Chapter III: International Public Sector Accounting Standards [IPSAS]

Content:
3.1 Introduction
3.2 Concepts and principles applicable to Public sector Accounting
3.3 Impairment of Non-cash generating assets (IPSAS 21)
3.4 Disclosure of financial information about the general government sector (IPSAS 22)
3.5 Revenue from non-exchange transactions (taxes and transfers, IPSAS 23)
3.6 Presentation of budget information in financial statements (IPSAS 24)
3.7 Cash flow statements (cash basis IPSAS)
Summary

Objectives of the study:

After studying this chapter, you will be able to:
• Understand the objective of public sector accounting
• Identifying the various users of Public sector accounting information
• Have good grasp of constitutional and regulatory framework as well as the concepts,
principles and bases of public sector accounting

3.1 Introduction
The simplest definition of public sector is all organizations which are not privately owned and
operated, but established, run and financed by the government on behalf of the public. The
definition conveys the idea that public sector consists of organizations where control lies in the
hands of public, as opposed to private owners. The objective of public sector is to provide
services to the public. Profit making is not primary motive to this sector.

Government accounting deals with the allocation of resources in accordance with the budget
constraint of a public sector organization, especially government. It is a composite activities of
analysing, summarizing, recording and interpreting the financial transactions of the Government
Ministries, Departments and Spending Agencies.

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International public sector accounting standards was developed by a responsible body called
International Public Sector Accounting standards Board (IPSASB) The objective of the IPSASB
is to serve the public interest by developing high-quality accounting standards for the public
sector and by facilitating the convergence of international and national standards, thereby
enhancing the quality and standardization of financial reporting around the world. Public interest
in the pronouncement of IPSASs may arise, for example, from a national or supranational need
to harmonize financial reporting of public sector entities. It is also in the public interest to
continue developing public sector accounting by means of the IPSASB standardization projects.
The IPSASB achieves these goals by:
 Publishing International Public Sector Accounting Standards (IPSASs)
 Promoting their acceptance and compliance on an international scale with these standards
 Publishing other documents that contain guidance on issues and experience with financial
reporting in the public sector

The main purposes of public sector accounting are:

• Ascertaining the legitimacy of transactions and their compliance with established
norms, regulations and statutes. Public sector disbursement should accord with the
provisions, appropriate acts and financial regulations. There should be due authorizations
for all payments so as to avoid an act of fund misappropriation.
• Providing evidence of stewardship: The act rendering stewardship is being able to
account transparently and diligently for the resources entrusted. Government and public
sector operators are obliged to display due diligence and sense of probity in the collection
and disposal of public funds.
• Assisting planning and control: The future faces a lot risks and uncertainties.
Therefore, mapping out plans prevents an organization from drifting since plans of
actions provide the focus of activities which are being pursued. The unforeseen
circumstance is built into plans so as to avoid or prevent organization failure. The public
sector establishments should act accordance with the mandate of the government.
• Ensuring objective and timely reporting: Users of public sector accounting information
are anxious to bridge their knowledge gaps on what government is doing. They definitely
treasure prompt and accurate statistics to evaluate government performance.

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 • Evaluating costs incurred and benefits derived: In Public sector, it is difficult to
measure the costs and benefits in financial terms in all aspects. The analysis of cost-
benefit assesses the economic and social advantages (benefits) and disadvantages (costs)
of alternative courses of actions, to ensure that comfort of the citizens is well catered for.

Other objectives are:

• Providing basis for decision making
• highlighting various sources of revenues receivable and expenditure to be incurred
identifying the source of funds for capital projects
• evaluating the economy, efficiency and effectiveness with which the public sector
institutions pursue their goals and objectives
• Ensuring that costs are matched by at least equivalent benefits accruing there from.
• Providing details of outstanding long term commitments and financial obligations.
• Providing means by which actual performance may be compared with the target set.
• Eliminating corruption
• Modernisation of the financial management system of the public sector entities;

The users of public sector accounting information can be categorized into two namely; internal
and external users. Internal users consists of the people such as the president of the country,
Ministers, secretary to the treasury, accountant general, auditor general, chief executive officers,
and heads of government departments. External users comprises of : the National Assembly,
members of the public, foreign countries, international financial institutions such as international
Monetary Fund(IMF) , Africa Development Bank (ADB), World Bank; creditors both locally
and internationally, political parties, Trade Unions and Researchers, International rating
agencies.

Compliance with the IPSAS guarantees that the financial reporting of public bodies conveys
what is termed a “true and fair view” of the financial status of an organization. The use of IPSAS
also ensures that financial statements are comparable for organizations that adopt them. Because,
IPSAS – following Accrual basis of accounting - are modeled around the International Financial
Reporting Standards (IFRS.) IPSAS take account of the characteristic features of the public

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sector. They are high quality global financial reporting standards for the application by public
sector entities other than Government Business Enterprises.

