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Implementing International Standards in the Public Sector (IPSAS) as part of wider finance reform

PwC Global Public Finance & Accounting Network The climate of public finance reform

As a result of the global financial crisis, In response, many of these The IFAC (International Federation of governments across the world are organisations are undertaking a range ) recently issued a letter to having to cope with substantial of reforms to increase accountability the G20 leaders recommending that pressure due to restricted and and transparency, whilst also governments should practice what they increased demand for public goods and improving operational performance preach and follow rules like those set services. As a result, public-sector and the Value for Money (VFM) that down for public companies. entities at all levels of government are the general public and individual facing unprecedented demands for consumers receive from public-sector improvement in the management of services and activities. One essential public finances. reform for improving the management of public finance is the implementation of accrual accounting compliant with International Public Sector Accounting Standards (IPSAS).

Who has adopted IPSAS?

IPSAS are being adopted by a large However, a diverse range of national With the United Nations and other number of organisations across the and sub-national government entities international organisations adopting world. Supranational public-sector also have projects and processes in IPSAS as their accounting framework, entities have been at the forefront of place aimed at the adoption of IPSAS, the number of public-sector the move towards IPSAS. Organisations IFRS or special accounting rules closely organisations announcing their such as the European Commission, the aligned with these international intention of implementing IPSAS has OECD, NATO and the United Nations standards. increased significantly. have already implemented IPSAS, or are currently in the process of doing so.

Organisations such as the European Commission, the OECD, NATO and the United Nations have already implemented IPSAS, or are currently in the process of doing so.

2 Implementing International Accounting Standards in the Public Sector (IPSAS) as part of wider finance reform The benefits of implementing IPSAS as part of wider finance reform

Enabling sound public-finance High-quality accounting management standards The superiority of accrual accounting IPSAS are developed by the over accounting is now International Public Sector Accounting IPSAS is a acknowledged by the vast majority of Standards Board (IPSASB), which finance and accounting professionals. focuses on the accounting and financial- catalyst to By introducing accrual accounting, reporting needs of governments and the providing public entities demonstrate a constituencies they serve. They set out commitment to improve the use and recognition, measurement, presentation high-quality management of resources, a desire to and disclosure requirements dealing financial promote enhanced financial reporting with transactions and events in the and transparency, plus greater general-purpose financial statements of statements accountability and a pledge to fight all public sector entities. The strategy of fraud and corruption. the IPSASB is, as appropriate, to align and, more the IPSAS with the International importantly, Cash accounting, and even accrual Financial Reporting Standards (IFRS) accounts based on locally defined issued by the IASB. This ensures that improving financial reporting standards, are no organisations in the public sector that operational longer sufficient to enable public-sector adopt IPSAS have financial reports that organisations to respond to the are consistent with and comparable to performance. legitimate needs and demands of the private-sector best practice, while also citizens they serve. Independent benefiting from guidance and standards are essential for high-quality interpretation for specific public-sector financial reporting, which in turn is issues such as heritage assets, public fundamental for developing the levels grants and from non-exchange of accountability and quality decision- transactions. making that lead to good governance, transparency and trust.

IPSAS as a catalyst for performance improvement It is important to acknowledge that implementing IPSAS is not an end in Value for money Performance, & reporting itself, but a catalyst to providing ent Reliability & Comparability high-quality financial statements and, managem even more importantly, improving financial Integrated Accrual operational performance. in publicy (incl. aturity Reporting) of m This is true in areas such as fixed assets degree Accrual Time and management, payroll a greater ards and the wider field of employee tow oving Cash benefits. M Accounting + Cost or Budget Analysis In assisting public-sector clients with Cash their IPSAS implementation, we have Accounting encountered many challenges, but also helped them reap many benefits. Business plan

Implementing International Accounting Standards in the Public Sector (IPSAS) as part of wider finance reform 3 What are the challenges?

