IFAC Issues Reporting Standards for World Governments
In May the International Federation of Accountants released the world’s first authoritative set of independent financial reporting standards for public-sector entities.
Known as International Public Sector Accounting Standards (IPSASs), the IFAC guidance is derived from the International Accounting Standards Committee’s International Accounting Standards (IASs), and adapted for use at all levels of government worldwide. The eight new standards are based on the accrual method of accounting and are expected to help public-sector entities better manage and account for their financial performance.
IFAC says the standards are particularly valuable because they were prepared independent of the influence of any nation’s standard-setting body. They address several financial reporting functions, including the presentation of financial statements, the accounting treatment of borrowing costs and financial reporting of interests in joint ventures.
Among those expected to benefit from use of the new standards by governments around the world are capital markets, rating agencies, other governments and international financial institutions, such as the World Bank and the International Monetary Fund.
According to Ian Ball, chairman of IFAC’s public sector committee, which developed and approved the standards, “in most cases, the quality of financial reporting by governments internationally is poor, and financial institutions have been unable to insist on high-quality information because there were no standards.” But, he added, as soon as governments begin modifying their national standards to conform to the new IFAC guidance, the quality of reporting will improve.
While acknowledging that standard setters such as IFAC have no authority to mandate compliance, Ball is optimistic that other factors, such as the influence of investors, lenders, credit-rating agencies and voters, will encourage governments to cooperate. “The main force for adoption,” he said, “is increased pressure on governments to account for and measure how well they improve their economies’ competitiveness.”
For example, governments interested in comparing the cost of their operations with those of their peers in other jurisdictions will be able to use the improved financial information to derive better performance benchmarks.
But getting world governments to convert to the accrual method might not be easy. Though it is thought to provide a clearer picture of an entity’s finances than the cash-basis method of accounting, only a minority of governments use it. Some observers see this as an all-too-common failure of stewardship. As one said, “Few entities choose to make themselves more accountable than they’re forced to.”
Until a decade ago, virtually all governments used the cash method. Since then, Ball said, there’s been a shift to the accrual method, even though some leading industrial nations, such as Japan, still have not adopted it. To provide practical advice for nations not yet ready to convert to the accrual method, IFAC issued an exposure draft, Financial Reporting Under the Cash Basis of Accounting.
Offering a U.S. perspective, GASB Chairman Tom Allen said, “We applaud the efforts of the IFAC public sector committee to provide standards and general guidance, particularly in countries that don’t have standard-setting bodies.” Although GASB was not involved in the preparation of the new standards, Allen said it will work with IFAC on future projects of this kind.
In issuing its first group of public-sector standards, IFAC simplified the task by basing them on the IASC’s private-sector standards. Ron Points, the IFAC committee’s U.S. representative, explained its reasoning. “We think standards generally apply to all sectors: banking, oil, gas, government, and so forth”, he said. “The differences [between the public and private sectors] are not so great as most people are led to believe. The same things are required: accrual accounting, consolidated statements and recording of infrastructure assets. All that’s needed is fine-tuning.”
On a related issue, Points said he viewed GASB Statement no. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as a major step forward. (See “ Government Reporting Faces an Overhaul ,” JofA, Jan.00, page 49.) “It put GASB standards and international standards on the same page,” he said.