IPSASB Conceptual

Framework for General

Purpose Financial Reporting
PREPARED BY: DR RASHID S. J
(Ph.D ECONOMY & FINANCE, CPA(T), IPSAS & MASTERY IN
DIRECTORSHIP
 Introduction
• Conceptual Framework (CF) sets out concepts that are to be applied in
developing:
o International Public Sector Accounting Standards (IPSASs); and
o Recommended Practice Guidelines (RPGs) applicable to the
preparation and presentation of general purpose financial reports
(GPFRs) of public sector entities.
• IPSASs are developed to apply across countries and jurisdictions.
 Introduction
• Public sector objective is service delivery not profit and generation of
a return on equity to investors.
• Thus, Public sector partially evaluated through financial position,
financial performance and cash flow.
• GPFRs assist in accountability and decision making.
 Introduction
• Public sector has over years been in dark when it comes to issues of
Internationalization of accounting standards since each country’s
governments and public sector was unique in its policies and strategies
aimed at achieving national goals
• International Public Sector Accounting Standards (IPSAS) are the
public sector standards equivalent of International Financial Reporting
Standards (IFRS).
 Why was IPSAS developed
• The need for greater transparency and accountability in Public Sector
financial reporting was heightened by the global financial crisis,
which reduced the resources that Governments had available.
Characteristics of Public sector
• Are responsible for the delivery of services to benefit the public and or
redistribute income and wealth.
• Mainly finance their activities by means of taxes and or transfer from
other level of government, social contributions, debt or fees.
• Do not have a primary objective to make profit
 IPSAS Accounting Bases
IPSAS Accounting bases are generally classified into :
 Cash accounting,
 Modified cash accounting,
 Modified accrual accounting and
 Accrual accounting (i.e. IPSAS).
 Cash-basis of accounting
• Is the Accounting method in which income is recorded when cash is
received, and expenses are recorded when cash is paid out.
• Totals of cash receipts and cash expenditures are shown in the
financial statements whether or not they relate to that period.
 Advantages
 Simple / Easy to understand by non-accountants
 Is less subject to estimates
 Easy follow up of budget implementation
 Useful for monitoring and estimating government’s cash resources
 Cash raised and spent remains the best indicator of the impact of the
public sector in the economy
 Short comings of cash-basis
 No matching of revenue and expenditure as expenses were recorded
only when paid not when due
 Assets and liabilities are not recorded.
 Cash-basis of accounting can be easily manipulated as the timing of
receipts and payments can be varied from one period to the next.
 Modified cash-basis of accounting
 Is an accounting method that combines elements of the two major
accounting method; cash method and accrual method
 The modified cash basis method uses accruals for long-term balance
items such as long term investments, property plant and equipment
 And uses cash basis for short term items such regular utility, wages
and other operational costs
 Generally modified cash basis are middle ground
 Revenues are recorded on cash-basis and expenditures are recorded
on accrual-basis.
 Modified accrual -basis of accounting
• Under this method revenues are recognized in the period they become
available and measurable, and expenditures are recognized in the
period the liability is incurred.
• In other words revenues are recorded on cash-basis and expenditures
are recorded on accrual-basis.
 Accrual-basis of accounting
• Is a system of accounting under which revenue is recognized
(recorded) when earned, and expenses are recognized when incurred.
• Totals of revenues and expenses are shown in the financial statements
whether or not cash was received or paid out in that period.
Users need information to support assessment
of:
• Services provided in an efficient & effective manner
• Availability of resources for current and future expenditures, and
restrictions and conditions attached.
• Future years burden of tax payers for meeting service delivery.
• Status of service delivery has improved or deteriorate from previous
periods.
 Factors considered in the design of CF
i. The volume and financial significance of Non-Exchange
Transactions
• In a non-exchange transaction, an entity receives value from another
party without directly giving approximately equal value in exchange.
• Impacts recognition, measurement, and presentation.
ii. The importance of approved Budget
• Approved budgets provides information that enables users to compare
actual financial results as an assessment of the extent to which a public
sector entity has met its financial objectives.
• Basis for accountability and decision making.
Cont.
iii. The Nature of public sector programs and the Longevity of the
public sector
• Programs take longer time and depend on future taxation.
• Powers of Government to commit and levy taxation is not recognized
as assets or liabilities in FS.
iv. The Nature and Purpose of Assets and Liabilities in the Public
Sector(PC)
• The primary reason for holding property, plant, and equipment and
other assets is for their service potential rather than their ability to
generate cash flows.
