Public Sector Conceptual Framework

Project Status

Exposure Draft 1 - Phase 1 Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Role, Authority and Scope; Objectives and Users; Qualitative Characteristics; and Reporting Entity (CF–ED1) published with a comment date of June 15, 2011.

Consultation Paper - Phase 2 Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Elements and Recognition in Financial Statements (CF–CP2)

Consultation Paper - Phase 3 Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Measurement of Assets and Liabilities in Financial Statements (CF–CP3) published with a comment date of June 15, 2011. These Consultation Papers were accompanied by At a Glance summaries.

Staff

John Stanford

Task Force

The IPSASB is leading a collaborative project, with participation from a group of national standards setters and other organizations (NSS) which develop authoritative requirements for financial reporting in the public sector.

Objective(s) of project

The objective of the project is to develop a Public Sector Conceptual Framework which is applicable to the preparation and presentation of general purpose financial reports of public sector entities. General purpose financial reports include, but are not necessarily limited to, financial statements and notes thereto.

Scope

The Public Sector Conceptual Framework will be developed primarily for all public sector entities other than Government Business Enterprises (GBEs).

GBEs are required to apply International Financial Reporting Standards (IFRSs) which are issued by the International Accounting Standards Board (IASB).

Background

Currently the concepts related to public sector financial statements are embedded in the existing IPSASs.

Many of the IPSASs currently on issue are based on International Accounting Standards (IASs/IFRSs) to the extent that the requirements of the IASs/IFRSs are relevant to the public sector. Therefore, the current IPSASs draw on concepts and definitions in the IASB Framework with modifications where necessary to address public sector circumstances.

The IASB is currently updating its Framework in a joint project with the Financial Accounting Standards Board of the USA. The IPSASB is monitoring progress on that project and lead authors of IPSASB project components liaise with their IASB/FASB counterparts.

Issues

The Framework will deal with financial reporting under the accrual basis and encompass such matters as:

• Objectives of financial reporting;
• Scope of financial reporting;
• Qualitative characteristics of financial information;
• Characteristics of the reporting entity;
• Definition and recognition of the elements of financial statements;
• Measurement; and
• Presentation and disclosure.

The project will also consider the need for a framework for financial reporting under the cash basis of accounting, and implications of matters dealt with in the accrual framework for the cash basis.

Task Force progress / Board discussions to date

March 2012:

Phase 1

The IPSASB completed its review of a draft Framework dealing with the matters addressed in CF–ED1. The IPSASB provided Staff with directions for development of a final draft of this Phase of the Framework. The IPSASB also agreed that the final draft should be revisited as other Phases of the Conceptual Framework are further developed to identify and resolve any overarching issues and to ensure that all Phases of the Framework articulate. The IPSASB confirmed that the major features of the draft Phase 1 Framework are to reflect the following.

• The Role and Authority of the Framework and the Scope of Financial Reporting:
  • The Conceptual Framework will establish the concepts that underpin financial reporting and will be applied by the IPSASB in developing IPSASs. The Framework will not establish authoritative requirements or override the requirements of IPSASs, but can provide guidance in dealing with financial reporting issues not dealt with by IPSASs or non-authoritative guidance issued by the IPSASB.
  • GPFRs encompass financial statements, including notes thereto, and the presentation of information that enhances, complements and supplements the financial statements.
• The Objectives, Users and Information provided by GPFRs:
• The primary users of general purpose financial reports (GPFRs) are service recipients (and their representatives) and resource providers (and their representatives).
• The objectives of financial reporting are the provision of information useful for accountability and decision making purposes by users.
• GPFRs can provide information about:
• Financial position, financial performance and cash flows;
• Budget information;
• Service delivery achievements;
• Prospective financial and non-financial information; and
• Explanatory information.
• The Qualitative Characteristics (QCs) of, and Constraints on, Information included in GPFRs:
  • The QCs are relevance, faithful representation, understandability, timeliness; comparability, and verifiability.
  • The constraints are materiality, cost-benefit, and achieving an appropriate balance between the qualitative characteristics.
• The Reporting Entity:
• A public sector reporting entity is a government or other public sector organization, program or identifiable area of activity that prepares GPFRs. It may comprise two or more separate entities that present GPFRs as if they are a single entity.
• Key characteristics of a public sector reporting entity are that:
• It is an entity that raises economic resources from, or on behalf of, constituents and/or uses economic resources to undertake activities for the benefit of, or on behalf of, those constituents; and
• There are service recipients or resource providers dependent on GPFRs of the entity for information for accountability or decision-making purposes.

