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Participant’s Guide for CBT ‐2 and ILT ‐1 (Accrual Accounting under IPSAS: The Basics) 1 International Public Sector Accounting Standards – (IPSAS)

IPSAS System-Wide Training Curriculum Chief Executives Board (CEB) for Coordination, United Nations System

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ccounting under IPSAS –

The Basics

Participant’s Guide


Participant’s Guide Accrual Accounting under IPSAS: The Basics

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Training Products to Support THE ADOPTION OF International Public Sector Accounting Standards (IPSAS)

by United Nations System Organizations

This material was prepared jointly by:

The United Nations IPSAS Implementation Team United Nations HQ New York, NY 10017

and

The Basics

International Business & Technical Consultants, Inc. 8614 Westwood Centre Drive Suite 400 Vienna, VA 22182, USA


This material is the property of the United Nations System Chief Executives Board for Coordination.

If there is any conflict between the contents of this material and IPSAS, the requirements of IPSAS prevail.



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Table of Contents

Course Description and Overview ……………………… 01

Unit 1 - Introduction to Accounting ………………………… 09

Unit Two - Bases of Accounting …………………..………. 14

Unit Three - Elements of Financial Statements …..……... 23

The Basics

Unit Four - Financial Statements Under IPSAS ……..….. 26

Unit Five - Key Areas of Change ……………………….… 38

Unit Six - Summary of Key Learning Points ……..……… 43

Contents



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List of Abbreviations/Acronyms Used in Course ILT 1

ASHI: After Service Health Insurance

CEB: Chief Executives Board for Coordination

ERP: Enterprise Resource Planning

GPFS: General Purpose Financial Statements

IFAC: International Federation of Accountants

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IPSAS: International Public Sector Accounting Standards

IPSASB: International Public Sector Accounting Standards Board

IT: Information Technology

PP&E: Property, Plant and Equipment

UNSAS: United Nations System Accounting Standards

Abbreviations



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ccounting under IPSAS – The Basics

Full Suite of IPSAS Courses Full Suite of IPSAS Courses The following suite of 7 Computer Based Training (CBT) courses and 11 Instructor Led Training (ILT) courses have been developed to support

IPSAS implementation in United Nations System Organizations

The following suite of 7 Computer Based Training (CBT) courses and 11 Instructor Led Training (ILT) courses have been developed to support

IPSAS implementation in United Nations System Organizations

e Basi

cs



IPSAS Training Course Name Course Number

CBT ILT

Orientation to IPSAS CBT-1

Accrual Accounting under IPSAS – The Basics CBT-2 ILT-1

Accrual Accounting under IPSAS – Beyond the Basics ILT-2

Accounting for Property, Plant & Equipment CBT-3 ILT-3

Accounting for Inventories CBT-4 ILT-4

Accounting for Employee Benefits – The Basics CBT-5

Accounting for Employee Benefits – The Basics & Beyond ILT-5

Accounting for Leases CBT-6 ILT-6

Accounting for Provisions & Contingent Liabilities & Assets CBT-7 ILT-7

Accounting for Intangible Assets ILT-8

Accounting for Financial Instruments ILT-9

Advanced Topics in Financial Reporting ILT-10

Preparing Accrual-Based Financial Statements ILT-11

Linkages Between IPSAS Courses

Introductory Working-Level Specialist

Orientation to IPSAS Accrual Accounting: Beyond The Basics

Advanced Topics in Financial Reporting

Accrual Accounting: The Basics

Property, Plant and Equipment Preparing Accrual Financial Statements

Inventory Employee Benefits: The Basics and Beyond

Intangible Assets

Financial Instruments

Leases

Employee Benefits: The Basics

Provisions and Contingencies



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Course Description and Overview Description - This course will introduce participants to the basic accrual accounting

concepts and principles that underpin IPSAS, the financial statements required by IPSAS and the elements of those statements. This course is a prerequisite for further courses in accrual accounting and financial reporting as well as the intermediate-level courses on each of the standards.

Target Audience - The target audience for this course includes staff from all levels and areas of an organization including non-financial staff. The profile of the target audience is thus varied. Since there will be both financial and non-financial staff attending, a range of knowledge and skill in accounting is expected. Participants will likely have limited knowledge of accrual accounting and IPSAS specifically.

Course Structure - The course begins with an introduction to the subject of accounting, followed by identification of different bases of accounting including cash and full accrual. The course will explain what IPSAS are and how they affect the various elements of financial reporting. The course will cover the financial statements required under IPSAS and will end with a discussion of the key change areas to be addressed during IPSAS implementation in the United Nations System Organizations, these areas include accounting policies and guidelines, work processes and information systems. The importance of auditors as key stakeholders in the IPSAS implementation is explained, highlighting the roles and expectations of the internal as well as the external auditors of an organization.

