IPSAS

Background

Governments around the world require private companies to be transparent about their
accounting but governments themselves are not transparent. The reasons why governments need
to be transparent are very similar to those of companies: we need to know how well they are
performing, what their fiscal position is, whether they are well managed and we cannot tell it
without good accounting. Investors are no longer confident that what governments tell them
about their finances is complete and accurate. Greater transparency - not less - is what is required
now to increase confidence of Investors. The State is the single largest public interest entity in
every country. Just as the board of directors of a private company is accountable to shareholders,
governments should be accountable to parliament and citizens. And to do that you need to be
transparent and produce accruals accounts based on the highest-quality standards.
In 2009, the World Food Programme (WFP) became the first United Nations organisation to
successfully implement IPSAS. This major organisational change was described by WFP’s
Executive Director, Ms. Josette Sheeran as a move from an ‘historical accumulation of rules that
no one could understand’ to ‘best practice’: “WFP’s financial statements used to be a Tower of
Babel; an historical accumulation of rules and requirements. Now we have joined the rest of the
world and WFP is following best practice. Updating for IPSAS requirements is less work
than trying to keep up-to-date with ad hoc detailed requirements that no one understands
completely and which have developed over many years for reasons that no one can
explain.”
INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARDS (IPSAS)

 International Public Sector Accounting Standards (IPSAS) are a full suite of standards,
designed for the public sector set by an independent, international standard setter.

 International Public Sector Accounting Standards (IPSAS) are an accounting framework

for the preparation and presentation of financial statements for the public sector.
  These standards are based on International Financial Reporting Standards (IFRS) issued
by the International Accounting Standards Board (IASB). The IPSASB’s policy is to
converge the accrual basis International Public Sector Accounting Standards (IPSASs)
with IFRSs issued by the International Accounting Standards Board (IASB) where
appropriate for public sector entities.

 The IPSASB (formerly Public Sector Committee (PSC)) is a Board of IFAC formed to
develop and issue under its own authority International Public Sector Accounting
Standards (IPSASs).

 The objectives of the IPSASB are to serve the public interest by developing high quality
public sector financial reporting standards and by facilitating the convergence of
international and national standards, thereby enhancing the quality and uniformity of
financial reporting throughout the world.

 Currently there are 42 standards, Over 40 Countries apply Accrual IPSAS (Kara,
2012).IPSAS also applied in European Commission projects and International
organization like UN, NATO, WIPO and EU. UN replaced its UNSAS with IPSAS
through UN general assembly resolution 60/283 in July 2006.
 The development of IPSAS has its origin in the Accounting profession as a way to
improve the transparency and accountability of governments and their agencies by
improving and standardizing financial reporting.
 Ian Carruthers the chair of IPSASB reiterates that the Non mandatory guidelines the
recommended practice guidelines emphasizes on service performance reporting and long
term financial sustainability.

Adoption of IPSAS in Kenya

 The Public Sector Accounting Standards Board (PSASB) was established as part of
(Public Financial Management (PFM) reforms in Kenya following the promulgation of
the new Constitution in 2010 and the subsequent enactment of the Public Finance
Management (PFM) Act in 2012.
  The PSASB is a statutory, standard setting body established under the Sections 192 to
195 of the Public Financial Management Act, 2012. The Board is a representative entity
and consists of nominees from the National Treasury, Controller of Budget.
Intergovernmental Budget and Economic Council, Auditor General, Institute of Certified
Public Accountants of Kenya , Association of Professional Societies of East Africa,
Capital Markets Authority, Institute of Internal Auditors and Institute of Certified Public
Secretaries of Kenya.

 The mandate of the Board is to set generally accepted accounting and financial system
standards for the public sector, develop and pronounce generally accepted internal
auditing standards.

 The Board is also mandated to mainstreaming of best practices for good governance,
internal controls and risk management in the public sector.
 The Board is the only standard setter of Accounting and Auditing Standards for the
Public Sector in Kenya.
 The PSASB through a Gazette Notice No. 1554 dated 8th August 2014, signed by the
Cabinet Secretary on 8 July 2014, adopted IPSAS and IFRS for use by public sector
entities. Retrospective application for the year ended June 2014 was encouraged by
PSASB.

 The use of IFRS and IPSAS was therefore formally adopted and applied for the first year
in the year ending 30 th June 2014. 2015/2016 financial year is the third year of
implementation of the standards that were gazette by PSASB in 2014.

