ACCOUNTING FOR PUBLIC SECTOR

AND CIVIL SOCIETY

CHAPTER THREE
INTERNATIONAL PUBLIC SECTOR ACCOUNTING
STANDARDS (IPSAS)
 LEARNING OBJECTIVES
After completing this chapter, you should
be able to:
 Explain the term IPSAS
 Distinguish between IFRS and IPSAS.
 Understand the essence and spread of IPSAS
 Describe the structure of IPSASB
 List the current pronouncements that constitute IPSAS
 Describe the Ethiopian new legal requirements related to
financial reporting
 Describe the conceptual framework of IPSAS

2
 What Does Accounting Do and Why
Does it Matter?
It captures, measures and reports information
about the economic events of an entity
Reports are used by stakeholders
(management, donors, beneficiaries, etc) to
evaluate performance and make effective
decisions.
In order to maximize the reliability and
usefulness of reported financial information,
the accounting standards applied should be
comprehensive, widely accepted and promote
transparency. 3
 NGO-specific accounting issues
 Non-exchange transactions (e.g. donated income)
 Fund accounting issues(Reporting Entity)
 Equity definition
 Budgetary information
 Narrative reporting and
 Valuation of NGO-specific assets (like)
 -----Con’d

At present there are Two sets of International

Accounting Standards
IFRS – For profit entities
IPSAS – For public sector
NONE – For NGOs
Financial Reporting Requirements in
Ethiopia
Ethiopia passed financial reporting law in
2014 which provides for financial
reporting requirements for:
 Commercial businesses
 Charities and societies
 And auditing requirements for External
Auditors
Financial Reporting Requirements in Ethiopia
The legal instruments are:
Financial Reporting Proclamation No. 847/2014
Regulation No. 332/2014: Establishment and
Determination of the Procedure of the Accounting and
Auditing Board of Ethiopia
The proclamation requires:
1. Charities and societies to follow International
Public Sector Accounting Standards (IPSAS)
2. Commercial entities which have public interest
to follow International Financial Reporting
Standards (IFRS)
 …Con’d
 PIE is a reporting entity that has a significant public
relevance because of the nature of its business,
its size, its number of employees.
 PIE in Ethiopia includes significant PIEs: banks,
insurances, MFIs, public enterprises (PEs); and
other PIEs: large private firms measured in terms of
sales turnover, labor force, total asset size, and
total liability size.
3. Commercial entities which don’t have public interest to
follow IFRS for SME
4. Public auditors to follow International Standards for
Auditing.
International Financial Reporting
Regimes
International
Accounting
Regimes

