Developments in IPSAS and IFRS

Paul Mason

Agenda

• Introduction• Recent IPSASs IPSAS 34–38, Interests in Other Entities IPSAS 39, Employee Benefits Impairment of Revalued Assets Applicability of IPSASs

• Recent IFRSs IFRS 9, Financial Instruments IFRS 15, Revenue from Contracts with Customers IFRS 16, Leases

• Future Developments• Other Issues

North America

Where do the IPSASB members come from?

Latin America/Caribbean

Europe

Africa/Middle East Australasia/Oceania

Asia

Convergence with IFRS

IFRS(Private Sector)

• Terminology

• Guidance for public sector

• Issues of the public sector

• Examples from the public sector

IPSAS(Public Sector)

Recent IPSASs

Interests in Other Entities

• IPSAS 34, Separate Financial Statements• IPSAS 35, Consolidated Financial Statements• IPSAS 36, Investments in Associates and Joint Ventures• IPSAS 37, Joint Arrangements• IPSAS 38, Disclosure of Interests in Other Entities

• Effective date: periods beginning on or after January 1, 2017

Interests in Other Entities: Decision Tree

Does the entity have control?

IPSAS 35

Does the entity have joint control?

IPSAS 37

Consolidate unless investment entity

IPSAS 35

Does the entity have significant

influence? IPSAS 36

Classify joint arrangement

IPSAS 37

Account for using the equity method

IPSAS 36

Account for assets, liabilities, revenue, expenses IPSAS 37

Account for using IPSAS 29 or other

IPSASs

In all cases, disclose in accordance with IPSAS 38 and other relevant IPSASsEntities with controlled entities or investments in associates or joint ventures

may present separate financial statements in accordance with IPSAS 34

Yes

Yes

Yes

No

No

NoJoint Operation Joint Venture

Investment Entity: Definition

An investment entity is an entity that:(a) Obtains funds from one or more investors for the purpose

of providing those investor(s) with investment management services;

(b) Has the purpose of investing funds solely for returns from capital appreciation, investment revenue, or both; and

(c) Measures and evaluates the performance of substantially all of its investments on a fair value basis.

IPSAS 39, Employee Benefits

• Replaces IPSAS 25, Employee Benefits• Effective date: Periods beginning on or after January 1, 2018

• Converged with IAS 19 (2011), Employee Benefits

• Main Changes: Termination benefits Post-employment benefits - removal of corridor approach Post-employment benefits - net interest expense or revenue

IPSAS 39: Termination Benefits

• Recognized at the earlier of the following dates: Entity can no longer withdraw the offer Entity recognizes costs of a restructuring (IPSAS 19)

• Measured in accordance with the nature of the employee benefit (short-term or long-term) If enhancement to post-employment benefits, apply requirements for post-

employment benefits

• Exclude any amounts paid in exchange for future service

Defined Benefit Plans under IPSAS 25

Items of Financial StatementsComponents of

defined benefit cost

Surplus or DeficitService cost

Interest cost

Expected return on plan assets

Actuarial gains and losses

Corridor Approach

Within corridorNot recognized

Net assets/equity

Outside corridorRecognized in future

periodsMandatoryOption

Defined Benefit Plans under IPSAS 39

Items of Financial Statements

New components of defined benefit cost

Surplus or Deficit

Service cost

Net interest expense/revenue

Remeasurements

Net assets/equity

Components of remeasurements

Actuarial gains or losses

Return on plan assets*

Change in the effect of the asset ceiling*

* Excluding amounts included in net interest

Example Net Interest Calculation

• Assumptions Fair value of plan assets: CU1,400

o Expected rate of return: 5.5% Defined benefit obligation:

CU1,500o Discount rate: 5%

• Net defined benefit liability: CU100

• Difference = remeasurement

• Interest under IPSAS 25: Expected return (1,400 * 5.5%)

o CU77 Defined benefit interest costs

(1,500 * 5%)o CU75

Net returno CU2

• Interest under IPSAS 39: Net interest cost (100 * 5%) CU5

IPSAS 39: Defined Benefit Plans Summary

Defined benefit obligation Plan assets Net defined benefit liability

Start of the reporting period

End of the reporting period

Service cost

Net interest expense

Remeasurements

500

125

35

80

740

400

28

55

483

100

125

257

7

25

Fair value

Interest revenue

Remeasurements

Interest expense

Service cost

Remeasurements

Present value

Present value

Fair value

Actual return 83

Deficit

Deficit

IPSAS 39: Other Changes

• Changes to defined benefit cost Does not distinguish the recognition of vested and unvested past service

cost Includes curtailments as one form of past service cost Unvested past services can no longer be deferred over the future vesting

period

• Clarifies the accounting for some risk-sharing features of defined benefit plans

• Disclosures

Impairment of Revalued Assets

• Impairment Standards: IPSAS 21, Impairment of Non-Cash-Generating Assets IPSAS 26, Impairment of Cash-Generating Assets

• Revalued assets under IPSAS 17, Property, Plant and Equipment and IPSAS 31, Intangible Assets excluded from scope

• Impairment of Revalued Assets Brings revalued assets in scope Effective date: annual periods beginning on or after 1 January 2018

Indicators of Impairment

The Applicability of IPSASs

• Series of amendments to other ISPASs: example from IPSAS 1, Presentation of Financial Statements:

5. This Standard applies to all public sector entities other than Government Business Enterprises. [Deleted]

6. The Preface to International Public Sector Accounting Standards issued by the IPSASB explains that Government Business Enterprises (GBEs) apply IFRSs issued by the IASB. GBEs are defined in paragraph 7 below.[Deleted]

The Applicability of IPSASs

7. The following terms are used in this Standard with the meanings specified:…Government Business Enterprise means an entity that has all the following characteristics:a) Is an entity with the power to contract in its own name;b) Has been assigned the financial and operational authority to carry

on a business;c) Sells goods and services, in the normal course of its business, to

other entities at a profit or full cost recovery;d) Is not reliant on continuing government funding to be a going

concern (other than purchases of outputs at arm’s length); ande) Is controlled by a public sector entity.

Reasons for Change

• Definition of a GBE was being applied inconsistently• Variety of controlled entities in the public sector: Entities with characteristics similar to the profit-oriented entities for which

the International Accounting Standards Board develops and maintains International Financial Reporting Standards

Entities which provide public services to achieve outcomes which enhance or maintain the well-being of citizens and are totally dependent on government funding

Between these two types of entities, there are other types of public sector entities which were more difficult to classify as either profit-oriented or service-oriented

• Role of regulators

The Applicability of IPSASs: New Approach

• Provide high-level characteristics of public sector entities for which IPSASs are designed.

• The IPSASB acknowledged that regulators and other relevant authorities might form different views from the IPSASB on the applicability of IPSASs in each jurisdiction. Many jurisdictions develop their own criteria to decide which entities should apply IPSASs. These criteria may vary for legal, economic or fiscal reasons. Therefore, the IPSASB is of the view that a principles–based approach is appropriate, because that approach allows flexibility in each jurisdiction. [IPSAS 1, BC 27]

Scope of IPSASs

• Preface to International Public Sector Accounting Standards:

10. The IPSASs are designed to apply to public sector entities that meet all the following criteria: (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; and

(c) Do not have a primary objective to make profits.

Recent IFRSs

IFRS 9, Financial Instruments

• Key Changes Introduced by IFRS 9 Classification and Measurement Impairment: Expected Loss Model

• Effective Date: Annual periods beginning on or after 1 January 2018 Transition arrangements for those who early adopted previous versions of

IFRS 9

IFRS 9: Classification and Measurement

• New classification model for financial assets Business model Contractual cash flow characteristics

• Classification of financial liabilities IAS 39 with minor changes Gains/losses from changes in own credit risk - OCI

Overall: Conceptual approach, principles-based, and reflects asset management

Overall: Key change is to addresses the “own credit” issue

Classification and Measurement – Financial Assets

IAS 39 (IPSAS 29)Fair Value Through Profit and

Loss (FVTPL)• Held for trading• FV option electionAvailable for Sale (AFS)Held to Maturity (HTM)Loans and Receivables

IFRS 9Fair Value Through Profit and

Loss (FVTPL)• Held for trading• FVTPL designation

FVOCI (Debt)FVOCI (Equity)Amortized Cost

Debt Instruments Matrix

SPPI Test Business Model Assessment Comments

Amortized Cost Pass SPPI & hold to collect

FVOCI (Debt) Pass SPPI& hold to collect and sell

FVTPL Residual category

Hold to Collect

Hold to Collect and Sell

FVTPL or other

“Solely payment of principle and interest” i.e. plain vanilla?

