IPSAS – Standards Designed for Government
IPSAS – Standards Designed
for Government
HENNING DIEDERICHS – ACA
ICAEW, FINANCIAL REPORTING FACULTY
© ICAEW 2017
About me
• Public Sector Financial Reporting,
part of Financial Reporting Faculty
• ICAEW Chartered Accountant
• 3 years Barclays Group Accounts
• 5 years UK Ministry of Finance,
Whole of Government Accounts
(WGA)
• Current focus on International
Public Sector Accounting
Standards (IPSAS)
© ICAEW 2017
ICAEW and international financial reporting
• Champion of global accounting
standards
• Close engagement with IASB and
the development of IFRS
• Contributor to International Public
Sector Accounting Standards
Board’s Consultative Advisory
Group (CAG)
© ICAEW 2017
Content
• IPSAS – An overview
• Importance of accruals accounting
• Choice of accounting standards
• Conceptual Framework
• IPSAS 12 – Inventories
• IPSAS 23 – Revenue from non-exchange transactions
• IPSAS 13 – Leases
• IPSAS 32 – Service concession arrangements
• IPSAS 35 – Consolidated financial statements
• Latest IPSAS developments
© ICAEW 2017
International Public Sector Accounting Standards
(IPSASs) – overview
• Established 1996
• Operate under IFAC
• 35 accruals based standards, 1 cash
standard
• 18 board members
• Based in Toronto
• IFRS-based
• Increased adoption (indirect)
© ICAEW 2017
Growing importance of accruals accounting
More information
for decision
making
Better reporting of
Government
Finance Statistics
Better
management of
resources – more
efficient and cost
effective
Improved
stewardship of
assets and
liabilities
Increased
transparency and
accountability –
intergenerational
fairness
© ICAEW 2017
Choice of accounting standards
G
A
A
P
IFRS
IPSAS
National
Standards
• Extensive usage
• Designed primarily for private sector
• Designed for public sector
• Not wide usage
• Use IPSAS or IFRS as reference point
• Flexibility
© ICAEW 2017
Does public sector need specific standards?
Public Sector differs from the private in many ways but these are the key
elements to consider in relation to accounting standards:
Relationship with Government Finance Statistics
Non-exchange transactions
Importance of budgets
Ability to change law and act as a regulator
Long term nature of governments – intergenerational aspects
© ICAEW 2017
Conceptual Framework
• What is it
• Qualitative characteristics
- Relevance
- Faithful representation
- Understandability
- Timeliness
- Comparability
- Verifiability
• Constraints on information included in general purpose financial reports
© ICAEW 2017
Conceptual Framework
• Provides definition of the elements:
- Assets: A resource presently controlled by the entity as a result of a past
event.
- Liability: A present obligation of the entity for an outflow of resources that
results from a past event.
- Revenue: Increases in the net financial position of the entity, other than
increases arising from ownership contributions.
- Expense: Decreases in the net financial position of the entity, other than
decreases arising from ownership distributions.
• Covers different measurement basis for assets and liabilities.
© ICAEW 2017
IPSAS 12 – Inventories
Objectives: IPSAS 12 describes the accounting treatment for inventories
including cost determination and expense recognition, including any write-down
to net realisable value. It also provides guidance on the cost formulas that are
used to assign costs to inventories.
Definition: Inventories are assets in the from of materials or supplies that are
either to be consumed in the production process, or to be consumed or
distributed in the rendering of services. They can also assets held for sale or
distribution or indeed in the process of production for sale or distribution.
© ICAEW 2017
IPSAS 12 – Recognition
The following recognition criteria apply for inventories:
Control over the asset
Probable that future economic benefits or service potential will
flow to the entity
Cost can be reliably measured
© ICAEW 2017
IPSAS 12 – Measurement
© ICAEW 2017
IPSAS 12 – Measurement
• Example of a deviation from IFRS: Inventories shall be measured at lower of
cost and current replacement cost where they are held for distribution at no or
nominal charge
© ICAEW 2017
IPSAS 12 – Cost formulas
• Non-interchangeable inventories (unique) or ring-fenced for specific projects:
specific costs allocated.
