Selecting International Standards for

Accrual-Based Accounting in the

IPSAS
Public Sector:

or

IFRS?
By: Caroline Aggestam-Pontoppidan

28 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT FALL 2011

 For a number of years, academics, regulators and
practitioners active within the sphere of public sector
accounting have debated the benefits and disadvantages
of adopting accrual accounting within the public sector.
Nevertheless, there is a clear push toward furthering the
conversion to accrual accounting among governments
and public sector entities.

This movement is strongly pur-
sued by the international standards-
setter, the International Public
Sector Accounting Standards Board
(IPSASB)1, issuer of International
Public Sector Accounting Standards
(IPSAS).2 The International Federa-
tion of Accountants (IFAC) issued a
series of recommendations3 for con-
sideration by the G20 countries at
their meeting in June 2010. IFAC spe-
cifically points out that:
many governments adhere to the
cash basis of accounting, IFAC and
the [IPSASB] encourage the adop-
tion of accrual-based accounting as it
reinforces the principles of transpar-
ency and accountability. Under the
accrual basis of accounting, transac-
tions and other events are recognized
when they occur (and not only when
cash or its equivalent is received or
paid). Therefore, transactions and
events are recognized and reported in
the financial statements of the peri-
ods to which they relate.4
In addition, the Organisation for
Economic Co-operation and Devel-
opment (OECD) has stated that
accrual accounting is critical to enable
accounting and reporting on the
allocation and use of total economic
resources at the disposal of manag-
ers. Recently, Ian Ball of the IFAC
strongly re-emphasized the message
of the incoming chairman of the
International Accounting Standards
Board (IASB), Hans Hoogervorst5 that
without transparency, there can be
no enduring stability at a 2011 inter-
national conference on Trust and
Accountability in Public Financial
Management.6 Ball added to Hooger-
vorsts statement: I believe that with-
out transparency, neither can there
be trust or accountability. And as a
basis for what follows, I should be
clear that a crucial element of trans-
parency in the public sector is accrual
accounting.7
At the same time, though, aca-
demics are debating whether the
accounting needs of the public sector
are well served by accrual account-
ing practices. Although the debate
continues, the trend in practice
seems clearthe number of public
entities and governments that have
or are in the process of adopting
accrual accounting is continuously
increasing. Today approximately
one-third of OECD countries have
adopted full accrual accounting.
This has been done either for the
entire government accounts or at the
ministry level.8
Public sector entities that seek to
apply a set of internationally recog-
nized accounting standards in their
move toward accrual accounting
most often turn to IPSAS issued by
the IPSASB, an independent board of
IFAC.9 A few countries have recently
chosen International Financial
Reporting Standards (IFRS). Austra-
lia, for example, became one of the
first countries to adopt IFRS within
local governments for the 20052006
financial year. Another example is the
United Kingdom, where the accounts
of central government departments
and entities in the wider public sec-
tor are to be produced using IFRS as
of March 2010. This article provides
an overarching introduction to the
definition of a government business
enterprise (GBE), as provided in
IPSAS, as a determinant for apply-
ing IPSAS or IFRS for a public sector
entity. It also briefly discusses some
key arguments for the application of
IFRS versus IPSAS by public entities
moving toward accrual accounting.

