How Will IPSAS Affect Your Organization
The credit crisis has raised several public sector accounting issues. Governments have extended credit to banks, guaranteed the liabilities of banks, purchased impaired debt instruments and in some instances have assumed control of banks. The unique nature of the credit crisis and the unprecedented response by governments around the world has reinforced the importance of high-quality standards for financial reporting by governments. The credit crisis has increased the need for accountability in the public sector and for transparency in its financial dealings.
IPSAS are based on the International Financial Reporting Standards (IFRS), formerly known as IAS. IPSAS are issued by the International Accounting Standards Board (IASB). IPSASB adapts IPSAS to a public sector context when appropriate. In undertaking that process, the IPSASB attempts, wherever possible, to maintain the accounting treatment and original text of the IPSAS unless there is a significant public sector issue which warrants a departure.
IPSAS has two bases of reporting in which governments are following, cash basis which is seen as a transitional measure to accruals basis. Many governments are using the cash basis IPSAS with future plans to adopt and report using an accruals basis.
- Transition to an accruals basis from cash basis IPSAS requires a great deal of thought and planning and will affect policies, chart of accounts and many of the internal process of the organization
- World Bank, Swedish International Development Agency, OECD and many other organizations are supporting the use of IPSAS as a reporting standard and are requesting that countries adopt the standards.
- Though no comparatives are required for the first year adoptors, a reconciliation to the former reporting is required.
The transition from existing accounting standards to a set of new standards is more than just a technical accounting exercise with quantitative/financial impacts. The transition will affect systems and data, financial reporting processes and outputs, financial compliance controls and certification activities, business metrics and performance management systems, extent and depth of financial disclosures, staff education and training programs, as well as financial measurements.
Some highlights of changes resulting from adoption of an accruals basis of IPSAS will have in the following areas:
1. Potential Financial impacts – Revenue, Leases, Financial Instruments and more
- Revenue – The IPSAS standard for revenue follows two standards, IPSAS 9 for revenue from Exchange Transactions and IPSAS 23 for Non-exhchange transactions. Considerable judgement is needed, leading to a variety of potential revenue outcomes. Thoughtful design will be needed to evaluate contract deliverables and issues such as the transfer of ownership and control triggering revenue recognition. IT System changes could be significant.
- Leases – At present IPSAS uses a principles-based framework to classify lease types. Heavy emphasis is put on substance of the transaction over form. In many cases operating leases could become finance leases under IPSAS. Impacts could be felt in the recording of lease expenditures versus carrying assets on the the balance sheet.
- Provisions – IPSAS may trigger provision obligations due to the “more likely than not” principle. Contracts and disputes will need to be evaluated carefully. As with leases, provision impacts could be in the areas, proceedures for evaluating and recording Provisions.
- Inventories – LIFO measurement is not allowed under IPSAS. IPSAS does allow FIFO and Weighted average costiin and also requires and evaluation of the lower of cost or net realizable value (NRV). Inventory tracking systems may need to be updated.
- Property Plant and Equipment(PPE) – A transition from cash basis to accruals basis IPSAS will require that all PPE be accounted for, with specific rules on valuation of the assets, and moreoverr will require that, using the principle of substance over form, will require that some assets over which the organization has all the rights of ownership will be required to reported even if they are not owned by the organiztaion.
- And more – Many other areas are affected including impairment, fixed assets, joint ventures, employee benefits, financial statement presentation requirements, and more.
2. Systems and Data – Transaction Details and Reporting Structures May Change
The lead times required to change Enterprise Resource Planning (ERP) systems can range from months to years. The potential adoption of IPSAS is likely to impact not only reporting structures but how individual transactions are captured and processed. Typical areas of IT impact include as fixed asset sub-ledgers, contract management and lease tracking systems, treasury and portfolio management systems, inventory subledgers, tracking of engineering and developments costs, and corporate and segment reporting. In addition the organization will need to provide the audit authority with explanations for balances in the first year of adoption, the reconciliations need to be carried out to ensure accurate and thoughtful application of the standards.
3. Financial Compliance – Impact on Internal Controls over Financial Reporting and more
Whenever there is a change of accounting policies, and a ripple through to supporting processes and systems, there is a need to evaluate the impact on financial compliance and control activities. IPSAS will bring significant changes in some sub-system areas, new financial reporting formats, new chart of account considerations, new accounting concepts that will need to be implemented in the field, and so on.
4. Business Metrics – Need to Review Impacts on Compensation and Contractual Obligations
Changes in accounting policies and resulting financial metrics may have a significant impact on various contractual obligations – both internally and externally. Business and financial metrics may change under IPSAS and management and staff compensation plans should be examined for any adverse effects. External obligations, such as banking debt covenants, may also be impacted by IPSAS and will need to be managed proactively.
5. Disclosures – A New Level of Discussion
The principles-based nature of IPSAS often times triggers the need for enhanced explanations to provide readers’ with sufficient information to effectively understand your organization’s financial statements. This is particularly acute in the transition from a cash basis of reporting to a full accruals basis IPSAS as the notes will need to be increased to discuss adjustments between the two different accounting bases. The legal implications of greater notes disclosure will also be an important consideration in the move to IPSAS.