• Interchangeable inventories: cost determined on either a ‘First-in, First-out’ or
weighted-average basis.
• Entity shall use the same cost formula for similar items – similar nature and
use.
• Change in the value of inventory closing balance will impact statement of
surplus/deficit (P&L): ‘cost of goods sold’ = purchases + opening inventory –
closing inventory.
© ICAEW 2017
IPSAS 12 – Disclosures
• Main disclosures are:
- Accounting policies such as the cost formula;
- Total carrying amount of inventories and carrying amount in classifications
appropriate to the entity;
- Amount of inventories recognised as an expense during the period;
- The amount of write down (if any).
© ICAEW 2017
IPSAS 23 – Revenue from Non-Exchange
Transactions (Taxes and Transfers)
Objectives: To prescribe requirements for the financial reporting of revenue arising from nonexchange transactions, other than non-exchange transactions that give rise to an entity
combination.
Key Definitions:
- Revenue is the gross inflow of economic benefits or service potential that results in an
increase in net assets/equity, other than on relating to contributions from owners.
- Exchange transactions are transactions in which one entity receives assets or services, or
has liabilities extinguished, and directly gives approximately equal value (primarily in the form
of cash, goods, services, or use of assets) to another entity in exchange.
- Non-exchange transactions are transactions that are not exchange transactions. In a nonexchange transaction, an entity either receives value from another entity without directly
giving approximately equal value in exchange, or gives value to another entity without directly
receiving approximately equal value in exchange.
© ICAEW 2017
IPSAS 23 – Recognition
© ICAEW 2017
IPSAS 23 – Application
• An entity shall recognise an asset in respect of taxes when the taxable event
occurs and the asset recognition criteria are met.
• Examples of tax and the taxable event:
- Income tax: earning of assessable income during the taxation period
- Value-added tax: undertaking of taxable activity during the taxation period
- Customs duty: movement of dutiable goods and services across the customs boundary
• Challenging: tax assets are initially measured at fair value – best estimate of
inflows of resources to the entity. Estimates will require judgement.
© ICAEW 2017
IPSAS 23 – Concessionary Loans
• Need to be careful when a transaction contains both exchange and nonexchange elements.
• Concessionary loans is a loan with below market terms.
• The element that is repayable and the interest on that element that is the
exchange portion.
• The difference between the loan proceeds and the fair value is the nonexchange portion and is recognised as revenue.
© ICAEW 2017
IPSAS 23 – Disclosures
• Amount of revenue from non-exchange transactions by major classes
showing separately taxes (split by major class) and transfers.
• Amount of receivables.
• Liabilities in relation to transactions subject to conditions and concessionary
loans subject to conditions.
• Amount of assets subject to restrictions and the nature of those restrictions.
• Any advanced receipts.
• Amount of any liabilities forgiven.
© ICAEW 2017
IPSAS 13 – Leases
Objectives: To prescribe, for lessees and lessors, the appropriate accounting
policies and disclosures to apply in relation to finance and operating leases.
Definitions: A lease gives one party (the lessee) the right to use an asset over
an agreed period of time in return for payment to the lessor.
© ICAEW 2017
IPSAS 13 – Classification
• All leases must be classified at inception as either a finance lease or
operating lease.
• Lease classification is based on the substance of the transaction, not the
legal form.
• The key question is who bears substantially all the risks and rewards.
• A lease is classified as a finance lease if it transfers substantially all the risks
and rewards from the lessor to the lessee. Everything else is an operating
lease.
© ICAEW 2017
ISPAS 13 – Classification
• Standard gives comprehensive examples as to what would constitute a
transfer of substantially all the risks and rewards.
• Examples include:
- Ownership is transferred at the end of the lease;
- Lessee has option to buy the asset at the end at a favourable prices so that it is likely to
be bought;
- Lease term covers substantially all of the assets life;
- Present value of lease payments is substantially equal to the fair value of the asset.
• If lease includes both land and buildings element, assess each separately.
