Handbook of governmental accounting

Handbook of Governmental Accounting PUBLIC ADMINISTRATION AND PUBLIC POLICY A Comprehensive Publication Program EDITOR-IN-CHIEF EVAN M BERMAN Distinguished University Professor J William Fulbright Distinguished Scholar National Chengchi University Taipei, Taiwan Founding Editor JACK RABIN Public Administration as a Developing Discipline, Robert T Golembiewski Comparative National Policies on Health Care, Milton I Roemer, M.D Exclusionary Injustice: The Problem of Illegally Obtained Evidence, Steven R Schlesinger Organization Development in Public Administration, edited by Robert T Golembiewski and William B Eddy Approaches to Planned Change, Robert T Golembiewski Program Evaluation at HEW, edited by James G Abert The States and the Metropolis, Patricia S Florestano and Vincent L Marando 11 Changing Bureaucracies: Understanding the Organization before Selecting the Approach, William A Medina 12 Handbook on Public Budgeting and Financial Management, edited by Jack Rabin and Thomas D Lynch 15 Handbook on Public Personnel Administration and Labor Relations, edited by Jack Rabin, Thomas Vocino, W Bartley Hildreth, and Gerald J Miller 19 Handbook of Organization Management, edited by William B Eddy 22 Politics and Administration: Woodrow Wilson and American Public Administration, edited by Jack Rabin and James S Bowman 23 Making and Managing Policy: Formulation, Analysis, Evaluation, edited by G Ronald Gilbert 25 Decision Making in the Public Sector, edited by Lloyd G Nigro 26 Managing Administration, edited by Jack Rabin, Samuel Humes, and Brian S Morgan 27 Public Personnel Update, edited by Michael Cohen and Robert T Golembiewski 28 State and Local Government Administration, edited by Jack Rabin and Don Dodd 29 Public Administration: A Bibliographic Guide to the Literature, Howard E McCurdy 31 Handbook of Information Resource Management, edited by Jack Rabin and Edward M Jackowski 32 Public Administration in Developed Democracies: A Comparative Study, edited by Donald C Rowat 33 The Politics of Terrorism: Third Edition, edited by Michael Stohl 34 Handbook on Human Services Administration, edited by Jack Rabin and Marcia B Steinhauer 36 Ethics for Bureaucrats: An Essay on Law and Values, Second Edition, John A Rohr 37 The Guide to the Foundations of Public Administration, Daniel W Martin 39 Terrorism and Emergency Management: Policy and Administration, William L Waugh, Jr 40 Organizational Behavior and Public Management: Second Edition, Michael L Vasu, Debra W Stewart, and G David Garson 43 Government Financial Management Theory, Gerald J Miller 46 Handbook of Public Budgeting, edited by Jack Rabin 49 Handbook of Court Administration and Management, edited by Steven W Hays and Cole Blease Graham, Jr 50 Handbook of Comparative Public Budgeting and Financial Management, edited by Thomas D Lynch and Lawrence L Martin 53 Encyclopedia of Policy Studies: Second Edition, edited by Stuart S Nagel 54 Handbook of Regulation and Administrative Law, edited by David H Rosenbloom and Richard D Schwartz 55 Handbook of Bureaucracy, edited by Ali Farazmand 56 Handbook of Public Sector Labor Relations, edited by Jack Rabin, Thomas Vocino, W Bartley Hildreth, and Gerald J Miller 57 Practical Public Management, Robert T Golembiewski 58 Handbook of Public Personnel Administration, edited by Jack Rabin, Thomas Vocino, W Bartley Hildreth, and Gerald J Miller 60 Handbook of Debt Management, edited by Gerald J Miller 61 Public Administration and Law: Second Edition, David H Rosenbloom and Rosemary O’Leary 62 Handbook of Local Government Administration, edited by John J Gargan 63 Handbook of Administrative Communication, edited by James L Garnett and Alexander Kouzmin 64 Public Budgeting and Finance: Fourth Edition, edited by Robert T Golembiewski and Jack Rabin 67 Handbook of Public Finance, edited by Fred Thompson and Mark T Green 68 Organizational Behavior and Public Management: Third Edition, Michael L Vasu, Debra W Stewart, and G David Garson 69 Handbook of Economic Development, edited by Kuotsai Tom Liou 70 Handbook of Health Administration and Policy, edited by Anne Osborne Kilpatrick and James A Johnson 72 Handbook on Taxation, edited by W Bartley Hildreth and James A Richardson 73 Handbook of Comparative Public Administration in the Asia-Pacific Basin, edited by Hoi-kwok Wong and Hon S Chan 74 Handbook of Global Environmental Policy and Administration, edited by Dennis L Soden and Brent S Steel 75 Handbook of State Government Administration, edited by John J Gargan 76 Handbook of Global Legal Policy, edited by Stuart S Nagel 78 Handbook of Global Economic Policy, edited by Stuart S Nagel 79 Handbook of Strategic Management: Second Edition, edited by Jack Rabin, Gerald J Miller, and W Bartley Hildreth 80 Handbook of Global International Policy, edited by Stuart S Nagel 81 Handbook of Organizational Consultation: Second Edition, edited by Robert T Golembiewski 82 Handbook of Global Political Policy, edited by Stuart S Nagel 83 Handbook of Global Technology Policy, edited by Stuart S Nagel 84 Handbook of Criminal Justice Administration, edited by M A DuPont-Morales, Michael K Hooper, and Judy H Schmidt 85 Labor Relations in the Public Sector: Third Edition, edited by Richard C Kearney 86 Handbook of Administrative Ethics: Second Edition, edited by Terry L Cooper 87 Handbook of Organizational Behavior: Second Edition, edited by Robert T Golembiewski 88 Handbook of Global Social Policy, edited by Stuart S Nagel and Amy Robb 89 Public Administration: A Comparative Perspective, Sixth Edition, Ferrel Heady 90 Handbook of Public Quality Management, edited by Ronald J Stupak and Peter M Leitner 91 Handbook of Public Management Practice and Reform, edited by Kuotsai Tom Liou 93 Handbook of Crisis and Emergency Management, edited by Ali Farazmand 94 Handbook of Comparative