INTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX

DEX2018 STATUS REPORT

INTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX: STATUS REPORTINTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX: STATUS REPORT25% of Governments Report on Accrual51% of Governments Reporting on Accrual Make Use of IPSASAccrual reporting—recording the economic substanceof transactions when they occur rather than when cashsettlement occurs—is fundamental to good decisionmaking, transparency and accountability. The InternationalPublic Sector Financial Accountability Index collects, verifies,and analyzes current financial reporting and budgetingframeworks used by federal and central governmentsaround the world, and also documents future reform plans.Accrual reporting frameworks are developed in variousways, many making use of international standards.Specifically, governments make use of International PublicSector Accounting Standards (IPSAS) in three main ways:The Index currently contains data from 150 jurisdictions,with the intention to update and expand its coverage anddepth over time.37 governments (25% of jurisdictions covered by theIndex) reported on accrual in their last set of publishedfinancial statements, while 45% are transitioning to accrualor already have some element of accrual in their financialreports. 30% of governments still report on a cash basis.CURRENT FINANCIAL REPORTING BASISAccrual (37)Cash (46)No data (106)Transitioning to accrual: sometransactions recognized on cash,some on accrual Directly: implementing IPSAS without altering any oftheir requirements Indirectly: implementing IPSAS through a nationalendorsement process, adjusting for any specificjurisdictional featuresInternational Public Sector AccountingStandards (IPSAS) adopted directly (31)National standards basedon IFRS (2)Other national financialreporting standards (70)IPSAS adopted indirectly via nationalstandards (14)National standards using IPSASas a reference point (33)No data (106)ACCRUALCATEGORIZATIONREPORTING BASIS DEFINITIONSAccrual: transactions recognizedwhen underlying economic eventoccurs; assets and liabilities reportedin balance sheetOf the 37 governments that currently report on accrual,19 (51%) are using IPSAS in one of these three ways:five governments have adopted IPSAS directly; five applyIPSAS indirectly; and nine use IPSAS to develop their ownnational standards. Some countries not categorized asreporting on accrual still make use of accrual IPSAS or thecash basis IPSAS in their financial reporting framework.CURRENT FINANCIAL REPORTING FRAMEWORKCash transitioning to accrual (67)Cash: transactions recognized whencash received or paid Reference point: developing national standards thatuse IPSAS as a guidance source25%CashAccrual30%Cashtransitioningto accrual45%Percentage of countries capturedin the Index that currently useeach reporting basis2The IPSAS on first time accrual adoption(IPSAS 33) defines the date of IPSASadoption as “the start of the reportingperiod in which the first-time adopteradopts accrual basis IPSAS and for whichthe entity presents its first transitionalIPSAS financial statements or its first IPSASfinancial statements.”Accrual categorization in the Index isbased on an entity’s most recent financialstatements. Several countries will publishtheir first IPSAS-based financial statementsfor 2018—these countries have beencategorized as transitioning to accrual.Other national financialreporting standardsInternational Public SectorAccounting Standards(IPSAS) adopted directly51659National standardsbased on IFRS2IPSAS adoptedindirectly vianational standardsNational standardsusing IPSAS as areference pointNumber of countries captured in theIndex on accrual that currently useeach reporting framework3

INTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX: STATUS REPORTINTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX: STATUS REPORTWithin Five Years, 65% of Governments Will Report on AccrualSuccessful transition to accrual involvesthe coordination of a number of complexchange processes, and delays can occuras a result. This makes it challenging toproject the exact number of governmentsthat will report on accrualin the future.However, based on Index findings, it isclear that the number of governmentsreporting on accrual will more thandouble in the next five years. The currentprojection is that, by the end of 2023,98 governments (65% of the Indexpopulation) will report fully on accrual.FUTURE FINANCIALREPORTING STANDARDSAccrual (98)REGIONAL TRENDSCash transitioningto accrual (26)There is significant accrual adoptionactivity underway across all regionsof the world. The regions expected tosee the greatest increases in accrualadoption by 2023 include:Cash (26)No data (106) Africa: 19 total countries(two currently) Latin American and theCaribbean: 21 total countries(five currently)IPSAS Usage and Influence Will Increase Asia: 21 total countries(six currently)Sustained support from internationaland regional organizations islikely to prove critical to successfulimplementation in all these regions.In Europe, accrual adoptionpredictions are made morecomplicated by uncertaintiessurrounding the development ofEuropean Public Sector AccountingStandards (EPSAS). Based on theinformation available, we estimatethat the number of governments onaccrual will double to 24 total overthe next five years.Cash17.5%Cashtransitioningto accrual17.5%65%AccrualPercentage of countries capturedin the Index projected to use eachreporting basis by 20234Of the 98 governments projectedto be reporting on accrual by 2023,72 (73%) will be making use of IPSAS:31 governments will adopt IPSASdirectly; 14 indirectly; and 27 will useIPSAS in developing their nationalstandards. This means not only thatthe number of governments makinguse of IPSAS will increase, but alsothat there will be an overall greaterpercentage of direct and indirectIPSAS implementation globally.International Public SectorAccounting Standards(IPSAS) adopted directlyOther national financialreporting standards24Nationalstandardsbased on IFRS312National standardsusing IPSAS as areference point2714IPSAS adoptedindirectly vianational standards2Number of countries captured by theIndex projected to be on accrual by 2023using each reporting framework5

INTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX: STATUS REPORTINTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDEX: STATUS REPORTAccrual Reforms Require Coordinated Planningand Sustained SupportAccrual Accounting Doesn’t Necessarily Leadto Accrual BudgetingFew governments will have exactly the same drivers for instituting an accrual reform program. Politicalcommitment to public financial management reform, including the adoption of an accrual reportingframework, will always be crucial, but the lndex responses reveal a number of other key sponsors.These include:The high-quality accrual informationproduced in an accrual reportingframework is a necessary precursorto accrual budgeting. However,the Index responses show that thistransition is not inevitable: the majorityof governments that have alreadyimplemented or plan to implement anaccrual reporting framework over thenext five years do not currently haveplans to introduce accrual budgeting. International and regional organizations Financial reporting standard setters Professional accountancy organizationsThe way in which a government migrates to an accrual reporting framework will depend on localcircumstances—typical considerations include government structure; centralization of accounting functions;geographical issues; IT infrastructure; and entity reporting or consolidated government reporting.COMMUNICATIONSCHANGE MANAGEMENTIMPLEMENTATIONSTRATEGY AND PLANDETAILEDPLANSEMBEDDINGAND SUSTAININGPREPARATIONTRANSITIONTRAINING AND CAPACITY BUILDINGImplementation of an accrualreporting framework must be basedon a firm foundation of strongfinancial and other controls, wellunderstood financial processes, andaccurate and timely reporting.Frequent and clear communications,a change management program, andcoordinated training and capacitybuilding are needed. This will needto encompass not only accountants,but also decision makers and users offinancial information who may notbe accountants. They will need tounderstand the financial managementenvironment, how to read thefinancial reports, and how to usereporting information for decisionmaking and accountability purposes.IPSAS 33 envisages two key phases inthe migration to an accrual reportingframework: preparation and transition.The preparation phase must includedetailed planning based on a gapanalysis to identify the resourceimplications of changes to operationalprocesses, IT systems, and accountingpolicies. The gap analysis shouldalso identify training and capacitybuilding needs.6Investing sufficient time and resourcesin planning and design will increasethe likelihood of successfully deliveringthe project to budget, scope, quality,and timetable. The Index responsesindicate that legislative changes atan appropriate point in the transitionprocess will generally be required.Strong program management,including regular feedback, will becritical to the success of the transitionphase. This will enable issues tobe addressed at an early stage,contributing to the success of theoverall program.Although accrual reportingdemonstrates how governmentsmanage resources and is an essentialpart of sound public financialmanagement, only 15 jurisdictionsreported that they currently preparebudgets on accrual. As this was notthe main focus for the Index, it isdifficult to draw firm conclusions asto how this situation might changethrough 2023—although the Indexresponses show that it will. Accrualbudgeting will, therefore, be asubject that needs further researchin the future.NEXT STEPSThis is the first of what we anticipateto be periodic status reports drawnfrom the Index, showcasing progressthroughout this crucial uptake periodfor accrual financial reporting globally.To ensure that the Index is anauthoritative source of informationabout public financial reporting, IFACand CIPFA have verified and checkedthe consistency of informationwherever possible. Appropriateamendments have been made whereavailable evidence did not supportresponses to the questions, or theresponses were inconsistent.CIPFA and IFAC will continue torefine the Index questions to reducethe potential for inconsistenciesand the need to seek clarification.The intention is to expand theIndex progressively in terms of bothcoverage and information depth, withregular updates of the key indices onthe status of accrual adoption anduse of IPSAS.7Copyright 2018 by the InternationalFederation of Accountants (IFAC) andthe Chartered Institute of Public Financeand Accountancy (CIPFA). All rightsreserved. Contact permissions@ifac.orgfor permission to reproduce, store ortransmit, or to make other similar usesof this document.ISBN: 978-1-60815-383-1

FOLLOW ationOfAccountantslinkedin.com/company/ifacFor more information aboutIFAC, please contact:Anthony MirendaHead of CommunicationsT 1 212-286-9344www.ifac.orgFor more information aboutCIPFA, please contact:Drew CullenDirector, Public AffairsT 44 207 543 5854www.cipfa.org

INTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDE: STATUS REPORT 6 INTERNATIONAL PUBLIC SECTOR FINANCIAL ACCOUNTABILITY INDE: STATUS REPORT The high-quality accrual information produced in an accrual reporting framework is a necessary precursor to accrual budgeting. However, the Index responses show that this