• A significant proportion of assets used by public sector entities is
specialized—for example, roads and military assets
Cont.
v. The Regulatory Role of Public Sector Entities
• Govt. have regulatory role in order to Safeguard public interests
vi. Relationship to Statistical reporting
• Government publishs Government finance statistics (GFS) and
General government sector for macro analysis and decision making
where as GPFRs are for accountability and decision making.
 Role and Authority of CF
Role GPFRs
Sets concepts for GPFRs under accrual Supports and enhances transparent
accounting. financial reporting.
IPSASB will apply these concepts for GPFRs meets financial information
future development of IPSASs and RPGs requirement of General users.
Authority: Not intended for specific needs of
specific user.
Not authoritative thus can not override Applicability of CF:
IPSASs
Provides guidance for those issues not  Government ministries, departments
dealt with in IPSAS. programs, boards, commissions,
agencies.
 International government
organizations.
IFRS Vs IPSAS information requirements
IFRS - GPFS IPSAS - GPFR
Statement of financial position Statement of financial position
Statement of profit and loss and Statement of financial performance
other comprehensive income
Statement of cash flow Statement of cash flow
Statement of changes in equity Statement of changes in net assets
Notes to the financial statements Statement of comparison between
budget and actual amount.
Notes to the financial statements
 Qualitative Characteristics of financial
statements
• The Conceptual Framework identifies six "qualitative characteristics"
of useful financial information.
• These characteristics indicate the types of information that are likely
to be most useful to the primary users of financial reports.
• Two of the qualitative characteristics are stated to be "fundamental".
These are:
i. Relevance
ii. Faithful representation.
 Qualitative Characteristics of financial
statements
• The remaining four qualitative characteristics are described as
"enhancing" since they further enhance the usefulness of financial
information that is already relevant and faithfully represented. The
enhancing characteristics are:
i. Comparability
ii. Verifiability
iii. Timeliness
iv. Understandability.
 Qualitative Characteristics of financial
statements
i. Relevance - financial information must be relevant to users'
decision-making needs. Irrelevant information is obviously not
useful.
a. Predictive value if can help users to predict future outcomes (e.g.
efficient use of resources etc).
b. Confirmatory value if it provides feedback which helps to confirm
or refute previous predictions.
 Qualitative Characteristics of financial
statements
ii. Faithful representation - financial information must be faithfully
represent the transactions and other events that it purports to
represent. A perfectly faithful representation would be complete,
neutral and free from error.
iii. Comparability - financial information should be compared with
previous period of the same entity and compared with the similar
period with another entity.
iv. Verifiability - different knowledgeable and independent observers
could reach general consensus.
 Qualitative Characteristics of financial
statements
v. Timeliness - financial information must be available to users in
time to be capable of influencing their decisions.
vi. Understandability - the information provided in financial reports
should be understandable by users.
 Elements of Financial Statements
• Asset is resources controlled by an entity as a result of past events and
from which future economic benefits or service potential are expected
to flow to the entity.
• Example: Hospital purchases Intensive Care Unit (ICU) equipments
► Resources controlled by an entity: The ICU equipments are under the
control of the hospital
► as a result of past events: Purchasing of the equipment
► from which future economic benefits or service potential are
expected to flow to the entity: Fees charged to patients as the
equipments are used.
 Elements of Financial Statements
• Liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits or service potential.
► Example: A public hospital purchased medical stock on credit (30 days
account)
► Present obligations of the entity: the hospital has a contractual obligation to
pay for purchases of stock.
► arising from past events: the credit purchase of medical stock
► the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits or service potential: the payment in 30
days for the purchased stock will results in outflow of cash.
 Elements of Financial Statements
• Revenue is the increases in the net financial position of the entity,
other than increases arising from ownership contributions.
• Expense is the decreases in the net financial position of the entity,
other than decreases arising from ownership distributions.
• Ownership Contribution is the inflows of resources to an entity
contributed by external parties in their capacity as owners which
establish/increase an interest in the net financial position of the entity.
• Ownership Distribution is the outflows of resources from the entity
distributed to external parties in their capacity as owners which
returns/reduces an interest in the net financial position of the entity.