IFRS IPSAS

IFRS for Cash Accrual

IFRS SME Basis Basis
What is IPSAS and Why Adopt It
What is IPSAS?
 Set of independently developed accounting
standards considered as best practice for the
public sector organizations
 Used to define the presentation of financial
statements
Why IPSAS?
 Provide consistent application of accounting
principles
 Improves accountability and transparency
through IPSAS compliant financial statements
 Improves the extent to which financial
policies, regulations and rules, business
practices and procedures respond to the
needs of the organization
 Key characteristics of the public
sector with potential implications
for Financial Reporting
 The volume and significance of non-
exchange transactions
 The importance of the budget
 The nature of property, plant and equipment
 Responsibility for local and national heritage
 The longevity of the public sector
 The regulatory role of government
 Ownership or control rights to natural
resources and phenomena
 Statistical bases of accounting
 IPSASB’s Goals And Objectives
The IPSASB aims to strengthen public financial
management and knowledge globally through the
enhancement of the quality and transparency of
public sector financial reporting by:
Developing high-quality public sector
financial reporting standards;
 Developing other publications for the
public sector; and
Raising awareness of IPSAS and the benefits
of their adoption.
 IPSASB’s Assessment
• IPSASB sets:
 Conceptual framework
 International Public Sector Accounting Standards
(IPSAS) and
 Recommended Practice Guidelines (RPGs)
Studies, Research and Special Report
• IPSAS is inspired by IFRS
• As a general rule, the IPSAS maintain the accounting
treatment and original text of the IFRS, unless there is
a significant public sector issue that warrants a
departure.
 INTRODUCTION TO IPSAS
The IPSAS Board is an accounting
standard-setter that is dedicated to
enhancing the quality of the accounts of
public sector entities. Its goal is to
develop:
standards that are convergent with
international private sector standards
specific standards for the public
sector where there is no equivalent in
the body of private sector standards
 IPSASB Pronouncements
In order to fulfill its objective, the IPSASB
develops and issues the following:
 International Public Sector Accounting
Standards (IPSAS): Standards to be
applied in the preparation of general purpose
financial reports of public sector entities.
 Recommended Practice Guidelines (RPG):
Provide guidance that represents good
practice that public sector entities are
encouraged to follow.
 Studies to provide advice on financial
reporting issues in the public sector.
 Other papers and research reports to
provide information that contributes to the
body of knowledge about public sector financial
reporting issues and developments.
 The convergence process:
Process for Reviewing and
Modifying IASB Documents
Step 1: Are there public sector issues
that warrant a departure?
Step 2: Should a separate public
sector project be initiated?
Step 3: Modify IASB document
Step 4: Make IPSASB style and
terminology changes to IASB
documents
 The IPSASB Conceptual Framework for
General Purpose Financial Reports
The Conceptual Framework has a preface and Five
Phases:
Preface
Phase 1:
Chapter 1: Role and Authority of the Conceptual
Framework
Chapter 2:Objectives and Users of General Purpose
Financial Reporting
Chapter 3: Qualitative Characteristics
Chapter 4: Reporting Entity
Phase 2: Elements in Financial Statements
Phase 3: Recognition in Financial Statements
Phase 4: Measurement of assets and liabilities in
Financial Statements
 International Public Sector
Accounting Standards (IPSASs)
 The IPSASs are accounting reporting guidelines
for the preparation and presentation of general
purpose financial reports of public entities.
 The IPSASs prescribe the manner in which general
purpose financial statements should be presented
to ensure comparability both with the entity’s
financial statements of previous periods and with
the financial statements of other public entities.
 To achieve this objective, the IPSASs set out
overall considerations for the presentation
(structure) and minimum requirements (content)
of financial statements, and provide guidance on
the recognition, measurement, and disclosure of
other specific transactions and events.
 Accrual & Cash Accounting
IPSAS
There are two sets of IPSAS. Under
accrual based IPSAS transactions and
events are recorded in the accounting
records and recognized as assets,
liabilities, net assets/equity, revenue, or
expenses in the financial statements of
the periods in which they occur.
• Cash-basis accounting is an accounting method
in which income is recorded when cash is
received, and expenses are recorded when cash
 ----Con’d
• Accrual accounting is an accounting method that
measures the performance and financial position
of an organization by recognizing income when
earned and expense when incurred rather than
when cash is received or paid.
• The IPSASB encourages to adopt the accrual
basis of accounting
• Accrual basis of accounting improve financial
management and increase transparency
resulting in a more comprehensive and accurate
view of a government’s financial position.
Scope and Authority of IPSASs
IPSAS are designed to guide the
preparation and presentation of general
purpose financial statements of public
sector entities.
Public sector entities include national
(central), regional and local
governments, and their component
entities such as departments, agencies,
boards, commissions et cetera.
IPSAS do not apply to Government
Business Enterprises (GBE).
 General purpose financial
statements
 General purpose financial statements are
those intended to meet the needs of users
who are not in a position to demand reports
tailored to meet their specific information
needs, e.g taxpayers and ratepayers,
members of the legislature, creditors,
suppliers, the media, and employees.
 Such reports provide information about an
entity’s assets, liabilities, changes in net
assets/equity, revenue, expenses, and cash
flows and may be presented separately or
within another public document such as an
annual report.
 Objectives of general purpose
Financial Statements
To provide information that is useful for
decision-making and to demonstrate the
accountability of the entity for the resources
entrusted to it by providing information:
a) About the sources, allocation and uses of financial
resources entrusted to it;
b) On how the entity financed its activities and met its
cash requirements;
c) That is useful in evaluating the entity’s ability to
finance its activities and to meet its liabilities and
commitments;
d) About the financial condition of the entity and
changes in it
e) Useful in evaluating the entity’s performance in
terms of service costs, efficiency and
accomplishments.
 -----Con’d
 General purpose financial statements also
have a predictive or prospective role. They
provide information useful in predicting the
level of resources required for continued
operations, the resources that may be
generated by continued operations, and the
associated risks and uncertainties.
 Financial reporting may also provide users
with information indicating whether
resources were obtained and used
a) in line with the legally adopted budget; and
b) in accordance with legal and contractual
requirements, including financial limits
established by appropriate legislative authorities.
 Components of Financial
Statements
A complete set of financial statements
comprises:
a) A statement of financial position;
b) A statement of financial performance;
c) A statement of changes in net assets/equity;
d) A cash flow statement;
e) When the entity makes publicly available its
approved budget, a comparison of budget and
actual amounts either as a separate additional
financial statement or as a budget column in the
financial statements; and
f) Notes, comprising a summary of significant
accounting policies and other explanatory notes.
 IPSAS Adoption in the world
• Currently 70 Countries adopted either
cash basis or accrual basis
IPSAS in Ethiopia
• Discussion
Chapter 2: Objectives and Users of
General Purpose Financial Reports
• The objectives of financial reporting by
public sector entities are to provide
information about the entity that is useful to
the users of GPFR for accountability purposes
and for decision-making purposes.
for the purposes of this Conceptual
Framework, the primary users of GPFR
are service recipients and their
representatives and resource providers
and their representatives.
Chapter Three: Qualitative characteristics of
information included in GPFRs
The qualitative characteristics of information
included in GPFRs of public sector entities are
 Relevance,
 Faithful representation,
 Understandability,
 Timeliness,
 Comparability, and
 Verifiability
All are integral part in making the financial and
non-financial information in GPFRs useful to
users.
 ---- Con’d--
• Relevance: Capable of making a difference in
users’ decisions
predictive value
confirmatory value
• Faithful representation: Faithfully represents the
phenomena it purports to represent
completeness (depiction including numbers and
words)
neutrality (unbiased)
free from error (ideally)
30
 ---- Con’d--
• Understandability: Classify, characterize, and
present information clearly and concisely
• Timeliness: having information available to
decision-makers in time to be capable of
influencing their decisions
• Comparability: like things look alike; different
things look different
• Verifiability: knowledgeable and independent
observers could reach consensus, but not
necessarily complete agreement, that a depiction
is a faithful representation 31
 Pervasive constraints
Pervasive constraints on information
included in GPFRs are:
Materiality,
Cost-benefit, and
Achieving an appropriate balance
between the qualitative
characteristics.
 Chapter 4: Reporting Entity