Why are you holding the asset and how do you manage it?

Roadmap for Financial Assets

FVOCI (Equity – no recycling)

Held for trading?

FVOCI Option Elected?

Contractual cash flow characteristics test (SPPI test)

Ds

FVTPL

Business Model Assessment

Fail

No

YesNo

YesFail

Fail Pass

FVOCI(Debt- with recycling) Amortized Cost

Hold to collect (no FVO elected)

Hold to collect & sell(no FVO elected)

All other cases

Equity Derivatives Debt (including hybrids)

IFRS 9: Impairment – the Stepped Profile

Deterioration in credit quality from initial recognition

Loss Allowance

Economic ECL (2009 ED)

Incurred Loss

Significant deterioration

12 months expected credit losses

IFRS 9 impairmentLifetime expected losses

Source: Based on illustration provided by IASB in March 2013 snapshot: Financial Instruments: Expected Credit Losses, page 9

Incurred loss model (IAS 39)

IFRS 9: Impairment – Expected Credit Loss Model

• IFRS 9 – 2 step expected credit loss model Eliminates the incurred loss threshold for recognition of credit losses ECL at inception and update for subsequent changes in credit risk

• Applies to debt instruments recorded at amortized cost or at FVOCI

• Expanded scope to include guarantees and loan commitments

Overall, the ECL is designed to: • Ensure more timely recognition of ECLs than the existing incurred loss model• Distinguish: instruments with significantly deteriorated credit quality and those without• Better approximate the economic ECLs

Expected Credit Loss Model – General Approach

Underperforming

(Significant increase in credit risk since initial

recognition)

Performing

(Initial recognition)

Non - Performing

(Credit Impaired Assets)

Stage 1

12- month expected credit losses Lifetime expected credit losses

Stage 2 Stage 3

Effective interest on gross carrying amount

Interest Revenue

Loss Allowance

Effective interest on gross carrying amount

Effective interest on amortized cost carrying amount (gross cost less credit allowance)

Change in credit risk since initial recognitionImprovement Deterioration

Financial Instruments: IPSASB Projects

• Updates to IPSASs 28 – 30 Based on IFRS 9 Exposure Draft in 2017

• Public Sector Specific Financial Instruments Currency in Circulation (notes and

coins) Monetary Gold IMF Quota Subscription and Special

Drawing Rights (SDR)

IFRS 15, Revenue from Contracts with Customers

• Joint IASB/FASB project• IASB/FASB due process – 7 years and 1500 comment letters 2008 Discussion Paper 2010 1st Exposure Draft 2011 2nd Exposure Draft

• Issued May 2014 • Replaces IAS 18, Revenue and IAS 11, Construction Contracts• Effective Date: Annual periods beginning on or after 1 January 2018 Was initially 1 January 2017

Scope of IFRS 15

• A “residual” standard for exchange transactions• Applies when the following standards don’t apply: IFRS 16, Leases IFRS 4, Insurance Contracts Financial instruments and other contractual rights or obligations within the

scope of IFRS 9, IFRS 10, IFRS 11, IAS 27 and IAS 28

• Excludes non-monetary exchanges in the same line of business to facilitate sales to customers

Scope of IFRS 15 and other IFRSs

IAS 18 IAS 11 IFRS 15 IFRS 9

Sale of goods or services

Construction contracts

Royalties

Dividends

Interest

Prior to IFRS 15 Following IFRS 15

Scope of IFRS 15 and other IFRSs

IAS 18 IAS 11 IFRS 15 IFRS 9

Sale of goods or services

Construction contracts

Royalties

Dividends

Interest

Prior to IFRS 15 Following IFRS 15

Core Principle of IFRS 15

Recognize revenue to depict the transfer of goods or services to customersin an amount that reflects the consideration

to which the entity expects to be entitled in exchange for those goods and services