The application of the IPSAS gives the financial reporting by bodies incorporated under public
law greater significance through comparability with internationally recognized regulations for
submitting financial statements. The greater transparency raises the quality of financial
management, facilitates dealings with financiers and simplifies communication with the general
public. IPSAS increases demand for public accountability and transparency by all stakeholders in
the Public Sector. The preparation of transparent and understandable financial statements is an
important way for Government bodies to demonstrate their accountability to their taxpaying
stakeholders and development partners. This communication is an important part of building
trust.

Many countries adopt IPSAS for public sector accounting for it has many benefits compared to
the previous accounting treatment in public sector. The Benefits of IPSAS adoption are:

1. Quality and comparability

The adoption of IPSASs by governments improves both the quality and comparability of
financial information reported by public sector entities around the world. It improve the
comparability of reports between various government agencies, parastatals, donor funded
projects etc. Reports prepared in accordance with IPSASs provide for comparability
between different financial periods, even within the same institutions, hence facilitating
management decisions.

2. Transparency

Disclosure information requirements of various reports facilitate transparency in the

financial dealings of public institutions. These disclosures will enable users of financial
information interpret the reports in the right context and better decision making
processes.

3. Consistency

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 IPSASs improve consistency in preparation and reporting of financial information. This
will in turn enable users to draw consistent conclusions given similar sets of financial
statements.

4. Accountability

Adoption of IPSASs improves accountability and eases the audits of public institutions.
This will translate into timely audit reports, better information to donors and countries
providing external assistance, better quality and credibility of financial reports.

5. Governance

IPSASs result in stronger governance procedures and a framework for the accounting
practice in the public sector. This will strengthen the financial management of public
institutions.

On the other hand, IPSAS faces some challenges in the process of implementing. There are a
number of challenges envisioned in the adoption of IPSAS which may include:

 The IPSASs concept needs to be embraced by stakeholders such as Parliament,

National Audit Office, Treasury, Government Departments, Development
Partners as well as Non – Governmental Organizations (NGOs).

 It is essential to have a legislative backing for the adoption of IPSASs among the
public sector entities.

 There are varying levels of national regulations relating to auditors and preparers
of financial statements, as well as a history of developing ethics codes to meet
local requirements.

 There are cost to be incurred in the implementations of IPSASs. Statutory bodies

responsible for enforcing accounting regulations require funding to roll out
implementation of IPSAS. These costs include research, training, capacity
building, technology and consultancy costs.

 There is call for political goodwill in the implementation of better accountability

in the Public Sector due to divergent views on accountability.

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3.2Concepts and principles applicable to Public sector Accounting
The IPSASB develops IPSASs for financial statements prepared on the accrual basis of
accounting as well as for financial statements prepared on the cash basis of accounting. IPSASs
govern the recognition, measurement, presentation and disclosure requirements in relation to
transactions and events in general purpose financial statements. Such financial statements are
characterized by the fact that they are issued for users who are unable to demand financial
information to meet their specific information needs.

Concepts have been defined as broad basic assumptions which underlie the preparation of
financial statement of an enterprise. Public sector accounting is an integral but separate branch of
financial accounting sharing in common many concepts and principles applicable in the private
sector. These concepts include: Consistency, Materiality, Periodicity, Duality, Historical cost,
prudency, Going concern and others.

There are three bases on which financial statements of Public Sector Institutions are compiled.
These are: (A) The Cash Basis, (B) The Accrual Basis, and (C) The Commitment Basis of
accounting.

1. The Cash Basis: This is a basis of accounting under which revenue is recorded only
when cash is received, and expenditure recognized only when cash is paid, irrespective
of the fact that the transaction might have occurred in the previous accounting period

Advantages of Cash Basis:

• It is simple to understand

• Its eliminates the existence of debtors and creditors

• It permits easy identification of those who authorize payments and collect revenue

• It allows for comparison between the amount provided in the budget and that actually
spent.

• It saves time and easy to operate

• It permits the delegation of work in certain circumstances

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 • The cost of fixed assets is written off in the year of purchase resulting into fewer
accounting entries

Disadvantages of Cash Basis

• It takes unrealistic view of financial transactions as only the settlement of liabilities
recognized.

• It does not provide for depreciation since assets are written off in the year of purchase

• It does not convey an accurate picture of financial affairs at the end of year.

