PUBLIC SECTOR FINANCIAL REPORTING
A Dynamic International Situation
By Ian Mackintosh, Chairman, IFAC Public Sector Committee
Financial reporting and international accounting standards are hot topics at the moment. Most of the focus has been on the private sector and the fall-out from the massive commercial collapses that have recently occurred.
However, the public sector has its own debates raging. Most by now accept that it is desirable for accounting standards to be harmonized as much as possible around the world. But there is not unanimous agreement on which standards should be used as a benchmark or how similar public sector accounting concepts and standards should be to their private sector counterparts.
Some jurisdictions are arguing that the Government Finance Statistics (GFS) rather than International Public Sector Accounting Standards (IPSASs) should be used to prepare general purpose financial statements for the public sector.
Others feel that public sector standards should have a conceptual framework of their own and be quite separate from private sector standards. Even those who do not share that view have differences of opinion on how closely an international public sector standard setter should work with its private sector counterpart.
In this article I will briefly outline the nature of GFS and IPSASs and give my opinion as to their respective roles. And I will address the question of how the international private and public sector standard setters might best work together in the future.
PSC and IPSASs
By the end of this year the IFAC Public Sector Committee (PSC) will have completed the first part of its standard setting project. A suite of twenty accrual accounting IPSASs will be in place. These IPSASs have been based on International Accounting Standards and the requirements of those standards have been adopted except where there is a public sector reason to do otherwise. The IPSASs, where relevant, use terminology more suited to the public sector and include additional commentary necessary to provide a public sector perspective to the requirements and to deal with public sector institutional matters.
As well as the accrual based IPSASs there will be a cash based IPSAS and authoritative documents on the transitional steps from cash to accrual accounting and on governance in the public sector.
IMF and tThe GFS
Government Finance Statistics (GFS) are a system of measurement and disclosure providing data to help statistical economic analysis. They are promulgated by the IMF and are set within an overarching System of National Accounts (SNA) framework. Broadly speaking the SNA attempts to measure the movements in a national economy and, in doing so, breaks the economy down into various sectors. The latest GFS manual was issued by the IMF in 2001 and is accrual based.
The GFS system breaks the total public sector into three, general government sector, non-financial public corporations and financial public corporations. It is my understanding that the IMF would prefer governments to consolidate those three parts in presenting a total public sector view. This consolidation would not be much different from the one required under the IPSASs.
However, the proposal being mooted in Australia is that the government only report one of the three parts, the general government sector (GGS).One of those sectors is t The GGSwhich has been described in the glossary section ofdefined by the an Australian Bureau of Statistics’ information paper as “a GFS sector comprising resident public institutional units which are mainly engaged in the production of goods and services outside the normal market mechanism for consumption by governments and the general public. Costs of production are mainly financed from public tax revenues. Goods and services are provided free of charge or at nominal charges well below costs of production”.
The GGS, then, excludes any government entity which charges a reasonable price for its services, and/or is not resident in the home country. Entities included in the GGS are those that are regarded as economically dependent on the government, all other government bodies are excluded from the GGS.
The latest GFS manual was issued by the IMF in 2001 and is accrual based.
GFS andv IPSASs
There are a number of technical differences between the GFS and IPSASs. Some may be able to be resolved by the PSC and the IMF working more closely together. Others will remain because of the different focus of the two frameworks, but they should mainly be able to be dealt with as matters of presentation.
To my mind, though, the major difference between the use of the GFS being proposed in Australia and IPSASs is the entity that is being addressed in each case. Under the proposed use of the GGS only resident entities which are economically dependent on government are consolidated into the financial results and the balance sheet. All other government bodies are included in other sectors.
IPSASs have adopted the notion of control for defining the reporting entity. Any entities controlled by a government (whether they are economically dependent or not) are consolidated into a whole of government financial report. So government business enterprises and financial institutions like the Reserve Bank are included in the whole of government consolidated reports.
Some examples of differences might be useful. Recently France Telecom, which is owned 55% by the French government announced a A$20 billion loss. Under the proposed GFS reporting where only GGS is shown, that loss would not have any effect on the budget or actual result for the GGS (unless the government had to put in some cash). Under the IPSAS framework the whole of government accounts would take up 55% of the $20b as a loss for the government although 45% of it would then be shown as being borne by minority interests.
Another example is the treatment of the Reserve Bank in Australia. Under GFS income from the Reserve Bank is only taken up when the dividend flows as cash. This has been in the order of $750m and it can flow prior to 30 June or after, substantially effecting the reported result. Under IPSASs the Reserve Bank’s profit (and not just its dividend) would be taken up on an accruals basis as it is earned.
Two different questions
The two systems are answering two quite different questions.
The GFS gives the answer to the question “What are the fiscal effects of the financial transactions of the general government sector on the national economy?” Its framework is designed to facilitate macro-economic analysis.
The IPSAS framework gives the answer to the question “How is the government doing financially?” It is a framework designed to produce general purpose financial statements to provide an overview of government financial performance, financial position, and cash flows.
The figure given most prominence in the Australian public sector (and probably in most public sectors) is the budget surplus or deficit. When a surplus of, say, $5 billion is announced which question do you want answered? Do you want to know how the GGS is going to effect the national economy in the coming year, or do you want to know how the government is going to do financially?
In my opinion the only reasonable answer is both.
But in reading the figures the reader needs to understand the basis of their preparation. At the moment I suspect that the average reader, including some of the “experts”, simply pick up the announced surplus or deficit and use it for their analysis and interpretation without due regard to its underlying framework. In other words they have an answer, but they are not sure which question has been asked.
I think that the two systems can and should work together. They both use similar principles and are derived from the same data base. Perhaps there could be a separate GFS statement within the financial statements called a “Financial Impact Statement” that makes it much clearer how the result being reported should be interpreted.
Public sector v private sector standards
Some would still argue that conceptually the accounting for public and private sectors is different. For instance there is some debate on whether governments are able to be obligated as required under the definition of a liability.
I agree My feeling is that time is proving those arguments wrong. An asset is still an asset, a liability a liability, an expense an expense and a revenue a revenue whether they are in the private or public sectors. Tthat there are some public sector circumstances which require special consideration. But I believe they are more a matter of interpreting concepts rather than changing them.
If that can be accepted, then there is a question of how public sector and private sector accounting standards should be set. At present we have a full-time International Accounting Standards Board (IASB), under an independent Board of Trustees, setting international accounting standards for the private sector. The PSC, setting international public sector accounting standards, is a committee of the International Federation of Accountants (IFAC) and its part time members are appointed from IFAC’s member bodies.
The IASB has a very heavy work program to achieve by 2005 and is strongly focused on that. The PSC is moving to the second part of its standard setting program which involves the consideration of public sector specific matters. This will be a very demanding phase.
The two bodies liaise closely together. The IASB has appointed one of its board to liaise with the PSC and the Chair of the PSC is a member of the IASB Standards Advisory Council. So at the moment both bodies are very busy with their programs and are liaising together well.
However, in the longer term consideration will have to be given as to the structure of both bodies and as to whether it would be more satisfactory for them to have even closer linkages.
These will be important discussions for Australian standard setters as they seek to harmonise with international standards in both the private and public sectors.