and Development Public Administration: Second Edition, edited by Ali Farazmand 95 Financial Planning and Management in Public Organizations, Alan Walter Steiss and Emeka O Cyprian Nwagwu 96 Handbook of International Health Care Systems, edited by Khi V Thai, Edward T Wimberley, and Sharon M McManus 97 Handbook of Monetary Policy, edited by Jack Rabin and Glenn L Stevens 98 Handbook of Fiscal Policy, edited by Jack Rabin and Glenn L Stevens 99 Public Administration: An Interdisciplinary Critical Analysis, edited by Eran Vigoda 100 Ironies in Organizational Development: Second Edition, Revised and Expanded, edited by Robert T Golembiewski 101 Science and Technology of Terrorism and Counterterrorism, edited by Tushar K Ghosh, Mark A Prelas, Dabir S Viswanath, and Sudarshan K Loyalka 102 Strategic Management for Public and Nonprofit Organizations, Alan Walter Steiss 103 Case Studies in Public Budgeting and Financial Management: Second Edition, edited by Aman Khan and W Bartley Hildreth 104 Handbook of Conflict Management, edited by William J Pammer, Jr and Jerri Killian 105 Chaos Organization and Disaster Management, Alan Kirschenbaum 106 Handbook of Gay, Lesbian, Bisexual, and Transgender Administration and Policy, edited by Wallace Swan 107 Public Productivity Handbook: Second Edition, edited by Marc Holzer 108 Handbook of Developmental Policy Studies, edited by Gedeon M Mudacumura, Desta Mebratu and M Shamsul Haque 109 Bioterrorism in Medical and Healthcare Administration, Laure Paquette 110 International Public Policy and Management: Policy Learning Beyond Regional, Cultural, and Political Boundaries, edited by David Levi-Faur and Eran Vigoda-Gadot 111 Handbook of Public Information Systems, Second Edition, edited by G David Garson 112 Handbook of Public Sector Economics, edited by Donijo Robbins 113 Handbook of Public Administration and Policy in the European Union, edited by M Peter van der Hoek 114 Nonproliferation Issues for Weapons of Mass Destruction, Mark A Prelas and Michael S Peck 115 Common Ground, Common Future: Moral Agency in Public Administration, Professions, and Citizenship, Charles Garofalo and Dean Geuras 116 Handbook of Organization Theory and Management: The Philosophical Approach, Second Edition, edited by Thomas D Lynch and Peter L Cruise 117 International Development Governance, edited by Ahmed Shafiqul Huque and Habib Zafarullah 118 Sustainable Development Policy and Administration, edited by Gedeon M Mudacumura, Desta Mebratu, and M Shamsul Haque 119 Public Financial Management, edited by Howard A Frank 120 Handbook of Juvenile Justice: Theory and Practice, edited by Barbara Sims and Pamela Preston 121 Emerging Infectious Diseases and the Threat to Occupational Health in the U.S and Canada, edited by William Charney 122 Handbook of Technology Management in Public Administration, edited by David Greisler and Ronald J Stupak 123 Handbook of Decision Making, edited by Göktug˘ Morçöl 124 Handbook of Public Administration, Third Edition, edited by Jack Rabin, W Bartley Hildreth, and Gerald J Miller 125 Handbook of Public Policy Analysis, edited by Frank Fischer, Gerald J Miller, and Mara S Sidney 126 Elements of Effective Governance: Measurement, Accountability and Participation, edited by Kathe Callahan 127 American Public Service: Radical Reform and the Merit System, edited by James S Bowman and Jonathan P West 128 Handbook of Transportation Policy and Administration, edited by Jeremy Plant 129 The Art and Practice of Court Administration, Alexander B Aikman 130 Handbook of Globalization, Governance, and Public Administration, edited by Ali Farazmand and Jack Pinkowski 131 Handbook of Globalization and the Environment, edited by Khi V Thai, Dianne Rahm, and Jerrell D Coggburn 132 Personnel Management in Government: Politics and Process, Sixth Edition, Norma M Riccucci and Katherine C Naff 133 Handbook of Police Administration, edited by Jim Ruiz and Don Hummer 134 Handbook of Research Methods in Public Administration, Second Edition, edited by Kaifeng Yang and Gerald J Miller 135 Social and Economic Control of Alcohol: The 21st Amendment in the 21st Century, edited by Carole L Jurkiewicz and Murphy J Painter 136 Government Public Relations: A Reader, edited by Mordecai Lee 137 Handbook of Military Administration, edited by Jeffrey A Weber and Johan Eliasson 138 Disaster Management Handbook, edited by Jack Pinkowski 139 Homeland Security Handbook, edited by Jack Pinkowski 140 Health Capital and Sustainable Socioeconomic Development, edited by Patricia A Cholewka and Mitra M Motlagh 141 Handbook of Administrative Reform: An International Perspective, edited by Jerri Killian and Niklas Eklund 142 Government Budget Forecasting: Theory and Practice, edited by Jinping Sun and Thomas D Lynch 143 Handbook of Long-Term Care Administration and Policy, edited by Cynthia Massie Mara and Laura Katz Olson 144 Handbook of Employee Benefits and Administration, edited by Christopher G Reddick and Jerrell D Coggburn 145 Business Improvement Districts: Research, Theories, and Controversies, edited by Göktug˘ Morçöl, Lorlene Hoyt, Jack W Meek, and Ulf Zimmermann 146 International Handbook of Public Procurement, edited by Khi V Thai 147 State and Local Pension Fund Management, Jun Peng 148 Contracting for Services in State and Local Government Agencies, William Sims Curry 149 Understanding Research Methods: A Guide for the Public and Nonprofit Manager, Donijo Robbins 150 Labor Relations in the Public Sector, Fourth Edition, Richard Kearney 151 Performance-Based Management Systems: Effective Implementation and Maintenance, Patria de Lancer Julnes 152 Handbook of Governmental Accounting, edited by Frederic B Bogui Available Electronically Principles and Practices of Public Administration, edited by Jack Rabin, Robert F Munzenrider, and Sherrie M Bartell