Roadmap for adoption Overview of the cash and accrual accounting basis
Module Three Introduction History of Convergence Global Adoption IPSAS in Nigeria Political and Economic Benefits Cash and Accrual Accounting Moving to Accrual Accounting
3
At the end of this presentation, the participants would be able to Understand the need for and history behind the global adoption of IPSAS Recap the progress that has been made in adopting IPSAS in Nigeria Appreciate the benefits of adopting IPSAS
IPSAS - International Public Sector Accounting Standards A set of accounting standards issued by the International Public Sector Accounting Standards Board (IPSASB) for use by public sector entities around the world for the preparation of Financial Statements
IPSASs are professionally developed, high quality, global accounting standards that require accounting on cash or accrual basis
5 Increasing collaboration, trade and commerce amongst the countries of the world have necessitated increased uniformity in the standards guiding financial statements For the statement to remain comprehensible and convey the same information to users across the world Hitherto, countries of the world have defined and set the standards of financial reporting in their individual territories. The need for the development of unified accounting standards has been the primary driver of the International Public Sector Accounting Standards, for public sector financial reporting. The commercial entities across the world are moving towards International Financial Reporting Standards (IFRS), governments are harmonizing with International Public Sector Accounting Standards (IPSAS).
6 Nigeria, a leading African nation with a population of over 150million people and a foremost OPEC member, with a public sector dominated economy, has identified the need to consider the value proposition of the IPSAS and implement same in order to remain relevant in the comity of nations. An increasing number of governments and intergovernmental organizations produce financial statements on the accrual-basis of accounting in accordance with IPSAS or IPSAS-similar standards. The current economic crisis and the severe fiscal constraints being experienced by many governments has underscored the need for governments to transparently report all their assets and liabilities.
IPSAS facilitates the alignment with best accounting practices through the application of credible, independent accounting standards on a full accrual basis. It improves consistency and comparability of financial statements as a result of the detailed requirements and guidance provided in each standard. Accounting for all assets and liabilities improves internal control and provides more comprehensive information about costs that will better support results-based management The information contained in accrual accounting IPSAS financial statements is considered useful, both for accountability and for decision-making purposes. Financial reports prepared in accordance with IPSAS allow users to assess the accountability for all resources the entity controls and the deployment of those resources, assess the financial position, financial performance, and cash flows of the entity and make decisions about providing resources to, or doing business with, the entity. 8 Efforts at the International convergence of accounting standards dates back to late 1950s in response to post World War II economic integration and related increases in cross-border capital flows. The initial efforts focused on harmonization- reducing differences among the accounting principles used in major countries of the world. By 1990s, the focus shifted from harmonization to the concept of convergence with greater interest on the development of a single set of high-quality, international accounting standards that would be used in countries of the world. The International Accounting Standards Committee (IASC), formed in 1973 was the first international standards-setting body. In 2001, the IASC was reorganized to become the International Accounting Standards Board (IASB) - an independent international standard setter. 9 By 2009, over 100 countries of the world had adopted the international accounting standards and either require or permit the use of standards issued by IASB or a local variant of such standards. The FASB of the U.S. and the IASB have been working together since 2002 to improve and converge U.S. GAAP and IFRS. It is hoped that by 2015, there will be a single set of reporting standards between the FASB and IASB. As of 2009, Japan and China were also working to converge their standards with the international accounting standards. Countries that have adopted the IFRS for her private sector organisations have also been seen to adopt the IPSAS for her government agencies.