• A public sector reporting entity is a

government or other public sector
organization, program or identifiable area of
activity (hereafter referred to as an entity or
public sector entity) that prepares GPFRs.
• A public sector reporting entity may comprise
two or more separate entities that present
GPFRs as if they are a single entity—such a
reporting entity is referred to as a group
reporting entity.
 ---- Con’d--
Key Characteristics of a Reporting Entity
• It is an entity that raises resources from, or
on behalf of, constituents and/or uses
resources to undertake activities for the
benefit of, or on behalf of, those constituents;
and
• There are service recipients or resource
providers dependent on GPFRs of the entity
for information for accountability or decision
making purposes. This sometimes requires
professional judgment
 Chapters 5 and 6: Elements and
Recognition
These elements, with their respective definitions are:
Assets:
 An asset is a resource presently controlled by
the entity as a result of a past event.
 A resource is an item with service potential or
the ability to generate economic benefits.
 Indicators of control:
 Legal ownership;
 Access to the resource, or the ability to deny or
restrict access to the resource;
 The means to ensure that the resource is used to
achieve its objectives; and
 The existence of an enforceable right to service
potential or the ability to generate economic
benefits arising from a resource.
 ….Con’d
 Liabilities a liability is a present obligation
that arises from a past event where there is
little or no realistic alternative to avoid an
outflow of service potential or economic
benefits from the entity.
• Revenue is increases in the net financial position of
the entity, other than increases arising from ownership
contributions.
• Expense is decreases in the net financial position of
the entity, other than decreases arising from ownership
distributions.
 The entity’s surplus or deficit for the period is the
difference between revenue and expense reported
on the statement of financial performance.
 ….Con’d
Deferred inflows
Deferred Outflows
• Ownership contributions: Inflows of
resources to an entity, contributed by external
parties in their capacity as owners, which establish
or increase an interest in the net financial position
of the entity.
• Ownership distributions: Outflows of
resources from the entity, distributed to external
parties in their capacity as owners, which return or
reduce an interest in the net financial position of
the entity.
 Broad themes of IPSAS
Like IFRS, IPSASs deal with the four main issues of
financial reporting: recognition, measurement,
presentation, and disclosure

