Introduction

2

Overview of session

1. The modernisation project

4. Some IPSAS key concepts

5. Questions

3. IPSAS and the E.C. accounting rules

2. Accrual V. Cash accounting

Introduction

1. The modernisation project

4

Issues addressed

Integration of financial and accounting IT platforms

Enhancements to data security and consistency

Accrual accounting in compliance with IPSAS

Accounting User requirements IT platforms

Decentralised Implementation

Centralised Information

5

Phase 3

IntegrateChange

Phase 1

FeasibilityStudy

Phase 2

2.1ProjectSet-Up

2.2Component Evaluation& Issues

Resolution

2.3InitialCon-

version

Converting to IPSAS- The big picture

1/1/2005

Phase 4

• Publication of annual

accounts• Stabilization

Introduction

2. Accrual V. Cashaccounting

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Cash-basis V. Accrual-basis

• A basis of accounting that recognises

transactions and other events when

cash is received or paid.

• Measures financial results for a period

as the difference between cash

received and cash paid.

• A basis of accounting under which

transactions and other events are recognized

when they occur (and not only when cash or

its equivalent is received or paid).

• Therefore, the transactions and events are

recorded in the accounting records and

recognised in the financial statements of the

periods to which they relate.

• The elements recognised under accrual

accounting are assets, liabilities, net

assets, revenue and expenses.

Cash-basis Accrual-basis

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Cash + Accrual

Budgetary =Cash-basis

IPSAS = Accrual-basis

E.C. Decision

9

The benefits of cash accounting

• Simple / Easy to understand by non-accountants

• Is less subject to estimates

• Cash accounting is adapted to the principle of annual parliamentary authority - Useful for assessing compliance with cash budgets / Easy follow up of budget implementation

• Useful for monitoring and estimating a government’s cahs resources

• Information on cash raised and spent remains the best indicator of the impact of the public sector on the economy

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Why adopt accrual accounting in addition?

• Both cash and accrual accounting address the question of the « affordability » of a public entity’s programmes and operations:

– Budgets and cash accounting-based financial statements lay out

a public entity’s spending and how it is financed

– Accrual accounting-based financial statements provide additional

information in describing a public entity’s financial position and

actual results

• Accrual accounting distinguishes expenditure which provides economic benefits in the short-term (i.e. for current consumption) from that which will benefit the E.C. (and the E.C. citizens) well into the future (i.e. capital expenditure).

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Why adopt accrual accounting in addition?

Enhanced information to the

“external world”

Enhanced

management information

Parliament General public

Incr

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d a

ccou

ntability

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New « Public Management Approaches »

• European impetus towards reforming governmental accounting and budgeting:

- Democratic pressure for increased transparency and

accountability in government

- Consumer pressure for improved delivery of public services

- Cost pressure to provide more and better infrastructure and

services, more efficiently

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More complete information

• Presentation of a proper combined picture of financial position and performance:

Assets

Net assets

Liabilities

• Complete information on the utilisation of resources (assets)

• Complete information on total borrowing and indebtedness

Revenues

<Expenses>

Net surplus/(deficit)

• Information about the total cost of policies and activities

• Comparison of revenue from « tax-payers » and the cost of policies and activities

14

Worked example: Australia

What does this tell?

Australia: 2002-2003 Budget at a glance

Underlying Budget cash surplus of $2.1 billion, or 0.3 per cent of GDP. Using accrual accounting concepts, however, the fiscal balance is forecast to be $0.2 billion.

15

Worked example: Australia (cont’d)

Revenue Revenue

<Expenses> <Expenses>

Assets

Liabilities

2.1. 0.2

By reporting the full picture, accrualaccounting shows that tax to be leviedin 2002/03 is enough to financethe current policies and activities – but that in addition the Australiangovernment is either disinvesting inassets or increasing liabilities – future taxation or other revenues are already committed to paying off debt ormaintaining assets

16

Worked example: Belgium

A l’occasion de cette rentrée parlementaire, le Gouvernement fédéral fait plus fort encore, avec l’opération Belgacom. En reprenant ses obligations en matière de pension, à concurrence de € 5 milliards […], et en faisant passer cela comme une recette, […] il oublie […] de dire qu’à cet actif correspond une dette transférée de Belgacom à l’Etat et contractée à l’égard de chaque pensionné de l’entreprise; tôt ou tard, l’Etat devra honorer cet engagement. Dès lors, […] en dérogation de toutes règles de comptabilité, il enregistre également cette recette comme un produit qui flatte ses comptes de résultat des années 2003 et 2004 (de respectivement € 3,6 et 1,4 milliards), […].

Sans cette opération effrontée, le budget de Verhofstadt II serait en déficit de 0,9 % du PIB en 2003 et de 0,4 % en 2004. Quant au surplus primaire hors Belgacom, il s’effrite jusqu’à 4,4 % cette année et 4,9 % en 2004, selon nos estimations. […] Et en 2005 ? […] Il n’y aura plus de nouvelle opération Belgacom. Par contre, l’Etat fédéral assumera déjà la charge des pensions de l’entreprise publique […]

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Worked example: Belgium (cont’d)

Accrual accounting would have provided information on the Belgian State’s overall financial position and current stock of liabilities.

Future revenues or additional borrowing will be needed in the longer term to satisfy the non-recognised liability.

Generally said, under cash-based accounting, spending controls can be circumvented by deferring payments or hiding liabilities.

