By Richard Johnstone | 27 August 2014

The Brazilian government is likely to halt the extension of borrowing powers to states if they do not met a deadline to comply with the International Public Sector Accounting Standards, a ratings agency has warned.

Fitch said the 26 states in the country face a challenge to meet the December deadline for switching to IPSAS. Currently, state expenses are recorded on an accrual basis, but their revenues use cash accounting.

According to the agency, the federal government is likely to impose penalties if the deadline was missed. This was likely to include not authorising credit extensions once the deadline has passed, as well as a halt to some asset transfers.

‘In our view, these penalties could delay state programs funded by credit operations,’ Fitch’s report, published on August 22, stated.

‘We view the adoption of accrual accounting for both as positive as it ensures commonality between expenses and revenues and it will allow for clearer assessment of state collections efforts and efficiencies. Also under IPSAS, states must consolidate their sizable pension deficits and disclose the fiscal incentives granted to companies, as well as the corresponding impact of these incentives on their fiscal performance.’

Currently, only a few states disclose the incentives offered to companies to operate in each area, and what impact these have on creating and retaining jobs.

Although Fitch highlighted that some states were resorting to third party consultancy to support the accounting transition, any cost were likely to be offset by efficiency gains over the medium term.