IFRS 15: 5 Step Revenue Model

(1) Identify contract with customer

(2) Identify distinct performance obligations

(3) Determine transaction price (includes variable consideration)

(4) Allocate price to performance obligations

(5) Recognize revenue when transfer control of asset to customer (at a point in time, or over time)

IFRS 15: 5 Step Revenue Model

• Step 1: Identify the Contract with the Customer Standard generally applies to a

single contract Can be applied to a portfolio When a contract is modified,

need to reassess

• Step 2: Distinct Performance Obligations Promise to transfer a distinct

good or service Two tests:

o Can the customer benefit from the good or service on its own? and

o Is it separately identifiable from other promises in the contract?

IFRS 15: 5 Step Revenue Model

• Step 3: Determine the Transaction Price Amount of consideration to

which an entity expects to be entitled in exchange for goods and services

Consideration of estimates Variable consideration included

“only to the extent that it is highly probable that a significant reversal in revenue recognition will not occur when the uncertainty is resolved”

• Step 4: Allocate Price to Performance Obligations Estimate the stand alone selling

priceo Cost pluso Market priceo Residual approach

Exceptionso Variable considerationo Discounts

IFRS 15: 5 Step Revenue Model

• Step 5: Recognize Revenue When, or as, a performance

obligation is satisfied By the transfer of control of an

asset to a customero At a point in time (typically

goods) oro Over time (typically services)

• Step 5: Transfer of Control Some indicators of when revenue

would be recognized “at a point in time”:o Entity has a right to receive

paymento Customer has: Legal title of the asset Physical possession of the

asset Significant risks and

rewards of ownership Accepted the asset

Recognizing Performance Obligations over Time

• An entity … satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met: Customer receives and consumes benefits as entity performs The customer controls the asset as it is being created or enhanced (e.g.,

work in progress) Asset created has no alternative use, and entity has an enforceable right to

receive payment

IFRS 15: Telecommunications Example

• Smart Phone Monthly Plan

Upfront cost CU0 24 month plan CU99 per montho BUT Standalone phone price

CU1,056 Under IFRS 15 recognize:o CU1,056 immediately o CU55 per month

Revenue: IPSASB Project

• Current literature on Revenue IPSAS 23 (Non-Exchange Revenue: Taxes and Transfers) IPSAS 9 (Revenue from Exchange Transactions) IPSAS 11 (Construction Contracts)

• Assessment of extent that IFRS 15 performance obligation approach can be applied to public sector revenues

• Address issues identified with application of IPSAS 23• Single CP to address need for common approach between

Non-Exchange Revenue and Expenditure (e.g. grants)

IPSAS 23: Implementation Issues

• Global standard – high level Implementation Guidance on main tax types – more detail required?

• Subsequent measurement not covered• Exchange/non-exchange classification• Transfers –’lumpy grants’: Stipulations - time requirements Capital grants

• Options: Stipulations - time as a condition? ‘Other Resources’ and ‘Other Obligations’? Disclosure

Applying a performance obligation approach to revenue and expense transactions?

IPSASB: Revenue Reporting Options

Category C

Converged IFRS 15

Sale of goods or services on commercial terms

e.g. fees from professional services provided at market rates

Category B

Stretched Performance Obligation Approach?

Satisfaction of performance obligations but does not include all the characteristics of a commercial based transaction

e.g. fees in exchange for the delivery of subsidised health services

Category A

IPSAS 23 based standard

No performance obligations

e.g. taxes, transfers, grants with no restrictions over use

Transaction ‘categories’

Current classification

Potential re-classification

Description (in summary)

Example

Non-Performance obligation

Performance Obligation

Exchange Non-Exchange

IPSASB: Non-Exchange Expenditure

• No current IPSAS• Non-exchange expenses outside Social Benefits project e.g.

Defense, Education, and Health and expenditure• Consistency / links with Social Benefits and existing IPSASs• Three potential approaches: Expanded IPSAS 19 Public sector performance obligation approach (reverse of revenue) IPSAS 23 reverse

• No obligating event for Collective Goods and Services, or Other Transfers in Kind?

