IPSAS: A case for Accounting Reform at the OAS

2010 ICGFM Winter Conference

Practical Uses of New Standards to Enhance Transparency and Program
Performance

Enrique Iglesias Conference Center

Inter-American Development Bank
1330 New York, Avenue
Washington, DC 20577
USA
Table of Contents
Pages
3-6
I. OAS in context
7-10
II. The move to IPSAS
11-23
III. Implementation challenges
24-25
IV. Progress report
26-28
V. 2011 and beyond

2
I. OAS in context

3
 Member States
• Public International organization
• Purpose: Brings together Western Hemisphere nations to achieve objectives of human rights, democracy, security and development.
• Authoritative Body: General Assembly
• Annual Budget: $170 million
• Workforce: 1,295 (permanent and temporary staff and project contractors stationed at Headquarters and in member states)

(1) On June 3, 2009, the Ministers of Foreign Affairs of the Americas adopted resolution AG/RES. 2438 (XXXIX-O/09), that resolves that the 1962 resolution, which excluded the Government of Cuba from its
participation in the inter-American system, ceases to have effect in the Organization of American States (OAS). The 2009 resolution states that the participation of the Republic of Cuba in the OAS will be the result of
a process of dialogue initiated at the request of the Government of Cuba, and in accordance with the practices, purposes, and principles of the OAS.
(2) On July 5, 2009, the Organization of American States (OAS) invoked Article 21 of the Inter-American Democratic Charter, suspending Honduras from active participation in the hemispheric body. The unanimous
decision was adopted as a result of the June 28 coup d’état that expelled President José Manuel Zelaya from office. Diplomatic initiatives are ongoing to foster the restoration of democracy to Honduras. 4
Structure

5
 OAS Funds
THE NEED FOR CONVERGENCE:

•Resources are accounted for in several funds: Operating Fund, Voluntary Fund, Special Revenue Funds, Fiduciary
Funds, Internal Service funds, and operate under different bases of accounting.

FUND DESCRIPTION ACCOUNTING STANDARDS

- Quotas from the Member States. - OAS proprietary standards –
Operating Fund - Voluntary contributions. modified cash basis
(“Regular Fund”) (“Budgetary & Financial Rules”)

Special Revenue funds - Contributions for specific projects/objectives. - Some US GAAP

(“Specific Funds”) - Some B & F rules

- Funds held in trust for specific objectives. - US GAAP

Fiduciary funds
(Medical Benefits, Retirement & Pension Fund)

- Indirect cost recovery, common costs. - B & F rules

Internal service fund

6
II. The move to IPSAS

7
 International Drivers

EUROPE
LATIN AMERICA - EC
Governments have - OECD
mandated or in the - NATO
process of adopting - Interpol
IPSAS.

UN/OAS MOVE TO IPSAS AFRICA

- UN: 2006 Many African
- OAS mandate to explore: 2007 governments in the
- OAS mandate to adopt: 2010 process of
adopting cash basis
IPSAS.

Institutions that support it: World Bank, IMF, Asian and Inter American
Development Banks.

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* Source: http://ec.europa.eu/budget/library/documents/implement_control/conf_accounting_1008/bergmann_en.pdf
 OAS Case Study
THE MOVE TO IPSAS
External Stimuli
– UN decision to move to IPSAS (2006)
– Worldwide move to accrual accounting.
PROJECT HIGHLIGHTS
Reform Drivers • Adoption of IPSAS is happening in the context
– Member States
of wider management reforms.
– Donors
– US Congress legislation.
– Finance Department • Substantial financing from the Canadian
International Development Agency (CIDA).
Stakeholders - $1.9 million
– Member States
– Donors • Expected implementation date: Jan 2012
– Senior Management
– OAS Staff
• Project cost: estimated $1.5 – 2 million.
Barriers
– Driving the message
– General implementation challenges

Institutional Arrangements
– Business culture
– Financial arrangements
– Unclear legal linkages with specialized organs
– Smaller size & budget
* Analytical framework derived from the Financial Management Reform Process Model. 9
 IPSAS Guidance

THE UN IPSAS TASKFORCE

IPSAS Board
Decentralized nature of UN operations and
differences among agencies highlights the
need for centralized body to issue guidance.
UN IPSAS Taskforce
– Working groups tackle specific accounting
issues.