The Basics

Description/O

verview

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Course Outline and Learning Objectives

As a result of completing this course, participants will be able to achieve the following objectives in each of the respective units of the course:

State the purpose of accounting. Explain how full accrual under IPSAS differs from the cash, modified cash, and

modified accrual bases. Identify the 5 key elements of financial reporting. Summarize how the treatment of each element under IPSAS differs from United

Nations System Accounting Standards (UNSAS). Identify the 5 financial statements required by IPSAS and the importance of

each. Discuss the key areas of change.

1. Purpose of Accounting

a. Describe what accounting is. b. Explain accounting as an information system.

c. Identify users of accounting information.

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d. Identify users of the United Nations System financial information. e. Explain the type of information needed by decision makers. f. Explain the hierarchy of accounting authorities and how it relates to the

accounting system and the information generated for decision makers. 2. Bases of Accounting

a. Describe the accounting bases. b. Explain the differences in accounting bases. c. Explain the differences between UNSAS and IPSAS. d. Identify the benefits of accrual accounting (IPSAS).

3. Elements of Financial Statements

a. Explain the elements of Financial Statements. Outline/O

bjectives

Assets Liabilities Revenues Expenses

b. Explain the composition of Net Assets/Equity.



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4

The Basics . Financial Statements Under IPSAS

a. Describe the General Purpose financial statements:

Statement of Financial Position. Statement of Financial Performance. Cash Flow Statement. Statement of changes in Net Assets/Equity. Statement of Comparison of Budget and Actual Amounts. Notes to the Financial Statements. Linkages between Financial Statements.

. Key Areas of Change

ange and how they should be addressed during

5 Describe the Key Areas of chimplementation of IPSAS:

Accounting policies and guidelines Work processes Information systems

. Sum g Points

ounting

ments

6 mary of Key Learnin

ummarize the following: S

1. Introduction to Acc2. Bases of Accounting

l State3. Elements of Financia4. Financial Statements under IPSAS

5. Key Areas of Change

Outline/O

bjectives





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Introduction to Accounting

Purpose of Accounting

Accounting as a System

Elements of the Accounting System

Decision Makers

Users of UN System Financial Information The Basics

Information needed by Decision Makers

Introduction to

Accounting

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Description and Overview In this unit, we will first describe what accounting is and explain how it serves both internal and external parties as an information system. We will also identify the users and their needs for financial information. Finally, we will examine the context in which the users of financial information within the United Nations System Organization use the information. Purpose of Accounting Accounting is a way of capturing financial information about the transactions and events of an organization, and summarizing that activity in reports that are used by persons interested in an organization. The focus of accounting is to provide information that is useful to decision makers. Accounting information is important because it provides a basis for informed, efficient and effective decision-making and permits other interested parties to evaluate the performance of decision-makers.

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Accounting as a System Accounting takes data received from an organization’s activities and converts the data into information for decision makers. Collecting, measuring, recording, processing and communicating information is the core of accounting. Thus, accounting is not an end in itself. Providing information about what an organization owns, what it owes, and how it performs is the aim of accounting. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable financial information about an identifiable economic entity.

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Accounting System and Accounting Standards

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At the international level there are two sets of Accounting Standards. These are, the International Financial Reporting Standards (IFRS), which apply to the private sector profit oriented organizations, and the International Public Sector Accounting Standards (IPSAS) which apply to the public sector and not-for-profit international organizations such as the United Nations System Organizations. IPSAS set out the requirements for recognizing, measuring, presenting and disclosing information for transactions and events of an organization. Organizations develop their accounting systems to comply with the set of standards selected for application. In the case of the United Nations System Organizations the standards selected for adoption and implementation are the IPSAS. A decision has been made to move from the current United Nations System of Accounting Standards (UNSAS) to IPSAS. UNSAS are based on the modified cash basis of accounting whereas IPSAS are based on the full accrual basis of accounting. Over and above the selected standards, organizations develop accounting policies indicating their choices between allowable alternative treatments of transactions or events. Consistency of application of such treatments to transactions and over time are required by IPSAS. In addition, organizations develop detailed instructions or procedures to guide an organization on specificities for recording and posting of transactions in the records of an organization.

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Decision Makers Accounting, in one form or another, is performed by each individual, household and small business as well as larger organizations. Individuals, households and small businesses will generally use cash based accounting to determine their cash flow. Private sector entities generally use accrual based accounting to report the results of their operations to their investors and other stakeholders. Public sector and not-for-profit organizations have tended to use cash or modified cash based accounting to report the results of their operations to taxpayers, donors and other stakeholders.

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Users of the United Nations System financial information Within the United Nations System Organizations the types of users include member states and governing bodies, donors, management, employees, implementing partners, vendors and other contractors, beneficiaries, other organizations in the United Nations System, other organizations and entities, media and the public. The users of accounting information may be grouped into three broad categories:

Those decision makers who need accounting information and have a direct financial interest in an organization’s activities, and depend on accounting to measure and report information about how an organization has performed. This category would include the Member States and governing bodies, donors, and creditors; and

Those who manage and work in an organization and have overall

responsibility for achieving its goals. For United Nations System organizations, this would include the Secretary General and the Executive Directors and management; and employees; and

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Those people, organizations, and agencies that have an indirect interest

in the organization, who make the third group, these include other organizations, the public, media, and the world at large.