PublicADMINISTRATIONnetBASE Handbook of Governmental Accounting Frederic B Bogui Boca Raton London New York CRC Press is an imprint of the Taylor & Francis Group, an informa business Federal Accounting and Financial Reporting    489 21 For example, OMB A-136, Form and Content of Agency Financial Statements, June 29, 2007 22 SFFAC 1, para 21 23 SFFAC 1, para 22 24 SFFAC 1, para 39 25 SFFAC 1, para 40 26 SFFAS 1, para 41 27 SFFAC 1, 42 28 SFFAC 1, 43 29 SFFAC 1, 45 30 SFFAC 1, 47 31 SFFAC 1, 49 32 SFFAC 1, para 50 33 SFFAC 1, para 51 34 SFFAC 1, para 52 35 SFFAC 1, para 53 36 SFFAC 1, para 54 37 SFFAC 1, para 55 38 SFFAC 1, para 56 39 SFFAC 1, para 57 40 SFFAC 1, para 60 41 SFFAC 1, para 61 42 SFFAC 1, para 62 43 SFFAC 1, para 166 44 SFFAC 1, para 168 45 SFFAC 1, para 176 46 SFFAC 1, para 186 47 SFFAC 1, para 75 48 SFFAC 1, para 110 49 SFFAC was approved by the FASAB in September 2007 and released on December 26, 2007 50 A detailed discussion regarding the FASAB’s mission can be found in the “FASAB Facts” on the Web at http://www.fasab.gov/aboutfasab.html 51 SFFAC 1, para 187 52 SFFAC 1, para 67 53 SFFAC 1, para 69 54 SFFAC 1, para 71 55 SFFAC 1, para 188 56 SFFAC 1, para 191 57 Pub L No 101-576 58 Pub L No 107-289 59 31 U.S.C § 9101 et seq 60 Pub L No 106-531 61 Pub L No 97-255 62 SFFAC 1, Entity and Display, para 13 63 SFFAC 2, para 16 64 SFFAS 27, Identifying and Reporting Earmarked Funds, Appendix 3: Glossary 490    Handbook of Governmental Accounting 65 The Budget System and Concepts, OMB, p 395–6; see also SFFAS 31, Accounting for Fiduciary Activities 66 SFFAC 1, Entity and Display, para 14 67 OMB Circular A-11 (2007) section 20.12 68 www.fms.treas.gov/ussgl/about.html 69 SFFAC 2, para 15 70 www.fms.treas.gov/ussgl/tfm_releases/07-02/2007/part1_current.html, Section I: Chart of Accounts 71 Section 806(4) defines “financial management systems” as including financial systems and the financial portions of mixed systems necessary to support financial management The FFMIA’s use of financial management systems, rather than “accounting systems” as used in the 1950 Act and FMFIA, is not legally significant 72 SFFAS 26, Presentation of Significant Assumptions for the Statement of Social Insurance: Amending SFFAS 25, para 73 SFFAS 2, paras 64A-B; SFFAS 7, para 15; and also see SFFAC 1, subjective 1C 74 SFFAS 7, paras 80–82 75 SFFAS 7, para 93 76 AICPA Auditing Standards (AU) Section 558.06 77 FASAB Consolidated Glossary Also see Financial Accounting Standards Board Statement of Financial Accounting Concepts (SFAC) 4, Objectives of Financial Report­ ing by Nonbusiness Organizations, para 50, SFAC 6, Elements of Financial State­ments, paras 139–141, 144–5; and CBO, Glossary of Budgetary and Economic Terms, “Accrual Accounting.” 78 FASAB Consolidated Glossary Also see Statement of Federal Financial Accounting Concepts No 1, Objectives of Federal Financial Reporting, September 1993, Paragraphs 45–46, 112–114, and 186–191 79 See also: Government-Sponsored Enterprises: A Framework for Strengthening GSE Governance and Oversight, by David M Walker, Comptroller General of the United States, before the Senate Committee on Banking, Housing and Urban Affairs GAO04-269T, February 10 http://www.gao.gov/cgi-bin/getrpt?GAO-04-269T 80 Annual reports to Congress, which also were originally required, were eliminated by the Federal Reports Elimination and Sunset Act of 1995 81 SFFAC 1, paras 168–9; also see SFFAS 4, paras 15 and 48 82 SFFAC 1, para 171 83 31 U.S.C § 9101(3)(I) 84 Pub L No 103-356, title IV, § 405(c), 108 Stat 3410, 3416 (Oct 13, 1994)(codified at 31 U.S.C § 331(e)(1)) Interestingly, while the provision’s language only addresses the executive branch, its title is “Governmentwide Financial Statement.” 85 Pub L No 101-576, 104 Stat 2838, 2849–2853 (Nov 15, 1990) Chapter 14 International Public Sector Accounting Standards Jesse Hughes Old Dominion University, Professor Emeritus of Accounting Contents 14.1 Introduction 493 14.1.1 International Public Sector Accounting Standards 494 14.1.2 Cash Basis Standard 495 14.1.3 Budgetary Reporting 497 14.1.4 Accrual Basis Standards 498 14.1.4.1 IPSAS and Presentation of Financial Statements (Based on IAS and IAS 7, Respectively) 498 14.1.4.2 IPSAS Accounting Policies, Changes in Accounting Estimates and Errors (Based on IAS 8) .499 14.1.4.3 IPSAS The Effects of Changes in Foreign Exchange Rates (Based on IAS 21) .499 14.1.4.4 IPSAS Borrowing Costs (Based on IAS 23) 500 491 492    Handbook of Governmental Accounting 14.1.4.5 IPSAS Consolidated and Separate Financial Statements (Based on IAS 27) 500 14.1.4.6 IPSAS Investments in Associates (Based on IAS 28) 500 14.1.4.7 IPSAS Interests in Joint Ventures (Based on IAS 31) 500 14.1.4.8 IPSAS Revenue from Exchange Transactions (Based on IAS 18) 500 14.1.4.9 IPSAS 10 Financial Reporting in Hyperinflationary Economies (Based on IAS 29) 501 14.1.4.10 IPSAS 11 Construction Contracts (Based on IAS 11) .501 14.1.4.11 IPSAS 12 Inventories (Based on IAS 2) 501 14.1.4.12 IPSAS 13 Leases (Based on IAS 17) 501 14.1.4.13 IPSAS 14 Events after the Reporting Date (Based on IAS 10) 501 14.1.4.14 IPSAS 15 Financial Instruments: Disclosure and Presentation (Based on IAS 32) 502 14.1.4.15 IPSAS 16 Investment Property (Based on IAS 40) 502 14.1.4.16 IPSAS 17 Property, Plant, and Equipment (Based on IAS 16) 502 14.1.4.17 IPSAS 18 Segment Reporting (Based on IAS 14) .502 14.1.4.18 IPSAS 19 Provisions, Contingent Liabilities, and Contingent Assets (Based on IAS 37) 503 14.1.4.19 IPSAS 20 Related Party Disclosures (Based on IAS 24) 503 14.1.4.20 IPSAS 21 Impairment of Non-Cash Generating Assets and IPSAS 26 Impairment of Cash Generating Assets (Based on IAS 36) 503 14.1.4.21 IPSAS 22 Disclosure of Information about the General Government Sector (no comparable IAS) .503 14.1.4.22 IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) (no