Update on latest public sector financial reporting activity

Governments typically contribute about 45% to a country’s GDP and therefore it is only right that they are transparent and accountable. For that reason, developing high quality, internationally accepted accounting standards for this sector is very important and in the public interest. The adoption of International Public Sector Accounting Standards (IPSAS) are set to grow over the coming years as more and more governments adopt these either directly or indirectly, as a reference point.  

Below is a summary of IPSASB’s (IPSAS Board) latest meeting, which took place in Washington.

First impressions
The meetings took place at the World Bank and whilst security was very tight (ie took a long time to get in), the building itself is very impressive. The space allocated to this meeting was large but it had to be with roughly 18 board members, 16 technical advisors and a dozen observers in attendance. The observers were mainly from OECD, IMF and World Bank.

Key discussion points
The key agenda items were on Public Sector Measurement, Leases, Revenue and Non-Exchange Expenses. The measurement project is due to be released for consultation imminently and I then expect to see the Heritage Assets project re-commence. It was put on hold to allow the thinking on public sector measurement to evolve.

Public Sector Measurement
This project was undertaken to improve consistency between the IPSASB’s Conceptual Framework and the measurement requirements/guidance in the relevant standards. For example, some standards refer to fair value yet this measurement basis is not an option in the Conceptual Framework. Furthermore, there are differences between the IFRS 13 Fair Value Measurement definition of fair value and that used in IPSAS.

This project will be the first to issue a consultation and an exposure draft at the same time, with the latter designed to give the respondent an idea of what a future standard might look like. The plan is to issue another exposure draft after the first round of consultations. Having seen the draft consultation and exposure draft, it looks as though the objectives of providing more detailed guidance on the implementation of replacement cost and cost of fulfilment, and the circumstances under which these measurement bases will be used, have been achieved. As well as providing detailed application guidance on all the proposed measurement bases, the consultation also tackles transactions costs and whether these should be expensed or capitalised.

IPSASB are in progress of updating their leasing standard following the introduction of IFRS 16 Leases. Their initial proposal was to mirror the lessee accounting as per IFRS 16 but to deviate from the lessor accounting model. IPSASB did not want to retain the risks and rewards based model and instead opted to introduce a lessor model based on control. IPSASB proposed a single right-of-use model (for both lessor and lessee) where the lessor would retain control of the underlying asset but transfer the right to use an underlying asset (separate economic phenomena per the consultation). The right-of-use asset would involve the recognition of a lease receivable for the lessor and a lease payable for the lessee.

Whilst this would ensure symmetry in accounting – conceptually appealing as well as being of particular importance in the public sector, the proposals received a mixed response with many arguing that the lessor would be double counting assets if it retained the underlying asset as well as recording a lease receivable.

This project is particularly difficult for IPSASB, both technically and politically, since no overall majority came to light regarding a preferred methodology for lessor accounting. Whilst many agreed to deviate from IFRS 16, suggestions on how to do this were less forthcoming. Back to the drawing board on this one.

This project seeks to incorporate the five step revenue recognition model as per IFRS 15 Revenue from Contracts with Customers. There are a number of public sector specific circumstances to consider, in particular the identification of a binding arrangement and performance obligation.

The current thinking is that enforceability is likely to play a key role in determining the accounting treatment. In a nutshell, a binding arrangement implies enforceability and if the performance obligation is also enforceable, then the five step model of IFRS 15 can be applied. If no such enforceability exists, then prepares would need to revert to the non-exchange revenue standard.

 In my view a few areas require some more thought, for instance:

  • Examples are required of binding arrangements that do not contain any performance obligations such as grants for the general running of a department;
  • The role of performance budgeting that result in specific spending programmes that are binding; and
  • Capital grants and how to account for those ie, transactions that are not performance obligations.

One key aspect in all of this is the timing of revenue recognition – if no performance obligations exist, then revenue is most likely to be recognised when receivable. Especially in relation to grants, government accounts preparers generally prefer to match the revenue with future expenditure by deferring the grant received and releasing it over time as and when expenditure is incurred. This is permissible under IAS 20 Government Grants and Disclosure of Government Assistance yet this matching principle is not in line with the Conceptual Framework of IPSAS.

Non-Exchange Expenses
IPSASB do not currently have a standard that deals with non-exchange expenditure (it does have non-exchange revenue) and this project was undertaken to plug the gap. Non-exchange transactions are those that do not involve the exchange of approximately equal value, typical examples include taxation, grants and levies such as speeding fines.

The non-exchange expenses project is also (as is the revenue project) examining the role that performance obligations could play in determining the relevant accounting treatment  rather than exchange/non-exchange distinction.