International Public Sector Accounting Standards Board - Coursework Example

ACCOUNTING STANDARDS REPORTING Student’s Name Course Tutor Date Introduction International Public Sector Accounting Standards Board (IPSASB) is a body that develops ethical accounting standards for use by the entities of the public sector referred to as International Public Sector Accounting Standards (IPSASs). The board fully recognises the important benefits of achieving comparable and consistent financial information in various sectors of the economy and it is the belief of IPSASB that the IPSASs play an instrumental role in provision of the right conditions for realisation of the benefits. According to IPSAB, income refers to the savings and consumption opportunity that is gained by an entity over a given period of time, and it is normally expressed in monetary terms. In public economics, it encompasses the accumulation of consumption ability of monetary and non-monetary total income. An expense on the other hand refers to an event where a liability is incurred or an asset is used up. In regard to public sector and private sector accounting equation, it leads to the reduction of owner’s equity. It is therefore defined by the IPSAB as economic benefits decreases during the accounting period in regard to depletions or outflows of assets or liabilities incurrence’s that result in equity decreases. An expense can be appropriately recognised in the operating statement when determining results for the period of reporting when there is probability that the loss or consumption of future economic values resulting from asset reduction or liabilities increase has occurred and when the measurement of loss or consumption of future economic values can be reliably done. The recognition criteria in financial statements of public sector The IPSASB therefore issues guidelines in relation to financial reporting under the accrual and cash concepts of accounting. The accrual basis is fundamentally based on the International Financial Reporting Standards (IFRSs), which are issued by the International Accounting Standards Board (IASB) in which the requirements of the very standards are wholly applicable to the public sector. In addition to that they are also concerned with specific issues of financial reporting of the public that are not dealt with in IFRSs. The adoption of the standards by any democratic government is believed to help in the improvement of quality and comparability as far as reporting of financial information by the public sector globally is concerned. The IPSASB rationally recognises the right of national standard setters and governments in the adequate establishment of accounting guidelines and standards for the purposes of financial reporting in their administrative roles. The board also encourages the full adoption of IPSASs as well as harmonisation of national requirements with the standards body. In relation to this, financial statements should be sufficiently be described as complying with the standards set by IPSASs in the event that they satisfy each of the applicable requirements of IPSAS (Milburn 1991, p 43-48). This Standard therefore requires a good comparison of the actual amount and budget amounts that arise from budget execution to be encompassed in the financial statements of entities that are needed to make available in the public domain their approved budget and which they are also universally held accountable. It is also a requirement of the Standard to have a disclosure of an explanation in relation to the reasons for difference in material between the actual amounts and budget. Compliance with the stipulated requirements as contained in the Standard will definitely ensure that public sector entities correctly and appropriately discharge their obligations of accountability and transparency enhancement of their financial statements. The public sector is expected to be carrying out this by demonstrating full compliance with all the approved budgets in they are publicly held responsible and accountable and in which the financial statements and budgets are professionally prepared on the same platform in line with financial performance in the realisation of the budgeted results (Sprouse 1996, p 23-45). Both in the private and the public sector, a liability is fundamentally recognised in the financial position statement when it is hypothesised that a lot of sacrifice for future economic benefits will be needed and also when the measurement of the amount of the liability can be done reliably. Conceptually, the benefits and the shortcomings of a market value based way of carrying out measurement for liabilities is principally similar to the ones for assets. Market values may be sufficient, for instance, under derivative financial contracts liabilities are traded on well stipulated exchanges. However, the ability to effectively transfer a liability is in principle restricted in many cases and the terms of transfer are also not well defined, and hence market values are not viable. In cases where market values are used in measuring liability it is essential to consider the treatment of the credit risk of the entity. Views are normally sort in relation to the issue concerning whether the sum at which a liability is quoted in a public sector financial statements entity should give a reflection of the credit risk of the entity. It has been argued that the issue bears no significance in the context of the public sector. It is noted that public ratings of the of public sector entities are basically high and are subject to very minimal change, as demonstrated by the use of a rate paid on state to estimate the value of a rate which is free of risks. Such an opinion however may be not popular in the perspective of market conditions of recent past years. The importance of the issue of the own credit risk of an entity largely depends upon the basis of measurement adopted. In cases of the use of historical cost, the resulting effect on the own credit risk of an entity is demonstrated in the eventual consideration received and thus in the amount that is reported at very first recognition. There are no general adjustments for changes in the credit risk of an entity. When market values are utilised, the impact of an own credit risk of an entity is therefore reflected at initial recognition and as well the effect of any amendments is recognized in the subsequent periods. When liabilities are measured based upon the fulfillment cost, and given that the fulfillment should not take place for a long period, it can then be said that incurring interest at a level that gives a reflection of the own credit risk of the entity, is part of an important aspect of fulfillment of cost. In cases where liabilities are calculated at assumption cost or price of release, it may then be argued that an entity’s own credit risk would have relevance to a given current value. However, any basis of measurement could undergo modification. The differences between the definitions and recognition criteria of accounting elements in the public sector from the private sector According to International Federation of Accountants (IFAC 2006, p1-6), the future economic benefits of assets are detailed both in the FASB and IASB asset definitions. The framework of IPSASB shows that the future governmental economic benefit pegged on an asset is the very potential to contribute either in a direct way or indirectly to the cash equivalents and cash flow to the