The Fiscal Affairs Division of the IMF, the International Public Sector Accounting Standards Board (IPSASB) and the Governance Global Practice Division of the World Bank co-hosted a one-day seminar in Washington in March 2019 on “Leveraging Government Financial Reporting for Fiscal Policymaking and the Management of Public Wealth”.
The main themes were:
- The potential of a comprehensive balance sheet approach to provide complete fiscal information;
- The need for international organizations to support the implementation of accrual accounting and the balance sheet approach; and
- How to use advances in digitization to support implementation of these reforms.
Within five years, it is projected that the proportion of governments reporting on an accrual basis will increase from 25% to 65%. Furthermore, by the end of 2023, nearly three-quarters of governments that report on accrual will use International Public Sector Accounting Standards (IPSAS) directly, indirectly through local law or regulation, or as a reference point. This picture is encouraging, but countries face many challenges to ensure that accrual information is used to its full potential.
Using Balance Sheet Information for Decision Making and Fiscal Risk Management
Jason Harris of the IMF highlighted the balance sheet approach pioneered in the October 2018 Fiscal Monitor, Managing Public Wealth, which embraces the concept of public wealth and emphasizes net worth as a key metric.
Based on a sample of 31 countries, public sector assets amount to 219% of GDP. Identifying and measuring these assets can facilitate better management with the potential for new or additional revenue streams. Balance sheet analysis also enables the identification and management of key fiscal risks. To be effective such analysis requires a comprehensive picture of the total public sector, rather than just the general government sector.
Improving Asset Management
Ian Carruthers, the IPSASB Chair, highlighted IPSASB’s Measurement project, which is developing guidance on key measurement bases to enhance consistency of reporting. The project is also exploring the accounting treatment of borrowing costs incurred in the acquisition, construction or production of an asset. The IPSASB has taken a preliminary view to require expensing, which would align IPSAS with the Government Finance Statistics Manual 2014. The IPSASB published Consultation Paper, Measurement, in April 2019.
IPSASB will launch a project on Natural Resources in 2020. This is an area where greater consistency of reporting between jurisdictions and higher quality information is needed. Scoping the project will be particularly important as there are varying views on the definition of natural resources. For many jurisdictions the primary focus is on sub-soil assets, but in other jurisdictions water is a key resource.
Improving Liabilities Management
Former IPSASB Chair Andreas Bergmann challenged some existing practices. Notably, the traditional definition of debt is not comprehensive. It includes certain financial instruments (e.g., bonds), but not others (e.g., finance leases, public-private partnership contracts). It also excludes debt issued by state-owned enterprises, which are usually guaranteed by government. These exclusions may have a substantial economic and fiscal impact.
In order to make the balance sheet more relevant for fiscal policy, it should provide a comprehensive picture of assets and liabilities and be able to reflect the associated risks. The new impairment model set out in IPSAS 41, Financial Instruments, adopts a more pro-active approach to risk identification that will generally lead to an earlier recognition of impairments, thereby enhancing the ability to evaluate the fiscal risks associated with managing a portfolio of assets or liabilities.
Maximizing the Impact of IPSAS-based Financial Information
Matthias Lichtentaler, Head of Digital Transformation, Bundesrechezentrum, Austria, provided the perspective of a non-accountant at the cusp of technological change on potential solutions and challenges for IPSAS implementation:
- Facilitating implementation through digitized processes and solutions;
- How artificial intelligence and block chain can optimize the local integration of IPSAS and foster transparency;
- A common digital IPSAS template (e.g., a cloud-based application) which could facilitate implementation in a cost-efficient way; and
Thomas Muller Marques Berger, the Chair of IPSASB’s Consultative Advisory Group, emphasized that the implementation of new accounting rules requires strong management of financial information. There is a risk that accounting and IT work streams are insufficiently connected. Investment in user-specific training is indispensable if technology is to be used efficiently and effectively.
Conclusion
A comprehensive balance sheet approach provides crucial information for improved fiscal policy and risk mitigation. The benefits of such an approach can be enhanced through the higher quality information that entity-based accrual accounting and digitization can bring. International partners can play a key role in supporting accrual implementation and advocating its benefits.
[1] Technical Director, International Public Sector Accounting Standards Board, Toronto, Canada.
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