• It cannot be used for economic decisions since it tends to hide basic information e.g.
missing information relating to fixed assets, debtors and creditors

• Its does accord with ‘matching concept’

2. Accrual Basis: - Under this method, revenue is recognized when earned and expenditure
acknowledged as liabilities when known or benefits received, notwithstanding the fact
that the receipts or payments of cash has taken place wholly or partially in other
accounting periods.It based on the principle of matching income and expenditure to the
time a transaction occurs rather than when payments are made or received. This means
that an expense is recorded at the point goods or services are received by an organisation
rather than thirty days later when the invoice for goods is paid. Similarly, income is
recorded at the point the sale is made. The accrual basis is practiced in private sector and
all parastatals. The reason private sector uses this method is because private concern are
for profit oriented. Therefore, it is necessary to estimate the profit made in each period
with the view to keeping investment assets intact and making periodic distributions to
shareholders by way of dividends.

Advantages of Accrual Basis:

• It takes a realistic view of financial transactions

• It gives an accurate picture of the state of financial affairs at the end of the accounting
period

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 • It aligns itself with matching concept

• It can be used for both economic and investment decision-making as all parameters for
performance appraisal are available.

• It gives allowance for depreciation of assets used in generation revenue for the enterprise

Disadvantages of Accrual Basis

• It is difficult to understand, especially by non accountants.

• It does not permit easy delegation of work in certain circumstances

3. Commitment Basis -- It is a basis that records anticipated expenditure evidenced by contract

or purchase order. In public sector financing, budgetary and accounting systems are closely
related to commitment basis

Advantages of Commitment Basis

• It is an aid to financial control since it is regarded as a charge made on budget provision.

• It can give a separate payment tabulation when it is required/requested

• It takes a realistic view of financial transactions

• It reveals an accurate picture of state of financial affairs at the end of accounting period.

• It aligns itself with matching concept

• It can be used for both economic and investment decision-making as all parameters for
performance appraisal are available.

• It gives allowance for depreciation of assets used in generation revenue for the enterprise

Disadvantages of Commitment Basis

• The system involves extra work. Actual figures have to be substituted for commitment
provisions to finally determine the running balances under sub-head of expenditure

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 • Over expenditure is more under commitment basis in the expectation that the
government may finally release funds to settle the obligations

• At the end of the financial year, all commitments that are subject of unfulfilled orders
have to be written back to reflect the exact picture of transactions which took place
during the year.

2.1 Impairment of Non-Cash-Generating Assets [IPSAS 21]

Non-cash-generating assets are assets not held with the primary objective of generating a
commercial return while Cash-generating assets are assets held with the primary objective of
generating a commercial return. Non-cash generating assets are assets other than cash-
generating assets and corporate assets. Therefore, an asset may be a non-cash generating
asset even though some cash is generated from its use. Non-cash generating assets are held
by Statutory Boards to fulfill social objectives and / or for national interests, rather than generate
commercial returns. Public parks, accommodation rented out to the needy at rates below cost-
recovery and toll-free roads are examples of non-cash generating assets.

Asset impairment is defined as a significant, unexpected decline in the service utility of a capital
asset. Impairments occur as a result of unexpected circumstances or events, such as physical
damage, obsolescence, enactment of laws or regulations or other environmental factors, or
change in the manner or duration of the asset’s use. Asset impairments result in a write-down of
the asset’s carrying value.

Depreciation (amortization) is the systematic allocation of the depreciable amount of an asset

over its useful life in the case of cash generating assets. It may not be appropriate to assess for
impairment for these assets in the same way as it is done for cash generating assets.
However, impairment shall be made on non-cash generating assets.

IPSAS 21 states that impairment is a loss in the future economic benefits or service potential of
an asset, over and above the systematic recognition of the loss of the asset's future economic
benefits or service potential through depreciation. An impairment loss of a non-cash-generating
asset is the amount by which the carrying amount of an asset exceeds its recoverable amount.

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Indicators of impairment for non-cash generating assets:

 Demand or expectations of demand for the services provided by the non-cash

generating assets have ceased or significantly declined;
 Significant long-term changes with an adverse effect on the Statutory Board have taken
place or will take place in the near future, in the technological, legal or
government policy environment in which the Statutory Board operates;
 Significant long-term changes with an adverse effect on the Statutory Board have taken
place, or are expected to take place in the near future, in the extent to which, or manner in
which, an asset is used or is expected to be used by the Statutory Board. These
changes include the asset becoming idle, plans to discontinue or restructure the
operation to which an asset belongs, or plans to dispose of an asset before the
previously expected date; or
 Evidence is available of obsolescence or physical damage of an asset.

The Objective of impairment of non-cash generating assets is to ensure that non-cash-generating

assets are carried at no more than their recoverable service amount. IPSAS 21 applies to all non-
cash-generating assets except assets arising from construction contracts (see IPSAS 11),
inventories (see IPSAS 12), financial assets that are included in the scope of IPSAS 29,
investment property measured at fair value (see IPSAS 16), non-cash-generating property, plant
and equipment that is measured at revalued amounts (see IPSAS 17), and other assets in respect
of which accounting requirements for impairment are included in another IPSAS 18. Public
sector entities that hold cash-generating assets shall apply IPSAS 26 to such assets.

