2015 Accountants Conference Theme: Transforming the accountancy profession in this era of high technology Adoption of International Public Sector Accounting Standards (IPSASs) April 2015
Presentation Outline No. Agenda item 1 2 3 4 Transition paths and key steps in the conversion process Overview of IPSAS adoption and key challenges Critical success factors for the implementation of IPSAS Conclusion Page 2
Transition paths and conversion process overview Page 3
Issues public entities are facing today Transparency and accountability As the sovereign debt crisis has highlighted, high-quality accounting and financial reporting standards are vitally needed in the public sector to enhance transparency and accountability. Demand for timely information Citizens, parliaments and other interest groups are increasingly demanding timely, reliable and detailed information from governments. Dependency on capital markets Private investors and rating agencies, in particular, are not satisfied when governments only provide them with cash information; they want a broader range of data, such as pension liabilities and depreciation. Robust financial management systems International financing and donor organizations are urging their beneficiaries to implement robust and sound public financial management systems. International Public Sector Accounting Standards (IPSAS) are the only globally accepted set of standards for the public sector. Harmonized public sector accounting The European Union has expressed strong support for harmonized public sector accounting and is expected to use IPSAS as its starting point for the development of its new European Public Sector Accounting Standards (EPSAS). Page 4
Why does IPSAS/accrual accounting matter? Just a few headlines Greece: Strong evidence for manipulation of the deficit and debt data presented Germany: 55 billion accounting mistake reduces debt levels UK: Banks not consolidated due to temporary control Almost everywhere: Pension liabilities not included Who is next to follow? But it is clear: Uncertainty damages the economic development Transparency and Accountability Relevant for all of us! Page 5
Discussion on transition paths (1/2) Non-IPSAS-Compliance IPSAS-Compliance Cash Basis (Modified) Cash Basis Cash Basis Accrual Basis Cash Basis Accrual Basis (Modified) Accrual Basis Accrual Basis Page 6
Discussion on transition paths criteria for choosing a transition path (2/2) Analysis of the starting point for the transition Jurisdictional setting (level of governments affected by transition, centralized/decentralized government, legal situation etc.) IT-infrastructure: What IT-systems are in place? What are future plans about the IT infrastructure? Capacity Manpower Technical/accounting knowledge Scope of reform (e.g. also implementation of accrual budgeting and/or performance budgeting) Verifiability: Standards as a solid base for auditing purposes Page 7
Major steps of a public sector GAAP conversion The diagram below describes the 8 major steps in a conversion project: 1. Sensitivity 3. Legal foundation 5. IT and processes 7. Audit readiness 1 2 3 4 5 6 7 8 2. Gap analysis and feasibility 4. Capacity building 6. First-time adoption, opening balance sheet 8. Consolidation Page 8
Overview of IPSAS Adoption Page 9
Relevance of accrual accounting in OECD countries Full Accrual Cash, but transitioning to accruals Cash Australia Austria Belgium Brazil Canada China Czech Republic Estonia France Germany Hungary Iceland Italy * Korea Latvia Lithuania Luxembourg ** New Zealand Norway * Poland Portugal Slovak Republic Sweden Switzerland United Kingdom United States Results of the 2013 OECD accruals questionnaire * Supplemental accrual information provided ** ESA95 Page 10
Overview of IPSAS adoption Momentum in adoption About 40 countries have adopted or are adopting accrual basis IPSAS or comparable standards, including Austria, Brazil, Chile, Estonia, France, Israel, Lithuania, Malaysia, New Zealand, Russia, Slovakia, South Africa, Spain, Switzerland Also sub-national governments are adopting IPSAS when the decentralized structure allows them to move independently e.g. Prefecture of Tokyo, State of Hesse, States of Zurich/Geneva Entire UN system, OECD, NATO, Interpol and EC Page 11
Overview of countries which plan or already adopt IPSASs Argentina Indonesia Pakistan Tanzania Armenia Israel Peru Ukraine Brazil Latvia Romania Uruguay Cyprus Lithuania Russia France Malaysia South Africa Ghana Morocco Spain India Nigeria Switzerland (Source: www.ipsasb.org, September 2008) Page 12
Conversion impact and challenges Main Challenges Political/Executive support Legal framework Accrual accounting know how/capacity building Staff capacities for reform IT/ERP system implementation Impact of reform on the organisation, i.e. changes to processes and systems Registration and measurement of assets and liabilities/opening balance sheet Changes in Presentation Technology Process IPSAS Conversion Additional Disclosure Requirements ERP Environment Financial Systems Architecture New Valuation Rules Organization 1. IPSAS conversion will impact all levels of accounting in a government 2. IPSAS conversions will impact several areas outside of the accounting function! 3. A top level conversion to IPSAS may not be sufficient! Page 13
The costs of an accounting reform are the main reason not to adopt accrual accounting Main reasons not to adopt accrual accounting 14 13 12 11 10 8 6 5 5 4 2 0 Costs of accounting reforms Cash accounting complements budgetary accounting Past implementation problems of reforms Balance sheets and profit/loss calculations are less important in the public sector Source: Toward transparency, A comparative study on the challenges of reporting for governments and public bodies around the world, Ernst & Young 2011 Page 14
Costs of adopting accrual accounting One of the main obstacles [ ] is the high expected cost of implementation. Country Scope Implementation Cost Czech Republic Four functional phases of the Integrated Information System Cost per inhabitant 100 Mill. EUR 9,58 EUR Denmark ERP and reconciliation system 60 Mill. EUR 10,75 EUR France Solely French state: Expenses incurred by preparer, information systems, training 1.5 Bill. EUR 22,95 EUR Hesse IT-system 240 Mill. EUR 39,40 EUR Netherlands All costs (only national level) 129 261 Mill. EUR 7,68 15,54 EUR Slovakia Software, hardware, training 22 Mill. EUR 10,71 EUR Switzerland Federal Gov.: ERP-system 38 Mill. EUR 4,78 EUR Source: Commission Staff Working Document, European Commission, Brussels, March 2013 Page 15
Key Success Factors adoption of IPSAS Page 16
Key Success Factors for the adoption of IPSAS Sustained political/executive support Effective engagement and buy-in of stakeholders Ownership Technical capacity training, re-training and technical assistance (where needed) Public awareness and communications Automated information systems - GIFMIS Adequate funding Appropriate legal framework Page 17
Conclusion Page 18
Conclusion IPSAS/accrual accounting will not solve financial problems of the public sector, it would contribute to and promote better financial management in the future A clearer financial picture in the first years of implementation need to be seen as incentive for improvement and stimulus to further reforms Accrual accounting information needs to get embedded in decision-making and made use of by decision makers Scope of information increases significantly; key is to make use of these information Finally, accrual accounting requires a change of mind Page 19
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