Implementing IPSAS has an Policies Systems impact on the entire organisation. One of the inevitable consequences Accrual accounting also requires It is therefore important for your organisation is facing, when it organisations to develop new ways of organisations to take their time to adopts accrual accounting, is the need reporting and communicating financial assess and prepare for the for it to review and amend its policies, information. As the focus for public- significant changes that will affect governance and control structures. sector bodies has traditionally lain on their policies, people, systems and budgetary execution rather than wider First, financial rules and regulations financial reporting, new data needs processes. are affected. A comprehensive might crop up when accrual accounting accounting manual, possibly is adopted under IPSAS. In order to supplemented with concise capture and analyse the increased implementation rules, can help your accounting data and information, IT staff quickly adhere to, the new systems often need amending. Many Making the accounting principles and understand public-sector entities use their IPSAS the concepts behind the IPSAS implementation as an opportunity to change to standards. Introducing accrual set up an enterprise-resource planning accounting may also require you to system or to upgrade their current IPSAS is much revise your budgetary accounting system. more than an policies, even if budgets remain on a cash, or some other, basis. Policies for Having one organisation-wide system accounting other business processes (e.g. HR, that can be used to manage and exercise. It has procurement, asset management) may coordinate all information, resources also be affected. and business processes means that an impact on significant efficiency savings and the entire Depending on your organisation’s productivity gains can be achieved. governance structure, introducing organisation accrual accounting may additionally Processes have an impact on the work done by and will affect Beyond people and systems, IPSAS your oversight bodies (e.g. the approval adoption also has an impact on entities’ its policies, and control process surrounding use of processes. Organisations will have to public funding). people, enhance existing processes, create new systems and People ones and re-examine internal control frameworks to ensure that internal control and risk management are processes. Accrual accounting is based on the effective under the new accounting occurrence of economic events, and not standards. merely on cash receipts and payments. Adopting accrual accounting or, for Where public-sector entities already those organisations that already apply utilise local accrual-based financial it, moving towards IPSAS as the basis reporting standards, the challenges of for accrual accounting, accrual IPSAS implementation are fewer, but budgeting or performance-based they still require careful consideration management requires a significant and management. For example, a cultural shift in the mindset of number of the standards can lead to management, staff, regulators, funds significant shifts away from locally- providers and other organisational defined accepted practices, especially stakeholders. in areas such as accounting for assets, investments and employee benefits. For this to be successful, it is essential that change management processes, including training, project management, awareness campaigns and organisational reform, are put in place and that they work.

4 Implementing International Accounting Standards in the Public Sector (IPSAS) as part of wider finance reform Our conversion methodology

Adopting IPSAS is a major Project and undertaking for an organisation, change and having a partner that has the management necessary knowledge, experience People Processes and expertise to manage the change in all these areas is essential.

Our IPSAS conversion methodology Gap analysis Embedding involves a three-phase approach and roadmap Conversion designed to add maximum value to your organisation. It ensures that IPSAS adoption does not inhibit the achievement of current operational Policies Systems and administrative goals and helps Financial management generate significant performance and improvement once conversion is reporting achieved.

Phase One: Component evaluation and issue Phase Three: Gap Analysis & Roadmap resolution encompasses establishing Embedding IPSAS accounting policies, developing The objective of a gap analysis is to the shell financial statements and The final phase is designed to enable gain a detailed understanding of the implementing the conversion strategy the organisation to move smoothly to a impact of IPSAS on the organisation, at departmental level. Once IPSAS new “business-as-usual” operation, highlight key accounting and reporting accounting policies have been using its “new language” comfortably issues that need to be addressed, documented, adjustments and data and authoritatively. Embedding the understand which business processes requirements identified and reporting- change involves continuing IPSAS may be impacted by IPSAS, and take an process solutions developed, the training throughout the entity, informed decision on how to proceed organisation is ready to undertake finalising the accounting manual and with the IPSAS conversion. The initial conversion. , completing systems roadmap allows the organisation to design, build and test, the design and design a detailed project plan, define its The initial conversion enables rollout of new business processes and needs and estimate the cost of the preparation of the organisation’s first procedures including internal control entire conversion process, including IPSAS-compliant financial statements and risk management, and from an information system point of and means that an informed decision modification of budgeting processes. In view. can be taken on the ongoing conversion practice, depending on the needs and strategy. For this, IPSAS reporting time constraints of the project, portions Phase Two: process and systems need to be of the work relating to phases two and Conversion designed, built and tested, IPSAS three may be carried out adjustments need to be calculated, simultaneously. The second phase of the conversion reporting packs completed for required methodology involves project set-up, disclosures, and IPSAS results Once conversion is completed, IPSAS component evaluation and issue consolidated and analysed. Once will be embedded across the resolution, plus the initial conversion. completed, the initial conversion organisation, with modified systems, The project set-up is designed to enable provides the organisation with Year 1 updated controls and procedural the organisation to manage the IPSAS IPSAS financial statements, an documentation, and fully trained staff. conversion project to a successful assessment of the business impacts and conclusion while continuing to run its a gap analysis of the relevant processes, business effectively. For this purpose, systems and organisational structure. the project management structure is set down, conversion tools are tailored and the project strategy is communicated throughout the organisation.

Implementing International Accounting Standards in the Public Sector (IPSAS) as part of wider finance reform 5 The European Commission • implementing a quality control implemented IPSAS-inspired accrual project aimed at improving the accounting standards for the financial accuracy of the financial data year ending 31 December 2005 as part communicated by each department, of a major accounting overhaul and to address the issues identified designed to increase financial by their auditors. transparency and accountability Implementing IPSAS led to major towards European Union taxpayers and impacts on the measurement and to provide decision-makers with recognition of property, plant and accurate data on the financial position equipment, prefinancing receivables, of the European Communities. After the year-end cut-off, employee benefits two years of intensive preparation, the and financial instruments at the European Commission was able to European Commission. Since 2005, present the 2005 full accrual financial the European Commission has statements to its oversight bodies. continued in its efforts to improve the In this process, PwC assisted the management of public finance in the European Commission in a number of European Communities. This resulted key tasks, including: in the positive Statement of Assurance, without qualification, provided by the • developing accounting rules based on European Court of Auditors on the IPSAS and a new chart of accounts, reliability of the 2007 annual accounts. new procedures and manuals; This assurance indicates that all • adapting the IT system to support the revenue, expenditure, assets and new accounting rules, and to capture liabilities were recorded and that the a wide range of information as and annual accounts faithfully reflect the when an economic event occurred; Community’s financial position at the year-end. • training users to apply the new practices and procedures needed to Following the successful initial capture the information in a transition to IPSAS, the European complete, reliable, timely manner; Commission is now committed to and ensuring that the wider benefits of IPSAS adoption are realised for operational performance. Case Study IPSAS at the European Commission