An impairment loss of a non-cash-generating asset is the amount by which the carrying amount
of an asset exceeds its recoverable service amount. An impairment loss shall be recognized
immediately in surplus or deficit. After the recognition of an impairment loss, the depreciation
(amortization) charge for the asset shall be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if any), on a systematic basis over its remaining
useful life.

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Computing the Impairment Amount in Non-Cash Generating Assets can be done considering the
recoverable service amount. Recoverable service amount is the higher of a non-cash-generating
asset’s fair value less costs to sell and its value in use. Value in use of a non-cash-generating is
the present value of the asset’s remaining service potential.

The present value of the remaining service potential of the asset is determined using any one of
the following three approaches, and depends on the availability of data and the nature of the
impairment:
A. Depreciated replacement cost approach : the present value of the remaining service potential
of an asset is determined as the depreciated replacement cost of the asset. The replacement
cost of an asset is the cost to replace the asset’s gross service potential. This cost is
depreciated to reflect the asset in its used condition. An asset may be replaced either through
reproduction (replication) of the existing asset or through replacement of its gross service
potential. The depreciated replacement cost is measured as the reproduction or replacement
cost of the asset, whichever is lower, less accumulated depreciation calculated on the basis of
such cost, to reflect the already consumed or expired service potential of the asset.

Example: An office building was constructed at a cost of $12 million. The estimated useful
life of the factory building is 50 years. The office is closed 10 years later due to a change in
development plans in the area. The office is converted to be used as a school. The
current replacement cost for a school similar to the capacity of the office is $ 8 million.
Analysis: As the purpose of the building has changed significantly and this change of use is
not anticipated to change in the foreseeable future, impairment is indicated. The impairment
loss using the depreciated replacement cost approach is determined as follows:

Carrying value of the building before change of use:

Cost 12,000,000
Accumulated depreciation ($12 m x 10/50 years) 2,400,000
A. Carrying amount 9,600,000
Replacement cost of a school of similar capacity:
Cost of school 8,000,000

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 Accumulated depreciation ($8 m x 10/50 years) 1,600,000
B. Recoverable Service amount 6,400,000
Impairment loss (A-B) 3,200,000

B. Restoration cost approach: the present value of the remaining service potential of the asset is
determined by subtracting the estimated restoration cost of the asset from the current cost of
replacing the remaining service potential of the asset before impairment. The latter cost is
usually determined as the depreciated reproduction or replacement cost of the asset
whichever is lower.
Example: Indication of impairment exists due to the physical damage to the building.
Impairment loss using the restoration cost approach is determined as follows:
Carrying value of the school building:
Cost 10,000,000
Accumulated depreciation ($10 m x 10/50 years) 2,000,000
A. Carrying amount 8,000,000
Replacement cost of a school of similar capacity:
Replacement Cost 8,000,000
Accumulated depreciation ($8 m x 10/50 years) 1,600,000
Depreciated replacement cost (undamaged) 6,400,000
Less: restoration cost 500,000
B. Recoverable Service amount 5,900,000
Impairment loss (A -B) 2,100,000
C. Service units approach: the present value of the remaining service potential of the asset is
determined by reducing the current cost of the remaining service potential of the asset before
impairment to conform with the reduced number of service units expected from the asset in
its impaired state. As in the restoration cost approach, the current cost of replacing the
remaining service potential of the asset before impairment is usually determined as the
depreciated reproduction or replacement cost of the asset before impairment, whichever is
lower.

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 Example: A water treatment plant was constructed at a cost of $4 million in 20X0. The plant
is estimated to treat water over its useful life 10 years. In 20X5, a change in technology for
water treatment resulted in a reduction of 25% of its annual output over the remaining 5 years
of it useful life. The replacement cost of a new water treatment plant is $5 million in 20X5.
Analysis
Indication of impairment exists due to the obsolescence of the water treatment
technology. Impairment loss using the service units approach is determined as follows:
Carrying value of water treatment plant:
Cost 4,000,000
Accumulated depreciation ($4 m x 5/10 years) 2,000,000
A. Carrying amount 2,000,000
Replacement cost of a water treatment plant:
Replacement Cost 5,000,000
Accumulated depreciation ($5 m x 5/10 years) 2,500,000
B. Depreciated replacement cost before adjustment for
remaining service units 2,500,000
C. Recoverable Service amount (B x 75%) 1,875,000
Impairment loss (A -C) 125,000

At each reporting date, review of assets is made to assess for any indication that an asset may be
impaired. If impairment is indicated, the entity shall estimate recoverable service amount.
Reversal of prior years’ impairment losses is allowed in certain instances.