Phase 2

The IPSASB completed its review of the 36 responses received to CF–CP2. The IPSASB considered the five outstanding questions in CF–CP2, for which it had not previously provided directions to Staff. The IPSASB also considered in more detail the nature of enforceability, whether enforceability should be a key characteristic of a liability arising from obligations related to non-exchange transactions and approaches to deferred inflows and deferred outflows. These issues had first been discussed at the December 2011 meeting.

The IPSASB reconsidered the position of “service potential” and “economic benefits” in the definition of an asset. The IPSASB agreed that the phrase “service potential or economic benefits” should be used in the definition of an asset.

Having acknowledged that ownership interests exist in the public sector, the IPSASB considered whether such interests should be defined as an element. The IPSASB concluded that ownership interests are not a prevalent feature of the public sector but that certain components of ownership interests would have to be defined so that they can be distinguished from revenue and expenses.

The IPSASB concluded that enforceability is not a key characteristic of a liability for either an obligation arising from an exchange or a non-exchange transaction. The IPSASB directed Staff to carry out further work on the nature and interpretation of constructive obligations in the context of non-exchange transactions.

The IPSASB decided to explore further all approaches to deferred outflows and deferred inflows, including presentation as well as defining separate elements.

The IPSASB also considered and provided directions on a preliminary outline of an Exposure Draft of the Elements and Recognition section of the Conceptual Framework.

Key Characteristics of the Public Sector

The IPSASB considered the responses to the Exposure Draft (ED), Key Characteristics of the Public Sector with Potential Implications for Financial Reporting. The majority of respondents were supportive of the ED and considered that it should be published in its entirety with the Conceptual Framework.

Respondents expressed some specific reservations, principally that:

• The ED had not highlighted adequately the areas where the identified characteristics have an impact on public sector financial reporting; and
• A number of the identified characteristics are either not specific to the public sector or are over-emphasized.

The IPSASB decided that the ED should be further developed and reconsidered at a future meeting.

Staff was also directed to carry out further work on the linkages with the 4 phases of the Conceptual Framework project as part of the identification and resolution of overarching issues.

December 2011: The IPSASB considers whether to issue an integrated (umbrella) ED comprising all four phases of the Framework. The IPSASB decides to defer a final decision until the phases have been further developed.

The IPSASB considers a further draft of the Phase Four Consultation Paper. Following further elaboration of the discussion of display, core and supporting information, the IPSASB approves a Consultation Paper on Presentation, with an exposure period of four months.

The IPSASB completes its review of responses to the Phase 1 ED. The IPSASB provides staff with directions for the preparation of  a first draft of the Framework for consideration in March 2012. Amongst such directions are:

• The primary users of general purpose financial reports (GPFRs) are service recipients (and their representatives) and resource providers (and their representatives) and the objectives of financial reporting are the provision of information useful for accountability and decision making purposes by users. The IPSASB also directed that the explanation of the relationship between users, objectives and information that may be provided by GPFRs should be strengthened;
• The scope of financial reporting should be broad enough to encompass financial statements, including notes thereto, and the presentation of information that enhances, complements and supplements the financial statements; and
• The qualitative characteristics (QCs) of information included in GPFRs are relevance, faithful representation, understandability, timeliness; comparability, and verifiability. The IPSASB also directed that:
  • the QCs are not to be identified as fundamental or enhancing – rather, that the QCs work together to contribute to the usefulness of information; and
  • the draft is to explain that materiality will be considered by the IPSASB in developing IPSASs and by individual entities in preparing GPFRs, and that it can relate to a number of the QCs;

The IPSASB also considers a first draft of a revised reporting entity section and provides directions for its further development, including that the next draft should reflect that a public sector reporting entity would encompass economic resources and activities (rather than focusing the explanation on the provision of goods or services).

The IPSASB continues its review of responses to the Phase 2 Consultation Paper, organizing the Specific Matters for Comment into themes.

The IPSASB explores the approaches to reporting financial performance and the determination of revenues and expenses for a reporting period. It takes the view that rigidly contrasting asset and liability-led and revenue and expense-led approaches is not helpful. The IPSASB concludes that there is information value in the identification of inflows and outflows applicable to particular reporting periods, but expresses some reservations that adopting such approaches might create inappropriate incentives to defer expenditure and income. The IPSASB directs Staff to further consider approaches to reporting financial performance, including the need for definitions of additional elements.