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Information needed by decision makers

Information needed by decision makers includes:

Financial performance showing the excess of revenue earned over expenses incurred;

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How an organization financed its activities and met its cash requirements;

The financial condition of an organization and changes to it; and

Budgetary performance and explanation of material variances.

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Bases of Accounting

Describe the Bases of Accounting Explain the Difference between Accounting Bases Explain the Difference between UNSAS and IPSAS Identify the Benefits of Accrual Accounting

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escribe the accounting bases ses ranges from cash to modified cash to modified

xplain the differences in accounting bases.

bases from cash to full accrual. Under

etween the two ends of the spectrum are hybrids of accounting – modified cash and

DA full spectrum of accounting baaccrual and ending with full accrual. The different accounting bases will be explained in this unit. In addition, the reason that accrual accounting provides the best measure of an organization’s financial performance will be explained by use of examples.

EThese slides show the continuum of accountingthe cash basis of accounting, transactions and events are recognized only when cash is received and paid. Under the full accrual basis of accounting, all assets and liabilities are recognized. In addition, expenses and revenues are recognized when incurred irrespective of the associated cash flows. Additional note disclosure of items recognized under full accrual accounting such as physical assets may also be required. Bmodified accrual. Although there are no consistent definitions for these modifications, the IPSASB (formerly Public Sector Committee) of the International Federation of Accountants—IFAC (see Study 11 Government Financial Reporting, chapters 9 and 17) explains them as follows:

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Modified Cash. Under the most common modification to the cash basis, the books are held open for a specified period after year end (e.g. around one month). The intentbehind this modification is to overcome some of the perceived timing difficult

e variation involvf all non-financial assets at the time of purchase. Under modified accr

curred and revenues are cognized when earned or when control of the related asset is gained in non-exchange

ncial condition” is used in the following examples to describe the overconomic wellbeing of an organization. This section provides exam

e

The Basics

ion ies

es the expensing ual, certain

all ples of how United

events on

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experienced under the cash basis whereby cash flows which relate to current year spending may not occur until after the end of the year. Modified Accrual. The non-recognition of certain classes of assets or liabilities is one of the most common variations to accrual accounting. Onoclasses of assets and liabilities are commonly not recognized. Full Accrual. All assets and liabilities are recognized. In addition, irrespective of the associated cash flows, expenses are recognized when inretransactions. Measuring financial condition: cash vs. full accrual accounting bases The term “finaeNations System Organizations might measure, record and report the samCash Basis and Accrual Basis of accounting.



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The examples referred to above demonstrate the effects of using different accounting bases to measure and report the financial condition of the United Nations System Organizations.

The Basics

The following conclusions can be drawn from this discussion:

Changes in an organization’s financial condition are not always captured by movements in the cash balance.

Full accrual accounting basis is aligned with changes in an organization’s financial condition.

On a comparative basis, the accrual accounting basis provides more comprehensive information than the cash basis about the financial condition of the organization and changes to it.

Full accrual accounting is now the accepted best practice. United Nations System Organizations will move from modified cash (UNSAS) to full accrual (IPSAS) accounting basis. Explain the differences between UNSAS and IPSAS UNSAS currently in effect are consistent with the modified cash basis of accounting. Thus, the current standards in use by United Nations System Organizations do not recognize some of the assets that are owned nor do they recognize some of the liabilities that are owed. In order to report their total asset and liability positions and improve management of their resources some public sector organizations move to the full accrual basis of accounting. These organizations using full accrual basis of accounting will be able to show the full costs of operations in their reports and financial statements.

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Usually IPSAS reports a larger group of assets and liabilities on the Statement of Financial Position than UNSAS. The pattern of expenses associated with these assets and liabilities is different.

Under IPSAS, expenses associated with investments in assets are reported later than under UNSAS.

Under IPSAS, expenses associated with liabilities are reported earlier

than under UNSAS. Timing of Recognition – Expenses It is important to note that the recognition of ‘unliquidated obligations’ (approved purchase orders for which goods and services have not yet been received) under UNSAS is made when purchase orders are issued. Under IPSAS, expenses are recognized when services or goods are received. Under the cash basis, expenses are recognized when payments are made.

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Timing of Recognition – Revenue In terms of recognition of revenue, under UNSAS there is a variety of different approaches to the timing of revenue, sometimes when cash is received; others when the organization has the “right to receive”. IPSAS introduces the concept of revenue from exchange transactions (revenue recognized when earned) vs. non exchange transactions (revenue recognized when control of the related asset is established and there are no conditions). Reporting differences – Current assets & Non-current assets Under UNSAS, current assets (for instance inventories), are expensed when a purchase order is issued and are not reported on the face of the statement of financial position. Under IPSAS, the same are reported as assets on the face of the statement of financial position when acquired and are expensed when consumed, sold or distributed. The non-current assets (for instance vehicles), are not reported on the statement of financial position under UNSAS and are expensed when the purchase order is issued. Under IPSAS, such non-current assets are reported as assets in the statement of financial position and are depreciated over their useful lives.