 Measurement of Assets in Financial
Statements
• Historical cost
• Market value
• Replacement value
• Net selling price; and
• Value in use
 Measurement of Assets in Financial
Statements
• Historical Cost is the consideration given to acquire/develop an asset,
which is the cash or cash equivalents or the value of other
consideration given, at the time of its acquisition or development.
• Market Value is the amount for which an asset could be exchanged
between knowledgeable willing parties in an arm’s length transaction.
• Replacement Cost is the most economic cost required for the entity to
replace the service potential of an asset (including the amount that the
entity will receive from its disposal at the end of its useful life) at the
reporting date.
Cont.
• Net Selling Price is the amount that an entity can obtain from sale of
the asset, after deducting the costs of sale.
• Value in use is the present value to the entity of the asset’s remaining
service potential or ability to generate economic benefits if it
continues to be used, and of the net amount that the entity will receive
from its disposal at the end of its useful life”
 Measurement of Liabilities in Financial
Statements
• Historical Cost is the consideration to assume an obligation, which is
the cash or cash equivalents or the value of the other consideration
received at the time the liability is incurred.
• Cost of Fulfilment is the cost that the entity will incur in fulfilling the
obligations represented by the liability, assuming that it does so in the
least costly manner.
• Market Value is the amount for which a liability could be settled
between knowledgeable willing parties in an arm’s length transaction”
Cont.
• Assumption Price is the amount which the entity would rationally be
willing to accept in exchange for assuming an existing liability.
• Cost of release is the amount that either the creditor will accept in
settlement of its claim, or a third party would charge to accept the
transfer of the liability from the obligator.
 Accrual-basis IPSAS Standards
• The accrual-basis IPSASs are based on the International Financial Reporting
Standards (IFRSs), issued by the International Accounting Standards Board
(IASB) where the requirements of those Standards are applicable to the public
sector.
• Currently there 43 IPSASs Accrual out of which only 5 standards has no
relevant IFRSs. They include
 IPSAS 1 Presentation of Financial Statements
 IPSAS 2 Cash Flow Statements
 IPSAS 3 Accounting Policies, Changes in Accounting Estimates and
Errors
 IPSAS 4 The Effects of Changes in Foreign Exchange Rates
Cont.
 IPSAS 5 Borrowing Costs
 IPSAS 9 Revenue from Exchange Transactions
 IPSAS 10 Financial Reporting in Hyperinflationary Economies
 IPSAS 11 Construction Contracts
 IPSAS 12 Inventories
 IPSAS 14 Events After the Reporting Date
 IPSAS 16 Investment Property
 IPSAS 17 Property, Plant, and Equipment
 IPSAS 18 Segment Reporting
 IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets
 IPSAS 20 Related Party Disclosures
 IPSAS 21 Impairment of Non-Cash-Generating Assets
 IPSAS 22 Disclosure of Financial Information about the General Government Sector
 IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers)
 IPSAS 24 Presentation of Budget Information in Financial Statements
 IPSAS 26 Impairment of Cash-Generating Assets
 IPSAS 27 Agriculture
 IPSAS 28 Financial Instruments: Presentation
Cont.
 IPSAS 30 Financial Instruments: Disclosures
 IPSAS 31 Intangible Assets
 IPSAS 32 Service Concession Agreements
 IPSAS 33 First Time Adoption of Accrual Basis IPSAS
 IPSAS 34 Separate Financial Statements
 IPSAS 35 Consolidated Financial Statements
 IPSAS 36 Investments in Associates and Joint Ventures
 IPSAS 37 Joint Arrangement
 IPSAS 38 Disclosure of Interest in Other Entities
 IPSAS 39 Employees Benefit
 IPSAS 40 Business Combination
 IPSAS 41 Financial Instruments: Recognition and Measurement
 IPSAS 42: Social Benefits
 IPSAS 43 Leases
 NBAA FEB 2017 QN ONE
You as a Director of Finance of one of the regulatory authority operating under the
Ministry of Housing in Tanzania, whereby the main sources of revenue for your entity is
regulatory fees charged to building contractors in the country. You have been applying
International Financial Reporting Standards over years, however, from the operations
you believe that the Authority falls under the Government Business Enterprise (GBE).
In early June 2016 you attended a meeting of all reporting entities under the government.
You heard the Accountant General emphasizing that all reporting entities under the
government with exceptional of commercial entities will be required to apply IPSASs
accrual with effect from the accounting period ending on 30th June 2016.