entity. In a similar manner it also demonstrates that one of the main characteristics of an asset includes a probable future benefit that includes a capacity to contribute to future cash inflows. As mentioned by Johnson (1994, p 6-12), in line with the requirements of IPSASB, financial reporting should sufficiently provide vital information to assist in presentation of potential investors, creditors and other possible users to assess the timing, amounts, and probable uncertainty of net cash flows within the entity. It is also a requirement that financial reporting should provide sufficient information detailing the economic resources of its assets. Such information can therefore inform users of its financial obligations and the ability of the entity in generation of the favorable cash flows. In the world over there is fundamental need to comply with the high accountability standards through adopting consistent basis of accounting as well as user friendly formats of financial reporting. The leaders of government need to plan for the future times. The quality of such government leaders decisions can only be improved and made better if they have unlimited access to reliable and trustworthy source of performance reports that recognize and give periodic comparisons to all forms of transactions in a transparent way. The only useful remedy to this challenge squarely lies in International public Sector Accounting Standards (IPSASs) adoption. Long-term fiscal sustainability refers to the ability of a government to successfully meet its financial commitments and service delivery for at the moment and in the future. Quite a number of technological and demographic factors have over the time created a lot of fiscal pressures for virtually all democratic governments. The pressures have witnessed sharp increase as a result of global financial crisis, which has resulted to renewed interest in the long-term financial impacts of state interventions. In the wake of the numerous problems of poor systems of infrastructure, unfavourable climatic conditions, rising levels of unemployment and others, the question that is being asked by many is whether the government can adequately eliminate the challenges with the limited resources available. The reflection of an entity’s own credit risk in the public and private sectors One of the main arguments for current values is build on the fact that they have more relevance compared to historical values for they reflect financial and economic conditions at the date of reporting. An own credit risk of entity is one of the main factors that affect the current value of its liabilities and the significance of the amount of the liability can be enhanced if it is pegged at an amount that reflects the entity’s own credit risk. According to Upton Jr. and Wayne (2001, p 12-26), an entity might therefore issue a liability in a lengthy transaction that compel it to pay for a long period of time such as two years. The discounted sum gives a reflection of the appropriate charge for the money’s time value, having consideration of the credit risk of the entity. In a year’s time such a liability still has a remaining maturity time of one year, and the entity might expect on the assumption that there are no general changes in the rates of interest. However, the amount of money that would be received may change if the credit rating of the entity changes and if it has decreased it would then receive a lower sum of money, and in the event of improvement then the amount has to be greater. Unless liability measure in the public sector is sufficiently updated to go hand in hand with the changes in own credit risk entity, there is a possibility that it may present two scenarios of identical liabilities, thus one issued in the past year and a newly issued one that are quoted at different amounts. This is in effect quite contrary to the comparability qualitative characteristic, which calls for reporting similar items in a similar way. This suggests that it is necessary to reflect changes in an entity’s own credit risk if all relevant circumstances are to be captured in the reported amount. The selection of measurement bases for assets and liabilities and capital maintenance concept is arguably used in the determination of the nature of the deficit or surplus for the period of accounting. A typical example of this involves the concept of real terms capital maintenance that requires that capital should be maintained upon allowing for the general price increase. As general price increases reflection in terms of measurement of specific liabilities and assets does not provide any useful information since the prices of specific assets are not prone to change by similar amount as normal prices, an adjustment of real terms is made in order to reach at a conclusive deficit or surplus for the year. The cumulative amount on such kind of adjustments is then comprehensively reported as a subset of equity, which is conceptually separate from any accumulated deficit or surplus. In the basis of commercial entities, a system of real terms may be of significance for it allows the stakeholders to compare the business growth with any tangible change in wealth that is quite necessary to maintain (The Public sector Accounting Board of Canada 2009, p 1-4). Similarly, in the context of the public sector, a real terms system allows for an evaluation in regard to whether the financial result in a way that in case the demands on resource providers such as taxpayers are not changed in real terms, it would then be satisfactory to maintain a current pattern of entity in terms of resource consumption. In public sector context, net selling is similar to “fair value less costs to sell” concept granted by IPSASs, with the only exception in the it is a little bit more explicit that the selling price is provisionally an expectation of the entity as opposed to market conditions (International Federation of Accountants, Public Sector Committee 1995, p 1-5). In the public and private sector, segment reporting calls for the complete disclosure of some vital information in relation to the activities of service delivery of the resources and entity as allocated to support the decision-making and accountability purposes. In comparison to the sectors that are reported under statistical platforms of financial reporting, in accordance to IPSAS, segments reported are not generally based on a distinction between non-market and market activities. Therefore the disclosure of the relevant information about the government does not override the necessity to make ample disclosures about segments in relation to IPSAS. As mentioned in Financial Instruments 2009, p 1-2), this is due to the fact that the information about the public sector budgeting alone is not a sure way of providing sufficient information to enable experts to fully evaluate the past performance of an entity in its bid to achieve major objectives of service delivery, when such objectives are realised through non-public sector entities. For example, identifying the general government sector as a segment cannot in any way provide critical information about the performance of a government in achieving some of the critical parameters of growth such as healthcare, education or telecommunication, when in effect the private sector is fully engaged in the delivery of services related to the same objectives. Bibliography Financial Instruments, September 2009. Retrieved on 15 September 2011 from Read More