The document discusses the modernization project aimed at integrating IPSAS (International Public Sector Accounting Standards) in public sector accounting, emphasizing the transition from cash-basis to accrual accounting. It highlights the benefits of accrual accounting for enhanced transparency, accountability, and comprehensive financial reporting, backed by case studies from Australia and Belgium. Additionally, it addresses key concepts of IPSAS, including substance over form, carrying value, and fair value, along with the importance of adopting these standards for improved financial management in the European context.

1. 
Introduction

2. 2 
Overview of session
1. The modernisation project
4. Some IPSAS key concepts
5. Questions
3. IPSAS and the E.C. accounting rules
2. Accrual V. Cash accounting

3. 
Introduction
1. The modernisation
project

4. 4 
Issues addressed
Integration of financial and accounting IT platforms
Enhancements to data security and consistency
Accrual accounting in compliance with IPSAS
Accounting User requirements IT platforms
Decentralised Implementation
Centralised Information

5. 5 
Phase 3
Integrate
Change
Phase 1
Feasibility
Study
Phase 2
2.1
Project
Set-Up
2.2
Component
Evaluation
& Issues
Resolution
2.3
Initial
Con-
version
Converting to IPSAS
- The big picture
1/1/2005
Phase 4
• Publication of
annual
accounts
• Stabilization

6. 
Introduction
2. Accrual V. Cash
accounting

7. 7 
Cash-basis V.
Accrual-basis
• A basis of accounting that recognises
transactions and other events when
cash is received or paid.
• Measures financial results for a period
as the difference between cash
received and cash paid.
• 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
recognised in the financial statements of the
periods to which they relate.
• The elements recognised under accrual
accounting are assets, liabilities, net
assets, revenue and expenses.
Cash-basis Accrual-basis

8. 8 
Cash + Accrual
Budgetary =
Cash-basis
IPSAS =
Accrual-basis
E.C. Decision

9. 9 
The benefits of
cash accounting
• Simple / Easy to understand by non-accountants
• Is less subject to estimates
• Cash accounting is adapted to the principle of annual
parliamentary authority - Useful for assessing compliance with
cash budgets / Easy follow up of budget implementation
• Useful for monitoring and estimating a government’s cahs
resources
• Information on cash raised and spent remains the best
indicator of the impact of the public sector on the economy

10. 10 
Why adopt accrual
accounting in addition?
• Both cash and accrual accounting address the question of the
« affordability » of a public entity’s programmes and operations:
– Budgets and cash accounting-based financial statements lay out a
public entity’s spending and how it is financed
– Accrual accounting-based financial statements provide additional
information in describing a public entity’s financial position and
actual results
• Accrual accounting distinguishes expenditure which provides
economic benefits in the short-term (i.e. for current consumption)
from that which will benefit the E.C. (and the E.C. citizens) well
into the future (i.e. capital expenditure).

11. 11 
Why adopt accrual
accounting in addition?
Enhanced information to the
“external world”
Enhanced
management information
Parliament General public
Increased
transparency
Increased
accountability

12. 12 
New « Public
Management
Approaches »
• European impetus towards reforming governmental
accounting and budgeting:
- Democratic pressure for increased transparency and
accountability in government
- Consumer pressure for improved delivery of public services
- Cost pressure to provide more and better infrastructure and
services, more efficiently

13. 13 
More complete
information
• Presentation of a proper combined picture of financial position
and performance:
Assets
Net assets
Liabilities
• Complete information on the utilisation of
resources (assets)
• Complete information on total borrowing
and indebtedness
Revenues
<Expenses>
Net surplus/
(deficit)
• Information about the total cost of policies
and activities
• Comparison of revenue from « tax-
payers » and the cost of policies and
activities

14. 14 
Worked example:
Australia
What does this tell?
Australia: 2002-2003 Budget at a glance
Underlying Budget cash surplus of $2.1 billion,
or 0.3 per cent of GDP. Using accrual accounting
concepts, however, the fiscal balance is forecast
to be $0.2 billion.

