Moving a ministry or authority from cash to accrual accounting is an asset-recognition and capability project before it is an accounting project.
Key takeaways
- The largest effort in IPSAS adoption is identifying and valuing assets that were never recorded.
- Use the transitional relief in IPSAS 33 deliberately, with a plan to exit it.
- Capability building in the finance team determines whether the second year's financial statements are produced without consultants.
Governments across the GCC are moving public sector entities to accrual-based International Public Sector Accounting Standards as part of wider fiscal transparency and transformation programmes. For the finance teams inside ministries, authorities and government companies, this is the largest change to their work in a generation. Having supported entities through the transition, we would describe the effort as roughly one part accounting policy, three parts asset identification and valuation, and two parts capability building.
The accounting policy part
IPSAS is closely aligned with IFRS, and for an entity with staff familiar with IFRS the policy selection is manageable. The public sector-specific standards that require the most thought are IPSAS 23 on revenue from non-exchange transactions (taxes, grants and transfers), IPSAS 17 and 45 on property, plant and equipment including heritage and infrastructure assets, IPSAS 39 on employee benefits, IPSAS 42 on social benefits and IPSAS 19 on provisions. The consolidation boundary, meaning which entities the reporting entity controls, is frequently a policy question with political dimensions and should be settled early.
The asset part
Cash-basis entities have never needed a complete fixed asset register, and most do not have one. IPSAS adoption requires every building, road, network, vehicle, item of equipment and parcel of land controlled by the entity to be identified, its existence verified, its cost or fair value established and its useful life estimated. For an entity with infrastructure assets this is a multi-year programme involving surveyors, valuers and engineers as well as accountants. IPSAS 33 provides transitional relief of up to three years for the recognition and measurement of certain assets, and the relief should be used deliberately, with a documented plan to exit it, rather than as a way to defer the work indefinitely.
Liabilities are the other half of the opening balance sheet. Employee benefit obligations under IPSAS 39 require actuarial valuation for the first time; provisions for legal claims and decommissioning need to be identified; and receivables from taxes and fees need to be recognised with an assessment of collectability.
The capability part
The opening balance sheet is produced once, typically with external support. The financial statements are produced every year, and the test of a successful adoption is whether the entity's own finance team can produce the second year's statements. That requires a chart of accounts and system that support accrual accounting, month-end procedures that capture accruals, prepayments and depreciation, and a team trained not only in the standards but in the judgements. Our adoption programmes therefore build training and coaching into every phase, and pair the entity's staff with our team on each workstream, rather than delivering a set of financial statements and leaving.
Governance and sequencing
The programme for a mid-sized entity runs in sequence: a gap assessment and impact analysis, policy selection and the asset programme, system and process changes in parallel, a dry-run set of financial statements for the year before the first reporting year, and the first compliant financial statements with an audit. How long each phase takes depends on the state of the asset records and the capacity of the finance team. A steering committee with authority over the finance, asset management and IT functions is essential; adoption fails most often where the finance team is asked to deliver it alone.