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The benefits to the E.C. of the modernisation project

Enhanced

management information

New informationEnhanced consistency

(ABAC for budgetary

accounting, general

accounting and management

information)

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Enhanced management information

New management functionalities - examples:

Master file of allnew contractors and

contracts per legal entity

Follow-up of clearing ofpre-financings

throughintermediary/final

payments

Inventory ofguarantees received

Immediate, straight-forwardassessment of the exposureor liability to any third party(commitments, payments,collections, …) Inventory of

assets

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Enhanced management information:Asset and liability managementExamples:

Accrual accounting focuses decisions-makers on:

– The broad range of options available in managing assets: under

a cash-based system, there is a tendency to focus on whether or

not to spend on new assets – while under an accrual-based

system, the focus also extends to whether to retain or upgrade

existing assets

– Financial assets and ensuring that they are measured realiably

(the E.C. cannot make appropriate financing decisions without

objectively assessing the recoverability of assets)

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Enhanced management information: Expenses

Accrual accounting will provide the E.C. with information on the full costs of their activities so that they can:

– consider the cost consequences of particular policy objectives

and the cost of alternative mechanisms for meeting these

objectives;

– better allocate responsibility for managing particular costs; and

– develop performance indicators.

22

Enhanced management information –Example: Loans• Unlike commercial loans, some E.C. loans may provide the

borrower for concessions – e.g. below-market interest rates

• If the E.C. lend from borrowed funds at rates lower than it pays to borrow money, they do so at a cost

• If accounted for on a cash basis, there is little impact in the year the loan is made

• But over time, the costs accumulate

• Future revenues are in fact being committed to meet the growing difference between the interest rate the E.C. pay for money and the rate they earn on funds they have lent

23

Enhanced management information –Example: Loans (cont’d)• Currently:

– In budgetary accounting, the loan

is not even recorded as an asset

– In the 2002 financial report, all

loans are reported at face value –

i.e. no information is given on the

future cost of the concession

granted to the borrower

• Under the new accrual-based E.C.

rules:

– Interest-free loans or loans at a rate

below market rates for similar products

to similar debtors will be recorded at an

amount equal to the present value of all

future cash receipts discounted using

the prevailing market rates

– any additional amount lent = the cost of

the concession to the borrower = a

reduction of income or an expense The same will apply to interest-free

pre-financings: this will measure

the cost of pre-financing

contractors / beneficiaries

Introduction

3. IPSAS and the E.C. accounting rules

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Why IPSAS?

1. World-wide impetus to enhance corporate financial reporting and its comparability – not only in the public sector:

– In the EU, listed companies are required to publish their

consolidated financial statements under IAS/IFRS for each

financial year starting on or after 1 January 2005 (IAS/IFRS

regulation of 7 June 2002). This applies to c. 7,000 listed

companies

26

Why IPSAS?

2. The only international comprehensive set of accounting standards for the public sector 1:

• Elaborated from International Accounting Standards

• Easier understanding

- Easier future convergence of national standards of Member States

• Adopted by the OECD; being adopted by the NATO

1Public sector refers to: international organisations; national governments; regional governments (state, provincial, territorial); local governments (city, town); and related governmental entities (agencies, boards, commissions and enterprises)

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The E.C. accounting rules

Basis of preparation Financial statements Net surplus or deficitfor the period,

fundamental errors andchanges in accounting policies

Property, plant andequipment

Group accounting

Intangible assets

Leases

Foreign currencytransactions

Inventories

Pre-financing

Revenues andreceivables

Payables andexpenses

Provisions,Contingent Assets andContingent Liabilities

Related parties andKey management disclosures

Cash andcash equivalents

Financial assets andfinancial liabilities

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Tools and resources

AccountingStandards

AccountingManual

Consoli-dation

Manual

Procedural guidelines by operation

http://www.cc.cec/budg/

29

Overview of training

Module 1 IntroductionFinancial statementsRevenues and receivablesExpenses and payablesPre-financingProvisions, Contingent Liabilities and Contingent Assets

Module 2 Property, Plant and EquipmentIntangible Assets LeasesInventories

Introduction

4. Some IPSAS key concepts

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Substance over form

• Accounting policies should reflect the economic substance of events and transactions and not merely their legal form – the definition of accounting policies requires the exercise of judgment

• Examples:

– From a risk and rewards perspective leasing an asset may in

substance be equivalent to owning it

– Control (and the obligation of consolidating another entity) refers

to an entity’s power to govern the financial and operating policies

of another entity and does not necessarily require an entity to

hold a majority shareholding or other equity interest in the other

entity

32

Carrying value

• Carrying value = the amount for which an asset or a liability are recognised in the financial statements

• Implies an initial measurement (e.g. the cost of acquisition of an asset) then subsequent measurements (e.g. the recognition of the value consumption of an asset through depreciation)

33

Depreciation

• Depreciation = the systematic allocation of the depreciable amount of an asset over its useful life

– Depreciable amount = The cost of an asset, or other amount

substituted for cost in the financial statements (e.g. fair value),

less its residual value

– Useful life = Either: (a) the period of time over which an asset is

expected to be used by the entity; or (b) the number of production

or similar units expected to be obtained from the asset by the

entity.

34

Fair value

Fair value = the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction

– Several standards require that assets or liabilities be measured at

their fair value (rather than at historical cost or cost of

acquisition): e.g. items of property, plant and equipment gifted;

financial assets held for trading; …

Introduction

5. Questions