15. 15 
Worked example:
Australia (cont’d)
Revenue Revenue
<Expenses> <Expenses>
 Assets
 Liabilities
2.1. 0.2
By reporting the full picture, accrual
accounting shows that tax to be
levied
in 2002/03 is enough to finance
the current policies and activities
– but that in addition the Australian
government is either disinvesting in
assets or increasing liabilities
– future taxation or other revenues are
already committed to paying off debt or
maintaining assets

16. 16 
Worked example:
Belgium
A l’occasion de cette rentrée parlementaire, le Gouvernement fédéral fait
plus fort encore, avec l’opération Belgacom.
En reprenant ses obligations en matière de pension, à concurrence de € 5
milliards […], et en faisant passer cela comme une recette, […] il oublie
[…] de dire qu’à cet actif correspond une dette transférée de Belgacom à
l’Etat et contractée à l’égard de chaque pensionné de l’entreprise; tôt ou
tard, l’Etat devra honorer cet engagement. Dès lors, […] en dérogation de
toutes règles de comptabilité, il enregistre également cette recette
comme un produit qui flatte ses comptes de résultat des années 2003 et
2004 (de respectivement € 3,6 et 1,4 milliards), […].
Sans cette opération effrontée, le budget de Verhofstadt II serait en
déficit de 0,9 % du PIB en 2003 et de 0,4 % en 2004. Quant au surplus
primaire hors Belgacom, il s’effrite jusqu’à 4,4 % cette année et 4,9 % en
2004, selon nos estimations. […] Et en 2005 ? […] Il n’y aura plus de
nouvelle opération Belgacom. Par contre, l’Etat fédéral assumera déjà la
charge des pensions de l’entreprise publique […]

17. 17 
Worked example:
Belgium (cont’d)
Accrual accounting would have provided information on the
Belgian State’s overall financial position and current stock of
liabilities.
Future revenues or additional borrowing will be needed in the
longer term to satisfy the non-recognised liability.
Generally said, under cash-based accounting, spending controls
can be circumvented by deferring payments or hiding liabilities.

18. 18 
The benefits to the E.C. of
the modernisation
project
Enhanced
management information
New information
Enhanced consistency
(ABAC for budgetary
accounting, general
accounting and management
information)

19. 19 
Enhanced management
information
New management functionalities - examples:
Master file of all
new contractors and
contracts per legal entity
Follow-up of clearing of
pre-financings
through
intermediary/final
payments
Inventory of
guarantees received
Immediate, straight-forward
assessment of the exposure
or liability to any third party
(commitments, payments,
collections, …) Inventory of
assets

20. 20 
Enhanced management
information:
Asset and liability management
Examples:
Accrual accounting focuses decisions-makers on:
– The broad range of options available in managing assets: under a
cash-based system, there is a tendency to focus on whether or not
to spend on new assets – while under an accrual-based system,
the focus also extends to whether to retain or upgrade existing
assets
– Financial assets and ensuring that they are measured realiably
(the E.C. cannot make appropriate financing decisions without
objectively assessing the recoverability of assets)

21. 21 
Enhanced management
information: Expenses
Accrual accounting will provide the E.C. with information on the
full costs of their activities so that they can:
– consider the cost consequences of particular policy objectives
and the cost of alternative mechanisms for meeting these
objectives;
– better allocate responsibility for managing particular costs; and
– develop performance indicators.

