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There are a number of questions regularly arise after the discussions between IMF and the country authorities on modernizing government accounting systems. Are accounting systems capable in producing financial statements that can provide a valid assessment of the government's financial performance and financial position? Can governments produce financial statements that are understandable and comparable across countries? Can we standardize the preparation of government financial statements across all countries? The development of the International Public Sector Accounting Standards (IPSAS) is an attempt to answer some of these questions. (Pattanayak S., 2010)
2.0 Development of International Public Sector Accounting Standards
Recognizing the need for common accounting standards for use by public sector entities, the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC) was established in late 1986. In August 1997, the PSC embarked on a Standards Program directed at developing IPSASs for financial reporting by public sector entities at the local, state, and national government levels. The initial phase of the Standards Program included developing IPSASs based on International Accounting Standards (IASs) promulgated by the former IASC (International Accounting Standards Committee) , or their subsequently revised versions, to the extent appropriate for the public sector. The IASs were originally developed for the private sector. The International Accounting Standards Board (IASB) is the successor of the IASC. The IASB is responsible for developing the International Financial Reporting Standards or IFRSs (new name for the IASs issued after 2001) primarily for business enterprises. In November 2004, the PSC's name was changed to the International Public Sector Accounting Standards Board (IPSASB) and its terms of reference updated to reflect that the IPSASB would focus on issuing IPSASs. (Pattanayak S., 2010) IPSASB was formed to address the needs of those involved in public sector financial reporting, accounting and auditing.(Abd Rauf, F., 2008) In 2005, the IPSASB reaffirmed its commitment to the objective of converging IPSASs with IFRSs, unless there is a public sector specific reason for a departure.(Pattanayak S., 2010)
IPSASs represent international best practices in financial reporting by public sector entities. It aims to improve the quality of public sector financial management, and to provide advice on financial reporting, accounting, and auditing issues, thereby increasing transparency and accountability in the public sector.(Abd Rauf, F., 2008) IPSASs issued 26 standards on the accrual basis of accounting and 1 standard on the cash basis of accounting.(Pattanayak S., 2010)
IPSASs set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events in general purpose financial statements of public sector entities, which includes national governments, regional (e.g.,state, provincial, territorial) governments, local (e.g.,city, town) governments and related governmental entities (e.g.,agencies, boards and commissions).(Wiki, 2010) This standards do not apply to Government Business Enterprises.(Abd Rauf, F., 2008)
3. 0 Practicability of IPSASs
The unique nature of the credit crisis and the unprecedented response by governments around the world has reinforced the importance of high-quality standards for financial reporting by governments. This has increased the need for accountability in the public sector and for transparency in its financial dealings.(Wiki, 2010) Thus, it results in more countries are in the process of adopting IPSASs. (Countries that in process of adopting IPSASs are listed in the appendix). But then admit that there are only five countries have fully adopted accrual accounting and apply accounting standards that are broadly consistent with IPSAS requirements which are Australia, Canada, New Zealand, United States of America and United kingdom.