© ICAEW 2017
IPSAS 13 – Finance Lease: Lessee’s Accounting
© ICAEW 2017
IPSAS 13 – Finance Lease: Lessor Accounting
Derecognise the asset and recognise lease payments
receivable equal to the net investment in the lease.
Finance revenue – will include both interest and
capital.
Symmetry of accounting – lessor and lessee mirror (or
close to)
© ICAEW 2017
IPSAS 13 – Operating Lease
Lessor – keeps the asset and records lease revenue on a
straight line basis
Lessee – records lease payments on a straight line basis
Reason why this was popular in the private sector was that
company could keep assets and liabilities off the balance
sheet.
© ICAEW 2017
IPSAS 13 – Disclosures: Finance Lease
Lessees: carrying amount of asset; reconciliation between total
minimum lease payments and their present value; payments due in
bands of years (leases than 1; 1-5, >5); total future minimum lease
payments receivable under non-cancellable sub-leases.
Lessors: reconciliation between gross investment in the lease and
the present value of the minimum lease payments (also split by
years); unearned finance revenue; unguaranteed residual values of
leased assets; accumulated allowance for uncollectible minimum
lease payments receivable.
© ICAEW 2017
IPSAS 13 – Disclosures: Operating Lease
Lessees: total of non-cancellable minimum lease payments payable
(split by years); contingent rent, minimum lease and sublease
payments recognised as an expense; total future minimum lease
payments receivable under non-cancellable sub-leases.
Lessors: future minimum lease payments receivable under noncancellable leases in total and receivable in less than one year, 1-5
years and more than 5 years.
© ICAEW 2017
IPSAS 32 – Service Concession Arrangements
• Objectives: To prescribe the accounting for service concession
arrangements by the grantor, a public sector entity.
• Definitions: A service concession arrangement is a binding arrangement
between a grantor and an operator in which the operator a) uses the service
concession asset to provide a public service on behalf of the grantor for
specified period of time and b) is compensated for its services over the period
of the service concession arrangement.
© ICAEW 2017
IPSAS 32 – Recognition & Measurement of Asset
• The grantor recognises a service concession asset if:
a) The grantor controls or regulates what services the operator must provide with the
asset, to whom it must provide them, and at what price; and
b) The grantor controls — through ownership, beneficial entitlement, or otherwise — any
significant residual interest in the asset at the end of the term of the arrangement.
• For whole of life assets, only a) needs to be met.
• Initially, measured at fair value except when grantor already owns asset.
© ICAEW 2017
IPSAS 32 – Recognition & Measurement of Liability
Already
owns the
asset
no liability is recognised
depends on how
operator is
compensated
Grantor
DR Asset
Not own the
asset
Financial Liability
Obligation as a result of the
binding arrangement to deliver
cash or another financial
asset
CR Liability
Unearned Revenue
Grant the right to earn
revenue from 3rd parties.
Economic substance is
increase in net assets,
therefore recognise revenue.
© ICAEW 2017
IPSAS 32 – Disclosures
Present information in accordance with IPSAS 1
A description of the arrangement and its significant terms
Any changes in the arrangement during the period
Nature and extent of rights to use specified assets
© ICAEW 2017
IPSAS 32 – Example Disclosure, WGA
© ICAEW 2017
IPSAS 35 – Consolidated Financial Statements
• Objectives: To establish principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities.
• Definitions:
- Consolidated financial statements: are the financial statements of an economic entity
in which the assets, liabilities, net assets/equity, revenue, expenses and cash flows of the
controlling entity and its controlled entities are presented as those of a single economic
entity.
- Control: an entity controls another entity when the entity is exposed, or has rights, to
variable benefits from its involvement with the other entity an has the ability to affect the
nature or amount of those benefits through its power over the other entity.
© ICAEW 2017
IPSAS 35 – Consolidated Financial Statements
• Consolidation process of presenting financial statements of all entities that
make up an economic entity on a consolidated basis
Entity A
Individual Accounts: X, A, B, C ,D
Entity B
Contolling
Entity X
Entity C
Entity D
Control
Controlled
Entities
Consolidated Accounts Z
© ICAEW 2017
IPSAS 35 – Control
3 conditions
in order to
have
control over
another
entity:
• have power over the other entity;
• have exposure, or rights, to variable
benefits from its involvement in the
other entity;
• Able to use its power to affect the
nature or amount of its benefits
from its involvement.