 Recognition (Recording):
 Defines what are assets, liabilities, revenues, and
expenses and when you should record them.
 Measurement (Valuation):
 Establishes a standard method for valuing
assets, liabilities, revenues and expenses.
 Financial Reporting (presentation & disclosure):
 Prescribes the format and content of reports
including the type of disclosures that should be
made in the reports in order to heighten
transparency.
LIST OF IPSAS
 IPSAS based on IFRS
36 of the 40 IPSAS in place as are based on
IFRS, including:
 IPSAS 1 (IAS 1): Presentation of Financial
Statements
 IPSAS 4 (IAS 21): The Effects of Changes
in Foreign Exchange Rates
 IPSAS 11 (IAS 11/IFRS 15): Construction
Contracts
 IPSAS 14 (IAS 10): Events after the
Reporting Date
 ---- Con’d--
 IPSAS 19 (IAS 37): Provisions, Contingent
Liabilities, Contingent Assets
 IPSAS 25/39 (IAS 19): Employee Benefits
 IPSAS 28 (IAS 31): Financial Instruments
(Presentation)
 IPSAS 29 ( IAS 39/IFRS 9): Financial
Instruments (Recognition and
Measurement)
 IPSAS 30 ( IFRS 7): Financial Instruments
(Disclosures)
 IPSAS 31 (IAS 38): Intangible Assets
 ---- Con’d--
 IPSAS 2 (IAS 7): Cash Flow Statements
 IPSAS 3 (IAS 8): Change accounting
policies , change in accounting estimates
and errors
 IPSAS 5 (IAS 23): Borrowing cost
 The five IPSAS not Based on
IFRS
 IPSAS 21: Impairment of Non-cash-
generating Assets
 IPSAS 22: Disclosure of Financial
Information about the General Government
Sector
 IPSAS 23: Revenue from Non-Exchange
Transactions (Taxes and Transfers)
 IPSAS 24: Presentation of Budget
Information in Financial Statements
 Cash Basis IPSAS
 Replaced IPSAS

IPSAS 6, 7, 8 with IPSAS

34,35,36,37
IPSAS 15 with IPSAS 28,29,30
IPSAS 25 with IPSAS 39
Difference between IPSAS and RPG
• IPSAS relate to the general purpose financial
statements (financial statements) and are
authoritative.
• RPGs are pronouncements that provide guidance
on good practice in preparing general purpose
financial reports (GPFRs) that are not financial
statements.
• Unlike IPSAS, RPGs do not establish requirements.
• All pronouncements by IPSASB relating to GPFRs
that are not financial statements are RPGs.
• RPGs do not provide guidance on the level of
assurance (if any) to which information should be
subjected.
 IPSAS and IFRS

A HIGHLIGHT OF THE DIFFERENCES

 Scope

IPSAS IFRS

IPSAS applies to IFRS applies to

 International  Government
organizations
Business Entities
 Public sectors
 National government  Private sectors
 Local government
 Other government
agencies and
commissions
 Basis of Accounting

IPSAS IFRS

IPSAS allows IFRS strictly uses

 Accrual Basis; or  Accrual basis
 Cash Basis
Financial Statement Presentation
IPSAS 1 IAS 1