• Obligating event limited to transfers/grants to other entities?

IFRS 16, Leases: Need for Change

Financial Statements

“One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.”Sir David Tweedie, addressing the Empire Club of Canada (2008)

IFRS 16: Definition of a Lease

• A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

• Effective Date: Annual reporting periods beginning on or after 1 January 2019

IFRS 16: What’s Changing?

• Lessor Accounting Substantially carry forward IAS 17 accounting requirements Some additional disclosure requirements

• Lessee Accounting Right-of-use asset Former operating leases capitalized All leases on balance sheet

o Accounting similar to current finance leaseso Exemptions for short-term leases and leases of low-value assets

Lease liability includes index-linked variable payments

IFRS 16: Right-of-use Asset

• Initial measurement of lease liability• Lease payments made at or before commencement date, less lease

incentives received• Initial direct costs incurred• Estimate of dismantling / restoration costs to be incurred

Initial Measurement (Cost)

• Cost Model• Cost• Less accumulated depreciation• Adjusted for remeasurement of the lease liability

• Fair Value (if investment property and lessee applies IAS 40 fair value model)

• Revaluation model in IAS 16 optional if applied to related class of property, plant and equipment.

Subsequent measurement

IFRS 16: Lease Liability

• At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.

IFRS 16: Lease Payments Included in Lease Liability

Fixed payments

Variable payments (index-linked)

Residual value guarantees

Optional payments (reasonably certain)

Variable payments (linked to sales / use)

Optional payments (not reasonably certain)

Discounted amounts included in lease liability

Excluded from lease liability

IFRS 16: Remeasurement of Lease Liability

• Adjustment to carrying amount of right-of-use asset Once carrying amount of right-of-use asset is zero, recognize in profit or loss

• Revised discount rate if either Change in lease term Change in the assessment of an option to purchase the underlying asset Revised discount rate is interest rate implicit in the lease for the remainder

of the lease term

• Discount revised lease payments if either: Change in amounts expected to be payable under a residual value

guarantee Change in future lease payments resulting from a change in an index or a

rate used to determine those payments

IFRS 16: Lessee’s Statement of Financial Performance

Decrease in Operating Expenses• No operating lease expense• Depreciation of all leased

assets

Increase in Financing Costs• Interest on all lease

liabilities

IFRS 16: Lease Expenses over Time

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00Ex

pens

e

Time

Operating LeaseExpense

IFRS 16 Lease TotalExpense

IFRS 16: Transitional Arrangements

• Definition of a lease Not required to reassess existing contracts (disclosure required if don’t)

• Lessees Apply retrospectively to each prior period; or Apply retrospectively with the cumulative effect of initially applying the

Standard recognised at the date of initial application

• Lessors No adjustments required except where intermediate lessor

Leases: IPSASB Project

• Lessees As IFRS 16

• Lessors Considering alternative models Consistency with Conceptual Framework Consolidation Issues

Future Developments

IASB Work Plan

• Completing large projects–finalising the new insurance contracts Standard and the revision of the Conceptual Framework, both of which are expected to be issued in 2017;

• Supporting implementation–continuing to develop support, including online support, for stakeholders’ implementation of new IFRS Standards, and maintaining existing Standards effectively through the IFRS Interpretations Committee and post-implementation reviews; and

• Focusing the research programme–reducing the number of research projects to enable stakeholders to engage in the Board’s work more fully and to ensure timely completion.

IPSASB Work Plan

Project Public sector specific

IFRS convergence

Public Sector Combinations (approve Dec 2016?)

Social Benefits

Heritage

Public Sector Measurement (starting 2017)

Infrastructure Assets (starting 2017)

Public Sector Combinations: Classification

• Amalgamation or Acquisition

• Control essential for acquisition, but not conclusive

• Economic substance Consideration Decision Making

No Yes

NoYes

Does one party to the public sector

combination gain control of operations?

Is the economic substance of the public sector

combination that of an amalgamation?