comparable IAS) 504 14.1.4.23 IPSAS 24 Presentation of Budget Information in Financial Statements (no comparable IAS) 504 14.1.4.24 IPSAS 25 Employee Benefits (Based on IAS 19) 504 14.1.5 Steps for Implementation of IPSASs 505 14.2 Conclusion 506 Attachments .507 International Public Sector Accounting Standards    493 14.1 Introduction In many countries, the method of budgeting used in the public sector has determined which accounting basis (cash or accrual) to use Budgets may be prepared on the cash, obligation/commitment, or the accrual basis Most governments in developing countries or economies in transition will prepare their budgets on the cash basis since such budgetary information is more easily comprehended by users In addition, it is simple to implement, and costs are low due to the lower level of accounting skills required These fixed budgets are approved by legislative bodies within governments in order to prioritize their revenue and spending plans As governments transition to the accrual basis of accounting, many prepare their budgets on the modified accrual basis of accounting (which includes current assets and liabilities) in order to plan for the use of financial resources As the full accrual basis of accounting (which includes total assets and liabilities) is achieved, some governments are moving to the accrual basis of budgeting so that they can plan for the use of total resources In the private sector, the International Accounting Standards Committee (IASC) previously accepted the challenge of establishing accrual-based International Accounting Standards (IASs) for application to commercial enterprises throughout the world The International Accounting Standards Board (IASB) has replaced the IASC and is in the process of replacing the IASs with International Financial Reporting Standards (IFRSs) However, like the IASC, their charge does not apply to the public sector To fill the void, the Public Sector Committee (PSC) of the International Federation of Accountants was given the responsibility to develop programs aimed at improving public sector financial management and accountability including developing accounting standards and ­promoting their acceptance In order to achieve its objectives, the PSC is developing a set of accounting standards for public sector entities worldwide The PSC was replaced by the International Public Sector Accounting Standards Board (IPSASB) in 2003 Initially, these International Public Sector Accounting Standards (IPSASs) are being developed by adapting IASs issued by the IASB to a public sector context In undertaking that process, the IPSASB attempts, wherever possible, to maintain the accounting treatment and original text of the IASs/IFRSs unless there is a significant public sector issue that warrants a departure In its ongoing work program, the IPSASB also intends to develop IPSASs to deal with public sector financial reporting issues that are either not comprehensively dealt with in existing IASs or for which IFRSs have not been developed or are not planned to be developed by the IASB Examples of these issues include the nature of the governmental reporting entity and recognition principles for tax revenue The IPSASs apply to all public sector entities other than Government Business Enterprises (GBEs) GBEs include both trading enterprises, such as utilities, and financial enterprises, such as financial institutions GBEs are, in substance, no 494    Handbook of Governmental Accounting different from entities conducting similar activities in the private sector, and they are expected to comply with the IASs and IFRSs A GBE means an entity that has all the following characteristics: Is an entity with the power to contract in its own name; Has been assigned the financial and operational authority to carry on a business; Sells goods and services, in the normal course of its business, to other entities at a profit or full-cost recovery; Is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm’s length); and Is controlled by a public sector entity 14.1.1 International Public Sector Accounting Standards IPSASs deal with issues related to the presentation of annual general purpose financial statements General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their specific information needs Users of general purpose financial statements include taxpayers and ratepayers, members of the legislature, creditors, suppliers, the media, and employees In democracies, political accountability of government to the electorate should take precedence Their elected representatives act on their behalf and use the financial statements to hold the government and the civil service to account for the resources that they were allocated to provide the agreed level of goods and services General purpose financial statements include those that are presented separately or within another public document such as an annual report The objectives of general purpose financial statements are to provide information useful for decision making, and to demonstrate the accountability of the entity for the resources entrusted to it In addition, general purpose financial statements can have a predictive or prospective role since they provide information useful to predict the level of resources required for continued operations Further, these statements provide users with information indicating whether resources were obtained and used in accordance with the legally adopted budget To assist users in this area, governments are encouraged to include in the financial statements a comparison of the actual results of operations with the approved budget for the reporting period IPSASs permit the presentation of annual general purpose financial statements on the cash or the accrual basis of accounting The accrual basis is preferred for the following reasons: improved