FALL 2011 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 29

GBE or Not?
Following the IPSAS, if a public
sector entity meets all the criteria for
being a GBE it is excluded from the
scope of IPSAS and mandated to apply
private sector international standards
IFRS.10 A GBE is an entity that has all
of the following characteristics:
a. it is an entity with the power to
contract in its own name;
b. it has been assigned the financial
and operational authority to carry
on a business;
c. it sells goods and services, in the
normal course of its business, to
other entities at a profit or full cost
recovery;
d. it is not reliant on continuing
government funding to be a going
concern (other than purchases of
outputs at arms length); and
e. it is controlled by a public sector
entity.
For any given public sector entity it
is often straightforward to determine
if it adheres to criteria (a), (b) and (e).
However, criteria (c) and (d) are less
clear. For criterion (c) a public sector
entity needs to analyze its revenue
streams to determine if it sells goods
and services at profit or full cost
recovery and not below. For criterion
(d) the public sector entity needs to
analyze its government funding.
In general, there are
significant areas of similarity
between IFRS and IPSAS,
and through the ongoing
convergence efforts carried
out by the IPSASB, such
similarity will improve.
However, the two standards
differ, mainly with respect
to sections where IPSAS
provides greater attention to
public sector issues.
30 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT FALL 2011
IPSAS Versus IFRS
The work of the IPSASB is focused
on the accounting and financial
reporting needs of national, regional
and local governments, related gov-
ernmental agencies and the constitu-
encies they serve. It attends to such
needs by issuing and promoting
benchmark guidance and facilitating
the exchange of information among
accountants and those who work in
the public sector or rely on its work.
In addition to this focus on address-
ing the specific needs of public sector,
part of the IPSASBs strategy is to con-
verge the IPSAS with the IFRS.
More than 30 countries have
either already adopted or are in
process of adopting accrual-based
or cash-based IPSAS for financial
reporting by all or part of their pub-
lic sectors. In addition, the OECD,
European Commission and North
Atlanta Treaty Organization enti-
ties have adopted accrual-based
IPSAS for their financial reporting.
Where a public sector organization
operates as a financial institution,
IPSAS requires that the organization
apply IFRS/International Account-
ing Standards (IAS). Consistent
with that requirement, development
banks, such as the Asian Develop-
ment Bank, the World Bank and the
International Fund for Agricultural
Development, apply IFRS/IAS.
IFRS are in principle developed
to serve the financial reporting and
accounting needs of the private sector
developed by the IASB. One of the key
aims of the IASB is to develop a single
set of high-quality, understandable,
enforceable and globally accepted
international financial reporting stan-
dards. IPSAS are based on the IFRS
and modified/expanded as necessary
for application in the public sector.
Both IPSAS and IFRS are principle-
based accounting standards.
In general, there are significant
areas of similarity between IFRS
and IPSAS, and through the ongo-
ing convergence efforts carried out
by the IPSASB, such similarity will
improve. However, the two standards
differ, mainly with respect to sections
where IPSAS provides greater atten-
tion to public sector issues. Non-cash-
generating assets and donations are
two examples where the public sector
requires different accounting treat-
ment from that of the private sector.
Specific differences can be found
in the areas of revenue (IPSAS 23,
Revenue from Non-exchange Transac-
tions) and budget reporting in finan-
cial statements (IPSAS 24, Presentation
of Budget Information in Financial State-
ments). In addition, IPSAS 22 on the
disclosure of financial information
about the general government sector,
has no corresponding IFRS.
The aim of IPSAS 23 is to accom-
modate transactions in which pub-
lic sector entities receive taxes and
transfers (cash or non-cash) without
directly giving approximately equal
value in exchange, or give value
to another entity without directly
receiving approximately equal value
in exchange.11 For public sector enti-