10 The following are the major timelines in the evolution of the international convergence of accounting standards:
Need for International Accounting & Auditing Standards is identified 1960 Accountants International Study Group is formed 1966 International Accounting Standards Committee (IASC) is established 1973 IFAC is founded 1977 IASC embarks on its comparability and improvements project 1987 IASC undertakes a Core Standard Program: Identifying what constitutes the core standards 1995 IASC is reconstituted in the International Accounting Standard Board (IASB) 2001 The European Union adopted the international standards 2002 The FASB and IASB issues a Memorandum of Understanding 2006 The Nigerian FEC issues a directive on the adoption of IPSAS in Nigeria 2010 11 Approximately 113 countries have adopted or are in the process of adopting IPSAS. The Seven countries that are fully accrual basis are, New Zealand, Australia, USA, UK, Canada, France and Columbia Implementation of IPSAS or IFRS is already underway in other international organisations and UN organisations. World Bank and IMF prepare their financial statements in accordance with IFRS, while UN adopted IPSAS in 2010.
the IPSAS maintain the accounting treatment and original text of the IFRS, unless there is a significant public sector issue that warrants a departure.
The IPSAS are also developed for financial reporting issues that are either not addressed by adapting an IFRS or for which no IFRS has been developed.
For the purposes of IPSAS, the public sector refers to national governments, regional governments (e.g., state, provincial, and territorial), local governments (e.g., town and city), and related governmental entities (e.g., agencies, boards, commissions, and enterprises).
The IPSAS are intended to be applied in the preparation of general-purpose financial reports that are intended to meet the needs of users who cannot otherwise command reports to meet their specific information needs
12 Strategic plans and reports become more meaningful as increased transparency provides a basis for member states to assess whether resources are being used effectively and efficiently. IPSAS supports efficient internal controls and results-based management. Adoption of IPSAS will provide a unified approach to managing all funds- regular; specific; voluntary; trust and service funds, and will allow for benchmarking with similar institutions and forecasting future flow of all resources to the organization. To achieve FGNs of strengthening Governance and Accountability, reduce corruption and deliver services more effectively and efficiently, the Government received a credit from the International Development Association under the Economic Reform and Governance Project (ERGP) to conduct a Gap analysis between the International Public sector Accounting Standard (IPSAS) and relevant National Standard and Reporting System with a view of improving the state of Public Financial Management and Reporting. The specific objective of the assessment is to develop a report for the countries authorities which will among other includes: Provide the Government and other stakeholders with a common well based knowledge as to where the country stands against the internationally developed norms of Public sector Financial Reporting; Assess the consequences of the prevailing variances; Provide a basis for measuring interim compliance Chart paths for improved compliance with IPSAS cash basis . Provide a road map for migration to accrual based IPSAS. The adoption of a firmly based Accounting, reporting and auditing framework is no doubt a solid value proposition as it provides for competent Financial Reporting and transparency. Consequently a transition plan was announced in July 2010 by the Federal Executive Council to adopt the provisions of the IFRS and IPSAS for the private and public sector respectively. A road map for implementation was launched in September 2010
Benefits of the Transition With IPSAS gap analysis and the bridging of the identified gaps in Nigeria, the users of Financial information will be able to benefit from a common set of Public sector accounting and Auditing standards issued by International Federation of Accountants and International Organization of supreme Audit institutions that are consistent, coherent and understandable. Migration to IPSAS based Standards will enable the provision of more meaningful information for decision makers and Improved consistency, quality and credibility of the Financial Reporting System Strategic plans and reports prepared will be more meaningful as increased transparency provides a basis for development partners and legislature to access whether resources are being used effectively and efficiently. Thus Enhancing Accountability, transparency and harmonization The implementation of IPSAS based Standards makes it possible for efficient internal controls and results based management Its adoption has provided the country with a unified approach to managing all funds and it has also ensured benchmarking with similar institutions and forecasting future flows of all resources to the public organizations In July 2012, the Office of the Accountant General of the Federation and the Financial reporting Council of Nigeria resolve to collaborate in promoting the uses of Accounting Standards in the Public Sector. A FAAC sub committee on the adoption of IPSAS was constituted. The committee had been working in creating awareness among stakeholders as well as organising capacity building interventions for various officials at level levels in the private sector among other strategic activities In January 2013, the decision to shift IPSAS transition date to January 1 st , 2014 for Cash Basis IPSAS and January 1 st , 2016 to Accrual Basis IPSAS was announced Towards this end, A national chart of accounts has been developed and communicated to officials at all levels of government
Sub Committee Deliverables Unified National Chart of Accounts Users Manual of the National Chart of Accounts Format for General Purpose Financial Statements (GPFS) IPSAS Cash Basis including statutory reports, statistical reports , performance reports and accounting policies Format for General Purpose Financial Statements (GPFS) IPSAS Accrual Basis including statutory reports, statistical reports , performance reports and accounting policies IPSAS Compliant Budget Templates
These templates have been approved by FAAC for use by the three tiers of government.