Amalgamation Acquisition

Assessing the economic substance

• Consideration Other than to compensate for

transfer of net assets No consideration paid No (former) owners

• Decision Making Under common control Imposed by third party Approval by referenda

Acquisition Amalgamation

Accounting for Amalgamations and Acquisitions

Amalgamation

Modified Pooling

Resulting Entity

Recognized by

Combining Operations

Carrying Amount

Difference / Reserves

Net Assets / Equity

Acquisition

Acquisition Method

Acquirer

Identifiable Assets and Liabilities

Fair Value

Difference

Goodwill, Loss or Gain

Social Benefits: Scope

Other IPSASs / IFRSs Social Benefits Non-Exchange Expenses

Category Contracts for Goods and Services

Contracts for Insurance Employee Benefits Social Benefits Universal Services Ad Hoc / Other

TransfersCollective Goods

and ServicesGrants and

Contributions

Examples Puchase of goodsPayment for services

Vehicle insurancePrivate medical

insurance

SalariesHealthcare

Employee pensions

State pensionsUnemployment

benefitsIncome support

Universal Healthcare

Universal Education

Disaster relief DefenseStreet lighting

Grants to other public sector entities

Grants to charities

Exchange or Non-Exchange Transaction?

Exchange Exchange Exchange Non-Exchange Non-Exchange Non-Exchange Non-Exchange Non-Exchange

Adresses needs of society as a whole?

No No No Yes Yes Yes Yes Sometimes

Mitigates effect of social risks?

No No Yes Yes Yes No No No No

Eligibility criteria related to social risks?

No No Yes Yes Yes No No No No

Provided directly to individuals/households?

No No Yes Yes No Sometimes No No

Scope of Social Benefits in GFS

Obligating Event – Potential Recognition Points

Eligibility Criteria Met to Receive Next

BenefitClaim Approved

Payment Date Arrived

Eligibility Criteria Met to Receive

Next BenefitClaim Approved

Eligibility Criteria Met to Receive

Next Benefit

Eligibility Criteria Initially Met

Key Participatory Events Occur

Some but not all eligibility criteria

may be met

Key ParticipatoryEvents

Eligibility Criteria Met to

Receive Benefit

ThresholdEligibilityCriteria

ApprovedClaim

EnforceableClaim

Earliest Recognition Point

Latest Recognition

Point

Requirements to satisfy ongoing eligibility criteria (including revalidation) affect

measurement but not recognition

Requirements to satisfy ongoing eligibility criteria (including revalidation) affect both

recognition and measurement

Obligating Event – Responses from Stakeholders

Insurance Approach

Applies to Social Security (Contributory) schemes only

Based on IASB Proposals for

Insurance Accounting

Approach

Net Present Value of Future

Cash Flows

Unsubsidized Programs:

Surplus Recognized over Coverage Period

Deficit Recognized As

Expense Immediately

Subsidized Programs:

Apply obligating event approach

Measurement

Heritage: Project Overview

• Provide requirements and guidance to replace provisional guidance in IPSAS 17

• Consultation Paper as initial step• Heritage items defined• Possible items included considered using UNESCO

conventions• Discussion in terms of Conceptual Framework (CF) asset and

liability definitions• CF impact on recognition, measurement and disclosure

Heritage: UNESCO Categories

• Cultural property• Intangible heritage• Natural heritage• Underwater heritage

Heritage: Proposed Definition

• Heritage items are items that are intended to be held indefinitely and preserved for the benefit of present and future generations because of their rarity and significance in relation, but not limited, to their archeological, architectural, agricultural, artistic, cultural, environmental, historical, natural, scientific or technological features.

Heritage: Draft Preliminary Views (1)

• The special characteristics of heritage items do not prevent them from being assets for the purposes of financial reporting

• Heritage assets should be recognized in the statement of financial position if they meet the recognition criteria

• Historical cost, market value and replacement cost (where replacement cost includes restoration cost) are appropriate measurement bases for heritage assets, dependent on circumstances

• There are no special issues related to the subsequent measurement of heritage assets

Heritage: Draft Preliminary Views (2)

• The special characteristics of heritage items do not, of themselves, give rise to liabilities

• The objectives of presenting information about heritage assets and heritage obligations are to help users to hold entities accountable for their preservation of heritage assets; make decisions for heritage preservation, including decisions on resource allocation; assess the effect of the entity’s holding of heritage items on its operational capacity, cost of services and financial capacity; and understand the extent of an entity’s heritage holdings and heritage-related obligations

Other Issues

IPSAS 24, Presentation of Budget Information

• If unused appropriations from the first year of the biennial budget are legally authorized to be spent in the second year, the original budget for the second-year period will be increased for these carry over amounts.