Benefits from adoption of IPSAS

a) Alignment with International best practice- IPSASs are developed after consultations
with a wide variety of stakeholders ,because they incorporate the widest ranging views,
 they are likely to lead to increase quality of financial statements of government and
government agencies
b) Improve accountability, transparency and disclosures of government activities and
resources to the public.
c) Enable better decision making
d) Acceptability accounts by donors and other external parties. Will improve reliability of
accounts and boost the confidence of external agencies such as donors on dependability
of accounts for example in credit worthiness analysis.
e) Enhanced comparability of financial information. Use of IPSAS across public sector
entities and even governments will enhance comparability among the entities and
Governments.
f) Improvement of professionalism of public sector accountants as training and capacity
building has to be undertaken on the new IPSAS framework.
g) Overall economic growth and development. With reduced misuse of public funds
increased emphasis on performance management and transparency, resources will be put
to their intended use. Ultimately, this will yield improved standards of living and
sustainable economic development.
h) Adoption of IPSASs will improve the audit of public institutions. This will translate into
timely audit report.

Challenges facing adoption of IPSAS

a) Legal barriers – In some jurisdictions, the reporting framework for government and
government agencies is stipulated in law. Thus the adoption of IPSASs would be
subordinate to the entrenched legal reporting framework.
b) The question for change management must always come to the for front
c) There exists budgetary constraints – The initial adoption of IPSAS will require hefty
investment in staff and other resources. Most government especially in the third world
cannot spare these resources.
d) In some instances the standard may not be suitable for reporting in an entity
e) The success of the process of adoption of IPSAS hinges significantly on the ability of the
entity to establish a wide pool of qualified personnel
f) Low literacy in IFRSs- Various countries have continued to face challenges in the
adoption of IFRSs. The IPSASs framework borrows quite heavily from IFRSs.This
means that low IFRSs, This means that low IFRS literacy will negatively impact the
adoption of IPSASs
g) The engagement of top level management and other stakeholders
h) There exists no clear roadmap for implementation of standards golbally

Proposals on overcoming the highlighted challenges

i. Partnership between standard setters and Government
ii. Legislative and legal reviews
iii. Gap analysis of current practices versus IPSAS and craft appropriate strategies
iv. Establish project implementation structures and teams with the requisite capacity to
oversee the process
v. IPSASB should generate and disseminate guidelines on interpretation and
implementation IPSASs.
vi. Improve on capacity within the implementation departments through
vii. Formation of an all-inclusive standard committee
viii. Adoption of IPSAS framework should be integrated
ix. The development partners should not encourage parallel accounting and reporting for
projects.
x. Knowledge and experience sharing a national and international
LIST OF IPSAS WITH CORRESPONDING IFRS

International Public Sector Accounting Standards (IPSAS) are issued by the International Public Sector
Accounting Standards Board (IPSASB).

# Title Based on

IPSAS 1 Presentation of Financial Statements IAS 1

IPSAS 2 Cash Flow Statements IAS 7

IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors IAS 8

IPSAS 4 The Effects of Changes in Foreign Exchange Rates IAS 21

IPSAS 5 Borrowing Costs IAS 23

IPSAS 6 Consolidated and Separate Financial Statements (superseded) IAS 27

IPSAS 7 Investments in Associates (superseded) IAS 28

IPSAS 8 Interests in Joint Ventures (superseded) IAS 31

IPSAS 9 Revenue from Exchange Transactions IAS 18

IPSAS 10 Financial Reporting in Hyperinflationary Economies IAS 29

IPSAS 11 Construction Contracts IAS 11

IPSAS 12 Inventories IAS 2

IPSAS 13 Leases IAS 17

IPSAS 14 Events After the Reporting Date IAS 10

IPSAS 15 Financial Instruments: Disclosure and Presentation (superseded)

IPSAS 16 Investment Property IAS 40

IPSAS 17 Property, Plant and Equipment IAS 16

IPSAS 18 Segment Reporting IAS 14

IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets IAS 37

IPSAS 20 Related Party Disclosures IAS 24

IPSAS 21 Impairment of Non-Cash-Generating Assets IAS 36

IPSAS 22 Disclosure of Financial Information About the General Government Sector n/a

IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) n/a

IPSAS 24 Presentation of Budget Information in Financial Statements n/a

IPSAS 25 Employee Benefits (superseded) IAS 19

IPSAS 26 Impairment of Cash-Generating Assets IAS 36

IPSAS 27 Agriculture IAS 41

IPSAS 28 Financial Instruments: Presentation IAS 32

IPSAS 29 Financial Instruments: Recognition and Measurement IAS 39

IPSAS 30 Financial Instruments: Disclosures IFRS 7

 IPSAS 31 Intangible Assets IAS 38

IPSAS 32 Service Concession Arrangements: Grantor IFRIC 12

IPSAS 33 First-time Adoption of Accrual Basis IPSASs n/a

IPSAS 34 Separate Financial Statements IAS 27

IPSAS 35 Consolidated Financial Statements IFRS 10

IPSAS 36 Investments in Associates and Joint Ventures IAS 28

IPSAS 37 Joint Arrangements IFRS 11

IPSAS 38 Disclosure of Interests in Other Entities IFRS 12

IPSAS 39 Employee Benefits IAS 19

IPSAS 40 Public Sector Combinations n/a

IPSAS 41 Financial Instruments IFRS 9

IPSAS 42 Social Benefits

IPSAS 21: Impairment of non-cash generating assets

 The objective of this standard is to prescribe procedures which an entity applies to determine
whether a non-cash generating asset is impaired and to ensure that impairment losses are
recognized.
 A non-cash generating assets are the assets that do not generate any direct cash inflows to the
Government like public roads and public dams.
 Unlike cash generating assets that are assets that generates direct cash inflows to the
Government.
 Unlike IAS 36(Impairment of assets).IPSAS 21 does not apply to non-cash generating assets
carried at revalued amounts.
 Impairment is the loss in the future economic benefits or service potential of an asset over and
above the loss due to depreciation.
 Impairment loss is the loss in value from carrying amount to the recoverable amount.
 Carrying amount is the accounting book value of an asset
 The recoverable amount for a non cash generating asset is the net social benefit (NSB) that the
public derive from the use of the asset it will be measured in terms of the net replacement
costs.
 To illustrate impairment consider a purpose built storage facility owned by a military unit which
is no longer needed although it is functional but not fully depreciated. Because of its specialized
nature it cannot be leased out or disposes of since it is no longer capable of providing the entity
with service potential, it is considered to be impaired.
 An entity shall assess at each reporting date whether there is any indication that an asset may
be impaired
 An impairment loss arises if the recoverable amount of an asset is less than the carrying value of
the asset and is recognized immediately in income statement.
 Impairment Loss = Carrying value less recoverable value
Carrying value = current net book value of the asset
Recoverable amount = the higher of Fair value of an asset (less cost to sell) and its value in use
(present value of the assets remaining service potential)
 It is note worthy that IPSAS 21 measures the value in use of a non- cash generating asset as the
present value of the assets remaining service potential using a number of approaches
 In contrast IAS 36 measures this value for a cash generating asset at the present value of future
cash flows from the asset. IPSAS 21 also only deals with the impairment of individual assets and
does not include cash generating units.
 The recoverable service amount (receivable amount) may also be measured in terms of
restoration costs.
 Net replacement cost is the net cost of coming up with a new asset or the net cost of replacing
an existing asset.
 Net restoration cost is the net cost of repairing the existing asset to a useable condition.

Example

In 1993 the Nairobi county government constructed public primary school at a cost of sh.25
million. It was estimated that the school would be used for 40 years. By the end of 2013, the
school population had declined from 1,500 students to 400 students as result of population shift
caused by bankruptcy of a major employer in the area. The management has no expectation
that enrolment will increase in future such that the upper storeys would be reopened. The
current replacement cost of the school is estimated at sh 13 million.