In order to ensure seamless and successful implementation of the various activities for the adoption of the provisions of IPSAS in the country, Implementation Committees were constituted at the Federal, State and Local Government Levels.
17 Political Benefits Economic Benefits Accountability: IPSAS requirement for increased disclosure in accounting reports increases the level of accountability in government Transparency: where IPSAS is adopted, full disclosure become an imperative of public sector accounting government Improved Credibility/Integrity: government accounting/reporting are not credible if government itself decides the rules Political Leverage: Government may be required to provide accounting information by a higher or legal authority e.g. UN, ICJ, etc International Best Practice & Comparability: IPSAS seeks to ensure that financial statements prepared in the basis of it are internationally comparable Comparable information assists the stakeholders in assessing how well their resources have been utilized. Greater Disclosures: IPSAS encourages full disclosure, which beams the light of transparency, integrity and accountability
Building confidence in Donor Agencies and Lenders: Adoption of IPSAS increases the countrys eligibility to access economic benefits from donor agencies (USDP, USAID etc), private sector financial institutions (Bonds and Bonds rating agencies), official institutions (IMF and World Bank) etc Improved Service Delivery: As a result of greater accountability and transparency, adoption of IPSAS will improve Value for Money (VfM) expenditure Aggregate Reporting: Adoption of IPSAS will ensure a holistic reporting of government financial transactions and positions Enhanced Public-Private Partnership arrangements: collaborative efforts between the public and private sectors is enhanced with both are running on similar set of accounting standards- IPSAS and IFRS Economic Leverage: Sovereign nations are induced with the prospect of commensurate benefits. Government susceptible to economic leverage are more likely to adopt IPSAS.
18 Political Benefits Economic Benefits Increased Control of Public Agencies: the increased disclosure, transparency and comparability IPSAS engenders will permeate the public sector bringing about greater accountability Enhanced Implementation of the Freedom of Information (FOI) Act 2011: The accountability and transparency requirements of IPSAS are consistent with and supports the provisions of the Nigerian FOI Act 2011 which seeks to promote access to government information
An IPSAS compliant economy keeps abreast of the latest market trend thereby become competitive in the global market place Increased Cross-border Investment and Foreign Direct Investment: the adoption of IPSAS will put the country on the same accounting pedestal as several other countries of the world, increasing the propensity to generate more cross-border and foreign direct investments through greater transparency and a lower cost of capital for potential investors
19 Political will and ownership Technical capacity- training, re-training and personnel development Public Orientation and Enlightenment Automated Information Systems Financial Ability Modular implementation 20 The global adoption of IPSAS is based on facts and values hinged on the following: 1. Accountability: while the private sector will regard management as being accountable solely to business owners, public managers are accountable to multiple stakeholders and more directly to elected officials and ultimately to the people 2. Transparency: IPSAS promotes openness and access to information by citizens and their understanding of decision-making mechanisms, thereby bridging the divide between the government and the governed 3. International Benchmark: IPSAS has become the global accounting language of countries around the world, necessary for information sharing and comparability 4. Aggregated Reporting: IPSAS encourages an all-encompassing financial reporting where consolidation is not the only level of aggregation. It encourages columns for governmental and business activities revealing the true and actual position of governments finances
The difference between cash and accrual basis of accounting stem from the basis of accounting adopted by the reporting entity.
Cash Basis of accounting is the recognition and recording of income and expenses only when cash is actually received (income) and expenses actually paid (expenditure).
