top stories

Share

Comments from ACCA
September 2004

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to respond to the Invitation To Comment (the ITC) Accounting for Social Policies of Governments - IFAC Public Sector Committee . These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Panel, a group of experienced accountants working in the public sector. They have also been considered by ACCA's Financial Reporting Committee.

We support the general approach of the ITC in applying the concepts of liabilities and constructive liabilities to social policies of governments and the majority view of their application to old-age pensions.

Governments' financial accounts prepared on an accrual basis should include the costs of the social policies which were applicable to the reporting period. This should take account of any social payments which are due for the period, but which were unpaid at the end of it. These payments will be liabilities as they will be present obligations at the balance sheet date. Any obligations for periods after the balance sheet date will be future obligations and so should not be recognised as liabilities in the balance sheet.

It is important that financial information is provided which helps to make governments accountable for the social policies they are pursuing, in terms of pensions and other sorts of benefits. Governments should provide additional information, including longer-term projections of the costs of their social policies. Thus, for example, the UK Government produces an annual report on the long-term financing implications of its policies. This report aims to provide a comprehensive analysis of long-term economic and demographic developments, and their likely impact on public finances. We consider that such reports should not form part of a government's financial statements and that they should include possible alternative levels of service provision, taxation and government debt.

Detailed Comments

Political commitments and legal liabilities


1. The political obligation which a government has to provide future social services is fundamentally different from the legal obligation which it has to pay its debts.
   
2. This is recognised by the ITC, which explains that:
   
   �A government may, as a result of previous public undertakings or commitments, be seen as having an obligation to provide particular goods and services for the benefit of its constituents in both current and future periods. However, an obligation to provide goods or services (or other benefits) to constituents in the future does not of itself give rise to a liability for financial reporting purposes.� ( paragraph 3.7 ).
   
3. This is demonstrated, for example, in the UK , where as a result of a change in Government policy, the link between the value of state pensions and average salaries was broken. As a result, in recent years the relative value of the state pension has fallen significantly. If the Government did have an obligation to maintain the value of the state pension it has successfully managed to avoid this obligation.
   
4. Any political obligation is hard to delineate and define and such obligations continue to apply for an indeterminate period into the future. Judgements about the nature of such obligations are subjective and will change over time. We therefore agree with the general approach of the ITC not to require government financial statements to include them by limiting the application of the concept of constructive obligations in this area.
   
5. The ITC comes close to saying that a government has an obligation to account for the costs of the goods and services it has provided during the year. With cash payments to individuals, however, the ITC refers to the government's obligation to pay the amounts which are due until the next validation point (which may be in the following financial year).
   
6. This extension of liabilities may add some uncertainty to the reliability of the amounts involved. For example:
   
   •  the government may have the discretion to make additional checks at any time,
   
   •  the death of the recipient would terminate the obligation
   
   and
   
   •  benefits paid under fraud or mistake might be subject to reclaim.
   
7. We believe that it would be more appropriate to consider such payments as part of the ongoing services which governments provide. As a result, only those payments which relate to time periods before the balance sheet date should be recognised as liabilities.
   
   Accounting for the sustainability of government policies
   
8. While the general purpose financial statements of governments should essentially reflect the legal obligations they have incurred, we think it important that governments also provide relevant information to help meet their accountability for the longer term financial implications of the social policies they have chosen to pursue. Governments are increasingly choosing to provide additional financial information, including longer-term projections of the probable costs of their social policies. Thus, in the last two years an annual report has been produced, as part of the UK Government's pre-budget statement, on the long-term financing of its policies. This report aims to provide �a comprehensive analysis of long-term economic and demographic developments, and their likely impact on the public finances� (HM Treasury, 2003, Long-Term Public Finance Report: Fiscal Sustainability with an Ageing Population ).
   
9. We believe that the ITC does not necessarily make a clear enough distinction between these longer-term financial projections and government general-purpose financial statements. We believe that these reports should be developed as two completely different types of financial report, which should be clearly distinguished as they have different bases and objectives.
   
10. Financial statements should be objective, independently verifiable and so auditable. They should provide essentially historic information about past events, which can be substantiated or audited through comparison with individual financial transactions. Information about the sustainability of government policies, in contrast, covers future events and time periods and so will inevitably be subject to additional uncertainties. Any �audit' of such information will inevitably be of a different type from the audit of the financial statements themselves.
    
11. •  Information to be provided on the sustainability of social programmes is circumscribed in the ITC as this is to be considered both �without significant increases in the tax burden� ( paragraph 9.12) and �without increasing the debt burden on the economy� (paragraph 9.16). This would, however, probably have the effect of significantly reducing the usefulness of the information provided. The future is inevitably uncertain. Thus, we believe that to be useful, information on future financial projections for governments should consider alternative levels of the following:
    
    •  social policy provision
    
    •  taxation
    
    •  government debt.
    
12. In addition, future projections should also utilise appropriate scenario analysis to consider the implications of different combinations of the above options. To be useful, information about the future should paint different pictures about what this could be. These scenarios can then form the basis of political decisions by citizens about the future they would prefer. They could also be an aid to public accountability. A government should be elected on the basis of its prospective policies and the effects these may have. The government should then be held to account for the extent to which those policies are implemented as promised.
    

Specific Matters for Comment

Below we have provided our responses to the specific issues on which the ITC requested comments.

