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IPSAS vs IFRS - what is the most suitable accounting framework for the public sector?

Author: ICAEW

Published: 05 Sep 2023

The adoption of accrual accounting by governments is gathering momentum. Many jurisdictions that are already applying accrual accounting have based their accounting framework on either International Financial Reporting Standards (IFRS) or International Public Sector Accounting Standards (IPSAS) and adapting them to suit their specific needs. If a government were to adopt accrual accounting now, is the adoption of IPSAS the most sensible option?

Government entities differ from private sector businesses in one fundamental way and that is profit. The majority of government entities are not profit seeking whereas private sector entities are (excluding charities, NGOs etc) but will this fundamental difference have an impact on the financial reporting and the accounting standards that underpin that process?

Differences between the public and private sectors financial reporting

The main thing to note is that financial reporting in the public and private sectors is not materially different when applying Generally Accepted Accounting Practice (GAAP). A balance sheet must be created, assets and liabilities valued, and revenue and expenditure recorded on an accrual basis – all with accompanying notes. Those familiar with private sector annual reports will feel quite at home reviewing accounts from UK central government entities.

Most differences between public and private sector accounting arise when transactions are not at arm's length. These are often referred to as non-exchange transactions, where an entity receives value from another entity without giving approximately equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange. Examples include taxes, fines and penalties but also grants and donations. IFRS assumes transactions are on a commercial basis and don't cover these types of transactions.

That is why, when comparing IFRS with IPSAS, the standards are broadly aligned (with different terminology) yet IPSAS contain a handful of standards that cover public sector specifics, the most prominent being social benefits.

Apart from non-exchange transactions another key difference has emerged in relation to fair value. IFRS 13 'Fair Value' has introduced a number of concepts that are not always easily applied in the public sector. These differences are explored in more detail in our second article on measurement but evolve around the application of highest and best use.

IFRS vs IPSAS – a closer look at key differences

We have reviewed four key areas where differences between public sector and private sector transactions are prevalent. As noted above, in many cases these transactions are not covered by IFRS so the comparison in those instances is to demonstrate how IPSAS can fill the void when compared with IFRS.

Please find the links to each of the four-part series of articles below:

  1. Accounting for grants: non-exchange transactions looking at both grant income and grant expenditure
  2. Measurement: a closer look at the application of fair value in the public sector and what alternative current value measurement bases are available in IPSAS
  3. Impairment: measurement differences in particular in relation to non-cash generating units
  4. Acquisitions and combinations: a look at the differences in how entities that are under common control are re-structured

Appendix 1: Background of UK Government path to IFRS adoption

In 1994 the UK Government decided to move away from cash accounting and to adopt accrual accounting. Whilst this paper is not about the virtues of accrual accounting, the benefits cited at the time were as follows:

  • Better management information – departments would be able to cost resources used and to match them to outputs they deliver;
  • More informed decision making by taking into account the opportunity cost of capital;
  • Improvements to public expenditure planning and promoting better use of resources;
  • Better information for formulating economic policy and preparing national accounts.

It took until 2001-02 for central government departments to publish the first set of accrual-based resource accounts which were based on UK GAAP. Almost ten years later, in 2009-10 International Financial Reporting Standards (IFRS) were adopted. The reasons for this change are not well documented but it is said that the Government wanted to remain aligned with the private sector and use internationally recognised standards. All EU listed companies were required to prepare financial statements following IFRS from 2005.