Whilst accrual basis of accounting recognises transactions and events when they occur ( and not only when cash or its equivalent is received or paid Cameralistic/cash-based accounting has been the mainstream accounting and financial information system in the sector for many years, with some governments using and preferring this method. Although cash accounting has its merits, it gives no information concerning liabilities and the future benefits for assets, accountability and decision-making. Accrual accounting was introduced as an alternative to cash accounting to improve the financial management of public sector entities Between the opposite poles of cash and accrual accounting, two other bases of accounting were identified by the International Federation of Accountants (IFAC): modified cash accounting and modified accrual accounting.
Cameralistic/Cash based Accounting Transactions and other events are recognized only when cash is received or paid.
Modified Cash Accounting Transactions and other events are recognized on a cash basis during the year. Additionally, unpaid accounts and/ or receivables are also taken into account by keeping the book open for a month after the years end.
Modified Accrual Accounting Transactions and other events are recognized on an accrual basis,but certain classes of assets or liabilities are not recognized. A typical example is the expensing of all non-financial assets at the time of purchase.
Accrual Accounting Transactions and other events are recognized when they occur, meaning they are recorded in the accounting records and recognized in the financial statements of the periods to which they relate.
Accrual accounting is an accounting methodology under which Transactions are recognized as the underlying economic events occur ,regardless of the timing of the related cash receipts and payments. Following this methodology, revenues are recognized when income is earned, and expenses are recognized when liabilities are incurred or resources consumed. This contrasts with the cash-accounting basis under which revenues and expenditures are recognized when cash is received and paid respectively.
Accrual accounting in the context of the public sector would generally imply the recording of transactions on an accrual basis, and the preparation of accrual-based financial statements for the government as a whole. systematically determining the full costs of a government's activities. Full cost information (including noncash costs such as depreciation) is essential for assessing the efficiency of government services and thus is a key element of any public sector performance management framework. requires the preparation of government balance sheets, and this involves the identification measurement, and periodic reporting of government assets and liabilities, it requires governments to adopt a more systematic approach for identifying, keeping track of, and valuing all assets and liabilities. encourage the development of systems (such as asset registers) and procedures for planning and management of assets and liabilities.
The introduction of accrual accounting, particularly when accompanied by related reform initiatives to improve public sector performance, can promote a general improvement in the management of assets, as well as a heightened awareness of the cost of holding and deploying assets. In a similar fashion, the requirement to identify, measure, and report government liabilities, and the resulting enhanced transparency, can foster better financial planning to ensure that the government is able to meet its liabilities as they fall due.
Accrual accounting helps to generate behavioral changes on the part of budget decision makers and managers. For example, the accrual based additional information they receive may prompt legislators to ask ministers and bureaucrats questions that they otherwise would not have asked. Such questions may concern, for example, the status and role of fiscal policy, or the use of public resources, including capital assets. In this way, an accrual accounting system may facilitate changes in the attitudes and behavior of ministers and civil servants, and hence to changes in government policy, that benefit the citizens. The progress toward accrual accounting is good news for financial reformers, who have long held the view that the accrual approach is better suited for financial management, accountability, risk management and decision-making. his is due to the fact that it provides better insight on the financial position of governmental bodies, liabilities and the future benefits of assets. However, research have shown that the adoption of a single accrual method is some way off as most entities consider the IPSAS as more of an aspiration than a feasible destination.
The global financial crisis and in particular, the crucial role that sovereign debt recognition has played would seem to be a teachable moment for focusing the attention of leadership on the advantages of accrual accounting..
An acceptable cash accounting based system Improving existing systems and processes Political Ownership Executive championing and Legislative backup and utilisation Technical Capacity Core accounting and IT Skills, Consider Outsourcing Integrated Systems Proven functionality in General Ledger, Purchases, accounts payable, assets management Sequencing of reform steps Supportive in a broader public sector reform agenda budgeting, etc Implementation timeframe and sequencing Spaced reforms of budget classification, cash accounting, and fiscal reporting Implementation staging by business areas - From simple to complex transactions..financial before non financial assets and liabilities Implementation staging by sector or size, and pilot studies State owned enterprises before full government reporting