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ICAA report calls for public sector accounting standard reform

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31 May 2013

The Institute of Chartered Accountants in Australia (ICAA) has released a report calling for reform of global public sector reporting, including the 'transformation' of the International Public Sector Accounting Standards Board (IPSASB) and the integration of the private and public sector financial reporting models under the auspices of the IFRS Foundation, possibly eventually leading in the longer term to a potential merger of the IPSASB and International Accounting Standards Board (IASB).

The report, It’s time...for global, high quality public sector financial reporting, notes an "emerging consensus of the need for improvements in the quality of financial reporting by governments and their agencies around the world" (such as the February 2013 meeting of the G20 financial ministers and central bank governors), and points out that the IPSASB has a key role to play.

The report sets out a vision of "high-quality, transaction-neutral, global financial reporting standards that are applied by reporting entities in the private and public sectors around the world". It argues that the IASB is a role model for the possible approach to reform of the public sector reporting focused on a 'transformed' IPSASB.

The report recommends the IPSASB should be restructured and adequately resourced, and that it operate in an environment where it can act, and be perceived to act, independently. It notes:

  • the possibility of placing the IPSASB within the scope of the Public Interest Oversight Board (PIOB) of the International Federation of Accountants (IFAC) may not be sufficient to ensure the perception of independence exists
  • the majority of members of the IPSASB should be appointed on a full-time basis, mirroring the process that occurred when the International Accounting Standards Committee (IASC) was reconstituted as the IASB
  • a new resourcing model is necessary, as the current level of funding is inadequate to maintain a full-time professional staff, follow an adequate due process, and ensure liaison with constituents.

In terms of the possibility moving toward 'transaction neutral' standards, the report states:

Some have interpreted transaction-neutral accounting standards as meaning that identical standards would apply to entities in both sectors or that private sector standards should apply to public sector entities. This is a misunderstanding of the notion of transaction-neutral standards.

Transaction-neutral standards should reflect the nature of the transactions and other events affecting the entity in question. For example, a for-profit entity (whether in the private or public sector) acquires and uses assets to generate profits for stakeholders... [whereas] a not-for-profit entity (whether in the private or public sector) acquires and uses assets to provide needed goods and services in accordance with its service delivery objective, not to directly generate future cash flows. ... The impairment standards should be the same for for-profit entities in either sector but different from the impairment standards for not-for-profit entities in either sector

To achieve such an outcome, it is acknowledged that a transaction-neutral conceptual framework would be a necessary base for standard setting.

The report considers possible approaches to developing the vision, including creating a completely new body, adopting the standards of a countries as the base for new standards, and a global standard setter established and funded by governments. It concludes:

... we believe the IFRS Foundation course of action, which would involve bringing the IPSASB into the IFRS Foundation, would be a more efficient strategy and would be more likely to be successful in achieving the vision.

The report recommends the following steps to implement this preferred course of action:

  • Amending the IFRS Foundation Constitution to include development of standards for the public sector, and the transaction neutral standard concept
  • Adding members from the public sector to the IFRS Monitoring Board and IFRS Foundation Trustees (ideally equal public and private representation)
  • Reconstituting the IPSASB with a smaller number of full-time members, with consideration in the longer term of merging the IASB and IPSASB, "after the transition to the modified IFRS Foundation has occurred and the two boards have been successfully pursuing their mandates"
  • Enlarging the IFRS Foundation's funding model to include contributions from public sector constituents.

Click for access to the report (link to the ICAA website).

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