In the context of the definition of a liability, the IPSASB also discusses the enforceability of obligations. The IPSASB considers whether a distinction should be drawn between exchange and non-exchange transactions and whether non-enforceable constructive obligations give rise to (i) liabilities for neither exchange nor non-exchange transactions; (ii) liabilities for only exchange transactions; or (iii) liabilities for both exchange and non-exchange transactions. The IPSASB decides to focus further discussion on the view that only enforceable obligations might give rise to liabilities for both exchange and non-exchange transactions. It directs staff to further consider the implications of such an approach and, in particular, to consider the meaning of the term ‘enforceability’ and the issue of obligations where only the elapse of time prevents an obligation from being enforceable at the reporting date.

In other areas, the directions to Staff reflect tentative views that:

• sovereign rights and powers only give rise to assets when such rights/powers are exercised;
• the sovereign power to repudiate obligations should not be used as a rationale not to recognize obligations that would otherwise meet the definition of a liability;
• the definitions of both assets and liabilities should include reference to a past event;
• the definitions of revenue and expense should not be limited to ordinary activities;
• generally net assets/net liabilities are residual amounts rather than residual interests or ownership interests. However, Staff is directed to consider further the existence of ownership interests at whole of government level.

The initial discussion on Phase 3 focuses on whether an overall measurement objective should be developed, and, if so, what that measurement objective should be. The IPSASB agrees that a measurement objective should be developed, but does not advocate that such an objective should represent current value or another measurement basis. Staff is directed to develop a measurement objective reflecting user needs, the objectives of financial reporting and the QCs.

The IPSASB considers a proposed outline of an ED on Phase 3. The IPSASB confirms that the list of measurement bases that are intended to be addressed in the ED is appropriate: historical cost, market values, fair value, replacement cost, value in use and net selling price. It is suggested that the discussion of fair value should be general rather than in the context of convergence or maintaining alignment with IFRS. It is also suggested that the notion of ‘optimality’ inherent in depreciated replacement cost can be confusing to some users and that this needs to be discussed in the ED.

September 2011: The IPSASB considers a further draft of the Phase Four Consultation Paper dealing with Presentation, which refines and reduces the number of presentation concepts and contains alternative approaches based on direct application of the QCs and a more extensive analysis of user needs. The IPSASB considers that the approaches are not oppositional and directs that they be integrated in a further revision.

The IPSASB conducts an initial review of responses to the Phase One ED and focuses discussion on the role, authority and scope of the Framework. It also considers the approach to the reporting entity and group reporting entity. No decisions are made.

The IPSASB conducts an initial review of responses to the Phase Two Consultation Paper dealing with Elements and Recognition. Tentative agreement is reached that the definition of an asset should include reference to both service potential and economic benefits and that the definition of a liability should not include identification of a specific party to whom an obligation is owed or a requirement for a settlement date.

The IPSASB conducts an initial review of responses to the Phase Three Consultation Paper dealing with Measurement. The IPSASB directs Staff to develop a single measurement objective.

June 2011: The IPSASB considers a further draft Consultation Paper on Presentation (Phase Four) with six presentation concepts mapped to the qualitative characteristics and constraints of financial reporting. The IPSASB determines that these concepts should be refined and reduced in number. The IPSASB also directs that the next draft should include alternative approaches to presentation: an approach driven by user needs and an approach that discuses presentation more directly in relation to the qualitative characteristics and constraints, without using separate presentation concepts.

March 2011:The IPSASB considers a draft Consultation Paper on Presentation and provides directions on the meaning of presentation and the relationship between presentation, display and disclosure. The IPSASB also agrees to further develop presentation concepts and map these concepts to the qualitative characteristics and the constraints on information included in GPFRs.

The IPSASB approves an ED of Key Characteristics of the Public Sector and their Impact on Financial Reporting, subject to circulation to Members of a further revised version. The ED will have a 4 month consultation period.

December 2010: The IPSASB publishes the ED on Phase One and Consultation Papers on Elements and Recognition, and Measurement with exposure periods of six months ending on June 15, 2011. The IPSASB also publishes At a Glance summaries related to the Consultation Papers. A staff draft Key Characteristics of the Public Sector highlighting certain characteristics of the public sector that may have an impact on development of a conceptual framework for the public sector and therefore on accounting standard-setting in the public sector is also available. The document has not been approved by the IPSASB and therefore does not represent the views of the IPSASB. It will be further considered by the IPSASB in first quarter of 2011, with a view to approval for exposure for public comment.