2.2 Disclosure of Financial Information about the General Government Sector [IPSAS 22]
Financial statements that are issued for users who are not in a position to demand financial
information to meet their specific information needs are referred to as general purpose financial
statements. Examples of such users of financial statements are citizens, voters, their political
representatives and other members of the general public. The term “financial statements” used
here and in the standards covers all disclosures and notes that have been identified as
components of the general purpose financial statements.

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Financial statements prepared on the accrual basis of accounting comprise a statement of
financial position, a statement of financial performance, a cash flow statement and a statement of
changes in net assets/equity. For financial statements prepared on the cash basis of accounting,
the statement of cash receipts and payments is the primary component of the financial statements
next to the accounting policies and explanatory notes.

In addition to the general purpose financial statements a public sector entity may prepare
financial statements for other parties (such as executive committees, the legislature and other
parties with supervisory functions) that can request financial information tailored to their needs.
Such financial statements are referred to as special purpose financial statements. The IPSASB
recommends that IPSASs also be adopted for special purpose financial statements where
appropriate.

Fundamental principles underlying the preparation of financial statements, including going

concern assumption, consistency of presentation and classification, accrual basis of accounting,
aggregation, materiality and others are applied in public sector accounting.

A complete set of financial statements comprises:

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 A. Statement of financial position;
B. Statement of financial performance;
C. Statement of changes in net assets/equity;
D. Cash flow statement;
E. When the entity makes it approved budget publicly available, a comparison of budget and
accrual amounts;
F. Notes, comprising a summary of significant accounting policies and other explanatory
notes

An entity whose financial statements comply with IPSASs shall make an explicit and unreserved
statement of such compliance in the notes. Financial statements shall not be described as
complying with IPSASs unless they comply with all the requirements of IPSASs. Assets and
liabilities, and revenue and expenses, may not be offset unless offsetting is permitted or required
by another IPSAS. Comparative prior-period information shall be presented for all amounts
shown in the financial statements and notes. Comparative information shall be included when it
is relevant to an understanding of the current period’s financial statements. In the case
presentation or classification is amended, comparative amounts shall be reclassified, and the
nature, amount of, and reason for any reclassification shall be disclosed.

The statement of changes in net assets/equity shows all changes in net assets/equity. Financial
statements generally to be prepared annually. If the date of the year end changes and financial
statements are presented for a period other than one year, disclosure thereof is required.
Current/non-current distinction for assets and liabilities is normally required. In general,
subsequent events are not considered in classifying items as current or non-current. An entity
shall disclose for each assets and liability item that combines amounts expected to be recovered
or settled both before and after 12 months from the reporting date, the amount to be recovered or
settled after more than 12 months.

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IPSAS 1 specifies minimum line items to be presented on the face of the statement of financial
position, statement of financial performance and statement of changes in net assets/equity, and
includes guidance for identifying additional line items, headings and sub-totals. Analysis of
expenses in the statement of financial performance may be given by nature or by function. If
presented by function, classification of expenses by nature shall be provided additionally. IPSAS
1 specifies minimum disclosure requirements for the notes. These shall include information
about: –
A. Accounting policies followed;
B. the judgments that management has made in the process of applying the entity’s
accounting policies that have the most significant effect on the amounts
recognized in the financial statements;
C. the key assumptions concerning the future, and other key sources of estimation
uncertainty, that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year;
D. the domicile and legal form of the entity;
E. a description of the nature of the entity’s operations;
F. a reference to the relevant legislation; and
G. the name of the controlling entity and the ultimate controlling entity of the
economic entity.

As per IPSAS 24, financial statements should include disclosures on differences between
Original and Final Budget – reasons for policy shifts, natural disaster, and other unforeseen
events should be issued as notes before, with or at the same time with Financial Statements.
Disclosure of Comparative Budget Information is not required. But aggregation of Budget
Information in line with Chart of Accounts or legislative body approval should be disclosed for
comparison and oversight purpose.

In public sector accounting, loans and borrowings are only disclosed if they pass through
National Treasury. Grants given directly to implementing Agencies are not disclosed in Financial
Statements. Assistance received in-kind should be valued and reflected in the Financial
Statements. Training and retraining of personnel, and IT hardware and software Development to

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automate the process of accounting should be indicated in the reports if occurred in the same
period.

The disclosure of appropriate information about general government sector (GGS) in their
consolidated financial statements can provide a better understanding of the relationship between
the market and non-market activities of the government and between financial statements and
statistical bases of financial reporting.