– 56 working papers issued to date.

OAS guidance
– OAS uses these papers as reference.

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III.Implementation challenges

11
 Implementation Challenges

INTERNAL EXTERNAL

Business culture (Relative) Novelty factor

- Operational changes driven by the adoption of - Lack of documented experiences in the
accrual accounting in a budget-driven Western Hemisphere.
organization.
Simultaneous implementation
- ‘Fund Accounting’ - An advantage because of operational and
structural similarities in some cases.
Political support
- Explaining accrual accounting and its benefits to BUT
non-accountants.
- UN agencies are competing for limited expert
- Resistance to change resources.

Project Financing
- Within the context of challenging financial times
and competing initiatives for scarce resources.

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 Impacted areas

Employee Benefits
(terminations,
annual leave)
Expense
Recognition Investments
(obligations, (fair value)
travel/accountable
advances)

Financial
Statement
IPSAS Financial
Statements
(cash flow, disclosures,
Consolidation budget reports)

Fixed Assets Revenue

(capitalization, (quotas / pledges/
depreciation) specific fund agreements)

13
 Reporting Entity
Consolidation of controlled entities.

Current Treatment IPSAS Treatment

OAS currently has other affiliated entities and Consolidation based on power and benefit criteria.
specialized organizations. OAS prepares financial
statements for some of these.
All transactions, balances, revenue, expense between
entities within the controlling entity are eliminated.
Most are prepared in accordance with US GAAP.

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 Reporting Entity
Implementation Challenges

BEFORE ADOPTION AFTER ADOPTION

- Review of all legal documents to analyze potential

control relationships.

- Consultation with legal department and affected

parties. Impact of consolidation in fund balance.

- Assess US GAAP to IPSAS transition impact.

- Stakeholder awareness: financial statement changes.

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 Revenue Recognition
Eg: Quotas, Voluntary Fund pledges, Specific Fund contributions, interest income.

Current Treatment IPSAS Treatment

Revenue
Recorded upon receipt of cash in all funds. Binding agreements will trigger revenue
Fully reserved receivables created for all recognition and recording of receivables
agreements.
Other income (e.g., interest) accrued as
earned

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 Revenue Recognition
Implementation Challenges

BEFORE ADOPTION AFTER ADOPTION

- Review and structure donor agreements - Accelerated recognition of revenue with ‘no strings
Exchange/non-exchange distinction attached.’

Conditions yes/no - Stage of completion for exchange transactions

Trigger for revenue recognition (services).

ERP readiness - Increase in fund balance. (in some cases)

- Stakeholder awareness: - Budget execution in all funds may be based on binding
Link between commitments and fund balance. agreements with member states/donors - not cash on
hand.
De-linking of cash receipts from revenue recognition.

17
 Expense Recognition
Eg: Purchase Order obligations.
Current Treatment
Commitments fully recognized as expense at
the point of the purchase order.
Recording of these expenses is not
dependent on the good/service actually
being received.
IPSAS Treatment
Delivery principle:
Expenses would not be recorded until the
underlying good or service has actually been
received/performed and then, only the
amount applicable to that period is
recognized.
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 Expense Recognition
Implementation Challenges

BEFORE ADOPTION AFTER ADOPTION

- Exclude obligations from the Statement of Financial

- Review of policy on expense recognition.
- Stakeholder awareness:
Impact of recognizing only actual expenses rather than
the full commitment.
Reinforce need for budgetary & accounting system to
control spending.
Performance.
- Expense recognition based on delivery principle.
- Continued monitoring and recording of expense as
service is delivered.
- Disclose multi-period/year commitments that are not
part of the period’s fund balance.

19
 Employee Benefits
Eg: home travel, repatriation expenses, separation indemnity, termination pay, and health and life
insurance benefits after separation.

Current Treatment IPSAS Treatment

 OAS does not accrue employee benefits in the
Operating Fund.  Employee benefits accrued for as earned.

