International Public Sector Accounting Standards (IPSAS) is a set of accounting standards created to ensure consistent financial reporting. International Federation of Accountants (IFAC) has been working on and has developed standards based on International Accounting Standards (IAS) but adapted to the peculiarities of the public sector. IFAC first introduced a set of accounting standards, I believe there were 10 in total in 2002, and as of February 2008 there is a total of 26 Standards which encompasses pronouncements that addresses many of the financial reporting challenges faced by public Sector organizations. Adopting IPSAS for many organizations/governments is no small feat. The discussion that follows outlines some of the concerns; obstacles and challenges for would be adopters.
Implementation or the adoption of IPSAS for public sector organizations does require decisions on the part of the adopter. The challenges that they will face range from resistance to change, justification, decisions on what in the standards is relevant to the organization, an education gap (skills of current staff) and the list goes on. Without the necessary resources, top level management support and understanding of the impact the transition can be fraught with difficulties.
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The difficulties in the transition from cash based to fully IPSAS compliant accruals accounting lie mainly in the knowledge of terminology and the definitions, support of senior management and the skill set of the staff making the transition. The key areas that cause the greatest difficulty are Property Plant and Equipment, Inventory and Budgetary reconciliation to financial statements. Other areas that do cause a great deal of discussion include revenue recognition, known as revenue from exchange transactions and Revenue from non exchange transactions.
The transition from cash accounting, which is often associated with large public sector entities, can be a challenge. Particularly when you factor in many of the "Statement of Financial Position and Statement of Performance" (Balance Sheet and Income statement) accounts that represent earned but not received cash payments (accounts receivable with revenue recognized), or used but not paid for (accounts payables and expensed), not to mention fixed assets and depreciation, long-term versus short-term debt and the associated concept of beneficial rights/risks of ownership. You also need to deal with the appropriate accounting treatments for revenue recognition, expense recognition and so on.
In order to see a successful transition there are a number of things that should be done in order to minimize the impact on your organization. In order to be successful you will need to assess the situation within your organization with respect to:
What is the motivation to make the change, is it a directive, a requirement from a interested party i.e. World Bank Funding
your readiness to make the transition, is there a champion on board who can make the decisions necessary to enable the transition
the ability of your IT systems to capture the correct data, can the data be collected on a transactional level or will you need to make adjusting entries at year end in order to capture all the accruals information.
Is it possible to make the necessary changes to your accounting system to capture data appropriately or should you be looking at a new system
What will the changes to your IT system cost versus implementing a new system
What are the stakeholders' positions on the transition are they for it, against it. How are you going to ensure that stakeholders needs are addressed
Staff knowledge level, will training be needed and if so at what level and will you provide in house training or go externally to have training delivered.
How are decision made in your organization, top down, collaborative â€¦
Should you set up an "Accounting Experts Working Group" to discuss the implications of the application of IPSAS Standards
Is your organization a collection of many smaller entities which are fully responsible for their accounting?
Do you consolidate the financial information of the smaller entities, and will it be a requirement to consolidate if IPSAS is implemented? If so how different are they, do you push for one way of dealing with the accounting issues or do you allow some freedom of action and adjust for consolidation.
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Should you consider having a centralized accounting standards body within your organization to evaluate the standards, make decisions on the appropriate accounting treatments, review and recommend accounting treatments for new standards or amendments to the standards, set accounting skill requirements for staff, provide internal accounting consulting to the disparate elements of your organization and coordinate training, and who will this body report to.
Do you have a listing of all your tangible and intangible fixed assets
And the list goes onâ€¦.
The transition to IPSAS is not easy, it will require many changes in the way things are done, IT systems and Staff re-education, there will be difficulties, fortunately IFAC recognizes this and therefore, adoption after the initial transition is foreseen over a period of up to 5 years, allowing time to deal with in particular the treatment of fixed assets. NATO first adopted IPSAS for its 2006 financial statements and will be compliant to all the standards for the 2011 reporting year. Many of the entities have made the full transition and are complete while some entities are struggling with the application of some of the standards and dealing with issues related to their accounting systems.
In NATO the decision to transition from cash based to full accrual accounting on the basis was made in 2002, to be implemented in 2006 and fully compliant by 2011,with no real action plan. To the credit of the Financial Directors of the various elements within NATO, they set up a "Accounting Experts Working Group", whose work set the standard for the broad application of IPSAS across all the entities. The work of this group was on going for 4 years, and resulted in a IPSAS Application manual which was formally adopted by the Financial Directors. The "Accounting Experts Working Group" was also called upon to deal with stake holder concerns and provide explanations of the impact of the various standards. Additionally this group developed a set of training requirements that needed to be addressed at all levels in the organization and worked with an external training partner to develop and deliver NATO specific training for IPSAS.
Was NATO's implementation a textbook example on how to implement IPSAS? It was not, however, there were many lessons learned and it has been successful. The one element that did fall to the wayside was its IT based accounting systems that were custom developed to address budgetary execution and cash accounting. They found that many of their disparate systems in use were not up to the task. Some entities attempted for transformational versus transactional financial statement creation making manual adjustments in order to compensate for their systems failings. Since that time many of the entities have begun implementing new accounting systems to meet their requirements, using the transformational method as a fit gap solution until they can have a system that can address IPSAS and accrual accounting issues on a transactional level.
This topic is becoming more and more relevant because a large number of countries including Croatia, Serbia, Slovenia, and Albania are all moving towards adopting IPSAS as their method of financial reporting. There is an increasing pressure on many nations to adopt full accrual accounting using IPSAS, the pressure comes from peer pressure and often it is a requirement of lenders such as the World Bank. So it is important that the considerations in this paper be thought through sooner than later.
For more information regarding IPSAS and transition to IPSAS, please follow this link http://www.ifac.org/PublicSector/.
Marc Neal, CMA spent 4 years from 2004 to 2008 leading a team within NATO to develop a guidance document which would give the disparate organizations that make up the whole of NATO a common approach to dealing with the IPSAS Standards. The discussions were lead by Mr. Neal who assisted by Senior Accountants across NATO were able to compile a set of decisions aimed at making the transition from cash to IPSAS compliant accrual accounting easier. In his role as Chairman of NATO's IPSAS Working Group, Mr. Neal was called upon to make presentations to many different stakeholders within NATO.