Financial information about the general government sector shall be disclosed in conformity with
the accounting policies adopted for preparing and presenting the consolidated financial
statements of the government, with two exceptions:
A. The general government sector shall not apply the requirements of IPSAS 6,
“Consolidated and Separate Financial Statements” in respect of entities in the public
financial corporations and public non-financial corporations sectors.
B. The general government sector shall recognize its investment in the public financial
corporations and public non-financial corporations sectors as an asset and shall account
for that asset at the carrying amount of the net assets of its investees.

Disclosures made in respect of the general government sector shall include at least of the
following:
A. Assets by major class, showing separately the investment in other sectors;  Liabilities by
major class;
B. Net assets/equity;
C. Total revaluation increments and decrements and other items of revenue and expense
recognized directly in net assets/equity;
D. Revenue by major class;
E. Expenses by major class;
F. Surplus or deficit;
G. Cash flows from operating activities by major class;
H. Cash flows from investing activities; and
I. Cash flows from financing activities.

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The manner of presentation of the general government sector disclosures shall be no more
prominent than the government’s financial statements prepared in accordance with IPSAS.
Disclosures of the significant controlled entities that are included in the general government
sector and any changes in those entities from the prior period must be made, together with an
explanation of the reasons why any such entity that was previously included in the general
government sector is no longer included.

2.3Revenue from Non-Exchange Transactions(Taxes and Transfers)[IPSAS 23]

IPSAS 23 prescribes requirements for the financial reporting of revenue arising from non-
exchange transactions, other than non-exchange transactions that give rise to an entity
combination. Exchange transactions are transactions in which one entity receives assets or
services, or has liabilities extinguished, and directly gives approximately equal value (primarily
in the form of cash, goods, services, or use of assets) to another entity in exchange. Non-
exchange transactions are transactions that are not exchange transactions. In a non-exchange
transaction, 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.

Transfers are inflows of future economic benefits or service potential from non-exchange
transactions, other than taxes. Stipulations on transferred assets are terms in laws or regulation,
or a binding arrangement, imposed upon the use of a transferred asset by entities external to the
reporting entity.
Conditions on transferred assets are stipulations that specify that the future economic benefits or
service potential embodied in the asset is required to be consumed by the recipient as specified or
future economic benefits or service potential must be returned to the transferor. This is what is
classified as Net assets either temporarily or permanently restricted asset. Restrictions on
transferred assets are stipulations that limit or direct the purposes for which a transferred asset
may be used, but do not specify that future economic benefits or service potential is required to
be returned to the transferor if not deployed as specified.

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An inflow of resources from a non-exchange transaction, other than services in-kind, that meets
the definition of an asset shall be recognized as an asset when, and only when the following
recognition criteria are met:
A. It is probable that the future economic benefits or service potential associated with
the asset will flow to the entity; and
B. The fair value of the asset can be measured reliably.

An asset acquired through a non-exchange transaction shall initially be measured at its fair value
as at the date of acquisition. An inflow of resources from a non-exchange transaction recognized
as an asset shall be recognized as revenue, except to the extent that a liability is also recognized
in respect of the same inflow. As an entity satisfies a present obligation recognized as a liability
in respect of an inflow of resources from a non-exchange transaction recognized as an asset, it
shall reduce the carrying amount of the liability recognized and recognize an amount of revenue
equal to that reduction. Revenue from non-exchange transactions shall be measured at the
amount of the increase in net assets recognized by the entity.

A present obligation arising from a non-exchange transaction that meets the definition of a
liability shall be recognized as a liability when, and only when the following recognition criteria
are met:
A. It is probable that an outflow of resources embodying future economic benefits or
service potential will be required to settle the obligation; and
B. A reliable estimate can be made of the amount of the obligation.
Conditions on a transferred asset give rise to a present obligation on initial recognition that will
be recognized when the recognition criteria of a liability are met. The amount recognized as a
liability shall be the best estimate of the amount required to settle the present obligation at the
reporting date.

An entity shall recognize an asset in respect of taxes when the taxable event occurs and the asset
recognition criteria are met. Taxation revenue shall be determined at a gross amount. It shall not
be reduced for expenses paid through the tax system (e.g. amounts that are available to
beneficiaries regardless of whether or not they pay taxes). Taxation revenue shall not be grossed

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up for the amount of tax expenditures (e.g. preferential provisions of the tax law that provide
certain taxpayers with concessions that are not available to others).