Results for these funds only reflect these benefits
when they are paid.
 An estimated liability for these employees is
disclosed in the footnotes to the financial
statements.
 Accrual does not include the estimated benefit cost
for field personnel.
What is not accrued
 “Accumulating, non-vesting” and “non-
accumulating” (sick leave, maternity leave.)
 Special termination benefits should not be accrued
until there is a detailed formal termination plan and
there is no realistic possibility of withdrawal.

20
 Employee Benefits
Implementation Challenges

BEFORE ADOPTION AFTER ADOPTION

- Review and analyze employee benefits

Annual leave balances.

Benefit plans (defined benefit/contribution).
- Marked increase in personnel-related liabilities.

Actuarial valuations for post employment benefits. - Establish standard procedure for recognition of
Field Staff benefits for new employees.

- Create Field Personnel Register. - Stakeholder awareness: possibility of negative fund

balance upon adoption.
- Review employee benefits for field staff.
Issue of local labor law compliance.

- ERP readiness: ability to record benefits automatically.

21
 Property Plant and Equipment
Eg: OAS buildings, cars, other project assets.

Current Treatment IPSAS Treatment

 OAS expenses the full cost of acquiring fixed assets  Cost of acquisition (cash or fair value) will be
at the time of purchase. These purchases are then distributed through the asset’s useful life.
capitalized and depreciated in a separate Fixed
Assets Fund.  Two models for valuing fixed assets on the
Statement of Financial Position (balance sheet) after
they have been first acquired and recorded at cost:
 Remaining book value is reported in the Regular
- Cost Model
Fund Statement of Assets, Liabilities and Fund
- Revaluation Model
Balance line item “Investment in the Fixed Assets
Fund.”

22
 PP&E
Implementation Challenges

BEFORE ADOPTION AFTER ADOPTION

- Review of all fixed assets (including country offices and - Assets included in the Statement for Financial
projects). Position.

- Review of fixed asset policy. - Regular appraisals if revaluation model is selected.

- Stakeholder education: impact on fund balance.
- New account created to record changes in asset fair
- Asset valuation model needs to be selected for each value if the revaluation model is used for certain
class of assets. asset classes.

- Select depreciation schedule. - Consistent application of asset valuation model and

depreciation schedule across asset classes.

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IV.Progress report

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 IPSAS at OAS: Where are we?
2007
− Mandate to explore IPSAS.
− Preliminary adoption plan
and budget approved.
− IPSAS gap analysis
completed.
IPSAS ADOPTION: ON THE ROAD TO 2012
2008 2009 2010
− Review of B&F rules − GS/OAS liaised with the − 5 IPSAS courses were
completed. UN IPSAS Taskforce to delivered during 2010 on
− receive implementation major change areas.
Documented business
guidance.
processes. − Engaged the external audit
− Progress report delivered to firm to issue expert opinion
− DFAMS personnel attended
CAAP in 2009. on major impact areas.
limited IPSAS training.
− Implemented some IPSAS
requirements in the 2009
audited financial
statements.
ONGOING
Coordination
Communication strategy.
Training
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V. 2011 and beyond

26
 Moving Forward
HIGH LEVEL GOALS FOR 2010 AND BEYOND

2010
- Deliver second progress report to the Budgetary Affairs Committee.
- External Auditors to provide expert guidance on IPSAS adoption.

2011
- Secure full financing for project.
- Recommend and adopt changes to the Budgetary and Financial Rules.
- Continue building on 2007-2010 achievements for 2012 implementation target.
- Additional training for finance/non-finance staff.
- IPSAS awareness for non-accountants.
- ERP gap analysis for IPSAS implementation readiness.

2012
- Reassessment of viability for 2012 implementation based on progress achieved in 2011.

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 Overarching themes
CHALLENGES TO BE ADDRESSED MOVING FORWARD

Bureaucratic barriers Implementation

• Approval • Timeline
• Resistance to change • Cost

Resource Availability • Detailed review of each standard

• Financial - Accounting policy changes
• Human - Business practice changes
- Risk register
Change management - Technical changes
• Communication strategy - ERP requirements
• Training
• Monitoring

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Q&A

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