Reporting on the Long-Term Sustainability of Public Finances
Exposure Draft (ED) 46, Proposed Recommended Practice Guideline (RPG), Reporting on the Long-Term Sustainability of a Public Sector Entity’s Finances was issued in October 2011 with comments requested by February 29, 2012.
Task Force (comprising IPSASB members, observers and external parties) was established to oversee project - United Kingdom (Chair), Australia, Canada, France, New Zealand, Sweden, Switzerland, United States, Eurostat and IMF.
Objective(s) of project
To produce a framework for the reporting and disclosure of information related to the long-term fiscal sustainability of governmental programs.
The project applies to reporting and disclosures about the long-term fiscal sustainability of governmental programs, including both projected outflows and inflows - for all public sector entities other than Government Business Enterprises (GBEs) preparing and presenting financial statements under the accrual basis of accounting.
GBEs are required to apply International Financial Reporting Standards (IFRSs) which are issued by the International Accounting Standards Board (IASB).
During the development of its project on social benefits the IPSASB formed a view that, the financial statements cannot satisfy all the needs of users in assessing the future viability of programs providing social benefits. This is regardless of the approach that is taken to the point at which a present obligation for different sorts of social benefits occurs and the view as to the extent of those present obligations and the resultant liabilities. The information in the financial statements needs to be complemented by information on the long-term fiscal sustainability of those programs.
Issues the project intends to consider include (but is not necessarily limited to):
- Mandatory/discretionary nature of proposals and requirements;
- Reporting entity for long-term fiscal sustainability reporting;
- Time horizons;
- Regularity of reporting;
- Assumptions and sensitivity of assumptions;
- Approach to discretionary programs; and
- Scope in terms of governmental programs.
Task Force progress / Board discussions to date
December 2012: The IPSASB discussed the proposal from the Task Force and staff to change the name of the vulnerability dimension to “revenue capacity.” The IPSASB tentatively agreed to change the name of the vulnerability dimension to “revenue vulnerability” and consider developing a new term for fiscal capacity. The IPSASB directed staff to clearly explain changes in terminology in the Basis for Conclusions. The draft RPG also needs to explain that changes in one dimension can affect the other two dimensions and clarify the links between the dimensions.
Staff proposed the following definition for a projection: “A projection is prospective financial information prepared on the basis of supportable assumptions about the entity’s policies, future economic and other conditions.” The IPSASB discussed this proposal and considered that the phrase “supportable assumptions” is vague and does not clearly articulate that the draft RPG requires the projections to be based on current policy with some limited exceptions. The IPSASB directed staff to consider whether a clearer term could be used instead of “supportable assumptions.”
Staff proposed that one of the instances where a departure from current policy may be appropriate is where a policy has been changed in a consistent direction over time. A member commented that the inclusion of this exception would considerably widen the instances where an entity could depart from current policy and considered that this would lead to projections being calculated using assumptions that are not supportable. Another member commented that if this exception is deleted, the draft RPG would not address the issue of fiscal drag where, if current policy is used to calculate the projections, all taxpayers will be eventually projected to be on the highest income tax rate. This member explained that this issue is usually addressed by projecting income tax revenues as a set percentage of GDP.
The IPSASB agreed that the issue of whether the document should be an authoritative standard or non-authoritative guidance would be deferred until criteria have been developed for the determination of the status of a document.
The IPSASB reviewed the draft RPG and members made comments to improve the text. The IPSASB agreed that a revised draft RPG will be considered at the March 2013 meeting.
September 2012: The IPSASB discussed a detailed review of responses to ED 46 prepared by the Staff.
The IPSASB tentatively agreed that the proposed guidance:
- Should revise characteristic (c) in paragraph 15 from: “Wide decision-making powers over service delivery levels” to: “The power and ability to determine the nature, level and method of service delivery including the introduction of new services.”
- Should be clarified to include only projections within its scope and that a definition of projections should be developed.
- Should clarify the relationship between projections and budgets or forecasts.
- Should be clarified to explain that long-term fiscal sustainability (LTFS) information should reflect the objectives of financial reporting and user needs.
- Should include an explanation that LTFS information is more likely to be useful if it is complete and includes a narrative explanation.
- Should separate the recommended disclosure from the related explanation in the “Disclosure of Principles and Methodologies” section.
- Should clarify the relationship of a LTFS Report to the GPFSs by adding the following text to paragraph 17: “Long-term fiscal sustainability information may be published as a separate report or as part of another report. It may be published at the same time as the GPFSs or at a different time.”
- Should clarify its reference to assurance by amending paragraph 51 to say: “There are a variety of approaches that an entity may take to provide assurance on long-term fiscal sustainability information.”
The IPSASB agreed that the following issues need further consideration:
- The definition of vulnerability.
- Whether examples illustrating how the proposed guidance might apply to different types of entity should be developed.
- Whether or not the calculation of indicators should be in accordance with IPSAS requirements or statistical requirements.
- Whether or not the proposed guidance is an RPG or a standard.
The IPSASB will consider the above issues at its December 2012 meeting, together with a draft RPG (acknowledging that the status of the guidance will be considered separately) revised for the decisions made above. The IPSASB also agreed that the Task Force should be re-activated.
June 2012: The IPSASB had an initial discussion of the high level overview of responses to Exposure Draft (ED) 46, Proposed Recommended Practice Guideline (RPG), Reporting on the Long-Term Sustainability of a Public Sector Entity’s Finances, prepared by Staff.
ED 46 was issued in October 2011 with comments requested by February 29, 2012. The IPSASB had received 37 responses.