22. 22 
Enhanced management
information –
Example: Loans
• Unlike commercial loans, some E.C. loans may provide the
borrower for concessions – e.g. below-market interest rates
• If the E.C. lend from borrowed funds at rates lower than it pays
to borrow money, they do so at a cost
• If accounted for on a cash basis, there is little impact in the
year the loan is made
• But over time, the costs accumulate
• Future revenues are in fact being committed to meet the
growing difference between the interest rate the E.C. pay for
money and the rate they earn on funds they have lent

23. 23 
Enhanced management
information –
Example: Loans (cont’d)
• Currently:
– In budgetary accounting, the loan
is not even recorded as an asset
– In the 2002 financial report, all
loans are reported at face value –
i.e. no information is given on the
future cost of the concession
granted to the borrower
• Under the new accrual-based E.C.
rules:
– Interest-free loans or loans at a rate
below market rates for similar products
to similar debtors will be recorded at
an amount equal to the present value
of all future cash receipts discounted
using the prevailing market rates
– any additional amount lent = the cost
of the concession to the borrower = a
reduction of income or an expense
The same will apply to interest-free
pre-financings: this will measure
the cost of pre-financing
contractors / beneficiaries

24. 
Introduction
3. IPSAS and the E.C.
accounting rules

25. 25 
Why IPSAS?
1. World-wide impetus to enhance corporate financial reporting
and its comparability – not only in the public sector:
– In the EU, listed companies are required to publish their
consolidated financial statements under IAS/IFRS for each
financial year starting on or after 1 January 2005 (IAS/IFRS
regulation of 7 June 2002). This applies to c. 7,000 listed
companies

26. 26 
Why IPSAS?
2. The only international comprehensive set of accounting standards
for the public sector 1
:
• Elaborated from International Accounting Standards
• Easier understanding
- Easier future convergence of national standards of Member States
• Adopted by the OECD; being adopted by the NATO
1
Public sector refers to: international organisations; national governments;
regional governments (state, provincial, territorial); local governments (city, town);
and related governmental entities (agencies, boards, commissions and enterprises)

27. 27 
The E.C. accounting rules
Basis of preparation Financial statements Net surplus or deficit
for the period,
fundamental errors and
changes in accounting policies
Property, plant and
equipment
Group accounting
Intangible assets
Leases
Foreign currency
transactions
Inventories
Pre-financing
Revenues and
receivables
Payables and
expenses
Provisions,
Contingent Assets and
Contingent Liabilities
Related parties and
Key management disclosures
Cash and
cash equivalents
Financial assets and
financial liabilities

28. 28 
Tools and resources
Accounting
Standards
Accounting
Manual
Consoli-
dation
Manual
Procedural guidelines by operation
http://www.cc.cec/budg/

29. 29 
Overview of training
Module 1 Introduction
Financial statements
Revenues and receivables
Expenses and payables
Pre-financing
Provisions, Contingent Liabilities and
Contingent Assets
Module 2 Property, Plant and Equipment
Intangible Assets
Leases
Inventories

30. 
Introduction
4. Some IPSAS key concepts

31. 31 
Substance over form
• Accounting policies should reflect the economic substance of
events and transactions and not merely their legal form – the
definition of accounting policies requires the exercise of
judgment
• Examples:
– From a risk and rewards perspective leasing an asset may in
substance be equivalent to owning it
– Control (and the obligation of consolidating another entity) refers
to an entity’s power to govern the financial and operating policies
of another entity and does not necessarily require an entity to hold
a majority shareholding or other equity interest in the other entity

32. 32 
Carrying value
• Carrying value = the amount for which an asset or a liability are
recognised in the financial statements
• Implies an initial measurement (e.g. the cost of acquisition of
an asset) then subsequent measurements (e.g. the recognition
of the value consumption of an asset through depreciation)

33. 33 
Depreciation
• Depreciation = the systematic allocation of the depreciable
amount of an asset over its useful life
– Depreciable amount = The cost of an asset, or other amount
substituted for cost in the financial statements (e.g. fair value),
less its residual value
– Useful life = Either: (a) the period of time over which an asset is
expected to be used by the entity; or (b) the number of production
or similar units expected to be obtained from the asset by the
entity.

34. 34 
Fair value
Fair value = the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in
an arm’s length transaction
– Several standards require that assets or liabilities be measured at
their fair value (rather than at historical cost or cost of
acquisition): e.g. items of property, plant and equipment gifted;
financial assets held for trading; …

35. 
Introduction
5. Questions