An entity recognizes an asset in respect of transfers when the transferred resources meet the
definition of an asset and satisfy the criteria for recognition as an asset. However, an entity may,
but is not required to, recognize services in-kind as revenue and as an asset. An entity shall
disclose either on the face of, or in the notes to, the general purpose financial statements:
A. The amount of revenue from non-exchange transactions recognized during the period by
major classes showing separately taxes and transfers.
B. The amount of receivables recognized in respect of non-exchange revenue.
C. The amount of liabilities recognized in respect of transferred assets subject to conditions.
D. The amount of assets recognized that are subject to restrictions and the nature of those
restrictions.
E. The existence and amounts of any advance receipts in respect of non-exchange
transactions.
F. The amount of any liabilities forgiven.

An entity shall disclose in the notes to the general purpose financial statements:
A. The accounting policies adopted for the recognition of revenue from non-exchange
transactions.
B. For major classes of revenue from non-exchange transactions, the basis on which the fair
value of inflowing resources was measured.
C. For major classes of taxation revenue which the entity cannot measure reliably during
the period in which the taxable event occurs, information about the nature of the tax.
D. The nature and type of major classes of bequests, gifts, donations showing separately
major classes of goods in-kind received.

2.4 Presentation of Budget Information in Financial Statements [IPSAS 24]

According to IPSAS 24, an entity shall present a comparison of the budget amounts either as a
separate additional financial statement or as additional budget columns in the financial
statements. The objective of IPSAS 24 is to ensure that public sector entities discharge their

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accountability obligations and enhance the transparency of their financial statements by demonstrating
compliance with the approved budget for which they are held publicly accountable. These financial
statements, as long as they are prepared on the same basis, they should reflect the financial performances
in achieving the budgeted results.

IPSAS 24 applies to public sector entities, other than Government Business Enterprises, that are
required or elect to make publicly available their approved budget. Original budget is the initial
approved budget for the budget period. Approved budget means the expenditure authority
derived from laws, appropriation bills, government ordinances, and other decisions related to the
anticipated revenue or receipts for the budgetary period. Final budget is the original budget
adjusted for all reserves, carry over amounts, transfers, allocations, supplemental appropriations,
and other authorized legislative, or similar authority, changes applicable to the budget period .

The comparison of budget and actual amounts shall present separately for each level of
legislative oversight:
A. The original and final budget amounts;
B. The actual amounts on a comparable basis; and
C. By way of note disclosure, an explanation of material differences between the budget and
actual amounts, unless such explanation is included in other public documents issued in
conjunction with the financial statements and a cross reference to those documents is
made in the notes.

An entity shall present a comparison of budget and actual amounts as additional budget columns
in the primary financial statements only where the financial statements and the budget are
prepared on a comparable basis.

If a basis other than the accrual basis is adopted for the budget, the major totals presented in the
statement of budget and actual comparison will be reconciled to net operating, investing and
financing cash flows in the financial statements operating, investing and financing cash flows in
the financial statements. The reconciliation shall be disclosed as part of the statement of
comparison of budget and actual amounts or in the notes to the financial statements. All
comparisons of budget and actual amounts shall be presented on comparable basis to the budget
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Disclosure of comparable information in respect of previous period in accordance with the
requirements of the standard is not required. The use of a columnar format for the financial
statements, with separate columns for budgeted amounts, actual amounts and for any variances
from the budget or appropriation makes the presentation clear and understandable. Where any
budgeted amounts or appropriations have been exceeded, or expenses incurred without
appropriation or authority, details may be disclosed by way of a note to the relevant item in the
financial statements.

All comparisons of budget and actual amounts shall be presented on a comparable basis to the
budget. An entity shall explain in notes to the financial statements the budgetary basis and
classification basis adopted in the approved budget, the period of the approved budget, and the
entities included in the approved budget. An entity shall identify in notes to the financial
statements the entities included in the approved budget.

The actual amounts presented on a comparable basis to the budget shall, where the financial
statements and the budget are not prepared on a comparable basis, be reconciled to the following
actual amounts presented in the financial statements, identifying separately any basis, timing and
entity differences:
A. If the accrual basis is adopted for the budget, total revenues, total expenses and net cash
flows from operating activities, investing activities and financing activities; or
B. If a basis other than the accrual basis is adopted for the budget, net cash flows from
operating activities, investing activities and financing activities.
The reconciliation shall be disclosed on the face of the statement of comparison of budget and
actual amounts or in the notes to the financial statements.

2.5 Cash Flow Statements [Cash Basis IPSAS 2]

A public sector may apply accrual, cash, or modified cash basis to record and report its financial
activities. IPSAS 2 allows using cash basis of accounting. Cash basis IPSAS requires the
presentation of information about historical changes in a public sector entity’s cash and cash
equivalents by means of a cash flow statement that classifies cash flows during the period

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according to operating, investing and financing activities. The cash flow statement identifies the
sources of cash inflows, the items on which cash was expended during the reporting period, and
the cash and cash equivalents as at the reporting date. The cash flow statement is intended to
provide users of financial statements with information for both accountability and decision–
making purposes. Cash flow information allows users to understand how a public sector entity
raised the cash it required to fund its business and administrative operations and how that cash
was used.