resource allocation, strengthened accountability over all resources, enhanced transparency on total resource costs of government activities, and more comprehensive view of government’s impact on the economy The cash basis is permitted in those instances where the countries have not yet developed the capability among their accounting staff to prepare their financial statements on the accrual basis or the costs are prohibitive If their statements are International Public Sector Accounting Standards    495 prepared on the cash basis, the countries are encouraged to transition to the accrual basis as soon as their accounting staff is adequately trained on the requirements of an accrual accounting system and funding can be arranged The balance of this article discusses the IPSASs and suggests a plan for implementation of these IPSASs in developing countries and economies in transition 14.1.2 Cash Basis Standard This is a comprehensive IPSAS on financial reporting under the cash basis It establishes requirements for the preparation and presentation of a Statement of Cash Receipts and Payments, as well as notes to support accounting policy It also encourages disclosures to enhance the cash basis report According to the IPSASB, the application of this standard is an important step toward financial reporting improvement in terms of consistency and comparability, as well as serving as a basis for enhancement and shift to the accrual basis of accounting The IPSAS on Cash Basis Financial Reporting identifies the requirements applicable in all entities that prepare cash basis general purpose financial statements It has been under development since an initial draft was issued in November 2000, and was finally issued in January 2003 The effective date of this standard was January 1, 2004, though earlier implementation was recommended For those entities that should present consolidated financial statements for the reporting period, this standard will be applicable years following the date of its initial enactment In April 2002, the PSC published Study 14 entitled “Transition to the Accrual Basis of Accounting: Guidance for Government and Government Entities” for entities intending to adopt the accrual basis The aim of this IPSAS is to describe the way in which cash basis general purpose financial statements should be presented This standard comprises two parts The first part is mandatory and contains requirements for cash basis financial statement presentation The second part is not obligatory and contains additional requests and explanations about the accounting policies, disclosures, and alternative methods of information presentation The objective of this IPSAS is to promote and enhance financial accountability and financial statement transparency Within the first part, the requirements in connection with financial statement structure and content and the reporting entity identification are explained, as well as requirements for disclosing movements of cash and cash equivalents generated from business, investment and financial activities In addition, the cash basis of accounting is defined, as well as all terms associated with it, such as cash, monetary resources equivalents, reporting entities, and cash controlled by the reporting entity Financial reporting means that entities should prepare and present general purpose financial statements that include a statement of cash receipts and payments along with accounting policies and explanatory notes All cash receipts and payments are recognized in the statement of cash receipts and payments, as well as cash balances controlled by the entity and payments by third parties on behalf of 496    Handbook of Governmental Accounting the entity Notes to financial statements include narratives, more detailed tables and analyses, as well as additional information on the purpose of fair presentation necessary to such information users An illustration of the required statement of cash receipts and payments is an appendix to the cash basis IPSAS and is included as Attachment 14.1 The information presented in the general purpose financial statements should be understandable, relevant, and truthful Their quality will affect the report usefulness for the users In that sense, in the second part of Annex of this standard, certain qualitative features of information are presented aimed at better financial reporting The accounting policies and remarks offer an explanation for better understanding of financial reports General considerations explain the treatment of the reporting period for preparation and presentation of financial statements, date of authorization, entity-related information, information in connection with the monetary balances constraints and access to loans, consistency in presenting, disclosing comparative information, identifying financial reports, error correction, consolidated financial reports, and foreign currency (i.e., treatment of foreign exchange cash flows) Within the consolidated financial statements, the standard gives an explanation about the entities, the range of the consolidated financial reports, all related to the goals, reporting entity, as well as procedures and ways of preparing consolidated financial reports on public sector entities The section on foreign currency explains the treatment of cash inflows, outflows, and balances in foreign currencies resulting from foreign currency transactions The first part of this standard is expanded by particular annexes in order to help explain the meaning of the standard through illustrations for its easier application in preparing and presenting general financial reports on cash basis using examples of government consolidated financial statements, additional financial reports, as well as examples of remarks in the financial reports The second part of the IPSAS on cash basis financial