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Reporting differences – Non-current liabilities & Commitments Non-current liabilities (such as employee benefits), are not required to be reported on the face of the financial statements under UNSAS. Under IPSAS the obligation to pay in the future is reported now, when entitlement to benefits occurs. Commitments including purchase orders and other obligations are reported as liabilities under UNSAS. Under IPSAS commitments are not reported on the face of the financial statements, although commitments such as contractual ones for property, plant and equipment are shown in the notes to the financial statements. Case 1: Differences between UNSAS and IPSAS – PP&E Under the present ‘modified cash’ accounting standards used by UNSAS, physical assets and intangibles are expensed immediately when purchased. Therefore, these assets are not reported in the financial statements nor is any expense (depreciation) associated with their usage over time. Since IPSAS requires reporting on the ‘full accrual’ basis, all assets (including all physical and intangible assets) are reported and depreciated/amortised over their useful lives. U

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The Basics

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Under the present ‘modified cash’ accounting standards used by UNSAS, liabilities associated with employees (i.e. annual leave, repatriation grants and After Service Health Insurance—ASHI) are not reported in the financial statements. Since IPSAS requires reporting on the ‘full accrual’ basis, all liabilities (including obligations to pay employee benefits in the future) are reported in the financial statements as those obligations are incurred. Identify the benefits of accrual accounting. When compared to UNSAS, accrual accounting under IPSAS will: 1. Support better accountability and transparency of resources and liabilities and

hence provide better information for decisions on:

Investments in assets. Management of assets and liabilities. Choices between different options with respect to service delivery.

2. Provide more meaningful and comprehensive information on expenses that can be

used to fully cost the services being provided. 3. Reduce scope to report expenses that may never occur (which may currently be

included in the obligations amounts).

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4. Provide a better basis for evaluating an organization’s performance in terms of

resource management. 5. Facilitate better support for results based management. 6. Improve consistency, comparability and reliability of financial statements, which

strengthens overall confidence in the financial information for both external and internal users.

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Elements of Financial Statements

Explain the Elements of Financial Statements

Explain the Composition of Net Assets/Equity

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In this unit we will explore each of the four key elements of financial statements and what they represent. In addition, we will look at the composition of the Net Assets/Equity section of the financial statements. Explain the elements of financial statements. The elements of financial statements are as follow:

The Basics

They are resources controlled by an organization as a result of past events, from which future economic benefits or service potential are expected to flow to the organization:

1) Assets

Non-current Assets (to last more than 12 months):

Property, Plant and Equipment (Examples: Land, buildings, vehicles, IT & Communication equipment, etc)

Intangible Assets (Examples: Software, copyrights, patents, trademarks etc)

Receivables (non-current) Investments

Current Assets: Inventories (Examples: fuel, spare parts, rations, vaccines, supplies, etc) Receivables (current) Cash

They are present obligations of an organization arising from past events, the settlement of which is expected to result in an outflow of resources from the organization.

2) Liabilities

Current or non-current:

Payables Employee benefits Provisions

3

Repre n asset (cash or receivable) in exchange for goods and sents inflow of aservices provided as a result of the organization’s operating activities:

) Revenue

Revenue from exchange transactions (value received is equal to or greater than value given)- Examples: Selling merchandise Rendering services Interest income

change transactions (value received without Revenue from non-exdirectly giving approximately equal value in exchange) – Examples: Assessments Donations Goods and services in kind

They sets to provide goods and services for are the use/consumption of asoperating activities:

Depreciation

4) Expenses

of Property, Plant and Equipment Consumption of Inventory Cost of goods sold Amortisation of Intangible assets

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Subsequent cours standards in more depth and demonstrate how the treatment of e h f financial reporting contrasts with

es will explore these ac of the four key elements o

UNSAS as well as the impact of adopting IPSAS:

Long term employee benefits

Buildings

Vaccines

Accumulated Surplus

Short term payables

Assessments

Software

Interest income

Voluntary contributions

Amortization

Travel

Vehicles

Cash

Fuel

Explain the composition of Net Assets/Equity. Net assets st in the assets of the organization after educting all its liabilities. In other words, net assets/equity is the net worth of the

m Organizations, it is comprised of

/equity represents the residual interedorganization. Within the United Nations Systereserves and accumulated surplus/deficit.

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Financial Statements under IPSAS

Describe the General Purpose Financial

Statements & Explain their Linkages

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this unit we will identify the financial statements required by IPSAS and explain their

escribe the General Purpose financial statements ancial Statements (GPFS):

Inpurpose and linkages between all the statements using examples. Financial statements should present fairly the financial position, financial performance, cash flows and budget to actual comparisons of an organization. Financial statements, with additional disclosures when necessary, should achieve fair presentation of this information. Information is presented fairly if it allows an informed user to reach valid conclusions about the financial activities of the organization under review. DIPSAS requires the following 5 General Purpose Fin

Statement of Financial Position; Statement of Financial Performance; Statement of Changes in Net Assets/Equity; Cash Flow Statement; and Statement of Comparison of Budget to Actual Amounts

The objectives of the general purpose financial statements in the public sector and not-

for-profit organizations is to provide information useful for decision making, and to demonstrate accountability for the resources entrusted to it. In addition IPSAS requires organizations to make additional disclosures in the form of notes to support the financial statements.