© ICAEW 2017
IPSAS 35 – Consolidation procedure
Align accounting policies and reporting dates
Line by line consolidation – add assets, liabilities, income,
expenditure together
Intra-group eliminations of transactions and balances – in full
Eliminate any investments of controlling entity in controlled entities
against the net assets of the consolidation entity
© ICAEW 2017
Latest IPSAS developments
• Key public sector standards being created:
- Social Benefits
- Heritage Assets
- Non-Exchange Expenses (and Income)
- Public Sector Specific Financial Instruments
• Social Benefits
- 3 models proposed: Obligating event approach, Social contract, Insurance contract
- Consultation in July 2015, expecting exposure draft soon
• Public Sector Specific Financial Instruments
- Currency in circulation, Monetary gold, IMF quota subscription and special drawing rights
- Consultation in July 2016, no further developments known
© ICAEW 2017
IFRS developments impact on IPSAS
IFRS 15 – change in model to
recognise income, away from
transactional model to
contract model approach
• IFRS 15 hinges on commercial contracts being in
place. This is not always the case in the public
sector
• UK analysis shows IFRS 15 can be applied to
government entities without adaptations
IFRS 16 – change in
definition from transfer of
risks and rewards to obtaining
substantially all economic
benefits means that finance
leases will now be the
majority of leases
• Issue for public sector: need to review all existing
lease agreements and other commercial
agreements to identify finance lease arrangements
• Symmetry of accounting is lost between lessor and
lessee
© ICAEW 2017
Questions and Answers
© ICAEW 2017
Contacting the Financial Reporting Faculty
+44 (0)20 7920 8605
henning.diederichs@icaew.com
icaew.com/frf
@ICAEW_FRF
© ICAEW 2017
© ICAEW 2017
for Government
HENNING DIEDERICHS – ACA
ICAEW, FINANCIAL REPORTING FACULTY
© ICAEW 2017
About me
• Public Sector Financial Reporting,
part of Financial Reporting Faculty
• ICAEW Chartered Accountant
• 3 years Barclays Group Accounts
• 5 years UK Ministry of Finance,
Whole of Government Accounts
(WGA)
• Current focus on International
Public Sector Accounting
Standards (IPSAS)
© ICAEW 2017
ICAEW and international financial reporting
• Champion of global accounting
standards
• Close engagement with IASB and
the development of IFRS
• Contributor to International Public
Sector Accounting Standards
Board’s Consultative Advisory
Group (CAG)
© ICAEW 2017
Content
• IPSAS – An overview
• Importance of accruals accounting
• Choice of accounting standards
• Conceptual Framework
• IPSAS 12 – Inventories
• IPSAS 23 – Revenue from non-exchange transactions
• IPSAS 13 – Leases
• IPSAS 32 – Service concession arrangements
• IPSAS 35 – Consolidated financial statements
• Latest IPSAS developments
© ICAEW 2017
International Public Sector Accounting Standards
(IPSASs) – overview
• Established 1996
• Operate under IFAC
• 35 accruals based standards, 1 cash
standard
• 18 board members
• Based in Toronto
• IFRS-based
• Increased adoption (indirect)
© ICAEW 2017
Growing importance of accruals accounting
More information
for decision
making
Better reporting of
Government
Finance Statistics
Better
management of
resources – more
efficient and cost
effective
Improved
stewardship of
assets and
liabilities
Increased
transparency and
accountability –
intergenerational
fairness
© ICAEW 2017
Choice of accounting standards
G
A
A
P
IFRS
IPSAS
National
Standards
• Extensive usage
• Designed primarily for private sector
• Designed for public sector
• Not wide usage
• Use IPSAS or IFRS as reference point
• Flexibility
© ICAEW 2017
Does public sector need specific standards?
