Should the U.S. Formally Adopt the International Public Sector Accounting Standards?

By: Jesse Hughes, Ph.D., CGFM, CPA, CIA

Dr. Jesse Hughes is a Professor Emeritus at Old Dominion University, Norfolk, VA and past president of the AGA’s Virginia Peninsula Chapter. He is currently a consultant in many developing countries to assist them in establishing good financial management practices in line with the IPSAS. At the federal level in the U.S., he had 10 years experience as an internal auditor and 10 years experience as a financial manager for the U.S. Department of Defense prior to spending 20 years in academe teaching a variety of accounting courses.

Much is being written about the attempts to harmonize the Financial Accounting Standards with the International Financial Reporting Standards applied in the private sector. In addition, the AICPA standards on ethics are being harmonized with the International Federation of Accountants standards. Yet nothing appears to be on the horizon relative to harmonizing the public sector accounting standards in the U.S. with those in the international community.

The International Federation of Accountants (IFAC, located in New York) was established in to set international standards for auditing, education and ethics as well as for accounting in the public sector. The International Accounting Standards Board (IASB, located in London) retained responsibility for setting the international accounting standards for the private sector. Within IFAC, the Public Sector Committee (PSC) was established in 1986 to address the International Public Sector Accounting Standards (IPSASs). The IPSASs are based on the IFRSs that apply to the private sector but are modified, as necessary, for application in the public sector. The first IPSAS (Presentation of Financial Statements) was issued in 1996 and 26 IPSASs have been issued to date. The PSC was renamed the IPSAS Board in 2004 and the IPSASB presently has voting members from the accounting profession in 15 countries (including the U.S.) as well as three voting members at large. Many industrialized countries (Australia, Canada, France, New Zealand, UK, etc.) have adopted these standards for application in their countries and many other countries are in the process of implementing these standards.

In the U.S., the Financial Accounting Standards Board (FASB) was established in 1973 to develop accounting standards. It was subsequently decided that FASB would establish accounting standards only for the private sector and Governmental Accounting Standards Board (GASB) was established in 1984 to build on the governmental accounting standards for state and local governments that had been previously adopted. Both boards report to the Financial Accounting Foundation. A member of GASB is presently a voting member of the IPSAS Board, and many of the IPSASs that have been issued over the years have been influenced by those in existence at the state and local level in the U.S. However, the same is not true of the public sector accounting at the federal level in the U.S. The Federal Accounting Standards Advisory Board (FASAB) was established in 1990 to develop federal accounting standards and consolidated statements in line with those standards were first issued in 1997. A brief history of the US efforts to develop public sector accounting standards is published on the www.ifac.org/Store website in an article titled “The Road to Accrual Accounting in the United States of America” dated March 2006.

Much has changed over the years since public sector accounting standards were originally established. The IPSASB is now actively establishing the public sector accounting standards for worldwide application and many countries are adopting them. If the U.S. desires comparability with these countries through the public sector financial statements, the U.S. will need to formally adopt the IPSASs. Even if the U.S. does not formally adopt the IPSASs, the differences between the IPSASs and those published by the GASB and FASAB should be identified to determine if our U.S. standards need to be harmonized with the international standards.

Do you think any attempt should be made to harmonize our U.S. public sector accounting standards with those adopted by the IPSASB?

TOMORROW: Robert Maitner Jr., CGFM, Senior Managing Consultant, IBM Public Sector Financial Management, on "OMB Circular A-123 Appendix A: A Fresh Look Three Years In"

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Comments

[Jess Hughes]

Perry,
Your comments are very insightful and are in line with my thoughts. Hopefully, in time, we can all be singing off of the same sheet of music.
Jess

[Perry Pahladsingh]

This is very interesting to read. I am a Dutch (!) chartered accountant and have been working in the Public Sector for many years. I have also commented on IPSAS Exposure Drafts and given IPSAS trainings around the globe.