ties the distinction between non-
exchange and exchange transactions
is necessitated, as these entities will
often have a combination of both
types of revenue transactions.
The recognition criteria established
in IPSAS for non-exchange versus
exchange revenue transactions differ.
IPSAS 23 calls for public sector enti-
ties to analyze the inflow of resources,
and the standard states that the entity
can recognize an asset arising from
a non-exchange transaction when it
gains control of resources that meet
the definition of an asset and satisfy
the recognition criteria.
IPSAS 24, on the presentation of
budget information in financial state-
ments, requires a comparison of bud-
get amount and the actual amounts
arising from execution of the budget
to be included in the financial state-
ments of public sector entities that
are required to, or choose to, make
publicly available the approved bud-
get for which they are held publicly
accountable. In addition, IPSAS 24
requires that public sector entities
reporting under IPSAS disclose an
explanation of any material dif-
ferences between the budget and
actual amounts. Applying IPSAS 24
shall strengthen transparency and
comparability between budget and
actual amounts as reported in the
financial statements.
IPSAS 22 establishes requirements
for preparing and presenting infor-
mation about the general government
sector (GGS). The standard is optional
and applied only in respect of a gov-
ernments consolidated financial
statements. Information disclosed in
accordance with this standard disag-
gregates those consolidated financial
statements according to the GGS
boundaries as specified in statistical
bases of financial reporting. The stan-
dard does not permit reporting enti-
ties to consolidate information about
entities that are not subject to com-
mon control, as statistical information
about government finances published
by a statistical agency would.12
Making the Choice
The decision to adopt accrual
accounting practices may involve a
desire to establish local standards to
fit the purpose, or it may involve the
implementation of an internationally
recognized set of accounting stan-
dards, such as IPSAS or IFRS. In most
cases, IPSAS is applied for accrual
accounting within the public sector
since these standards are focused
on the specific needs of public sector
entities. The key underlying reason-
ing for moving toward accrual-based
accounting within the public sector
is most frequently associated with a
quest for better-informed assessments
of the resource allocation decisions
made by governments and other pub-
lic entities, thereby increasing trans-
parency and accountability. Such
requirements may be met through the
application of IPSAS, IFRS or nation-
ally developed accounting standards.
Where government follows IPSAS,
as in Switzerland, it has for example
been said that the application of the
IPSAS gives bodies incorporated
under public law greater significance
through comparability with general
and internationally recognized regu-
lations for submitting accounts. The
strengthened transparency raises
the quality of financial management,
facilitates transactions with finan-
ciers, and simplifies communication
with the public.
As illustrated in this article, any
public sector entity that embarks
on accrual accounting under IPSAS
will need to assess itself vis--vis the
definition of a GBE. If the entity finds
itself meeting the criteria of a GBE,
IPSAS mandates it to apply IFRS as
opposed to IPSAS.
Apart from following the route of
determining that a public sector meets
the requirements of a GBE, as per
IPSAS, and thus is mandated to apply
IFRS, we can also observe that some
countries have chosen not to imple-
ment IPSAS but have instead opted
to go for IFRS. The primary driver
for public entities that have opted for
IFRS has been that of bringing the
governments benefits in consistency
and comparability between financial
reports in the global economy and to
follow private sector best practice.
It is clear that those countries that
opt for IFRS have a particular wish to
ensure that government accounting is
fully comparable to that of the private
sector. Implementing IFRS within the
private sector is often associated with
benefits such as better financial infor-
mation for shareholders, regulators
and other stakeholders, enhanced
comparability, and increased capabil-
ity to secure cross-border listing and
funding. Researchers are, however,

