Accounting for social policy obligations has long confounded the preparers and users of governmental financial reports.The controversy currently surrounding the gargantuan obligations of the Social Security Administration is an example of the difficulties of dealing with long-term, big-number obligations of vaguely defined liability.
Such numbers can be hard to forecast and tricky to report in a politically charged environment. Questions of long-term liability relate to a wide variety of social benefits: old age pensions, unemployment insurance, welfare, health care, public education, disaster relief, subsidized housing, and arguably even such unquestionable obligations as public protection, the judicial system and national defense.
The International Public Sector Accounting Standards Board of the International Federation of Accountants has begun to deal with this thorny issue.
Comments on a discussion memorandum have come in from around the world, and the board hopes to issue a proposed standard within the next year or so.
The standard would not resolve conflicts over Social Security, because the U.S. government recognizes the standards of the Federal Accounting Standards Advisory Board, rather than of the IPSASB. Some of the concepts raised in the memorandum, however, relate to accounting for the sustainability of Social Security, and whether its promised benefits should be counted as a liability.
Likewise, American state and local governments do not meet IPSASB standards because the Governmental Accounting Standards Board establishes generally accepted accounting principles for non-federal governmental entities. GASB wants to harmonize its standards with those of the IPSASB.
GASB technical director David Bean said that the IPSASB memorandum is legally moot but technically interesting. "There are definitely ideas [in the memorandum] that relate to the FASAB and whether Social Security should be an accounting liability," Bean said. "It isn't a legal liability, but should we be looking at moral obligations as well as legal obligations?"
Other moral, rather than legal, obligations, Bean said, include such services as education, transportation and public protection.
The memorandum also relates to GASB's project on its conceptual framework. The board is now struggling with a definition of "liability," and the answer is far from obvious, especially for a "non-exchange transaction" such as the typical social policy benefit, including Social Security.
Big liabilities
As social policy obligations can constitute more than half of a national government's budget, the numbers are huge. The eventual IPSASB standard will have a proportionately huge impact on the world economy. The impact will be especially hard-felt in European countries that are especially generous in their obligations to citizens.
The discussion memorandum does not deal with the post-employment benefits of government personnel.
The fundamental issue is one of liabilities and how they should be treated in financial reporting. The memorandum suggests that "liabilities" be defined as "present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential."
"One of the big issues for governments in Europe, North America and Latin America - and less so in the Asia-Pacific region - is old-age pensions," said IFAC technical manager Matthew Bohun. "Funds like the U.S. Social Security were set up a long time ago, when demographics were different and expected to stay the same. The issue today is whether the funds are being properly reported in financial reports."
Bohun explained that "liability" is already defined in international accounting and auditing standards, but some countries have established funds that cannot be recognized as a liability because the government has a certain discretion in deciding what will be paid out, and when. Such funds are largely unfunded.
The memorandum identifies three measurement options: recognition when the beneficiary satisfies all eligibility requirements; threshold criteria; and key participatory events, such as the entry of a worker into the workforce.
The IPSASB steering committee proposed certain standards and, lacking a consensus, suggested various alternatives for others. They concluded, for example, that defense and public education would not be considered liabilities, but could not agree on several other issues.
"The big issue is old-age pension obligation," Bohun said. "The steering committee did not reach a consensus view on this issue. That largely depended on the experiences of social security systems in their own countries. Some were of the view that a liability should be recognized in accordance with an actuarial assessment that would be entered in the balance sheet, with changes recorded as an expense each year. Others felt that these obligations should be recorded as an expense when they are paid. Others have intermediate views."
The U.S. Social Security Administration has a trust fund into which Social Security taxes are paid and from which benefits are withdrawn. The system does not require the government to recognize a liability for the present value of future benefits payable. For the year ending Sept. 30, 2005, for example, the government must recognize a liability for the Social Security benefits due in October.
The Association of Government Accountants was the only U.S.-based organization to offer a comment letter on the memorandum. The group's letter agreed with most of the points recommended by the IPSASB steering committee, but expressed concern over requiring disclosures about the overall sustainability of a government's social benefits.
"The audit issues that might arise if 'sustainability disclosures' were included in the financial statements are the same as would arise when auditing any 'estimated' information," the letter stated. "Much of the information or factors that relate to sustainability will be subjective."
Canadian organizations, especially local and provincial governments, offered much more comment, because Canada's Institute of Chartered Accountants is developing a standard that is expected to mirror that of the IPSASB.
Bohun said that the vagueness of long-term social policy obligations and the difficulties of defining "liabilities" make an international standard all the more important.
"We don't think that governments should be less accountable than private corporations," Bohun said. "Government financial reports should be at least as transparent, if not more so, than public corporations'."
