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IPSASB proposes public sector consolidation, joint arrangement and related requirements based on IFRS

  • IPSASB (International Public Sector Accounting Standards Board) (mid gray) Image

22 Oct 2013

The International Public Sector Accounting Standards Board (IPSASB) has published a series of five exposure drafts on accounting for interests in other entities. The five exposure drafts are based on the 'package of five' standards issued by the IASB in May 2011 dealing with consolidation, joint arrangements, the equity method, separate financial statements and disclosure. However, the IPSASB is proposing to make a number of amendments to the IASB's pronouncements to tailor them for the public sector.

The exposure drafts follow the IPSASB practice of, where relevant, developing its International Public Sector Accounting Standards (IPSAS) based on IFRS, and follows a Memorandum of Understanding between the IASB and IFAC signed in November 2011, which among other objectives, seeks "to highlight financial reporting issues where alignment between the requirements of the IASB and the requirements of the IPSASB is necessary".

The exposure drafts are based on IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures, including the amendments made in 2012 in relation to transitional guidance and investment entities. The proposals in the IPSASB exposure drafts align with the requirements of these equivalent IASB pronouncements, except where departure is considered justified. In this regard, the IPSASB notes various reasons for modifying IFRS in developing the proposals, including:

  • Modifying terminology to reflect public sector needs and align with the vocabulary used in other standards
  • Considering the interaction with the Government Finance Statistics and the System of National Accounts
  • Reflecting differences between existing IPSAS and IFRS, e.g. the IPSASB has not yet issued an equivalent standard to IFRS 9 Financial Instruments
  • Developing additional guidance addressing specific public sector issues.

Some of the differences between the proposals and the IASB's requirements include:

  • Modification of the scope exemptions from the requirement to prepare consolidated financial statements, including focusing on the information needs of users
  • Provide modified guidance on when an entity would be considered an 'investment entity' that is exempt from consolidation, and to extend the requirement to measure investments on the fair value basis to the consolidated financial statements of a controlling entity of an investment entity, even if it is itself not an investment entity
  • Inclusion of additional guidance on when the definitions of 'power' and 'control' may be met in the public sector context, focused on concepts such as regulatory control, economic dependence, special voting rights, and considering 'benefits' rather than 'returns' (including the assessment of non-financial benefits)
  • Modifying the measurement of an investment in an associate or joint venture at initial recognition in some cases, and requiring an investor to have a 'quantifiable ownership interest' before the equity method is applied
  • Permit an entity to use the equity method in its separate financial statements to account for its interests in controlled entities, joint ventures and associates (the IASB is also considering introducing this option into IAS 27)
  • Changing the associated disclosure requirements to reflect public sector needs.

The proposals would replace IPSAS 6 Consolidated and Separate Financial Statements, IPSAS 7 Investments in Associates and IPSAS 8 Interests in Joint Ventures. As these IPSASs were themselves largely based on previous IASB requirements, the changes proposed from these standards are consistent with those faced by for-profit entities applying the 'package of five' IASB standards, e.g. a unified control model based on control and power, the elimination of proportionate consolidation, and numerous additional disclosures. Additionally, the exposure drafts propose the elimination of permitted alternative treatments in some cases where an interest was 'temporary' (an earlier IFRS requirement).

The consideration of how the new consolidation, joint venture and disclosure requirements might be applied in the public sector has already been subject to some debate. For instance, the Australian Accounting Standards Board (AASB) had previously issued proposals on this matter in the Australian context, and these proposals where considered by the IPSASB in developing its own proposals. Additionally, the New Zealand External Reporting Board (XRB) has recently published a policy paper where it states that standards issued by the IASB on new topics will not be included in New Zealand standards for 'public benefit entities' unless the IPSASB addresses the issue. The proposals could also impact the proposed harmonised government accounting standards in Europe, based on 'European Public Sector Accounting Standards' (EPSAS) which would be based on IPSAS.

The IPSASB exposure drafts are open for comment until 28 February 2014.

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