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The importance of each of the statements is highlighted below:

The Statement of Financial Position presents all assets and all liabilities

statement of assets and liabilities. The statement is made up of two lists which balance, n one side it lists all the assets, current and non-current and on the other side it lists the

ne year usually become e "opening balances" of the next year. However, in the first year of transition to IPSAS,

e able to use UNSAS-compliant closing balances of the previous

of an Organization at the end of the accounting period.

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The statement of financial position may also be referred to as a balance sheet or

osum total of current and non-current liabilities and the net assets/equity amounts. The balance sheet therefore reflects the equation, Assets = Liabilities + Net Assets/Equity. It reflects the net worth or wellbeing of an organization. In general if the sum total figure, which balances on both sides, is increasing it means the organization is becoming better and if it decreases it means the organization is not doing so well. Beginning Balances In the Statement of Financial Position, the "closing balances" of oth U

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organizations will not byear to prepare IPSAS-compliant Statement of Financial Position. Besides, some balances will be reported on the face of the IPSAS-compliant Financial Statements for the first time.





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etermining IPSAS-compliant beginning balances is a very important and

ut also on the degree of reliability and accuracy of data current IT systems, the extent to which current IT Systems will require changes and the

Organizations will need to collect, cleanse and process accounting data to determine such balances. The process may involve professional appraisers and use of actuarial services. Dchallenging exercise that can start before the year of transition. The level of challenge will vary for each organization in the UN System. Not all organizations will face the same degree of challenge in order to obtain beginning balances for issuance of IPSAS compliant Financial Statements. The degree of challenge will depend not only on the significance of each balance in the Statement of Financial Position, bincomplexity and variety of business processes and the geographical dispersion of data. In the effort to smooth the process of IPSAS implementation, some UN organizations have started to progressively comply with IPSAS requirements. In order to cope with the challenges of obtaining beginning balances, each organization should take steps to properly train and co-ordinate the work of all finance and non-finance staff that will be involved in the exercise.

The Statement of Financial Performance presents the surplus/deficit from the organization’s activities identifying the extent by which the revenues exceeded or were less than the expenses for the period.

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he statement of financial performance can be prepared by nature (i.e., revenue source and expense type-employee costs, supplies, etc.) or by function (i.e., revenue source and function of expense—poverty eradication, peacekeeping, etc.). The statement of financial

T

performance may also be referred to as a statement of revenues and expenses or an income statement among other names. This statement is presented to assist users of information in understanding the combined effects of the changes in the revenues and expenses of an organization for a period. It sums up in monetary terms an organization’s various activities, transactions and events and the ability of an organization to meet its delivery obligations and making projections for the future.

The Statement of Changes in Net Assets/Equity reports the increase or decrease in the organization’s net asset position and it describes all changes including the surplus/deficit for the period.

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The Statement of Cash Flows describes the movement and changes in the amount of cash identifying the net cash flows from operating, investing, and financing activities of an organization for the period.

how the amount of cash changed during the period due to the net cash flows from erating, investing, and financing activities; and the cash available at the end of the

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The Statement of Cash Flows identifies the cash available at the beginning of the period;

opperiod. The Cash Flow Statement is very beneficial since it assists management in the following areas: forecast future cash flows, evaluate movements in assets, provide insight into liquidity and solvency, and compare operating performance. U

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IPSAS requires, for those public sector organizations that make their budgets publicly available, preparation and presentation of the Statement of Comparison of Budget to Actual Amounts. If the budget is maintained

expenses as originally approved as well as the approved final budget at the end of the riod. These budget amounts are compared to the actual revenue received and the

on a separate basis (for example cash) than the accounting basis (for example accrual), the actual figures are presented on the budgetary basis in order to make the figures comparable.

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The Budget to Actual Comparative Statement reflects the budget for revenue and

peactual expenses incurred. To assure comparability in the amounts reported, the actual amounts are reported on the budgetary basis which (for all United Nations System Organizations) will be different that the accounting basis (IPSAS). Since each United Nations System Organization is required to make their budgets publicly available, a Statement of Comparison of Budget and Actual Amounts is required.

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Notes to the Financial Statements

IPSAS requires organizations to make additional disclosures in the form of notes to support the financial statements. Such notes may include disclosure on accounting

part from those involving estimations) management has made in the process of applying the organization’s accounting policies that have the

SS

policies as well as the judgments (a

most significant effect on the amounts recognized in the financial statements. The notes may also include the key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Notes also disclose additional information not presented on the face of the statements but is necessary for fair presentation as defined by IPSAS; this includes key assumptions made about the future. Notes also provide additional information that is not presented on the face of financial statements but is relevant to gaining an understanding of the statements. The notes are not a separate statement but are part of the Statement of Financial Position, Statement of Financial Performance or other statements which they support.

hown below are examples of notes to financial statements applicable to some UN ystem Organizations.

