely to conflict with this approach. We understand that these are being reviewed by IPSASB, to consider the scope to converge, with or even incorporate, the tests for control being used in the national accounts.
A fuller analysis is included in Annex A, which includes our view of the broader EU position.
2) Can the list of options presented at the TF meeting under point 4 be considered as consistent and complete? Which do you consider the better and the worse options from your perspective, and what do you see as the pros and cons?
1. Full IPSAS implementation.
2. Partial IPSAS implementation – with a common core of either some of the standards or partial application of some of the standards.
3. Establishing a set of ‘EPSAS’: this could be EU adopted IPSAS (along the lines of IFRS – ie instead of direct full adoption of IPSAS); it could be a European set of public sector standards in their own right, but based on IPSAS; or variations of these approaches (with perhaps some modified cash accounting).
4. A completely new set of EU specific standards.
5. Only requiring full accrual accounting at the consolidation level and not for all entities (consolidation levels would of course need to be defined)
The UK considers that the list of options presented at the TF meeting is consistent and complete.
From the UK perspective, the best option would be the one that closely matches the current UK position. In the UK financial reporting guidance for the public sector is based on EU-adopted International Financial Reporting Standards (IFRS), subject to such adaptations as are necessary for the public sector context. IFRS rather than IPSAS was chosen as the basis for financial reporting, as the UK government decided it was necessary to utilise the same standards for its financial reporting as are being utilised by the private sector, given that the sectors operate in the same economy. In determining whether the public sector context requires an adaptation of EU-adopted IFRS, the following is considered:
i) Whether applying the requirements of the relevant financial reporting standard would mean that the accountability and decision making objectives of public sector financial reporting would not be adequately met;
ii) Whether applying the requirements of the relevant financial reporting standard would mean that the qualitative characteristics of public sector financial reporting would not be adequately met; and
iii) Whether applying the requirements of the relevant financial reporting standard would result in impracticability issues.
The factors below may indicate an adaptation of EU-adopted IFRS is necessary for the public sector context:
· Accountability or regulatory framework differences;
· Governance or financial management differences;
· Alignment with other government financial frameworks;
· The existence of specific powers;
· The impact of social benefits or other non-exchange activities;
· The existence of contributed/donated assets
· The existence of non-cash generating activities or assets;
· Differences related to the structure or service potential of assets;
· Sustainability issues;
· EU-adopted IFRS not addressing the public sector circumstances, or not doing so adequately;
· Different or additional guidance in a relevant International Public Sector Accounting Standard (IPSAS); or
· Practical difficulties with implementation in the public sector or Value for Money considerations.
In determining the type and form of the proposed adaptation of EU-adopted IFRS the UK considers the applicability of the adaptation in the context of the following guidance sources:
· International Public Sector Accounting Standards, as issued by the International Public Sector Accounting Standards Board;
· The relevant international Conceptual Framework, as developed by the standard setters in the absence of more specific guidance in a standard;
· Other financial reporting standards relevant to the public sector.
Of the options presented, potentially the closest to the UK position is the establishment of a set of EPSAS taking the form of EU adopted IPSAS along the lines of EU adopted IFRS. Our view, based on the current conceptual frameworks, is that IPSAS would need to maintain a close link with IFRS. The UK’s support for a particular option will, however, depend on the choice of start point, e.g. IFRS and the process adopted to potentially move from that start point.
In our opinion a minimalist approach, which does not provide for data to enable assets and liabilities to be recognised or that is on a modified cash basis would not achieve the stated objectives. This could result in a situation where the financial reporting framework might not be as robust as the ESA/SNA framework, diminishing the value of adopting some form of IPSAS based accrual accounting. It would also deny public sector entities the major benefit of accrual accounting, because only when entities are able to capture and recognise the economic events that give rise to assets and liabilities are they able to better manage the resources that are entrusted to them.
Pros and cons of each option
Full IPSAS implementation
Pros:
· Requires no adaptation so would ensure application of common standards by all member states and eliminates the risk of manipulation of standards to achieve specific accounting results.
· Full adoption of accrual accounting standards would provide public sector entities with the finance management benefits of accrual accounting
Cons:
· There may be circumstances where minor adaptations of IPSAS are necessary due to differences in accountability, regulatory, governance or financial management frameworks. Full IPSAS implementation would not allow for this to occur, resulting in financial statements that do not meet the needs of users.
· Full adoption places responsibility for financial reporting policy of EU public sector entities in the hands of the IPSASB. Eurostat will need to consider whether the changes likely to be made to this, including public interest oversight, the establishment of a Consultative Advisory Group and the new opportunity for nominations for Board membership to be made from outside IFAC member bodies, will provide sufficient safeguards and influencing opportunities from a European perspective.