reporting refers to additional disclosures encouraged, as well as to a treatment of public sector entities intending to shift toward the accrual accounting The following additional disclosures are encouraged: NN Reservations about Going Concerns NN Identification of Extraordinary Items NN Extent of Administered Transactions (i.e., “pass-through” cash flows and transfers) NN Major Classes of Cash Flows NN Related Parties NN Assets and Liabilities NN Comparison with Budgets NN Consolidated Financial Statements NN Joint Ventures NN Financial Reporting in Hyperinflationary Economies International Public Sector Accounting Standards    497 Cash basis government financial reporting is characteristic of the budget in developing countries and economies in transition Including a budgetary column in the financial reports allows for direct comparisons between the planned and actual amounts This information is useful for external users interested in government accountability in view of approved budgets, as well as for internal users who monitor the current spending against actual expenditures The second part of this standard contains guidelines for those public sector entities that wish to switch to the accrual basis in terms of presenting a statement of cash receipts and payments using the same form (see Attachment 14.2) required by IPSAS on the cash flow statement Certain appendices are provided containing illustrations that should help explain how to present cash flow reports classified by operating, investing, and financing activities, as well as how to disclose cash flows generated from interests and dividends Also, there are appendices that describe the qualitative characteristics of financial reporting (comprehensibility, relevance, truthfulness, and comparability), certain constraints for relevant and truthful information, as well as the treatment of the issues with regard to establishment of control over another entity for the purposes of financial reporting 14.1.3 Budgetary Reporting Most governments prepare budget to actual comparative statements during the fiscal period in order to maintain budgetary control However, these comparative statements are not presently a part of the prescribed end of year general purpose financial statements Guidance in the present IPSASs* is as follows: “Public sector entities are typically subject to budgetary limits in the form of appropriations or budget authorizations (or equivalent), which may be given effect through authorizing legislation General purpose financial reporting by public sector entities may provide information on whether resources were obtained and used in accordance with the legally adopted budget Where the financial statements and the budget are on the same basis of accounting, this standard encourages the inclusion in the financial statements of a comparison with the budgeted amounts for the reporting period Reporting against budgets may be presented in various different ways, including: * (a) the use of a columnar format for the financial statements, with separate columns for budgeted amounts and actual amounts A column showing any variances from the budget or appropriation may also be presented, for completeness; and Paragraph 22, IPSAS 1, Presentation of Financial Statements (May 2000) 498    Handbook of Governmental Accounting (b) a statement by the individual(s) responsible for the preparation of the financial statements that the budgeted amounts have not been exceeded If any budgeted amounts or appropriations have been exceeded, or expenses incurred without appropriation or other form of authority, then details may be disclosed by way of footnote to the relevant item in the financial statements.” IPSAS 24, Presentation of Budget Information in Financial Statements, was issued in December 2006 to replace the aforementioned option IPSAS 24 requires a Budget to Actual Comparative Statement and applies to all public sector entities that make their budgets publicly available It requires that the original and final budgets be reflected in the Statement along with the actual revenues and expenses on the budgetary basis An example of the optional Budget to Actual Comparative Statement is an Appendix to the Cash Basis IPSAS and is included as Attachment 14.3.* 14.1.4 Accrual Basis Standards In addition to the Cash Basis IPSAS, there are 26 accrual IPSASs and these are summarized in this section (with the corresponding IASs shown in parenthesis).† The accrual basis means a basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid) Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate The elements recognized under accrual accounting are assets, liabilities, net assets/equity, revenue, and expenses 14.1.4.1 IPSAS and Presentation of Financial Statements (Based on IAS and IAS 7, Respectively) These IPSASs set out the overall considerations for the presentation of financial statements, guidance for the structure of those statements, and minimum requirements for their content A complete set of financial statements includes the following components (comparable statements in the private sector are identified in parenthesis): Cash flow statements (same title)—see Attachment 14.2; Statement of financial position (balance sheet)—see Attachment 14.4; * † Appendix 2, Cash Basis IPSAS, p 78 For detailed information on each standard, the reader should obtain the Handbook of International Public Sector Accounting Pronouncements from the International Federation of Accountants (New York) or they can be downloaded at no charge from the www.ifac.org Web site International Public Sector Accounting Standards    499 Statement of financial performance (income statement)—see Attachment 14.5; Statement of changes in net assets/equity (statement of changes in equity)— see Attachment 14.6; and Accounting policies and notes to the financial