According to the research by Johan Christiaens on " Impact of IPSAS on Reforming Governmental Financial Information Systems", it is clear that IPSAS will not be used frequently in most of the countries. The local governments of Baden-Württemberg, Greece, Italy and Saxony-Anhalt and the central governments of Flanders, Italy and Wallonia are planning to introduce an accrual based financial information system, but none of these will link the new accounting legislation to the IPSASs. Only central governments in Netherlands and Norway will use IPSAS when converting the current cash accounting system to an accrual based system. (Christiaens J., 2009)
4.0 Impact of IPSASs
There is always a question mark on why are there only five countries have fully adopted accrual accounting. What are the claim of advantages of using accrual accounting and what are the actual impact of IPSASs bring to the government accounting? Let us review them from the actual evidence of the real benefits achieved by introducing full accrual accounting in UK, Australia and New Zealand.(Andy Wynne, 2008)
4.1 Evidence from UK
UK National Audit Office(NAO) has concluded that the move to accrual accounting (in a report issued in 2003) on the Government's financial management reforms is too soon to identify any discernible benefits from better resource management in terms of contributing to improve public services.(Andy Wynne, 2008)
After five years, NAO published a follow-up report and made another conclusion that the accruals-based accounting gave departments better understanding on how they are using their financial resources, for example by offering more detailed information to manage their assets and liabilities. Besides, it also help them to identify under-utilized assets and dispose of those no longer required.(Andy Wynne, 2008)
However, one of the negative impact of accrual accounting which has been identified is the unnecessary complexity and incomprehensibility of information. Another problem is the costs of introducing accrual accounting. The costs will be ongoing rather than being 'one off'. For example, the increased costs of employing more professionally qualified accountants(Andy Wynne, 2008)
In an article for the International Public Sector Bulletin (February, 2008), the lead researcher, Howard Mellett indicated that no positive impact on decision making was found by adopting accrual accounting. Its measures didn't influence 'rent or buy' or 'retain or dispose' decisions. Similarly, no evidence was found in recognizing opportunity cost of capital.(Andy Wynne, 2008)
Besides, Noel Hepworth, the former leader of CIPFA (UK's public sector accounting body) concluded that accrual accounting is risky because introducing accrual accounting is costly, time consuming and requires a diversion of resources from other activities. It requires a great deal of co- operation from key actors and needs significant changes of substance to the organization. Moreover, accrual accounting provides wide scope for the exercise of judgment. This will require technical knowledge, a disciplined approach and a capable audit system to monitor the exercise of judgment.(Andy Wynne, 2008)
Members of the UK parliament also complained about the complexity of the Government's financial reporting. They claimed that "even members with financial or business experience find difficult in understanding the financial information provided". As a result, it causes confusion and inefficiency for Parliamentary scrutiny in public spending. (Andy Wynne, 2008)
4.2 Evidence from Australia
A leading Australian academic has claimed that "the current presentation of accrual budgets and financial statements of Australian Government departments has become a controversial matter. It has led to widespread dissatisfaction in Parliament and parts of the Public Service".(Andy Wynne, 2008)
The Australia Committee considers that the adoption of accrual accounting and budgeting has the potential for enhancing the management of the Commonwealth's funding and expenditure and has done so to an extent. Nevertheless, the associated outcomes and outputs framework of accrual budgeting which improve in transparency have made the Parliament become more challenging in controlling the appropriations processes.(Andy Wynne, 2008)
Despite this, the number of professionally qualified accountants working across the UK central government increased nearly fourfold from almost 600 in 1989 to 2200 in 2003 (the period over which accrual based accounting was introduced) In addition, the auditors fees for the UK National Audit Office increased by 67% with the introduction of accrual accounting in 2001 and 2002.
4.3 Evidence from New Zealand
In the case of New Zealand, two academics concluded that the financial mechanisms built on accrual accounting base, over the long term, had a harmful effect on departmental capability by escaping parliamentary control and understanding. They also argued that this reform "promised significantly more in terms of efficiency, better service, and increased public choice than it delivered in practice".(Andy Wynne, 2008)
Just like UK and Australia, the introduction of accrual accounting in New Zealand has also been accompanied by misunderstandings and confusion. Debits and credits were muddled with fiscal targets and capital expenditure; and cash and accruals were muddled with departments being expected to retain cash from their accrual-based appropriations. (Andy Wynne, 2008)
By reviewing the evidence above, it is clear that there are positive and negative impacts of IPSASs. Although the fact that the IPSASs are based on IFRS/IAS, which are international business accounting rules, the power of the country specific business accounting rules slows down the IPSAS compliance process. In order to overcome this, a cultural change is necessary. As this will take time, it can be concluded that there is still a long way to go on the road leading to full IPSAS compliance.(Christiaens J., 2009) In conclusion, IPSASB will need to continue its efforts to make the countries all around the world being more familiar with IPSAS.