November 2010: The IPSASB approves an ED on Phase One and Consultation Papers on Elements and Recognition, and Measurement with exposure periods of six months.

June 2010: The IPSASB considers a draft of Exposure Draft (ED) on Phase One subjects (Objectives, Scope, Qualitative Characteristics and Reporting Entity) and makes directions for revision so that a further version can be circulated out-of-session, with a view to approving an ED in November 2010. The IPSASB also considers further versions of draft Consultation Papers on Elements and Recognition, and Measurement and provides directions for further development. In accordance with directions at the April 2010 meeting the Consultation Paper on Measurement includes consideration of both assets and liabilities.

May/June 2010: The IPSASB establishes a Standard Setters Advisory Panel on the Conceptual Framework, which supersedes the Subcommittee.

April 2010: The IPSASB considered a revised project plan that reflected the priority accorded to the project by the IPSASB at its December 2009 meeting. The IPSASB further discussed issues arising from the analysis of responses to the first Consultation Paper. The IPSASB also discussed further issues papers on the Elements and Recognition phase and a draft Consultation Paper on the assets component of the Measurement phase, together with issues papers on the deprival value model in the context of liabilities and concepts of capital.

December 2009: The IPSASB continued its review of responses to the Phase 1 Consultation Paper. This review will continue at the IPSASBs next meeting in April 2010.

September 2009: The IPSASB continued its consideration of issues relating to Phase 3: Measurement. The IPSASB agreed that the next stage of development is to take a draft CP 3 to the Conceptual Framework Subcommittee.

May 2009: The IPSASB commenced its review of the 55 responses to the Consultation Paper on Phase 1 of its Conceptual Framework project. The IPSASB will continue its review of the responses at meetings during 2009.

The IPSASB also considered a draft Consultation Paper on the definition and recognition of elements (phase 2) and a first paper on measurement (phase 3). The IPSASB will consider further papers on phases 2 and 3 at its September meeting.

March 2009: Comments on the Consultation Paper (see below) are due by March 31. The IPSASB will commence its review of comments at its next meeting in May 2009.

September 2008: The IPSASB approved and published for comment the Consultation Paper Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: The Objectives of Financial Reporting, The Scope of Financial Reporting, The Qualitative Characteristics of Information Included in General Purpose Financial Reports, The Reporting Entity, with a comment date of March 31, 2009.

June 2008: The IPSASB reviewed an updated draft Consultation Paper dealing with 'objectives of general purpose financial reporting', 'scope of general purpose financial reporting', 'qualitative characteristics of financial information included in general purpose financial reports' and 'the reporting entity'. The IPSASB confirmed its preliminary views on the objectives and scope of financial reporting and agreed preliminary views that, in broad terms:

The qualitative characteristics of information included in general purpose financial reports (GPFRs) should be identified as relevance, faithful representation, timeliness, understandability, comparability and verifiability. Constraints on information included in GPFRs are materiality, cost and the appropriate balance between the characteristics;

• The key characteristic of a reporting entity is the existence of users dependent on GPFRs for accountability purposes and for making resource allocation, political and social decisions. A reporting entity may have a separate identity at law or be an organization, activity or administrative arrangement; and

The boundary of a group reporting entity should include the government (or other reporting entity) and other entities over which the government (or other reporting entity) has the power to direct the strategic financing and operating policies and, as a consequence, has access to, and can increase, maintain or protect, benefits from those entities or is exposed to a financial burden or loss by the other entities.

The IPSASB also tentatively agreed the text of the draft Consultation Paper subject to a final review of amendments and agreement on the executive summary and other introductory material out of session. The Consultation Paper is planned for publication in September.

The IPSASB also reviewed developments with the group 2 Consultation Paper which deals with the definition and recognition of elements.

The Board discussed some of the key aspects of the IASB/FASB conceptual framework project and in that context considered the need to change the existing IPSASB asset and liability definitions. As such, the IPSASB directed staff to explore the 'rights and obligations' approach being mindful of the type of rights a government possesses (non-exchange) and the types of liabilities of a government (non-exchange). The Board expressed concern with taking a strictly 'legal' approach as well as focusing solely on enforceability noting that some environmental liabilities may be questionable using this approach.

While open to considering developments from the IASB/FASB project, the IPSASB also believed it was important to firstly review its existing definitions and consider general improvements that could be made. The Board also emphasized the importance of keeping any definitions at a high level and identifying public sector specific examples to illustrate the effects of any changes proposed.