Public Sector differs from the private in many ways but these are the key
elements to consider in relation to accounting standards:
Relationship with Government Finance Statistics
Non-exchange transactions
Importance of budgets
Ability to change law and act as a regulator
Long term nature of governments – intergenerational aspects
© ICAEW 2017
Conceptual Framework
• What is it
• Qualitative characteristics
- Relevance
- Faithful representation
- Understandability
- Timeliness
- Comparability
- Verifiability
• Constraints on information included in general purpose financial reports
© ICAEW 2017
Conceptual Framework
• Provides definition of the elements:
- Assets: A resource presently controlled by the entity as a result of a past
event.
- Liability: A present obligation of the entity for an outflow of resources that
results from a past event.
- Revenue: Increases in the net financial position of the entity, other than
increases arising from ownership contributions.
- Expense: Decreases in the net financial position of the entity, other than
decreases arising from ownership distributions.
• Covers different measurement basis for assets and liabilities.
© ICAEW 2017
IPSAS 12 – Inventories
Objectives: IPSAS 12 describes the accounting treatment for inventories
including cost determination and expense recognition, including any write-down
to net realisable value. It also provides guidance on the cost formulas that are
used to assign costs to inventories.
Definition: Inventories are assets in the from of materials or supplies that are
either to be consumed in the production process, or to be consumed or
distributed in the rendering of services. They can also assets held for sale or
distribution or indeed in the process of production for sale or distribution.
© ICAEW 2017
IPSAS 12 – Recognition
The following recognition criteria apply for inventories:
Control over the asset
Probable that future economic benefits or service potential will
flow to the entity
Cost can be reliably measured
© ICAEW 2017
IPSAS 12 – Measurement
© ICAEW 2017
IPSAS 12 – Measurement
• Example of a deviation from IFRS: Inventories shall be measured at lower of
cost and current replacement cost where they are held for distribution at no or
nominal charge
© ICAEW 2017
IPSAS 12 – Cost formulas
• Non-interchangeable inventories (unique) or ring-fenced for specific projects:
specific costs allocated.
• Interchangeable inventories: cost determined on either a ‘First-in, First-out’ or
weighted-average basis.
• Entity shall use the same cost formula for similar items – similar nature and
use.
• Change in the value of inventory closing balance will impact statement of
surplus/deficit (P&L): ‘cost of goods sold’ = purchases + opening inventory –
closing inventory.
© ICAEW 2017
IPSAS 12 – Disclosures
• Main disclosures are:
- Accounting policies such as the cost formula;
- Total carrying amount of inventories and carrying amount in classifications
appropriate to the entity;
- Amount of inventories recognised as an expense during the period;
- The amount of write down (if any).
© ICAEW 2017
IPSAS 23 – Revenue from Non-Exchange
Transactions (Taxes and Transfers)
Objectives: To prescribe requirements for the financial reporting of revenue arising from nonexchange transactions, other than non-exchange transactions that give rise to an entity
combination.
Key Definitions:
- Revenue is the gross inflow of economic benefits or service potential that results in an
increase in net assets/equity, other than on relating to contributions from owners.
- Exchange transactions are transactions in which one entity receives assets or services, or
has liabilities extinguished, and directly gives approximately equal value (primarily in the form
of cash, goods, services, or use of assets) to another entity in exchange.
- Non-exchange transactions are transactions that are not exchange transactions. In a nonexchange transaction, an entity either receives value from another entity without directly
giving approximately equal value in exchange, or gives value to another entity without directly
receiving approximately equal value in exchange.
© ICAEW 2017
IPSAS 23 – Recognition
© ICAEW 2017
IPSAS 23 – Application
• An entity shall recognise an asset in respect of taxes when the taxable event
occurs and the asset recognition criteria are met.
• Examples of tax and the taxable event:
- Income tax: earning of assessable income during the taxation period
- Value-added tax: undertaking of taxable activity during the taxation period
- Customs duty: movement of dutiable goods and services across the customs boundary
• Challenging: tax assets are initially measured at fair value – best estimate of
inflows of resources to the entity. Estimates will require judgement.
