IPSASB works to improve public sector accounting standards amid coronavirus

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The International Public Sector Accounting Standards Board is trying to prod more countries to adopt its standards along with the accrual method of accounting, as nations around the world face unexpected expenses and revenue shortfalls arising from the novel coronavirus pandemic.

“In terms of the accounting standards, what we're saying is that actually we've got an increasingly complete set of International Public Sector Accounting Standards, or IPSAS,” said IPSASB chair Ian Carruthers, who has led the board since 2016. “We did a staff Q&A, which looked at different types of interventions that governments are making, be they expenditures on the tax side or guarantees, and inspections on the financial side, to show how those were relevant to what professionals working in different governments are going to need.”

IPSASB issued an exposure draft in February on the expenditure side for governments looking at their revenue and transfer expenses, and it has been extending the comment deadlines on some of its other upcoming standards to give its stakeholders more time to offer their feedback.

“A lot of the interventions we’re seeing are actually government expenditures, whether that's transferring resources to individuals, households, firms or other parts of government,” said Carruthers. “The real question is are those just one-off payments or are they some form of performance requirement or restriction on the use of the money and so on? We're seeing that draft guidance actually starting to be tested in practice, which from a board perspective is really important. But it's also nice to be in a position where we've provided guidance just immediately before the pandemic hit. Hopefully that's going to be of real use.”

The staff Q&A document on COVID-19 answers some of the questions that people might have about the accounting ramifications of government interventions in response to the pandemic. It could be helpful to entities in the U.S., even though state and local governments tend to rely on the domestic U.S. GAAP standard-setters like the Governmental Accounting Standards Board. While U.S. GAAP doesn’t specifically address government aid to businesses, some accountants analogize to International Financial Reporting Standards.

“It obviously depends on where you are around the world as to where your source of guidance actually is, because the U.S. — both on the corporate side and public sector side — has very well established standards,” said Carruthers. “You have FASB setting standards for the private sector and you also have the Governmental Accounting Standards Board and the Federal Accounting Standards Advisory Board in the U.S. Elsewhere around the world, you have different frameworks, and increasingly what we're seeing is that as governments are making the move on cash reporting to accrual reporting, they’re starting to pick up on our standards, International Public Sector Accounting Standards, which actually address the issues that they're facing. Where they haven't got their own domestic standards for accrual reporting for governments, they’re turning to those. You see that happening in Latin America, Africa and Asia, in particular.”

IPSASB is affiliated with the International Federation of Accountants, which produced a report in November 2018 with the Chartered Institute of Public Finance and Accountancy predicting that by 2023, 65 percent of governments around the world will be reporting on an accrual basis. At the time of the report, only 25 percent of governments worldwide were using accrual accounting (see our story).

“You're seeing a very rapid change,” said Carruthers. “Increasingly you're also seeing an interest from the international institutions, not just in the narrow measures like government debt, but actually what the broader impact on government balance sheets will be. Coming out of this crisis, what's the impact in terms of guarantees that governments have taken on? Will those turn into government expenditure in future years? If they've essentially made equity injections, what’s the situation? Did they really get assets or are they write-offs? Those sorts of broader measures are going to be really important because of the impact on government finances of the interventions that are being made at the moment.”

He believes there will be a long-term impact on what governments can do later with the funds they have available. “You’re going to see some hard choices being made about where do I put money,” said Carruthers. “Do I spend it on health? Do I have taxes to stimulate the economy and what do I do about infrastructure spend? Those choices will go forward over the years. What you need then is really good information, and you need it on the basis of international standards, not standards for individual jurisdictions, but from around the world so that you can really compare apples and apples.”

After massive government interventions this year in Washington like the $2 trillion CARES Act, the U.S. government’s budget deficit reached $737 billion last month, according to the Congressional Budget Office, and it’s expected to hit $3.7 trillion by the end of this year. Other countries are also pouring massive amounts of money into shoring up their economy in the face of the pandemic. The International Monetary Fund has been tracking the spending in response to the COVID-19 crisis and published a Fiscal Monitor report last month on how governments are dealing with the crisis.