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FALL 2011 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 31

questioning whether such benefits
can translate into the public sector
and thus also the suitability of IFRS
for public sector entities.
Regardless of which standards are
used (whether nationally developed
standards, IPSAS or IFRS) when con-
verging to accrual accounting it is
important to recognize a few critical
lessons learned from those countries
that have already made the change.
The lessons learned include:
the transition is not just a technical
exercise, it requires culture change
and needs to link with wider pub-
lic sector management reforms;
the phasing of implementations
needs to be carefully planned;
there is a need for greater accoun-
tancy skills and appropriate IT
systems; and
the importance of communica-
tion with all internal and external
stakeholders should not be over-
seen or underestimated.13
All these factors are critical to take
into account in any project seeking to
adopt accrual accounting practices.
Whether an entity seeks
to implement or is in the
process of implementing
either accrual-based
IPSAS or IFRS, similar
objectives seem to be
sought, namely better-
informed assessments
of the resource
allocation decisions
and strengthened
transparency and
governance.
32 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT FALL 2011
Conclusion
Research has been devoted to
questions concerning the benefits
that accrual accounting can bring to
public entities and their stakeholders.
Whether an entity seeks to implement
or is in the process of implementing
either accrual-based IPSAS or IFRS,
similar objectives seem to be sought,
namely better-informed assessments
of the resource allocation decisions
and strengthened transparency and
governance.
Countries that have opted to imple-
ment IFRS have sought to ensure that
private sector best practices are imple-
mented within the public sector. For
example, in 2007, the UK government
announced that the annual financial
statements of government depart-
ments and other central government
bodies would be prepared using
IFRS, adapted as necessary for the
public sector. IFRS would therefore
replace the UK Generally Accepted
Accounting Principles. The reported
aim of moving to IFRS is to bring
benefits in consistency and compara-
bility between financial reports in the
global economy and to follow private
sector best practice.14
More research is clearly called for
to create a fuller and more in-depth
understanding of the overall chal-
lenges and costs versus benefits of
adopting of IPSAS or IFRS in the pub-
lic sector.
End Notes
1. International Public Sector Accounting
Standards Board (IPSASB) is a standards-
setting board under the International Fed-
eration of Accountants (IFAC).
2. IPSAS were first developed in 1996. The
IPSAS are available free of charge on IFACs
website, www.ifac.org.
3. IFAC has focused the recommenda-
tions on the need for greater transparency
and accountability in public sector finances,
and built on the previous submissions IFAC
provided to the G20 in March and July 2009.
4. IFAC (2010) Recommendations for the
G-20 NationsMeeting of June 26-27, 2010.
www.ifac.org
5. European Commission Conference,
Financial Reporting and AuditingA Time
for Change? Speech by Hans Hoogervorst,
The objectives of financial reporting,
February 9, 2011, see www.ifrs.org/NR/
rdonlyres/5E4AA870-2E7C-469E-8175-177D07
3D4F5A/0/20110209speechHHBrussel.pdf.
6. The Chartered Institute of Public Fi-
nance and Accountancys first international
conference, IIPFA-IFAC governance project.
7. Ball (2011), Trust and accountability in
public financial management.
8. See for example Pretorius & Pretorius
(2008) Review of public financial management
reform literature.
9. The IPSASB also produces one IPSAS
for public sector entities who wish to follow
cash accounting practices.
10. See IPSAS Preface 12, IPSAS 1.5, 1.12.
11. Exchange transactions, on the other
hand, are transactions in which one entity
receives assets or services, or has liabilities
extinguished, and directly gives approxi-
mately equal value (primarily in the form
of cash, goods, services, or use of assets) to
another entity in exchange (cf. IPSAS 9).
12. cf. IPSAS 22, IN4.
13. See for example Aggestam, 2010;
OECD, 2002; Pretorius & Pretorius, 2009.
14. Wayment (2009) IFRS and the public
sector, Topics gateway series no. 58.
Additional References
Aggestam, C. (2010) A Project Management
Perspective on the Adoption of Accrual
Based IPSAS, International Journal of Govern-
mental Financial Management, Dec. 2010.
Ball, I. (2011) Trust and accountability in
public financial management, CIPFA-IF-
AC Governance project, keynote speech,
March 17, 2011.
IFAC (2011) Handbook of International
Public Sector Accounting Pronounce-
ments. Volume I and II. New York.
IFAC (2010) Recommendations for the G-20
NationsMeeting of June 2627, 2010.
www.ifac.org.
OECD (2002) Accrual accounting and
budgeting. Paris
Pretorius, C. & Pretorius, N. (2008)
Review of public financial management
reform literature. London: DFID.
Wayment, S. (2009) IFRS and the
public sector, Topics gateway series no.
58. Chartered Institute of Management
Accountants (CIMA), July, 2009.
Caroline
Aggestam-
Pontoppidan is
assistant profes-
sor, Department
of Accounting
and Auditing,
Copenhagen
Business School,
Frederiksberg,
Denmark.
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