© ICAEW 2017
IPSAS 23 – Concessionary Loans
• Need to be careful when a transaction contains both exchange and nonexchange elements.
• Concessionary loans is a loan with below market terms.
• The element that is repayable and the interest on that element that is the
exchange portion.
• The difference between the loan proceeds and the fair value is the nonexchange portion and is recognised as revenue.
© ICAEW 2017
IPSAS 23 – Disclosures
• Amount of revenue from non-exchange transactions by major classes
showing separately taxes (split by major class) and transfers.
• Amount of receivables.
• Liabilities in relation to transactions subject to conditions and concessionary
loans subject to conditions.
• Amount of assets subject to restrictions and the nature of those restrictions.
• Any advanced receipts.
• Amount of any liabilities forgiven.
© ICAEW 2017
IPSAS 13 – Leases
Objectives: To prescribe, for lessees and lessors, the appropriate accounting
policies and disclosures to apply in relation to finance and operating leases.
Definitions: A lease gives one party (the lessee) the right to use an asset over
an agreed period of time in return for payment to the lessor.
© ICAEW 2017
IPSAS 13 – Classification
• All leases must be classified at inception as either a finance lease or
operating lease.
• Lease classification is based on the substance of the transaction, not the
legal form.
• The key question is who bears substantially all the risks and rewards.
• A lease is classified as a finance lease if it transfers substantially all the risks
and rewards from the lessor to the lessee. Everything else is an operating
lease.
© ICAEW 2017
ISPAS 13 – Classification
• Standard gives comprehensive examples as to what would constitute a
transfer of substantially all the risks and rewards.
• Examples include:
- Ownership is transferred at the end of the lease;
- Lessee has option to buy the asset at the end at a favourable prices so that it is likely to
be bought;
- Lease term covers substantially all of the assets life;
- Present value of lease payments is substantially equal to the fair value of the asset.
• If lease includes both land and buildings element, assess each separately.
© ICAEW 2017
IPSAS 13 – Finance Lease: Lessee’s Accounting
© ICAEW 2017
IPSAS 13 – Finance Lease: Lessor Accounting
Derecognise the asset and recognise lease payments
receivable equal to the net investment in the lease.
Finance revenue – will include both interest and
capital.
Symmetry of accounting – lessor and lessee mirror (or
close to)
© ICAEW 2017
IPSAS 13 – Operating Lease
Lessor – keeps the asset and records lease revenue on a
straight line basis
Lessee – records lease payments on a straight line basis
Reason why this was popular in the private sector was that
company could keep assets and liabilities off the balance
sheet.
© ICAEW 2017
IPSAS 13 – Disclosures: Finance Lease
Lessees: carrying amount of asset; reconciliation between total
minimum lease payments and their present value; payments due in
bands of years (leases than 1; 1-5, >5); total future minimum lease
payments receivable under non-cancellable sub-leases.
Lessors: reconciliation between gross investment in the lease and
the present value of the minimum lease payments (also split by
years); unearned finance revenue; unguaranteed residual values of
leased assets; accumulated allowance for uncollectible minimum
lease payments receivable.
© ICAEW 2017
IPSAS 13 – Disclosures: Operating Lease
Lessees: total of non-cancellable minimum lease payments payable
(split by years); contingent rent, minimum lease and sublease
payments recognised as an expense; total future minimum lease
payments receivable under non-cancellable sub-leases.
Lessors: future minimum lease payments receivable under noncancellable leases in total and receivable in less than one year, 1-5
years and more than 5 years.
© ICAEW 2017
IPSAS 32 – Service Concession Arrangements
• Objectives: To prescribe the accounting for service concession
arrangements by the grantor, a public sector entity.
• Definitions: A service concession arrangement is a binding arrangement
between a grantor and an operator in which the operator a) uses the service
concession asset to provide a public service on behalf of the grantor for
specified period of time and b) is compensated for its services over the period
of the service concession arrangement.