“What they've done is drawn together intelligence on what's going on in terms of intervention that governments are making,” said Carruthers. “You can see the range of interventions going on there, and what's happening in terms of expenditure being made, income tax deferrals, guarantees and so on. They're starting to take a balance sheet focus, which they have done for the last 18 months or so.”

The report describes huge amounts of money being spent in the U.S. and other G-7 countries to battle the disease and its impact on the economy.

“Pretty much all of them have got significant expenditures,” said Carruthers. “They've got significant amounts of forgiveness or tax deferrals, and they're also doing guarantee schemes to support borrowing by the private sector. The trouble is some of those may not result in immediate cash flows, but they will have an impact in future years. This is why you actually need to look at the balance sheet. You need to understand what's going on in terms of the impacts on receivables and in terms of guarantees where you’ve actually acquired assets as a result of the crisis. There are a lot of different complexities which governments are going to need to understand. That's really where they need the international standards because not only do you need accrual, but you need independently set standards so you’ve got a yardstick so that you can start to compare between governments.”

Countries are slowly moving from the cash basis to the accrual basis of accounting, but that could accelerate after the current crisis. “All countries are facing challenges as a result of the pandemic,” said Carruthers. “We are all in this together. But it's not just countries in Latin America that actually still account on a cash basis. For example, the federal government in Germany is still on a cash basis. You've got a very mixed picture. In Latin America, you've got countries like Chile and Colombia, which have published their first sets of statements based on International Public Sector Accounting Standards over the last year or so. So you will be able to see the impact upon their public finances when they actually publish the financial statements for the current financial year. But there's also a big debate going on within Europe, for example, about whether accrual accounting is right for Europe. That's why countries like Germany are still on a cash basis and some others on different sets of standards.”

He believes more government should move to the accrual basis so they can make better fiscal projections as they move forward and try to recover the economy from the pandemic. “What accrual reporting can provide is better information for fiscal management,” he said.

Like FASB and GASB, IPSASB has been looking at deferring the effective dates of some of its upcoming accounting standards to give stakeholders more time to comment on them and get ready for them. “We certainly want to make sure that we support our stakeholders using IPSAS through the pandemic,” said Carruthers. “We are looking at the draft standards that we have out for consultation, so the immediate action we've taken is to extend the consultation period on those three exposure drafts on revenue and transfer expenses, which are really important to our stakeholders. We're giving them more time to comment on those to really consult their constituents before getting back to us. Then we will have a look at the effective dates for our standards going forward. That's something that we'll need to discuss with the board. We have two standards that have an effective date of the beginning of January 2022. We will look at whether we should extend those to give people relief in terms of encouraging implementation of the standards, and allowing for the fact that they are likely to have to divert efforts elsewhere during the period of the pandemic. We have a board discussion coming up in early June and we'll look at the situation at that stage, and that will probably be when we make proposals on the effective dates.”

At IPSASB’s last quarterly board meeting in March in New York, 14 of the 18 board members were present physically, while others joined remotely. However, the next board meeting in June will be completely remote.

“June will be our first virtual board meeting, and we'll have to keep an eye on what happens going forward,” said Carruthers. “Although we can keep our business going in terms of standard setting, there's a big difference as our sister standard-setting boards, on audit and ethics [the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants], are meeting the week after us. In terms of how much business you can get through, it does impact on discussions and so on, both in the meeting but also outside the meeting.”

In the meantime, he foresees more governments taking a closer look at their accounting as they make tremendous outlays to fight the pandemic. “This is a time like no other in terms of the scale of what's happening, and it's happening around the world,” said Carruthers. “All governments are increasing expenditure. They're going to suffer impacts on both levels of tax: tax receivables going forward, guarantees and so on. There are huge challenges, and this is the time that you really do need accrual information, not just the conventional debt measures. You need to have not only accrual information, but consistent accrual information. Governments need to take the right decisions going forward. The markets and the international institutions are going to need comparable data to say, ‘Where are we going to put the resources? Where are the resources needed? And what will be the cost of that? What should we charge for that money?’ Wherever you look, there are needs for information, and that really just adds to the imperative that already existed to move over to accrual reporting for government finances.”

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