• A complete set of financial • A complete set of financial

statements comprises: statements comprises:
 Statement of financial  Statement of financial
position; position;
 Statement of financial  Income statement
performance;  Statement of changes in
 Statement of changes in net equity;
assets;  Cash flow statement;
 Cash flow statement;  Statement of comprehensive
 A comparison of budget and income;
accrual amounts;  Notes to FS
 Notes to FS • Prohibits the use of extra-
• Does not prohibit the use of ordinary items
extra-ordinary items
 Cash Flow Statement
IPSAS 2 IAS 7
• Changes in cash and cash • Changes in cash and
equivalents are classified cash equivalents are
into operating, investing classified into
and financing activities. operating, investing
• Operating activities can be and financing activities.
presented using either
direct or indirect method.
• Operating activities can
be presented using
• If direct method is used,
either direct or indirect
IPSAS encourages entities
to disclose a reconciliation method.
of Surplus/Deficit and
Cash flows from
operations
Accounting Policies, Estimates and Errors

IPSAS 3 IAS 8
• Changes in accounting • Changes in accounting
estimates are treated estimates are treated
currently and prospectively currently and prospectively
• Changes in accounting policy • Changes in accounting policy
are accounted for are accounted for
retrospectively retrospectively
• Correction of errors are • Correction of errors are
accounted for retrospectively accounted for retrospectively
• Retrospective application • Retrospective application
requires adjustment of requires adjustment of
Accumulated Surplus/Deficit Retained Earnings
 Effects of Changes in Foreign Exchange
Rates

IPSAS 4 IAS 21

• Foreign currency gains • Foreign currency gains

and losses are and losses are
recognized in recognized in profit or
surplus/deficit. loss.
• Foreign currency • Foreign currency
translation adjustments translation adjustments
are recognized as a are recognized as part
separate component of of other comprehensive
net assets. income.
 Borrowing costs

IPSAS 5 IAS 23

Two accounting • Borrowing costs are

treatments are allowed: recognized as expense when
incurred.
 Expense model • Borrowing costs related to a
(benchmark treatment); qualifying asset shall be
and included as part of the cost
of the asset.
 Capitalization model
(alternative treatment)
 Separate and Consolidated Financial
Statements
IPSAS 6 IAS 27 and IFRS 10

• Allows entities to use • Requires investment in

the equity method to subsidiary to be
account for controlled accounted for using the
entities in the separate cost method in the
financial statements of separate financial
controlling entities. statements.
• Requires controlling • IAS 27 does not require
entities to disclose a this disclosure.
list of significant
controlled entities in
consolidated financial
statements.
Investment in Associates/ Joint Venture

IPSAS 7 and 8 IFRS 11

• Investments in • Investments in
associates are associates are
accounted for using the accounted for using the
equity method. equity method.
• Investments in joint • Investments in joint
ventures are accounted ventures are accounted
for using: for using equity method
 Equity method; or
 Proportionate
consolidation.
 Revenue

IPSAS 9 IAS 18

• Title- Revenue from • Title- Revenue

Exchange • Revenue is limited only
Transactions to those that arise from
• Revenue includes ordinary activities.
those that arise from
ordinary activities and
gains.
 Construction Contracts

IPSAS 11 IAS 11
 IPSAS 11 makes it clear • Recognize loss
that the requirement to immediately when the
recognize an expected total estimated cost
deficit on a contract exceeds the total revenue
immediately it becomes
probable that contract from the contract.
costs will exceed total
contract revenues applies
only to contracts in which it
is intended at inception of
the contract that contract
costs are to be fully
recovered from the parties
to that contract.
 Inventory

IPSAS 12 IAS 2
• Inventories are required to • Inventories are required to
be measured at the lower of be measured at the lower of
cost and net realizable cost and net realizable
value. value.
• Inventories are required to
be measured at the lower of
cost and current
replacement cost where they
are held for:
 Distribution at no charge; or
 Consumption in the
production process of goods
to be distributed at no
charge
 Leases

IPSAS 13 IAS 17

• Leases are classified • Leases are classified

into: into:
 Operating Lease; or  Operating Lease; or
 Finance Lease
 Finance Lease
• Income or expense • Income or expense related
related to operating to operating lease is
lease is recognized on a recognized on a straight line
straight line basis over basis over the lease term
the lease term • Exposure draft on Leases is
expected to change the
accounting for leases.
 Events after Reporting Date