statements 14.1.4.2 IPSAS Accounting Policies, Changes in Accounting Estimates and Errors (Based on IAS 8) All items of revenue and expense recognized in a period are included in the determination of the net surplus or deficit for the period If fundamental errors occur, the benchmark treatment requires that the amount of the correction that relates to prior periods should be reported by adjusting the opening balance of accumulated surpluses or deficits Further, if there has been a change in accounting policies, it should be applied retrospectively with the resulting adjustment reported as an adjustment to the opening balance of accumulated surpluses or deficits If the amount of any resulting adjustment that relates to prior periods is not reasonably determined, the change should be applied prospectively 14.1.4.3 IPSAS The Effects of Changes in Foreign Exchange Rates (Based on IAS 21) A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction At each subsequent reporting date: Foreign currency monetary items should be reported using the closing rate; Nonmonetary items that are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and Nonmonetary items that are carried at fair value denominated in a foreign currency should be reported using the exchange rates that existed when the values were determined Exchange differences should be recognized as revenue or as expenses in the period in which they arise, with the exception of exchange differences as a result of net investment in a foreign entity For these exceptions, exchange differences arising on a monetary item that forms part of an entity’s net investment in a foreign entity should be classified as net assets/equity in the entity’s financial statements until the disposal of the net investment, at which time they should be recognized as revenue or as expenses 500    Handbook of Governmental Accounting 14.1.4.4 IPSAS Borrowing Costs (Based on IAS 23) This IPSAS prescribes the accounting treatment for borrowing costs and requires either the immediate expensing of borrowing costs or, as an allowed alternative treatment, the capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset 14.1.4.5 IPSAS Consolidated and Separate Financial Statements (Based on IAS 27) A controlling entity should present consolidated financial statements for controlled entities (foreign and domestic) Control is presumed to exist when at least one specified power condition and one specified benefit condition exists Minority interests should be presented in the consolidated statement of financial position separately from liabilities and the controlling entity’s net assets/equity Minority interests in the net surplus or deficit of the economic entity should also be separately presented 14.1.4.6 IPSAS Investments in Associates (Based on IAS 28) An associate is defined as an entity in which the investor has significant influence (generally 20% or more) and which is neither a controlled entity nor a joint venture of the investor The investment in an associate should be accounted for in consolidated financial statements under the equity method, except when the investment is acquired and held exclusively with a view to its disposal in the near future In this case, the cost method is required 14.1.4.7 IPSAS Interests in Joint Ventures (Based on IAS 31) A joint venture is defined as a binding arrangement whereby two or more parties are committed to undertake an activity that is subject to joint control In its consolidated financial statements, a venturer should generally report its interest in a jointly controlled entity using the reporting format for proportionate consolidation 14.1.4.8 IPSAS Revenue from Exchange Transactions (Based on IAS 18) This standard distinguishes between exchange and nonexchange transactions An exchange transaction (i.e., sale of goods or services) is one in which the entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value to the other party in exchange Revenue from exchange transactions is measured at the fair value of the consideration received or receivable and is recognized when earned (Nonexchange transactions, such as taxes, are not International Public Sector Accounting Standards    501 included in this standard and are being addressed in a separate standard to be published at a later date.) 14.1.4.9 IPSAS 10 Financial Reporting in Hyperinflationary Economies (Based on IAS 29) This IPSAS describes the characteristics of a hyperinflationary economy and requires financial statements of entities that operate in such economies to be restated In general, the restatement of financial statements is considered if the cumulative inflation rate over three years is approaching, or exceeds, 100% 14.1.4.10 IPSAS 11 Construction Contracts (Based on IAS 11) Since many construction contracts may exceed one or more fiscal periods, revenue and expenses should be recognized in the period incurred by reference to the stage of completion of the contract activity at the reporting date 14.1.4.11 IPSAS 12 Inventories (Based on IAS 2) Inventories should be measured at the lower of cost and net realizable value or, under specific circumstances, current replacement cost The cost of inventories should be assigned by using the first-in, first-out or weighted average cost formulas (Note: The last-in, first-out method previously used in the private sector is not permitted for use in the public sector.) 