REQUIRED
Prepare a presentation to be submitted to the Audit Committee informing them the need
to migrate to IPSASs accrual, your presentation should include:
(i) Why do you think your Authority should migrate to IPSASs accrual?
(ii) The difference between IFRSs and IPSASs accrual (10 Marks)
 SUGGESTED ANSWER
To: The Audit Committee
From: Director of Finance
Subject: Migrating to IPSAS accrual
•From the meeting I attended of all reporting entities under the government, the Accountant General emphasized
that all reporting entities under the government with exceptional of commercial entities will be required to apply
IPSASs accrual with effect from the accounting period ending on 30th June 2016.
•For entities to apply IPSAS accrual should have all of the following characteristics as prescribed by NBAA technical
pronouncement no. 1 of 2015, including:
a) Are responsible for the delivery of services to benefit the public and/or to redistribute income and wealth;
b) Mainly finance their activities, directly or indirectly, by means of taxes and/or transfers from other levels of
government, social contributions, debt or fees
c) Do not have capital providers that are seeking a return on their investment or a return of their investment; and
Cont.
•(a)(ii) Difference between IFRSs and IPSASs accrual
▪ Service potential as part of the definitions and recognition criteria
•Many of the assets and liabilities of entities within the public sector are acquired or incurred as a result of the entity’s
service delivery mandate, for example, heritage assets and parks maintained for public access. IPSAS introduces the
concept of service potential into the definition of assets, liabilities, revenue and expenses. Service potential is also a
supplementary recognition criterion to account for items that do not result in the inflow or outflow of economic benefits,
where an item either contributes to or detract from the entity’s ability to deliver its services.
▪ Exchange vs non-exchange transactions
Non-exchange transactions are those transactions where an entity either receives value from another entity without
directly giving approximately equal value in exchange, or gives value to another entity without directly receiving
approximately equal value in exchange. Within the public sector non-exchange transactions are prevalent. IPSAS
provides principles to guide the measurement and recognition of non-exchange transactions, whereas IFRS is generally
silent on the matter.
▪ Recognition of revenue from government grants
•IPSAS focuses on whether there is entitlement to the revenue from government grants (even though there may be
restrictions on how the funds are spent), or an obligation to meet certain conditions, which is recorded as liability. The
distinction between restrictions and conditions is crucial in determining whether or not to recognize revenue from a non-
exchange transaction. As a result, government grants are generally fully released to income earlier under IPSAS than
under IFRS.
Cont.
▪ Income tax
•IPSAS presumes that entities that operate within the public sector are generally exempt from income taxes
and therefore does not cater for the accounting of income taxes. In the unlikely event that an entity reports
using IPSAS but is liable for tax, reference should be made to IFRS (IAS 12Income Taxes) for guidance.
▪ Reporting of budgets vs actual
•With the increased focus on stewardship, service delivery and budget management in the public sector,
IPSAS requires a comparison of the actual financial performance of an entity with the approved budget of
that entity, where the budget is publicly available. There is no equivalent requirement in IFRS.
▪ Impairment of non-cash-generating assets
•In light of the assets recognized based purely on their service potential (as opposed to economic benefits),
IPSAS also caters specifically for impairment considerations for noncash-generating assets. IFRS assumes
that all assets will be cash-generating; whereas
•IPSAS assumes that the majority of a public sector entity’s assets are likely to be non-cash generating.
IPSAS 21Impairment of Non-cash-generating Assets provides specific guidance on how to determine the
value-in-use of such assets.
▪ Elimination of private sector specific concepts
IFRS provides principles for certain economic phenomena that are irrelevant to the operations of a public
sector entity, such as accounting for share-based payments and earnings per share disclosures. IPSAS
excludes such guidance and refers reporting entities back to IFRS if and when applicable.
 NBAA JULY 2016 QUESTION 4
The Mayor of Tangamano Municipal Council (TMC) who attended one
of the NBAA seminars has argued against preparation of IPSAS
financial statements for its municipal council in favour of IFRS
financial statements. He has maintained that IFRS has a lot more
standards in issue (41 international accounting standards including those
which have been withdrawn, 16 IFRSs plus SICs and IFRICS) whereas
IPSASs has only 38 standards in issue by 31st December 2015.
REQUIRED:
Write a briefing note to the Mayor explaining why his municipal should
prepare IPSAS based financial statements.