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Assets/Equity and compare the budget to actual amounts for the period and present the nancial position of the organization at the end of the period. These statements are nked as shown below.

Every United Nations System Organization, from the date of implementation of IPSAS, will be required to present financial statements at least annually to cover its activities. The statements should describe the financial performance, cash flows, changes in net

fili

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inancial Position.

In addition to reporting the net assets/equity accruing to an organization over time, IPSAS

Financial Position.

The Statement of Financial Performance reports the operating activities for the accounting period. If more revenue is earned during an accounting period than expenses incurred, a surplus will be reported; otherwise, a deficit will occur. In the financial statements, the surplus/deficit shown on the Statement of Financial Performance will also be included in “accumulated surplus/deficit” in the Statement of Changes in Net Assets/Equity which is also included in the Net Assets/Equity section of the Statement of F

requires the presentation of the entity’s total amount of revenue and expense for the period (including amounts recognized directly in net assets/equity during the period). As a result, the Statement of Changes in Net Assets/Equity identifies the change in the net asset position during the period. This change will be due to the surplus/(deficit) incurred during the period, as reported in the Statement of Financial Performance, as well as amounts recognized directly in net assets/equity during the period and any changes in reserve balances. The Statement of Cash Flows identifies the cash available at the beginning of the period; how the amount of cash changed during the period due to the net cash flows from operating, investing, and financing activities; and the cash available at the end of the period. The cash balance at the end of the period is also reflected in the Statement of

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ken out by current and non-current liabilities) at a point in time. The et Assets/Equity section of the Statement of Financial Position is the difference between

The Statement of Financial Position is a culmination of inputs from all the above stated statements as reflected in the diagram above. The Statement of Financial Position identifies the assets owned (broken out by current and non-current assets) and the liabilities owed (broNthe assets owned and the liabilities owned and is broken out by the reserves and the accumulated surplus/(deficit) for an organization.

IPSAS does not dictate the method of budgeting since it deals only with presentation and disclosure of the budget. There is no requirement to change the basis of budgeting as a result of IPSAS adoption. Financial reporting and budget presentation are closely connected and IPSAS includes a standard (IPSAS 24) on Budget Reporting. But this Standard does not prescribe how to budget, what to include in a budget, or the budget basis. While IPSAS 24 on Budget Reporting does not require any change of the budget basis, there are still implications related to budgeted amounts in the United Nations System Organizations:

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Dual accounting or recording will be required to take care of one basis for

financial reporting (for instance on accrual accounting) and another for budget on a modified cash basis. Transactions recorded on the two bases, budgetary and financial, must be reconciled;

Annual budget amounts will be required; thus, the multi-year budget

amounts have to be split into annual amounts; and

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Analysis and explanation of major variances of budget to actual amounts

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of the original to final budget must be issued in conjunction with the financial statements



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Key Areas of Change

Key Areas of Change to be addressed during impleme

ntation of IPSAS

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his Unit explains the key areas of change that need to be addressed during the implementing IPSAS in the United Nations System Organizations. The key areas of change include development of accounting policies and guidelines, re-configuring of

formation systems and other work processes. The Unit will also cover key role of ed Nations System Organizations embark upon

IPSAS implementation.

y Areas of Change

the absence of an IPSAS an organization needs to develop policies based on other

T

inauditors in all these areas as the Unit

Ke

Accounting Policies and Guidelines

Accounting policies are specific principles, bases and conventions, rules and practices adopted by an organization in preparing and presenting financial statements. Accounting policies clarify the application of the requirements in relevant accounting standards to individual transactions and balances. Where an organization adopts IPSAS, a summary of the accounting treatment required by the IPSAS or options selected from allowable alternative treatments represents the accounting policy for that transaction or event. In U

nit 5

authoritative guidance.



Accrual A

ccunder IPSA

S –ounting

The Basics

OagaoathN tion is developing additional policies and guidelines to support the system-wide ones while adapting them to the local conditions. Each organization will

More staff ill be involved in the collection of data and a greater degree of professional judgment will

AS prescribes an increased use of estimates and assumptions where

and etermine whether to replace or upgrade the current system.