IPSAS 14 IAS 10
 Events after the reporting • Events after the
date are classified into reporting date are
 Adjusting event; and
classified into
 Non-adjusting event
 Adjusting event; and
 IPSAS 14 notes that where
the going concern  Non-adjusting event
assumption is no longer • If going concern
appropriate, entity should assumption is no longer
determine the impact of
this change on the appropriate, IFRS 5
carrying value of assets shall be applied (PIC)
and liabilities recognized in
the financial statements
 Financial Instruments

IPSAS 28, 29 and 30 IFRS 9

• Financial assets are • Financial assets are

classified into: classified into:
 Financial assets at  Financial assets at
FVPL FVPL
 Available for sale  Financial assets at
 Held to maturity amortized costs
 Loans and
receivables
 Investment Property

IPSAS 16 IAS 40

• Investment property is a • Investment property is

real property that is a real property that is
held by an entity for held by an entity for
capital appreciation, for capital appreciation, for
rental, or both. rental, or both.
• Property held to provide
a social service and
which also generates
cash inflows is not an
investment property.
 Property, Plant and Equipment/
Intangible Assets
IPSAS 17 and IPSAS31 IAS 16 and IAS 38
• IPSAS does not require or • No guidance is provided on
prohibit the recognition of how to account for heritage
heritage assets. assets.
• PPE and Intangible assets
may be accounted for using • PPE and Intangible assets
either: may be accounted for using
 Cost model; or either:
 Revaluation model  Cost model; or
 Revaluation model
• Revaluation increases and
decreases are offset on a • Revaluation increases and
class of asset basis decreases may only be
matched on an individual
item basis
 Agriculture

IPSAS 27 IAS 41

• The definition of • IAS 41 does not deal

“agricultural activity” with such transactions.
includes transactions • IAS 41 encourages, but
for the distribution of does not require,
biological assets at no entities to provide a
charge or for a nominal quantified description
charge. of each group of
• IPSAS 27 requires biological assets
entities to provide a
quantified description of
each group of biological
assets.
 Segment Reporting

IPSAS 18 IFRS 8

• IPSAS 18 does not • Guidance is provided

specify quantitative on which segments are
thresholds that must reportable.
be applied in
identifying reportable
segments.
 Impairment of non-cash
generating assets
IPSAS 21 IAS 36
 IPSAS 21 deals with the  IAS 36 deals with the
impairment of non-cash- impairment of non-financial
generating assets. assets.

 IPSAS 21 measures the value  IAS 36 measures the value

in use of a non-cash- in use of a non financial
generating asset as the asset as the present value
present value of the asset’s of future cash flows from
remaining service potential the asset.
using a number of
approaches.
 IAS 36 uses the concept of
 Impairment testing is cash generating unit.
applied to individual assets.
Impairment of cash generating assets

IPSAS 26 IAS 36

• IPSAS 26 does not • IAS 36 does not

apply to cash- exclude from its scope
generating assets assets carried at
carried at revalued revalued amounts.
amounts. at the
reporting date. • IAS 36 includes
• Goodwill is outside the extensive requirements
scope of IPSAS 26. and guidance on the
impairment of goodwill.
 IPSAS 23- Revenue from Non-
exchange transactions
 Non-exchange transactions are transactions
wherein an entity either receives value from
another entity without directly giving
approximately equal value in exchange.
 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
 IPSAS 24- Presentation of Budget
Information in FS
• 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 currently presented in
accordance with IPSAS
Service Concession Arrangements
IPSAS 32- Grantor IFRIC 12- Operator
 The grantor recognizes a  The operator either
service concession asset and recognizes a financial asset or
either a financial liability or an intangible asset.
unearned revenue.
 A financial liability is  A financial asset is recognized
recognized to the extent that to the extent that the
the grantor has an operator has an unconditional
unconditional contractual contractual right to receive
right to pay cash or another cash or another financial
financial asset. asset.
 An unearned revenue is  An intangible asset is
recognized to the extent that recognized to the extent that
the grantor gives the grantor the operator receives a right
a right to charge users for the
public service. or license to charge users for
the public service.
 Cash basis

• Basic financial statements shall include:

 Statement of Cash Receipts and Payments
 Explanatory Notes
 Comparison of Budget and Actual

• IPSAS encourages entities to disclose

accrual basis information.
72