6 Implementing International Accounting Standards in the Public Sector (IPSAS) as part of wider finance reform How PwC can help you

We can offer either assistance on a full conversion process or ad hoc services on request.

Examples of potential challenges

Project and change management How we can assist you • You need full assistance in your IPSAS conversion process or wish to outsource its entire management to an external partner. • PwC can provide management of all or part of the IPSAS conversion process for your organisation. The full conversion • You need assistance with specific aspects of the conversion management includes training, technical advice, development of process. the conversion strategy and all other services necessary to ensure the successful conversion to IPSAS. IPSAS accounting advice

• You are uncertain how far your current accounting standards differ from IPSAS. • PwC can provide a range of technical support, including services • You do not have sufficient internal expertise for specific areas such as gap analysis between current accounting standards and that are key to your organisation’s IPSAS implementation. IPSAS, and technical analysis on critical areas that affect your • You need quick, reliable access to a team of experts for ad hoc financial statements (e.g. financial instruments, property, plant requests or regular discussions. and equipment, employee benefits, etc.). • Advice can be delivered as part of an individual engagement or as an ongoing relationship throughout your IPSAS implementation. Training and workshops

• You need an overview of IPSAS to understand what implications adopting them may have on your organisation. • From individual technical training sessions in key accounting • Your financial professionals require individual training on areas to workshops providing an overview of IPSAS and their key IPSAS accounting areas. implications for an organisation, PwC has a team of trainers who • You want to facilitate organisational change and increase have the skills and experience to transfer understanding and staff’s awareness for IPSAS, addressing the benefits and knowledge to your staff. challenges. • Our IPSAS specialists act as workshop facilitators and trainers to public finance specialists across the globe. Process and system improvement

• You’re looking for advice on the process and information system aspects of the conversion. • Our services include business process reviews, design of risk • You want to take advantage of the introduction of IPSAS to and compliance frameworks, internal control procedures and streamline business processes. manuals. • You want to be certain that changes to your organisation • Furthermore, PwC can guide your organisation in embedding and business processes are effectively translated into the IT the changes into your IT environment. environment. • You aim at high levels of corporate governance and want to ensure the new IPSAS environment complies with your existing regulatory framework.

Financial management and reporting • PwC can provide a range of services to assist your organisation improve the quality and credibility of its financial management information and allow reporting to be utilised for compliance • You want the additional information provided by IPSAS and performance improvement. to be easily utilised by management. • This ranges from compliance reviews of whether IPSAS • You want to ensure that financial and budgetary accounts requirements are met in financial statements and annual are complementary, readily reconcilable, and provide your reports, to the development of cost accounting, billing solutions organisation with a total view of financial management. or other management reporting that will help generate real • You want to use the enhanced information available from operational performance benefits for the organisation. IPSAS to generate operational performance improvements by introducing further reforms such as cost accounting.

Implementing International Accounting Standards in the Public Sector (IPSAS) as part of wider finance reform 7 Who to contact

No matter where in the world you are, we For a detailed discussion on how can draw on the PwC network to deploy the switch to IPSAS could affect your teams comprising local and international operations and to obtain further experts who have “been there and done information, please contact: that”, combining practical IPSAS expertise, specialist knowledge and local public-sector Jan Sturesson Jean-Louis Rouvet knowledge. Global leader Government Global Public Finance & and Public Services Accounting leader Tel: +46 46 286 9339 Tel: + 33 1 5657 8578 [email protected] [email protected]

Patrice Schumesch Jean-Philippe Duval Global Public Finance & Global Public Finance & Accounting partner, Global ACS Accounting partner, (Accounting Consulting Services), IPSAS expert IPSAS expert Tel: + 33 1 5657 8461 Tel: +32 2710 4028 [email protected] [email protected] Josy Steenwinckel Richard Golding European Union Institutions United Nations Relationship partner Global Relationship partner Tel: +32 2 710 7220 Tel: +41 58 792 9526 [email protected] [email protected] Matthew Z. Hodge Tony Kingsley Government IFRS Specialist International Development Tel: +44 113 289 4226 Assistance (IDA) network [email protected] Tel: +44 20 7804 2098 [email protected]

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