PwC

Introduction
Overview of session

1. The modernisation project

2. Accrual V. Cash accounting

3. IPSAS and the E.C. accounting rules

4. Some IPSAS key concepts

5. Questions

2 PwC
 PwC

Introduction

1. The modernisation project

Issues addressed

Accounting User requirements IT platforms

Accrual accounting in compliance with IPSAS

Decentralised Implementation

Enhancements to data security and consistency

Centralised Information
Integration of financial and accounting IT platforms

4 PwC
 Converting to IPSAS
- The big picture
1/1/2005

Phase 1 Phase 2 Phase 3 Phase 4

2.2
2.3
2.1 Component
Initial • Publication of
Project Evaluation
Feasibility Con- Integrate annual
Set-Up & Issues
Study version Change accounts
Resolution
• Stabilization

5 PwC
 PwC

Introduction

2. Accrual V. Cash
accounting
 Cash-basis V.
Accrual-basis
Cash-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.
7 PwC
Accrual-basis
• 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 + Accrual

E.C. Decision

Budgetary = IPSAS =
Cash-basis Accrual-basis

8 PwC
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

9 PwC
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).

10 PwC
Why adopt accrual
accounting in addition?
Enhanced information to the
“external world”
Increased transparency

Increased accountability
Parliament General public

Enhanced
management information

11 PwC
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

12 PwC
More complete information

• Presentation of a proper combined picture of financial position

and performance:

Net assets • Complete information on the utilisation of

resources (assets)
Assets
Liabilities • Complete information on total borrowing
and indebtedness

Revenues • Information about the total cost of policies

and activities
<Expenses> • Comparison of revenue from « tax-
Net surplus/ payers » and the cost of policies and
(deficit) activities

13 PwC
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.

14 PwC
Worked example: Australia
(cont’d)

Revenue Revenue By reporting the full picture, accrual

accounting shows that tax to be levied
<Expenses> <Expenses> in 2002/03 is enough to finance
the current policies and activities
D Assets
– but that in addition the Australian
D Liabilities government is either disinvesting in
assets or increasing liabilities
2.1. 0.2 – future taxation or other revenues are
already committed to paying off debt or
maintaining assets

15 PwC
 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 […]

16 PwC
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.

17 PwC
 The benefits to the E.C. of
the modernisation project
Enhanced
management information

Enhanced consistency New information

(ABAC for budgetary
accounting, general
accounting and management
information)

18 PwC
Enhanced management
information
New management functionalities - examples:
Follow-up of clearing of
Master file of all pre-financings
new contractors and through
contracts per legal entity intermediary/final
payments

Immediate, straight-forward Inventory of

assessment of the exposure
guarantees received
or liability to any third party
(commitments, payments,
collections, …) Inventory of
assets
19 PwC
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)

20 PwC
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.

21 PwC
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

22 PwC
Enhanced management
information –
Example: Loans (cont’d)
• Currently: • Under the new accrual-based E.C.
rules:
– In budgetary accounting, the loan
is not even recorded as an asset – Interest-free loans or loans at a rate
below market rates for similar
– In the 2002 financial report, all
products to similar debtors will be
loans are reported at face value –
recorded at an amount equal to the
i.e. no information is given on the
present value of all future cash
future cost of the concession
receipts discounted using the
granted to the borrower
prevailing market rates

The same will apply to interest-free – any additional amount lent = the cost
pre-financings: this will measure of the concession to the borrower = a
the cost of pre-financing reduction of income or an expense
contractors / beneficiaries

23 PwC
 PwC

Introduction

3. IPSAS and the E.C.

accounting rules
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

25 PwC
 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

1Public 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)

26 PwC
 The E.C. accounting rules

Basis of preparation Financial statements Net surplus or deficit

for the period,
fundamental errors and
Group accounting Foreign currency changes in accounting policies
transactions
Related parties and
Key management disclosures Financial assets and Revenues and
Cash and financial liabilities receivables
cash equivalents
Pre-financing
Payables and
Inventories Property, plant and expenses
equipment
Intangible assets Provisions,
Leases Contingent Assets and
Contingent Liabilities
27 PwC
Tools and resources

http://www.cc.cec/budg/

Procedural guidelines by operation

Consoli-
Accounting Accounting
dation
Standards Manual
Manual

28 PwC
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

29 PwC
 PwC

Introduction

4. Some IPSAS key concepts

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
31 PwC
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)

32 PwC
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.

33 PwC
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; …

34 PwC
 PwC

Introduction

5. Questions