14.1.4.12 IPSAS 13 Leases (Based on IAS 17) Each lease should be classified as a finance lease or an operating lease A finance lease is a lease that transfers substantially all risks and rewards incident to ownership of an asset Title may or may not eventually be transferred Lessees should recognize assets acquired under finance leases as assets and the associated lease obligations as liabilities Lessors should recognize lease payments receivable (at an amount equal to the net investment in the lease) under a finance lease as assets in their statements of financial position The recognition of finance revenue should be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment outstanding in respect of the finance lease An operating lease is a lease other than a finance lease and should be recognized as revenue to the lessor or expense to the lessee in the period to which it applies 14.1.4.13 IPSAS 14 Events after the Reporting Date (Based on IAS 10) The reporting date is the date of the last day of the reporting period to which the financial statements relate Events after the reporting date are those events that occur between the reporting date and the date when the financial statements (including 502    Handbook of Governmental Accounting the audit opinion) are authorized for issue An entity should adjust the amounts recognized in its financial statements to reflect adjusting events after the reporting date depending on the government’s intention in relation to certain matters In most cases, the announcement of government intentions will not lead to the recognition of adjusting events but would qualify for disclosure as nonadjusting events 14.1.4.14 IPSAS 15 Financial Instruments: Disclosure and Presentation (Based on IAS 32) The issuer of a financial instrument should classify the instrument as a liability or as net assets/equity in accordance with the substance of the contractual arrangement on initial recognition and the definitions of a financial liability and an equity instrument 14.1.4.15 IPSAS 16 Investment Property (Based on IAS 40) Investment property is defined as property (land or building) held to earn rentals or for capital appreciation rather than use in the production or supply of goods or services, or for sale in the ordinary course of operations It should be recognized as an asset when it has future economic benefit and the cost or fair value can be reliably measured 14.1.4.16 IPSAS 17 Property, Plant, and Equipment (Based on IAS 16) This standard applies to property, plant, and equipment including specialist military equipment and infrastructure assets It does not apply to forests or minerals Subsequent to initial recognition as an asset, the benchmark treatment permits an item of property, plant, and equipment to be carried at its cost less any accumulated depreciation and any accumulated impairment losses The depreciable amount should be allocated on a systematic basis over its useful life and recognized as an expense It does not require or prohibit the recognition of heritage assets 14.1.4.17 IPSAS 18 Segment Reporting (Based on IAS 14) A segment is a distinguishable activity of an entity for which it is appropriate to separately report financial information for the purpose of evaluating the entity’s past performance in achieving its objectives and for making decisions about the future allocation of resources In most cases, separate reporting will reflect the segments for which information is reported to the governing body and the most senior manager of the entity International Public Sector Accounting Standards    503 14.1.4.18 IPSAS 19 Provisions, Contingent Liabilities, and Contingent Assets (Based on IAS 37) A provision is a liability of uncertain timing or amount It should be recognized when an entity has a present obligation as a result of a past event, it is probably that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation Contingent liabilities and contingent assets may be disclosed in the financial statements, if considered beneficial 14.1.4.19 IPSAS 20 Related Party Disclosures (Based on IAS 24) Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions or if the related party entity and another entity are subject to common control Related party relationships where control exists should be disclosed irrespective of whether there have been transactions between the related parties 14.1.4.20 IPSAS 21 Impairment of Non-Cash Generating Assets and IPSAS 26 Impairment of Cash Generating Assets (Based on IAS 36) Cash generating assets are assets held with the primary objective of generating a commercial return while non-cash generating assets are all assets other than cash generating assets An impairment is a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciation If the recoverable service amount of an asset is less than its carrying amount, the carrying amount shall be reduced to its recoverable service amount That reduction is an impairment loss and it shall be recognized immediately in surplus or deficit 14.1.4.21 IPSAS 22 Disclosure of Information about the General Government Sector (no comparable IAS) The General Government Sector (GGS) comprises all organizational entities of the general government as defined in statistical bases of financial reporting A public sector entity may elect to disclose financial information about the GGS If they elect to make such disclosures, the GGS shall recognize its investment in the Public Financial Corporations and Non-Financial Corporations sectors as an asset and shall account for that asset at the carrying amount of the net assets of its investees The GGS disclosures shall be reconciled to the consolidated financial statements of ... readers to the broader scope of government accounting This handbook is a complete manual to a wide range of governmental accounting topics that fall under the Governmental Accounting Standards Board... n  Handbook of Governmental Accounting … the eighteenth publication of the National Committee on Governmental Accounting (NCGA), combines and revises the following publications: Municipal Accounting. .. important activities of the GASB Of interest may be a document called Facts about GASB, which can be found at 8  n  Handbook of Governmental Accounting GASB FASB Number of members Status of members (full-time/part-time)