rganizations such as the United Nations System Organizations making the transition to ccrual accounting need to establish a new set of accounting policies and review existing uidelines, rules, regulations and procedures. The United Nations system organizations re undertaking this task and two levels, at the system-wide level and at the individual rganization level. At the system-wide level a harmonized set of IPSAS-compliant ccounting policies and guidance have been developed and will be applied consistently roughout all United Nations System Organizations. At the individual level each United ations System Organiza

review operational procedures, chart of accounts, accounting manuals and posting rules to guide the recording and accounting for transactions, activities and events. Each organization will also ensure that its internal control policies are reviewed including ensuring that the Financial Regulations and Rules are not in conflict with IPSAS. Work Processes Work processes that support the preparation of financial statements will need to be reviewed and in some cases re-configured to gather data required to prepare the IPSAS-compliant financial statements in the most efficient way. While IPSAS will not change the core business processes of the United Nations System Organizations it will require the collection of additional data to support changes in the accounting and reporting associated with many business processes. In many of the cases more data will be required from, for instance, procure to pay, asset management and human resources processes. wbe required as IPSthe services of external specialists such as Actuaries and Appraisers may be required. Information Systems Organizations contemplating a transition to accrual accounting need to perform an assessment of all existing information systems that link to the financial reporting system to ensure that they support IPSAS requirements and preparation of IPSAS-compliant financial statements. A robust information system or enterprise resource planning system (ERP) is a critical factor to successful implementation of IPSAS. Such an assessment should establish the current situation, shortfalls in terms of information required in order to comply with accrual-based IPSAS, determine the degree of desired decentralization or integration d Some United Nations System Organizations have completed reviews of their information systems and have already begun the process of upgrading or replacing their existing IT/ERP systems in preparation for IPSAS implementation. Extensive training on the new/upgraded systems is required. IT/ERP key areas of change include:

Fixed assets module Inventory module Human resources



Budget (dual system)

Unit 5



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ccunder IPSA

S – Finance module

Audit Issues Auditors constitute one of the key groups of stakeholders for a successful implementation of IPSAS in an organization. While it is essential that auditors maintain their independence, there are many benefits to be obtained from establishing a cooperative wo g re itors from the beginning of the IPSAS implementation process. Auditors are not expected to give absolute assurances that a particular system or process would meet audit requirements; but they may be able to provide helpful advice regarding the criteria that would be used in assessing the system or process.

two sets of auditors, which are namely internal auditors and

rkin lationship with the aud ounting Organizations normally haveexternal auditors; their roles and areas of focus are as follows:

Internal Auditors—their main focus is on the organization’s internal controls as well as an evaluation of the efficiency and effectiveness of operations.

External Auditors—their main focus is on financial statement reporting.

Before IPSAS adoption, the external auditors will review the Project Plan and monitor progress and overall preparedness. This includes a strategy for data conversion and obtaining beginning balances. A couple of areas of major emphasis will be on data collection and “cleansing” of data for areas such as PPE and inventories.

The Basics

After IPSAS adoption, the external auditors will audit the financial statements to express an opinion on the fair presentation of information in the financial statements and their degree of compliance with IPSAS. audits will be performed on a yearly basis.

These

Auditors a ais a critical smean increasaccrual accoOrganizatobtaining Financial Posunder IPSASetermined a liance with IPSAS. Audits of the

re key stakeholder in the implementation of IPSAS therefore their involvement

uccess factor. Bear in mind that significant changes to systems generally ed audit risks. This is amplified by the transition from modified cash to full unting. One of the most important steps United Nations System

ions would need to take is developing a strategy for data conversion and beginning balances to be included in the first IPSAS-compliant Statement of

ition. This statement is the starting point for all subsequent accounting . Auditors will pay special attention to how beginning balances were

nd will spend extra time verifying their compdUnited Nations System Organizations are conducted by Board of Auditors comprising staff of the Auditors-General of member countries. The audits may become an annual feature as IPSAS requires issuance of at least annual financial statements. The auditors will audit the Statement of Financial Position to ensure that it:

Includes all the assets and liabilities that IPSAS requires; Excludes any assets and liabilities that IPSAS do not permit; Classifies all assets, liabilities and equity in accordance with IPSAS; and Measures all items in accordance with IPSAS.

Unit 5

Accrual A


Other factors that exacerbate risk of misstatement are as follows:

Staff have limited experience with IPSAS; Major changes in the new information system; Significant changes in financial statements formats and increased disclosures;

and Increased reliance on professional judgments

ue to h it opinion will present a

inions that can be

o reservations concerning the

and ar n

presented in

onsidered the opposite of an unqualified or “clean

to various

D t e United Nation’s move from UNSAS to IPSAS, audchallenge in the initial implementation. There are four types of audit op

sued based on an audit of the GPFS prepared in accordance with IPSAS: is Unqualified opinion — The unqualified opinion has nfinancial statements. This is also known as a “clean opinion”. This type of report is issuedby auditors when the financial statements presented are free of material misstatements

e i accordance with IPSAS. Qualified opinion — This type of report is issued when auditors encountered one of two types of situations which do not comply with IPSAS, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or clean opinion”, but the report states that the financial statements are “

The Basics

accordance with IPSAS with a certain exception which is otherwise misstated. Adverse Opinion – It can be issued when the auditor determines that the financial statements of an organization are materially misstated and, when considered as a whole, o not conform with IPSAS. It is cd

opinion”. Disclaimer of Opinion – This type of report, commonly referred to simply as a “Disclaimer”, is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements. This type of report is issued when the uditor tried to audit an Organization but could not complete the work due a

reasons and does not issue an opinion. To minimize the risk of a qualified audit opinion or disclaimer the following actions need to be taken:

Have supporting information and schedules ready; Be aware of common audit issues and take steps to avoid their occurrence; Have a robust system of internal controls; Understand the auditor’s objectives; and Involve the auditors in the process of developing IPSAS-compliant policies and

procedures. Unit 5





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ccounder IPSA

S –unting

The Basics

Summary of Key Learning Points

Unit 6

Accrual A

ccounder IPSA

S –nting u

The Basics ) Introduction to Accounting:

1

Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable financial information about an identifiable economic entity.

