IPSASB issues guidance on long-term fiscal sustainability

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25 Jul, 2013

The International Public Sector Accounting Standards Board (IPSASB) has issued its first 'Recommended Practice Guideline' (RPG), providing non-mandatory guidance on reporting on the long-term sustainability of a public sector entity’s finances, including the nature and extent of financial risks that the entity faces. The guidance recognises that long-term fiscal sustainability information is broader in scope than information in financial statements, and focuses on the three dimensions of service, revenue and debt.

RPGs are a new type of pronouncement issued by the IPSASB, and they are designed to provide guidance on the broader aspects of financial reporting that are outside the financial statements. RPGs are considered 'good practice' and entities are encouraged to apply them, but compliance with RPGs is not required in order for an entity's financial statements to comply with International Public Sector Accounting Standards (IPSAS). In this context, Recommended Practice Guideline 1 Reporting on the Long-Term Sustainability of an Entity’s Finances (RPG 1) provides guidance on providing information about a public sector entity's projected flows which underlie its long-term fiscal sustainability, including projected inflows and outflows related to the provision of goods and services and programs providing social benefits using current policy assumptions over a specified time horizon.

RPG 1 is the result of a long project and consultation process, which initially began as a project on accounting for 'social policy obligations' in 2002 and more recently saw an exposure draft issued in October 2011.  The importance of the project has been amplified by the global financial crisis and the sovereign debt crisis.

The IPSASB recognised that financial statements in themselves could not provide sufficient information about a public sector entity's long term fiscal sustainability, as the IPSASB's Conceptual Framework determined that an entity could not recognise an asset for future tax receipts and liabilities for future obligations such as social benefits which had been legislated. Accordingly, RPG 1 focuses on the provision of projections of future inflows and outflows, including future capital expenditure, over a specified time horizon.

Under the RPG, projections are prepared on the basis of current policy assumptions, and assumptions about future economic and other conditions.  The projections may be based on relevant budgets and forecasts already prepared, and may make use of assumptions and projections prepared by others, such as finance ministries. The time period for the projection will depend on balancing verifiability, faithful representation and relevance, reflect the characteristics of the entity and the longevity of its key programs, and will often be presented in a tabular format. Additional guidance is provided on factors such as demographic and economic assumptions, inflation and discount rates and sensitivity analysis. The RPG also sets out the minimum disclosure requirements surrounding the projections and the overall long-term fiscal sustainability information.

When an entity reports on its long-term fiscal sustainability, it discusses three inter-related dimensions, by reference to their capacity and vulnerabilities, which are summarised below:

DimensionCapacity focusVulnerabilities
Can current services be maintained given current revenue policies and debt constraints?
Capacity to maintain or vary the volume and quality of services provided or the entitlement programs delivered Willingness of recipients and beneficiaries to accept reductions in services and entitlements
Not having the ability to determine or vary service levels, for example where another level of government determines the level of services to be provided
Can entities collect sufficient revenue to maintain service levels given debt constraints?
Capacity to vary existing taxation levels or other revenue sources or introduce new revenue sources Unwillingness of taxpayers to accept increases in taxation levels
Extent of dependence upon revenue sources outside the entity's control or influence
How sustainable is projected debt, given current service and revenue policies?
Capacity to to meet its financial commitments as they come due or to refinance or increase debt as necessary Market lender confidence
Interest rate risk

As a non-mandatory guide, RPG 1 does not have a stated effective date, but long-term fiscal sustainability information should not be described as complying with the RPG unless it complies with all of its requirements. Click for IPSASB press release (link to IFAC website).

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