A cash flow statement must analyze changes in cash and cash equivalents during a period,
classified by operating, investing and financing activities. Cash equivalents include investments
that are short term (less than three months from date of acquisition), readily convertible to known
amounts of cash, and subject to an insignificant risk of changes in value. Generally they exclude
equity investments.

Cash flows from operating activities of a public sector entity are an indicator of the extent to
which a public sector entity is financed by taxes or the sale of goods and services. Examples of
cash flows from operating activities in accordance with IPSAS 2.22 are:

 Cash receipts from taxes, levies and fines

 Cash receipts from charges for goods and services provided by the entity

 Cash receipts from grants or transfers and other appropriations or other budget authority
made by central government or other public sector entities

 Cash receipts from royalties, fees, commissions and other revenue

 Cash payments to other public sector entities to finance their operations (not including
loans)

 Cash payments to suppliers for goods and services

 Cash payments to and on behalf of employees

 Cash receipts and payments of an insurance entity for premiums and claims, annuities
and other policy benefits

 Cash payments of local property taxes or income taxes (where appropriate) in relation
to operating activities

 Cash receipts and payments from contracts held for dealing or trading purposes

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  Cash receipts or payments from discontinued operations

 Cash receipts or payments in relation to litigation settlements

Cash flows from investing activities mainly consist of cash payments to acquire resources that
are intended to contribute to the entity’s future public service delivery. Examples of cash flows
from investing activities in accordance with IPSAS 2.25 are:

 Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets. These payments include those relating to capitalized development costs and self-
constructed property, plant and equipment.

 Cash receipts from sales of property, plant and equipment, intangibles and other long-
term assets

 Cash payments to acquire equity or debt instruments of other entities and interests in
joint ventures (other than payments for those instruments considered to be cash
equivalents or those held for dealing or trading purposes)

 Cash receipts from sales of equity or debt instruments of other entities and interests in
joint ventures (other than receipts for those instruments considered to be cash equivalents
and those held for dealing or trading purposes)

 Cash advances and loans made to other parties (other than advances and loans made by a
public financial institution)

 Cash receipts from the repayment of advances and loans made to other parties (other than
advances and loans of a public financial institution)

 Cash payments for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
payments are classified as financing activities

 Cash receipts from futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities

Cash flows from financing activities present valuable information in that they show future claims
by providers of capital to the entity. Examples of cash flows from financing activities in
accordance with IPSAS 2.26 are:

 Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or
long-term borrowings

 Cash repayments of amounts borrowed

 Cash payments by a lessee for the reduction of the outstanding liability relating to a
finance lease

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 Cash flows for operating activities are reported using either the direct (recommended) or the
indirect method. Public sector entities reporting cash flows from operating activities using the
direct method are encouraged to provide a reconciliation of the surplus/deficit from ordinary
activities with the net cash flow from operating activities. Cash flows from interest and
dividends received and paid shall each be disclosed separately and classified as operating,
investing or financing activities.

Cash flows arising from taxes on net surplus are classified as operating unless they can be
specifically identified with financing or investing activities. The exchange rate used for
translation of cash flows arising from transactions denominated in a foreign currency shall be the
rate in effect at the date of the cash flows.

Aggregate cash flows relating to acquisitions and disposals of controlled entities and other
operating units shall be presented separately and classified as investing activities, with specified
additional disclosures. Investing and financing transactions that do not require the use of cash
shall be excluded from the cash flow statement, but they shall be separately disclosed.

The following table is an example of the structure using the direct method in accordance with IPSAS 2
(cf. Appendix to IPSAS 2)

20X0 20X1
Cash flows from operating activities
Receipts
Taxation X X
Sales of goods and services X X
Grants X X
Interest received X X
Other receipts X X
Payments
Employee costs (X) (X)
Superannuation (X) (X)
Suppliers (X) (X)

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Interest paid (X) (X)
Other payments (X) (X)
Net cash flows from operating activities X X
Cash flows from investing activities
Purchase of property, plant and equipment (X) (X)
Proceeds from the sale of property, plant and equipment X X
Proceeds from the sale of investments X X
Purchase of foreign currency securities (X) (X)
Net cash flows from investing activities (X) (X)
Cash flows from financing activities
Proceeds from borrowings X X
Repayment of borrowings (X) (X)
Distribution/dividend to government (X) (X)
Net cash flows from financing activities X X
Net increase/(decrease) in cash and cash equivalents X X
Cash and cash equivalents at the beginning of the reporting period X X
Cash and cash equivalents at the end of the reporting period X X

Summary

Chapter end questions

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