Selecting International Standards for Accrual-Based Accounting in the Public Sector: IPSAS or IFRS?
Aggestam-Pontoppidan, Caroline, The Journal of Government Financial Management
For a number of years, academics, regulators and practitioners active within the sphere of public sector accounting have debated the benefits and disadvantages of adopting accrual accounting within the public sector. Nevertheless, there is a clear push toward furthering the conversion to accrual accounting among governments and public sector entities.
This movement is strongly pursued by the international standards-setter, the International Public Sector Accounting Standards Board (IPSASB)1, issuer of International Public Sector Accounting Standards (IPSAS).2 The International Federation of Accountants (IFAC) issued a series of recommendations3 for consideration by the G20 countries at their meeting in June 2010. IFAC specifically points out that:
"...many governments adhere to the cash basis of accounting, IFAC and the [IPSASB] encourage the adoption of accrual-based accounting as it reinforces the principles of transparency and accountability. Under the accrual basis of accounting, transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, transactions and events are recognized and reported in the financial statements of the periods to which they relate."4
In addition, the Organisation for Economic Co-operation and Development (OECD) has stated that accrual accounting is critical to enable accounting and reporting on the allocation and use of total economic resources at the disposal of managers. Recently, Ian Ball of the IFAC strongly re-emphasized the message of the incoming chairman of the International Accounting Standards Board (IASB), Hans Hoogervorst5 that "without transparency, there can be no enduring stability" at a 2011 international conference on "Trust and Accountability in Public Financial Management."6 Ball added to Hoogervorst's statement: "I believe that without transparency, neither can there be trust or accountability. And as a basis for what follows, I should be clear that a crucial element of transparency in the public sector is accrual accounting."7
At the same time, though, academics are debating whether the accounting needs of the public sector are well served by accrual accounting practices. Although the debate continues, the trend in practice seems clear-the number of public entities and governments that have or are in the process of adopting accrual accounting is continuously increasing. Today approximately one-third of OECD countries have adopted full accrual accounting. This has been done either for the entire government accounts or at the ministry level.8
Public sector entities that seek to apply a set of internationally recognized accounting standards in their move toward accrual accounting most often turn to IPSAS issued by the IPSASB, an independent board of IFAC." A few countries have recently chosen International Financial Reporting Standards (IFRS). Australia, for example, became one of the first countries to adopt IFRS within local governments for the 2005-2006 financial year. Another example is the United Kingdom, where the accounts of central government departments and entities in the wider public sector are to be produced using IFRS as of March 2010. This article provides an overarching introduction to the definition of a government business enterprise (GBE), as provided in IPSAS, as a determinant for applying IPSAS or IFRS for a public sector entity. It also briefly discusses some key arguments for the application of IFRS versus IPSAS by public entities moving toward accrual accounting.
GBE or Not?
Following the I PSAS, if a public sector entity meets all the criteria for being a GBE it is excluded from the scope of I PSAS and mandated toapply private sector international standards IFRS.10 A GBE is an entity that has all of the follow ing characteristics:
a. it is an entity w ith the power to contract in its own name;
b. it has been assigned the financial and operational authority to carry on a business;