The IPSASB considers that the following issues should be clarified when developing the final guidance:
- Going concern: The difference between the short-term notion of going concern and the long-term nature of LTFS Reports.
- To which entity should the proposed RPG apply: That different indicators and time horizons will be used in preparing LTFS Reports depending on the level of government and nature of the entity.
- Position of LTFS Report relative to financial statements: That a LTFS Report is a part of GPFRs rather than GPFSs.
The IPSASB discussed respondents’ views as to whether or not a LTFS Report could or should be audited or otherwise be subjected to assurance and a number of members cautioned against increasing the coverage or audit and assurance in both the core text and the Basis for Conclusions. However, members agreed that staff should continue to liaise with the IAASB.
A detailed analysis of the responses will be discussed at the IPSASB’s September 2012 meeting.
September 2011: The IPSASB considers a further draft of the ED. The IPSASB directs that in its guidance on whether to report the ED should emphasize the existence of service recipients as well as resource providers and that the definitions of gross debt and net debt should be drawn from a draft of the Public Sector Debt Statistics—Guide for Compilers and User.
The IPSASB approves ED 46 of an RPG, Reporting on the Long-Term Sustainability of a Public Sector Entity’s Finances.
August 2011: Task Force considers revised drafts of ED.
June 2011: The IPSASB considers a first draft Exposure Draft of a Recommended Practice Guideline (RPG). The IPSASB confirms its tentative view that, while emphasizing the importance of reporting in this area, it should not develop an IPSAS at this time. Consistent with this view the IPSASB determines that the RPG should not include an effective date. The IPSASB agrees that the core of the RPG should be the dimensions of fiscal sustainability: fiscal capacity, service capacity and vulnerability.
November 2010: The IPSASB considers further key issues, including:
- A bottom-up principles based approach related to dimensions or components of fiscal sustainability;
- Linkage to the reporting entity and the objectives of financial reporting; and
- The nature of GPFRs, the frequency of reporting of information on the long-tem sustainability of the public finances and the relationship to other publicly available documents.
The IPSASB also agreed that, at a future date, it should ask the IFAC Board to amend its Terms of Reference to clarify that it has the authority to issue pronouncements, whether of an authoritative or non-authoritative nature on the more comprehensive scope aspects of general purpose financial reporting.
June 2010: Task Force meets to consider views of respondents. The IPSASB considers the 32 responses to Consultation Paper and Staff analysis and summary of the responses. The IPSASB agrees in principle to continue with the project and to develop a non-mandatory pronouncement, but highlights a number of key issues that need to be further explored prior to development of any pronouncement.
November 2009: Consultation Paper, Reporting on the Long-Term Sustainability of Public Finances is approved by IPSASB and published. Consultation period expires on April 30th, 2010.
September 2009: The IPSASB considers a further version of the Consultation Paper and provides a number of detailed directions, mostly of a structural and editorial, rather than substantive, nature. The IPSASB agrees that the Consultation Paper should be circulated for further views out-of-session with a view to approval prior to the December 2009 meeting. Because of the connotations of the word fiscal in some jurisdictions it is agreed to change the title of the draft Consultation Paper to Reporting on the Long-Term Sustainability of Public Finances.
May 2009: The IPSASB considered some key issues identified by the Task Force and carried out a preliminary review of a draft Consultation Paper.
The IPSASB reaffirmed its commitment to this project, which it considered of increased significance due to the global financial crisis and the scale of recent government interventions with long-term consequences. The focus of the Consultation Paper will be at the national government level, but the importance of fiscal sustainability reporting to all governmental levels will be acknowledged. The IPSASB agreed that information on long-term fiscal sustainability should be within General Purpose Financial Reports (GPFR) in order to meet users needs, while acknowledging the views of those with reservations. The IPSASB reiterated the view made during deliberations on the response to the Conceptual Framework project that a GPFR is not likely to be a single report encompassing all aspects of reporting.
The IPSASB agreed a working definition of fiscal sustainability, based on a modification of the version put forward by the Task Force, as: the ability of public sector entities to meet financial commitments both now and in the future.
The IPSASB accepted that the Consultation Paper should acknowledge that it was drawing on the work of other professions. The approach would emphasize disclosure and transparency of assumptions. The Consultation Paper will not examine assurance issues, but will discuss more broadly the steps that might be taken by preparers to enhance the reliability of projections.
A further version of the Consultation Paper will be considered at the September 2009 meeting.
March 2009: Second meeting of Task Force in Paris. Task Force considered a preliminary draft of the Consultation Paper and made further proposals on structure and format and also highlighted issues on which further directions are necessary from the IPSASB.
October 2008: The IPSASB noted the overall support for the project by those who had commented on the project brief and confirmed that the project should proceed.
The IPSASB directed that the aim should be to produce a high level framework rather than detailed prescription. The IPSASB further directed that the project's scope should not be restricted to the national government level.
September 2008: Task Force meets in London and agrees issues to be addressed in Consultation Paper and proposed outline structure for Consultation Paper for consideration by the IPSASB.
March 2008: Project brief published for comment as part of a package of documents - ED 34, Social Benefits: Disclosure of Cash Transfers to Individuals and Households and Consultation Paper, Social Benefits: Issues in Recognition and Measurement.
November 2007: The IPSASB approved a project brief - to be issued in March 2008 with ED 34, Social Benefits: Disclosure of Cash Transfers to Individuals and Households and Consultation Paper, Social Benefits: Issues in Recognition and Measurement