• The unexpended amounts from the first annual period would then be included in the original budget for the second annual period

• Where multi-period budgets are adopted, entities are encouraged to provide additional note disclosure about the relationship between budget and actual amounts during the budget period.

• Extracts from paragraph 38

IPSAS 17, Property, Plant, and Equipment

• Derecognition of PPE

• Componentization

IPSAS 17: Derecognition

• Gain or loss recognized in Surplus or Deficit Difference between net proceeds (if any) and carrying amount

• Derecognize the carrying amount of replaced parts Whether depreciated separately or not May use the cost of the replacement as an indication of what the cost of the

replaced part was at the time it was acquired or constructed

• Some or all of the revaluation surplus included in net assets/equity in respect of property, plant, and equipment may be transferred directly to accumulated surpluses or deficits when the assets are derecognized.

IPSAS 17: Componentization

• Significant components• Different asset life or

depreciation method• Aim – financial statements

include appropriate amounts for carrying amount and depreciation

• Materiality• Role of professionals, e.g.

Quantity Surveyors

Provisions, Contingent Liabilities and Contingent Assets

Present Obligation

• IPSAS 19, paragraph 24: Where it is more likely than not that a present obligation exists at the

reporting date, the entity recognizes a provision (if the recognition criteria are met)

Where it is more likely that no present obligation exists at the reporting date, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits or service potential is remote

Constructive Obligation

By an established pattern of past

practice, published policies, or a

sufficiently specific current statement,

the entity has indicated to other parties that it will

accept certain responsibilities

As a result, the entity has created a valid expectation

on the part of those other parties

that it will discharge those responsibilities

Results in an entity having no realistic

alternative to settling that obligation

Illustrative Example

At the reporting date legal proceedings have been commenced seeking property and punitive damages from a municipality for injuries from an accident. It is alleged the municipality was negligent in maintenance of the road. Legal counsel advises there is a 30% probability that the municipality will be held liable.• Should the entity recognize a provision or disclose a

contingent liability ? Explain• Does the answer change if, at the next period end, the

probability is assessed as (a) remote or (b) 60%? Explain

Measurement of Provisions

• Amount recognized is best estimate of the expenditure required to settle the present obligation at the reporting date

• Best estimate is the amount an entity would rationally pay to settle the obligation or to transfer it to a third party at reporting date

• Uncertainty is dealt with by various methods Expected value Individual most likely outcome

Accounting Policies and Prior Period Adjustments

• IPSAS 3, Accounting Policies, Changes in Accounting Estimates and Errors

• Changes in Accounting Policies Mandated by IPSAS (e.g., removal of corridor approach by IPSAS 39) To provide reliable and more relevant information (e.g., adopting the

revaluation model rather than the cost model for PPE) General rule is retrospective application; IPSASs may include specific

transition arrangements

• Prior period adjustments Retrospective restatement if material

• Changes in accounting estimate Recognized prospectively

IPSAS 12, Inventories: Definition

Inventories are assets:(a) In the form of materials or supplies to be consumed in the

production process; (b) In the form of materials or supplies to be consumed or

distributed in the rendering of services;(c) Held for sale or distribution in the ordinary course of

operations; or (d) In the process of production for sale or distribution.

Inventory or Asset?

• Spare parts and servicing equipment are usually carried as inventory and recognized in surplus or deficit as consumed.

• However, major spare parts and stand-by equipment qualify as property, plant, and equipment when an entity expects to use them during more than one period.

• Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant, and equipment, they are accounted for as property, plant, and equipment.

Questions and Discussion

• Visit the IPSASB web site http://www.ipsasb.org