© ICAEW 2017
IPSAS 32 – Recognition & Measurement of Asset
• The grantor recognises a service concession asset if:
a) The grantor controls or regulates what services the operator must provide with the
asset, to whom it must provide them, and at what price; and
b) The grantor controls — through ownership, beneficial entitlement, or otherwise — any
significant residual interest in the asset at the end of the term of the arrangement.
• For whole of life assets, only a) needs to be met.
• Initially, measured at fair value except when grantor already owns asset.
© ICAEW 2017
IPSAS 32 – Recognition & Measurement of Liability
Already
owns the
asset
no liability is recognised
depends on how
operator is
compensated
Grantor
DR Asset
Not own the
asset
Financial Liability
Obligation as a result of the
binding arrangement to deliver
cash or another financial
asset
CR Liability
Unearned Revenue
Grant the right to earn
revenue from 3rd parties.
Economic substance is
increase in net assets,
therefore recognise revenue.
© ICAEW 2017
IPSAS 32 – Disclosures
Present information in accordance with IPSAS 1
A description of the arrangement and its significant terms
Any changes in the arrangement during the period
Nature and extent of rights to use specified assets
© ICAEW 2017
IPSAS 32 – Example Disclosure, WGA
© ICAEW 2017
IPSAS 35 – Consolidated Financial Statements
• Objectives: To establish principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities.
• Definitions:
- Consolidated financial statements: are the financial statements of an economic entity
in which the assets, liabilities, net assets/equity, revenue, expenses and cash flows of the
controlling entity and its controlled entities are presented as those of a single economic
entity.
- Control: an entity controls another entity when the entity is exposed, or has rights, to
variable benefits from its involvement with the other entity an has the ability to affect the
nature or amount of those benefits through its power over the other entity.
© ICAEW 2017
IPSAS 35 – Consolidated Financial Statements
• Consolidation process of presenting financial statements of all entities that
make up an economic entity on a consolidated basis
Entity A
Individual Accounts: X, A, B, C ,D
Entity B
Contolling
Entity X
Entity C
Entity D
Control
Controlled
Entities
Consolidated Accounts Z
© ICAEW 2017
IPSAS 35 – Control
3 conditions
in order to
have
control over
another
entity:
• have power over the other entity;
• have exposure, or rights, to variable
benefits from its involvement in the
other entity;
• Able to use its power to affect the
nature or amount of its benefits
from its involvement.
© ICAEW 2017
IPSAS 35 – Consolidation procedure
Align accounting policies and reporting dates
Line by line consolidation – add assets, liabilities, income,
expenditure together
Intra-group eliminations of transactions and balances – in full
Eliminate any investments of controlling entity in controlled entities
against the net assets of the consolidation entity
© ICAEW 2017
Latest IPSAS developments
• Key public sector standards being created:
- Social Benefits
- Heritage Assets
- Non-Exchange Expenses (and Income)
- Public Sector Specific Financial Instruments
• Social Benefits
- 3 models proposed: Obligating event approach, Social contract, Insurance contract
- Consultation in July 2015, expecting exposure draft soon
• Public Sector Specific Financial Instruments
- Currency in circulation, Monetary gold, IMF quota subscription and special drawing rights
- Consultation in July 2016, no further developments known
© ICAEW 2017
IFRS developments impact on IPSAS
IFRS 15 – change in model to
recognise income, away from
transactional model to
contract model approach
• IFRS 15 hinges on commercial contracts being in
place. This is not always the case in the public
sector
• UK analysis shows IFRS 15 can be applied to
government entities without adaptations
IFRS 16 – change in
definition from transfer of
risks and rewards to obtaining
substantially all economic
benefits means that finance
leases will now be the
majority of leases
• Issue for public sector: need to review all existing
lease agreements and other commercial
agreements to identify finance lease arrangements
• Symmetry of accounting is lost between lessor and
lessee
© ICAEW 2017
Questions and Answers
© ICAEW 2017
Contacting the Financial Reporting Faculty
+44 (0)20 7920 8605
henning.diederichs@icaew.com
icaew.com/frf
@ICAEW_FRF
© ICAEW 2017
© ICAEW 2017