A draft of the group 2 Consultation Paper is planned to be provided to the IPSASB for consideration before the next Board meeting in October 2008.

March 2008: The IPSASB performed a review of a first draft Consultation Paper which consolidates four previously separate chapters dealing with 'objectives of general purpose financial reporting', 'scope of general purpose financial reporting', 'qualitative characteristics of financial information included in general purpose financial reports' and 'the reporting entity'. Each chapter was discussed in detail with the IPSASB agreeing that the draft paper be restructured and refocused to identify a number of IPSASB preliminary views for further consideration in June 2008 - these included:

• The objectives of financial reporting be identified as the disclosure of information for accountability and decision making purposes;
• The scope of financial reporting should encompass the disclosure of financial information about past transactions and events such as presented in "conventional" financial statements, as well as non-financial information about the performance of the entity including its service delivery achievements, and prospective financial information consistent with the achievement of the objective of financial reporting - but would not encompass matters of policy formulation; and

A public sector reporting entity should be described as an entity that is required or elects to prepare a general purpose financial report (GPFR) in accordance with IPSASs. The IPSASB agreed the need to further explore whether the boundary of the reporting entity in the public sector should be determined on a control or an accountability basis, and issues that might arise in the application of those bases.

For qualitative characteristics, the IPSASB had significant discussion as to whether timeliness and understandability need special consideration in a public sector context. Related to this was 'if' and 'what' any 'order of application' should be applied to public sector qualitative characteristics.

The IPSASB directed that the draft Consultation Paper be revised for scheduled approval at their next meeting in June 2008.

November 2007: The IPSASB reviewed papers on 'objectives', 'scope of general purpose financial reporting', 'qualitative characteristics of financial information' and 'the reporting entity' prepared by national standards setters and IPSASB staff. They directed that a first draft of a Consultation Paper which consolidates all four papers be prepared for review at their next meeting in March 2008.

July 2007: The IPSASB reviewed draft consultation papers on "Objectives of financial reporting" and the "Scope of financial reporting" and provided directions for their further development. Final drafts of these papers are to be reviewed by the IPSASB at its November 2007 meeting, together with papers on the "Characteristics of the reporting entity" and "Qualitative characteristics of financial information".

The IPSASB agreed that other components of the project should be actioned as soon as possible with a view to accelerating the development process.

The subcommittee met and considered a revised paper dealing with the reporting entity. The paper is to be further developed for review, as discussed above, by the IPSASB in November 2007.

March 2007: The IPSASB noted progress and the current status of the project, including that initial issues papers on Objectives, Scope, Reporting Entity and Qualitative Characteristics had been prepared for review by the subcommittee.

The Board discussed the scope of the conceptual framework, differences between general purpose financial statements and general purpose financial reporting and the notion of a reporting entity. Members noted that the need to demonstrate accountability implied reporting beyond general purpose financial statements, and a range of factors would need to be considered in determining the reporting entity.

The subcommittee held its first meeting to confirm operating procedures and timing of project development and to review initial issues papers dealing with:

• Objectives of financial reporting: prepared by UK - ASB;
• Scope of financial reporting: prepared by South Africa-ASB;
• Qualitative Characteristics: prepared by Norway - Institute; and
• Reporting entity: prepared by Australia - AASB.

November 2006: The IPSASB formally approved the project brief, noting that:

• The project would be actioned with the expectation that CPs on the components of the Framework and then an exposure draft of the full Framework would be issued;
• The IPSASB Framework would deal with general purpose financial reports, and would not be limited to only general purpose financial statements;
• When the draft of the paper on objectives of financial reporting was developed, it would be used as the basis for "focus group discussions" and/or similar public hearings, to facilitate additional input on users and user needs; and
• The Framework under the accrual basis would initially be developed, and the implications for the cash basis of financial reporting considered towards the end of the project.

July 2006: The IPSASB met with representatives of national standards setters (NSS) from Argentina, Australia, Canada, France, Israel, Malaysia, Italy, the Netherlands, New Zealand, Spain, South Africa, Switzerland, the United Kingdom and the United States of America. Also participating were the Public Sector Committee of the Federation des Experts Comptables Europeens (FEE), the IASB, the Task Force on the Harmonization of the Public Sector Accounting (TFHPSA) and Eurostat. There was agreement the IPSASB would lead a collaborative project. A draft project brief and tentative development program was also agreed for formal approval in November 2006.