· The IPSASB’s project to develop a conceptual framework for public sector financial reporting will not be completed until 2014. However, with the issue of key Exposure Drafts planned for this autumn, the eventual shape of the framework, and potential for significant changes to existing standards should be reasonably clear by the end of 2012.
Partial IPSAS implementation
Pros:
· We cannot see any benefits to the adoption of an incomplete or partial set of standards.
Cons:
· Depending on which standards were not implemented, partial IPSAS implementation could result in the non-recognition of assets, liabilities, revenues and expenses that are essential to understanding an entities economic results and position.
· Could result in a situation where the financial reporting framework was not as robust as the ESA/SNA framework, making the entire process of adopting some form of IPSAS based accrual accounting redundant. It would also deny public sector entities the major benefit of accrual accounting, because only when entities are able to capture and recognise the economic events that give rise to assets and liabilities are they able to better manage the resources that are entrusted to them.
· For those countries with more developed financial reporting, partial implementation would be a retrograde step in financial reporting.
Establishment of a set of EPSAS
Pros:
· Provided that this were undertaken through the option of an EU adopted IPSAS, this would mirror the financial reporting framework of private sector entities within the EU and thus build on the experience gained in that area.
· Would enable recognition of circumstances where an adaptation of IPSAS is necessary due to differences in accountability, regulatory, governance or financial management frameworks. This would result in financial statements that more fully meet the needs of users.
Cons:
· Depending on how the standards were adopted this could result in the non-recognition of assets, liabilities, revenues and expenses that are essential to understanding an entities economic results and position.
· Differences in the accountability, regulatory, governance or financial management frameworks of member states means that EPSAS could be adopted that only meet the needs of some users of the financial statements.
· It could result in the re-opening of issues already settled by IPSASB, which has already considered the public sector perspective. This could also lead to divergences with reporting outside Europe.
· Additional governance necessitated by issuing EPSAS may lead to a delay in the effective date of standards.
Completely new set of EU specific standards
Pros:
· We cannot see any benefits to the development of a completely new set of EU specific standards.
Cons:
· Would require the development of a conceptual framework on which to base the standards which would be a significant undertaking and delay adoption.
· Likely to take public sector financial reporting further away from private sector financial reporting. As all entities are operating within the same economy and utilising the same scarce resources we believe that common economic events should be accounted for in the same manner whether they are related to a public or private sector entity.
· There would be significant costs involved in developing a new set of standards, and it may take a considerable amount of time to develop, agree and implement such standards (as evidenced by the time taken to develop the current IPSAS suite).
Only requiring full accrual accounting at the consolidation level and not for all entities
Pros:
· Providing an appropriate level of consolidation was selected, this option could provide for a solution that achieves some of the goals of Commission in a cost effective manner.
Cons:
· Absence of accrual accounting at individual entity level would severely limit the extent of information quality improvements, since basic transactions would neither be recorded nor audited on a consistent (IPSAS) basis, and the need for unaudited (and possibly unreliable) accrual adjustments would still remain.
· As entities will still need to provide accrual based accounting information to enable consolidation to take place this dual reporting framework may actually be more costly and cumbersome to implement.
3) Is the governance structure like the one implemented for IFRS in the EU (IASB governance) a meaningful reference model for public sector accounting? What might be the appropriate process of endorsement for the EU public sector? What might be the appropriate endorsement criteria? Linked to the review of IPSAS and a governance structure, what do we need at an EU technical platform to resolve / amend / improve problematic standards?
The UK view is that a governance structure would need to be able to address the following two questions – are the IPSAS suitable for the public sector in the European Union, and secondly do they meet ESA requirements. The due process followed by IPSASB during the development of its standards should ensure that they meet the generic needs of the public sector, but consideration would need to be given to differences in the regulatory, or financial management frameworks of the European Union. It would be important however to avoid re-litigation of issues already determined by IPSASB. With regards to ESA, conceptual differences would need to be reviewed, and a focus maintained on aligning accounting and statistical treatments where possible. A governance structure analogous to that used for IFRS might be appropriate as long as it addresses these fundamental points.
The endorsement process would also need to address the questions raised above. This would require the involvement of Eurostat as well as potentially preparers and auditors. Those involved in the endorsement process need to have a proactive influencing role, as EFRAG does, and they must also have an opportunity to input at the planning and development stages of accounting standard development. Consideration would need to be given to Eurostat’s existing data collection requirements and linkage made to the Debt and Deficit Manual revisions.
4) In some cases the issue is not the first time implementation of IPSAS – it is moving from a national approach to accruals to an (IPSAS-based) harmonised system. Contribution were invited concerning the project of amending existing accruals based systems, such as the extent of differences and the points of convergences between the national standards and the IPSAS Standards.