Accrual-based financial reporting in the public sector is essential for transparency, accountability, and effective fiscal management, especially in light of rising debt levels and economic uncertainty. The transition to accrual accounting over cash-based systems can address significant liabilities and improve asset and liability management, ultimately benefiting government financial health and market perceptions. While implementation may incur substantial costs, the long-term economic benefits and improved financial outcomes greatly outweigh these initial investments.

1. Why accruals based financial
reporting?
Page 1
Andreas Bergmann, Chair IPSASB
29 September 2014
ADB Regional Workshop on
Public Sector Accounting

2. Page 2
The headlines continue …
Public Sector Financial Reporting Matters:
– Eurozone Government’s Debt Levels are above pre-crisis level
– US Debt Level is above pre-crisis level
– … however, debt figures still exclude significant liabilities (e.g. pensions)
– Europe and US still in substantial deficits
– Slowing growth hurts Emerging Economies’ government finances
Who’s next to follow?
What’s clear: Uncertainty damages economic development

3. Page 3
Public sector is different: Key characteristics
• Involuntary Transfers and Non-Exchange Transactions
• Importance of an Approved Budget
• Nature and Purpose of Assets and Liabilities in Public
Sector
• The Nature of Public Sector Programs and the Longevity
of the Public Sector Entities
• The Regulatory Role of Public Sector Entities
• The Importance of Government Finance Statistics (GFS)
3

4. Page 4
The Standards that matter
Financial Position Financial Performance
Assets Liabilities Expenses Revenue
Recognized
Recognized
and measured
and measured
In period of
economic
impact
In period of
economic
impact
Complete Complete Complete Complete
Maturity Maturity Transaction
sector neutral
Transaction
sector neutral
Transaction
sector neutral
Transactions
sector neutral
Standards for
sector specific
transactions
General Purpose Financial Statements

5. Page 5
The Standards that matter
Cash Flows Changes in Net Assets/Equity
Outflows Inflows Direct Through
Financial
Performance
Recognized
and measured
Recognized
and measured
In period of
economic
impact
In period of
economic
impact
Complete Complete Complete Complete
Notes to Financial Statements:
- Accounting Policy
- Disclosures about specific positions
- Risks, …

6. Page 6
Public sector is different: Key characteristics
• Involuntary Transfers and Non-
Exchange Transactions
• Importance of an Approved Budget
• Nature and Purpose of Assets and
Liabilities in Public Sector
• The Nature of Public Sector
Programs and the Longevity of the
Public Sector Entities
• The Regulatory Role of Public
Sector Entities
• The Importance of GFS
6
To be presented … completely
Comparison with actual is important
To be presented … completely
Programs need to funded, bankruptcy
no «easy way out»
International standards prevent games
Equally on accrual basis (GFSM 2001,
GFSM 2014)

7. Page 7
Key characteristics require accrual accounting
• Citizens and other resource
providers want accountability
• Decision makers need a reliable
basis for their decisions
7

8. Page 8
Common obstacles – the reasons “why not”
• Budgets on cash and accounting on accruals
– Quite common
– Possible, but requires some reconciliation
• GFS still based on cash-based GFS86 … well, needs to
be changed since 2001 …
• Obstruction by certain line ministries, often Defense
– Reassured that secretive details are not presented (aggregation)
• Cost for IT, training
– But usually around 0.01% of budget incl IT … and this spread
over approx. 5 – 7 years
• Duration and complexity of project

9. Page 9
Benefits
• Better balance sheet management  lower debt, better
interaction with fiscal rules
– Better asset management  “finding assets”, higher efficiency
– Better liabilities management  lower interest rates, lower debt
• Acceptance on financial markets  lower interest rate
• Less likely economic shocks  lower risk, lower interest
rate