Accounting provides information for the decision makers and accountability to stakeholders.

Accounting provides information which can be used to determine whether the organization is improving in terms of financial performance and position at the end of a period than an organization was at the beginning of that period.

2) Bases of Accounting:

These are Cash, Modified Cash, Modified Accrual and Full Accrual Currently United Nations System Organizations prepare Financial Statements

under UNSAS which is modified cash basis of accounting. IPSAS requires full accrual accounting and is regarded as best practice. Major changes from moving to full accrual include:

Reporting long term assets (PP&E and Intangibles) and

depreciating/amortizing them over their useful lives. The point of recognition of expenses is moved from the point of issuing of a

purchase order to the point of the delivery of goods or services. Employee bene

obligations are fits are recognized as services are rendered and the related reported as liabilities.

3) Elem nThe el

e ts of Financial Statements:

ements of financial statements are identified as: Assets: Current and Non-Current (PP&E, Intangibles, etc) Liabilities: Current and Non-Current Net Assets/Equity Revenue (from exchange and non exchange transactions) Expenses

4) FinanThe financ

cial Statements under IPSAS: ial statements required by IPSAS are:

Statement of Financial Position Statement of Financial Performance Change in Net Assets/Equity Cash Flow Statement Statement of Comparison of Budget and Actual Amounts

Multi-year budgets need to be split into annual amounts IPSAS does not require a change in the budget basis.

Notes t Financial Statem

Unit 6

to he Financial Statements are not separate but are part of theents.



Accrual A

ccountir IPSA

S –ng unde

The Basics ey Areas of Change:

y IPSAS implementation: KThe following areas will be impacted b

Ac u

Org tions System Organizations making the transition to accrual accounting need to establish a new set of accounting policies and review exi system-wide level a harm idance have been develo d d Nations System Organi t stem Organization is

nes while erational

accounts, accounting manuals and posting rules to guide the

co nting Policies and Guidelines

anizations such as the United Na

sting guidelines, rules, regulations and procedures. At theo eniz d set of IPSAS-compliant accounting policies and gu

itepe and will be applied consistently throughout all Unza ions. At the individual level each United Nations Sy

developing additional policies and guidelines to support the system-wide oadapting them to the local conditions. Each organization will review opprocedures, chart of recording and accounting for transactions, activities and events.

Information Systems

A robust information system or enterprise resource planning system (ERP) is a critical factor to successful implementation of IPSAS. Organizations implementing IPSAS should conduct an assessment to establish the current situation, shortfalls in terms of information required in order to comply with accrual-based IPSAS, determine the degree of desired decentralization or integration and determine whether to replace or upgrade the current system. Training of staff in the new ERP is very important to the successful implementation of IPSAS.

the United Nations collection of additional data to support

ting and reporting associated with many business processes.

Data Collection Processes and Workflows

hile IPSAS will not change the core business processes of WSystem Organizations it will require the changes in the accounIn many of the cases more data will be required from, for instance, procure to pay, asset management and human resources processes.

many benefits to be obtained from establishing ditors from the beginning of the IPSAS cted to give absolute assurances that a

Unit 6

Audit Issues

Auditors constitute one of the key groups of stakeholders for a successful implementation of IPSAS in an organization. While it is essential that auditors

aintain their independence, there arema cooperative working relationship with the auimplementation process. Auditors are not expeparticular system or process would meet audit requirements, but they may be able to provide helpful advice regarding the criteria that would be used in assessing the system or process. Auditors will pay special attention to how beginning balances were determined and will spend extra time verifying their compliance with IPSAS. The auditors will audit the Statement of Financial Position to ensure that it:





Accrual A

ccountir IPSA

S – Includes all the assets and liabilities that IPSAS requires; Excludes any assets and liabilities that IPSAS do not permit; Classifies all assets, liabilities and equity in accordance with IPSAS; and Measures all items in accordance with IPSAS.

ccessful IPSAS implementation should ensure a smooth audit. To minimize the k of a qualified audit opinion or disclaimer the following actions need to be en:

Suristak

ng unde

Have supporting information and schedules ready; Be aware of common audit issues and take steps to avoid their occurrence; Have a robust system of internal controls; Understand the auditor’s objectives; and Involve the auditors in the process of developing IPSAS-comp

The Basics

liant policies and

Unit 6

procedures.

accrual accounting under ipsas – participant’s guide · table of contents . ... (accrual...

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