(a) Do you consider that separate Exposure Drafts and IPSASs should be prepared for: (i) old age and similar pensions; and (ii) other social policy obligations?

We consider that a single Exposure Draft and IPSAS should be developed for all types of social policy obligation. We believe that essentially the same challenges are faced when accounting for old age pensions as for other social policy obligations.

 

(b) Do you consider that unfunded pension plans to provide government employees with benefits as a consequence of their employment, where the pensions are to be paid from government revenues, should be included or excluded from the scope of any forthcoming IPSAS on social policy obligations?

We consider that all occupational pensions provided by governments to their employees should be excluded from the scope of any IPSAS developed from this ITC. Such pensions should be accounted for in the same manner as other employment-related benefits.

(c) Do you agree that notions of social benefits are well understood and need not be defined in an IPSAS? If you are of the view that it is necessary to define social benefits for inclusion in an International Public Sector Accounting Standard (IPSAS), please outline the reasons for this view and your proposed definition.

We agree that it should be unnecessary to develop an explicit definition of social benefits for inclusion in an IPSAS to be produced on this topic.

(d) Do you agree that the definition of a liability and the related concepts of a legal and constructive obligation in IPSAS 19 should be applied to non-exchange transactions in the public sector (see Chapter 3)? If you disagree, please outline the concept of a liability that you believe is appropriate for non-exchange transactions in the public sector.

We agree with the definition of a liability developed in IPSAS 19 being applied to non-exchange transactions in the public sector. We consider, however, that the past event which gives rise to a liability may also include the passage of time. Thus social payments relating to periods after the balance sheet date are not present obligations as the past event includes not only the individual qualifying for the benefit, but also the passage of time for which the benefit relates. Thus liabilities should only be recognised in the financial statements for goods, services or payments relating to the reporting period. Payments for future periods should be considered to be in the nature of executory contracts which are dependent on the passage of time for the liability to crystallise.

(e) Do you agree with the Steering Committee's conclusions about the alternate approaches to determine when a constructive obligation arises, in Chapter 4? Are you of the view that there are other circumstances in which a constructive obligation may arise? If so, please describe those circumstances.

We agree with the Steering Committee's conclusions on when a constructive obligation arises except that we believe this only applies to payments relating to periods before the balance sheet date. This is because one of the applicable eligibility criteria will be that the individual has lived throughout the period for which the payments are due. Thus, for example, in the case of state pensions, if a recipient were to die on the balance sheet date the government would only be liable for benefits up to that date.

(f) Do you agree with the Steering Committee view in Chapter 5 that a present obligation for the provision of goods or services to constituents does not arise prior to the provision of those goods and services? Do you agree that any costs incurred in acquiring goods and services for delivery in the future should be recognized in accordance with IPSASs or, in the absence of such, other generally accepted accounting practices for dealing with such exchange transactions?

We agree with both of these views.

(g) Do you agree that the financial reporting consequences of cash advances provided by a government to allow individuals to purchase specified goods and services as discussed in Chapter 5 differ from cash advances discussed in Chapter 6, which are provided for use at the discretion of the recipient? If you disagree with this view, please outline your views on how an entity should account for cash advances discussed in Chapter 5 and Chapter 6.

We consider that these two types of transaction do not fundamentally differ and should be accounted for in the same manner. Cash advances should be recognised if they are present obligations at the balance sheet date. Thus they will be recognised as liabilities if they relate to the time period before the balance sheet date, but remain unpaid.

(h) Do you agree with the Steering Committee view in Chapter 7, that the principles developed in Chapters 5 and 6 also apply to specific events, such as disaster relief, which give rise to obligations which government will satisfy in the future? If you disagree with this view, please identify the factor(s) that make disaster relief and similar specific events different from other benefits as considered in Chapters 5 and 6.

We agree with the treatment suggested by the Steering Committee.

(i) Do you agree with the majority view of the Steering Committee regarding old age pension obligations, the minority view, or do you have another view (see Chapter 8)?

We agree with the majority view of the Steering Committee.

We consider that such disclosures should be provided. They should not, however, form part of the financial statements and they should include possible alternative levels of service provision, taxation and government debt.

(j) Do you agree with the Steering Committee view in Chapter 9 that the disclosure requirements in IPSAS 1 Presentation of Financial Statements and IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets should apply in respect of social benefits and that additional detailed disclosures of individual social benefits should not generally be required?

We agree with this view of the Steering Committee. We consider, however, that disclosures, at least in the notes to the accounts, may be appropriate for particularly significant individual social benefits.

(k) Do you agree with the Steering Committee view in Chapter 9 that the PSC should explore the possibility of requiring disclosures about the overall sustainability of a government's social benefits including the assumption that higher-level disclosures are more likely to meet users' needs? (To respond to concerns about information overload, the Steering Committee proposes that disclosures about the sustainability of social benefits should encompass all social benefits collectively, unless the future obligations associated with a specific individual benefit are much greater than those associated with all other benefits.)

We consider that such disclosures should not form part of the financial statements and they should include possible alternative levels of service provision, taxation and government debt.

(l) Do you foresee any audit issues that might arise if �sustainability disclosures� were included in the financial statements? If so, please describe those issues.

We consider that there will be difficult problems with the form of the audit opinion if such projections were to be included within the financial statements.

Back to top