10. Page 10
Benefits
• IMF-FAD addressing issue of transparency in a
comprehensive paper
– Fiscal transparency does matter
– Harmonization of Accounting and Statistics needed
– ROSC initiative should be followed up
• Eurostat Report
– Endorsement mechanism as expected
– Alignment with GFS is an emphasis
– Some caution the risk of dual standards (EPSAS) and of a backward
step for those on IFRS/IPSAS (e.g. UK, Spain, Austria, Baltic countries)
• G20 Finance Ministers press release February 2013
– Strengthening government balance sheet
– Looking at governmental financial reporting

11. Page 11
IMF: Transparency is relevant
• Less debt and lower interest rates

12. Page 12
IMF: Transparency is relevant
• Fiskal Risk:
– Government financial reporting responsible for increase of
government debt during financial crisis
• 23% of increase in debt due to incomplete information
• 37% of increase in debt due to underestimating likelyhood and
impact of economic shocks
– Critical are off-balance sheet items, such as
• State owned enterprises (if there is no consolidation …)
• PPP (if there’s no accounting for them)
– Critical are also financial statements without impairment testing
and/or current value measurement

13. Page 13
Transparency is relevant
• Significant correlation between PEFA indicator
(PI25) and overall PEFA performance (Vany,
2010)
• Main advantages:
– Financial planning
– Financial control, debt, investment and
liquidity management
– Reliable base for audit

14. But implementation cost is substantial
• Normative change: Legislative basis,
endorsement of standards, development
of operational guidance («manual»)
• Configuration of IT/ERP-Systems
• Collection and verification of data,
especially in areas not accounted for
previously (e.g. asset register)
• Verification/audit
Page 14
• Cross cutting: Training
Implementation
of IPSASs
requires

15. But implementation cost is substantial
• Normative change: 5%
• IT/ERP-Systems: 75%
• Collection and verification of data: 10%
• Verification/audit: pro memo
Page 15
• Cross cutting: Training 10%
• The need to implement a new IT/ERP
(or not!) largely determines the total
cost and explains the substantial
variance observed
Cost of
Implementation

16. Page 16
Whats’s needed: an integrated system
Budgeting Accounting Audit
Governmental
Financial
Statistics

17. Page 17
But return is easily higher than cost:
The Swiss Experience
• Direct returns to projects: Assets «found», risks identified
– easily add up to about half of the project cost
• Returns from accrual reporting:
– Debt management policy can identify non-bond types of debt
more easily and limit/reduce that; debt «shifting» is effectively
prevented
– Assets are more actively managed, leading to disinvestment or
better usage
– Lower interest rates (e.g. State of Geneva -0.5%/Hiler 2012)
– Accrual accounting (A) assists debt breaks/fiscal rules (F) as it
keeps track and helps to prevent «workarounds», especially
Financial Instruments

18. But return is easily higher than cost:
The Swiss Experience
in CHF bn in % of GDP
60 %
50 %
40 %
30 %
20 %
10 %
0 %
Page 18
300
250
200
150
100
50
0
Switzerland: Gross dept of general government (“Maastricht”), 1990-2012, 2016E
F A
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Confederation Cantons Cummunes Social security funds Debt ratio

19. Page 19
But return is easily higher than cost:
The Chilean Experience
• Moved to accruals in 1973, fiscal surplus rule since 2000
• Very low Gross Government Debt
• Even 10% lower when considering Sovereign Wealth Funds
 Net Government Debt

20. Page 20
But return is easily higher than cost:
The Chilean Experience
• Exemplary management of PPPs
– Management of contracting by central PPP competence
center
– All airports and many roads are financed through PPPs
– Liabilities (if there are any) on balance sheet

21. Page 21
Conclusion
• Standards based accrual accounting of governments is
essential for economic growth and prosperity
• IPSASs are a full suite of standards, designed for the
public sector, set by an independent, international
standard setter
• Time and cost required for implementation are
substantial – but economic returns are much higher

22. Page 22
Questions Discussion & Further Information
• Visit our webpage http://www.ipsasb.org/
• Or contact us by e-mail :
Chair IPSASB: andreasbergmann@ifac.org
Technical Director: stepheniefox@ifac.org