The very important thing to understand from IPSAS is that these are fully independent, which make them unique in the Public Sector. By choosing the IPSAS as a country's own accounting framework it stresses upon the idenpendent status of the accounting standards used. Unfortunately, this strength is also its very weakness, i.e. it removes any influence of the local/national standard setting body in preparing IPSAS-compliant financial statements.
Opposed to suggested here, its definitely not allowed to do cherry-picking from IPSAS to prepare IPSAS compliant financial statements (IPAS1.
What does this all mean ? Well, we can see the very advanced countries like in Europe, the USA, Canada, South-Africa and New Zealand will base their own accounting standards on IPSAS, keeping their own national sovereignty to apply national accounting standards. On the other hand, we can see that less developed countries, such as those applying for NAFTA or the EU are instructed to reform their own sets of public sector accounting standards based on IPSAS or prepare IPSAS-compliant financial statements.
Also multigovernmental bodies s.a. OECD, NATO and the UN transform to IPSAS, in order to prepare reliable, advanced financial statements.
My personal thoughts are that chances that the developed countries (already on accruals) are quite slim, whereas its more likely to have them introduced in multigovernmental entities. The very difficulty with implementing, is that IPSAS are principles-based, which is very contrary to the rule-based sets of accounting commonly seen in the Public Sector.
So preparing Federal Statemenst of the US based on IPSAS will be more of use for non-US stakeholders.
Clearly, moving from one own's set of accounting standards to a set of standards set by an idenpendent body will have a political message in itself as well. Only think of the discussions we have seen on moving to IFRS in the US and Canada.

[Anna]

Representatives from the FASAB do attend IPSASB meetings so they are aware of what IPSASB is addressing.

[Jess Hughes]

Anna,
Thanks for your comment. As we all know, the world is getting smaller and the US federal government is involved in many countries. The IPSAS Board has issued a standard (IPSAS 4) on "The Effect of Changes in Foreign Exchange Rates" but I have not seen anything on the FASAB website that addresses the issue. Perhaps it would be beneficial to adopt that IPSAS for application in the US. Another example could be the IPSAS (IPSAS 24) on Budget to Actual Comparative Statements. At least, we could look at the IPSASs to see the similiarities and differences with our Federal Accounting Standards.
Jess

[Anna]

I have attended training sessions explaining the IFRS convergence and how it is working in the private sector. It is my understanding from these training sessions that countries can still retain differences. The convergence or harmonization applies to companies in the country that operate internationally. Others would still follow the "local" standards. So in the US FASB would ramain as a standard setter for those companies doing business solely in the United States. I guess the equivalent would hold for the public sector. The FASAB would remain and issue US-applicable standards for public sector entities in the federal environment.

[Jess Hughes]

Tom,
I agree that the ultimate test is providing meaningful information. And 18 members on the IPSAS Board from around the world have put their heads together to determine what that might be. Each country that adopts the IPSASs have the opportunity to prepare special financial statements to meet their unique requirements, if they so desire. The only thing that I am suggesting is that those of us working in the public sector should consider the IPSASs in the development of our governmental accounting standards in order to identify our differences and our similarities. This is being done to a large extent by GASB but I see little movement in that direction posted on the website of FASAB. This harmonization effort is being done in the private sector by FASB and the IFRS Board. I suggest that it also be done in the public sector.
Jess

[Tom S]

Should the U.S. formally adopt the International Public Sector Accounting Standards? The short answer is no. I think they should be considered but should not determine what the standards are for U.S. governments. I would say the same thing for government in any country. Different countries and different levels of government may have unique characteristics, especially the federal level versus state and local. There may be a natural evolution towards convergence but that makes sense only if it produces meaningful financial reporting for the end users. To me, that is the ultimate standard for government accounting standards.

[Jess Hughes]

I noted a typo on my blog. FASB was identified as the "Federal" Accounting Standards Board but, of course, I meant to say the "Financial" Accounting Standards Board.