Governments and Accrual Reporting

By Michalis Lardis, Senior Manager, KPMG Limited

Accrual reporting refers to the recording of the economic substance of transactions when they occur, rather than when cash settlement occurs. Many governments have already adopted accrual reporting and many more are on the road to implementation. Taking into account the data collected for 150 governments, we list below the analysis of their reporting status: • 37 governments (25%) reported on accrual in their last set of published financial statements • 68 governments (45%) are transitioning to accrual or already have some element of accrual in their financial statements • 45 governments (30%) still report on a cash basis. Accrual reporting frameworks are developed in various ways, many making use of international standards. Of the 37 governments that currently report on accrual, 19 (51%) are using International Public Sector Accounting Standards (IPSAS), in one of these three ways: • 5 governments have adopted IPSAS directly; implementing without altering any of their requirements • 5 governments apply IPSAS indirectly; implementing through a national endorsement process, adjusting for any specific jurisdictional features • 9 governments use IPSAS to develop their own national standards; they use IPSAS as a guidance source.

What is IPSAS?

The International Public Sector Accounting Standards Board (IPSASB), an independent standard-setting board, develops IPSAS, a suite of cash and accrual-based standards used by governments and other public sector entities around the world to prepare generalpurpose financial statements. Financial and sovereign debt crises have brought to light, as never before, the need for better financial reporting by governments worldwide and the need for improvements in the management of public sector resources. The IPSASB has established IPSAS to improve the quality, consistency and transparency of public sector financial reporting globally.

development. Adopting ADOPTING accrual-based accounting ACCRUAL-BASED will improve financial ACCOUNTING WILL management and give a more complete, accurate view of assets and liabilities. IMPROVE FINANCIAL MANAGEMENT AND GIVE A MORE COMPLETE, ACCURATE VIEW Improved accuracy in OF ASSETS AND reflecting revenues and LIABILITIES expenses Accrual-based standards provide a complete, reliable picture of a government’s financial and economic position and performance.

Regional status

The regions expected to see the greatest increases in accrual adoption by 2023 include: • Latin American and the Caribbean: Benefits of IPSAS 21 countries (5 currently) • Africa: 19 countries (2 currently) Improved accountability and decision- • Asia: 21 countries (6 currently) making • Europe: accrual adoption predictions Adopting accrual-based IPSAS: are made more complicated by uncer• improves the quality of general-purpose tainties surrounding the development reporting by public sector entities of European Public Sector Accounting • can lead to better informed assessments Standards (EPSAS). It is expected that of governments’ resource allocation decisions • helps increase transparency and accountability. the number of governments on accrual will double to 24 total over the next five years. Of the 98 governments projected to be reporting on accrual by 2023, 72 (73%) Improved management of assets and liabilities will be making use of IPSAS: • 31 governments will adopt IPSAS directlyGovernments reporting on a cash basis • 14 indirectlydo not account for significant liabilities, • 27 will use IPSAS in developing their such as pensions, and property or plant national standards. and equipment, such as infrastructure

Government of Cyprus

The Government has been maintaining accounts and preparing financial statements using the cash basis of accounting, with certain modifications to financial liabilities in the form of bonds and guarantees. The Treasury of the Republic is responsible for the execution of all accounting activities of the central Government, including the preparation of its annual financial statements. Ιn 2016, the Treasury prepared and adopted an action plan and roadmap to transition from modified cash to accrual basis accounting. Based on the initial plans, if the necessary measures are taken, it is expected that the Government will prepare its first Opening Balance Sheet on 1 January 2020 and its first set of consolidated financial statements that will be in compliance with IPSAS for the year ending 31 December 2021. The Treasury contracted KPMG Limited in Cyprus, on 16 November 2017, to assist with the provision of training services to the Government in the understanding of IPSAS and the framework for public sector accounting. The IPSAS training sessions started in March 2018 and were completed in April 2019. In Cyprus, the Government is at the first stages of its effort to convert from cash accounting to the accrual basis of accounting for the preparation of its financial statements. This conversion will most probably take place in line with the relevant IPSAS provisions, as the process within the European Union for the issuance of the EPSAS is expected to take time. The aim is to complete the conversion at the central Government’s level within the next two years, while the wider government and other public sector entities are expected to follow. Beyond the above-mentioned benefits, the future implementation of IPSAS by both the central and wider Government – and hence uniform accounting policies – will allow the preparation of consolidated financial statements, something that could also be useful in future capital raising in the public sector.

IN CYPRUS, THE GOVERNMENT IS AT THE FIRST STAGES OF ITS EFFORT TO CONVERT FROM CASH ACCOUNTING TO THE ACCRUAL BASIS OF ACCOUNTING FOR THE PREPARATION OF ITS FINANCIAL STATEMENTS