Solution

Impairment loss = Carrying amount- recoverable amount

Sh. ‘000’
Carrying amount
Cost 25,000
Accumulated depreciation 25,000/40 * 20 12,000
 Net Book Value 12,500

Recoverable amount (Higher the fair value or value in use) or net

replacement cost

Replacement cost (net cost of coming up with a new asset or cost of 13,000
replacing an existing asset)
Accumulated depreciation cost (13,000/40)*20 (6,500)

Recoverable service amount 6,500

Impairment loss = Carrying amount – Recoverable amount 6,000

= 12,500- 6,500

IPSAS 23: REVENUE FROM NON-EXCHANGETRANSACTIONS (TAXES AND TRANSFERS)

 In a non-exchange transaction, an entity receives value from another entity without directly
receiving approximately equal value of exchange
 Transfer in the context of the standards are inflows of future economic benefits or services
potential from non-exchange transactions other than taxes
 Transfers include grants, debts forgiveness, fines, bequests, gifts, deductions and goods and
services in kind.
 With regard to taxes the standard stipulates that:
i. An entity is required to recognize an asset in respect of taxes when the taxable
event occurs and the asset recognition criteria are met. The revenue arises for the
government but not for other entities, for example, where the tax is collected by an
agency, the revenue accrues to the government but not to the agency, items such as
fines and penalties are not considered as part of taxes.
ii. Tax revenue shall be determined at gross amount and it shall not be reduced for
expenses paid through the tax system, these are amounts payable by the
government whether or not individual pay taxes.
iii. Taxation revenue shall be grossed up for the amount of tax expenditure, for
example, home owners may be provided with mortgage interest relief, and
insurance payers may be provided insurance relief e.t.c. If a tax payer does not pay
tax, he does not access the concessions/relief. This type of concessions/reliefs are
called tax expenditures.

IPSAS 24: PRESENTATIONOF BUDGET INFORMATION IN FINANCIAL STATEMENTS

 This standard requires that financial statements of public sector entities which make
their approved budgets publicly available to include a comparison of actual amounts
 with the amounts in the original and final budget together with an explanation of any
material difference between budget and actual amounts.
 The disclosure of comparative information in respect of the previous period is not
required.

Example 1

The following information has been compiled by the Ministry of Finance for the fiscal year ended 30
June 2008.

Budgeted Actual
Sh ‘000’ Shs. ‘000’
Receipts
Revenue from taxes 150,000 130,000
Donations and grants IMF and 20,000 15,000
world bank
Donations and grants from 15,000 16,000
Agencies
Borrowings National 100,000 70,000
Revenues from trading activities 60,000 75,000

Payments
Health 70,000 60,000
Education 150,000 134,000
Defense 30,000 20,000
Housing 45,000 55,000
Internal security 60,000 75,000
Others 40,000 30,000

Required

Prepare the budget information that the Ministry of Finance should present based on the requirements
of ipsas 24 (presentation of budget)

Budgeted Actual (Over)/Under

provision
Sh ‘000’ Shs. ‘000’
Receipts
Revenue from taxes 150,000 130,000 (12,000)
Donations and grants 20,000 15,000 (5,000)
IMF and world bank
Donations and grants 15,000 16,000 1000
from Agencies
Borrowings National 100,000 70,000 (30,000)
 Borrowings International 40,000 80,000 40,000
Revenues from trading 60,000 75,000 15.000
activities
Total receipts 385,000 394,000 9,000
Payments
Health 70,000 60,000 10,000
Education 150,000 134,000 16,000
Defense 30,000 20,000 10,000
Housing 45,000 55,000 (10,000)
Internal security 60,000 75,000 (15,000)
Others 40,000 60,000 20,000
Total Payments (395,000) (404,000) (9000)
Net Receipts payments (10,000) (10,000) 0

Assignment

Question 1

The following summary of receipts and payments was extracted from the records of Ministry of Finance
for the fiscal year ended 30 June 2010.

Actual Original Final Budget

sh “billion” Budget “billion”
Sh “billion”
RECEIPTS Taxation 300 250 280
Aid from International agencies 100 150 120
Borrowing 200 180 210
Disposal of assets 100 80 90
Trading activities 200 180 190
Other receipts 50 40 70
PAYMENT Health 200 250 190
S Education 300 280 300
Defense 100 110 100
Housing 80 100 90
Others 200 180 190

Required

The statement of comparison of budget and actual amounts for the fiscal year ended 30 June 2010 in
accordance with International Public sector accounting standard (IPSAS 24: Presentation of Budget
information in Financial statements).
Question 2

On January 2004, the government built an office at cost of sh. 50 million. The building was expected to
provide service for 40 years. On 31 December 2013, after 10 years of use a fire caused severe structural
damage and due to safety reasons, the office building was closed for repairs that cost sh
35.5million.These repairs were made to restore the office building to occupiable condition. The current
cost of a new office building is sh.100 million.

Required

Impairment loss to be recognized for the office building using the cost of restoration approach.