The sovereign debt crisis showed many countries were in the dark about the details of their finances. Adopting International Public Sector Accounting Standards across Europe would provide a great opportunity to address this

Eurostat, the European Union’s equivalent of the Office of National Statistics, is carrying out a study on behalf of the European Commission to consider whether EU governments should be required to produce their financial statements using International Public Sector Accounting Standards (IPSAS).  As part of the study, Eurostat has been seeking views from interested parties on the suitability of IPSAS for member states.

This study is in part a response to the sovereign debt crisis, which highlighted the fact that many governments have yet to adopt accrual accounting and consequently do not know the full extent of their liabilities.

Whilst it may seem strange that the European Union would mandate the accounting standards to be used by governments, this would be consistent with the approach taken in the private sector where the use of EU-adopted International Financial Reporting Standards (IFRS) has been mandatory for listed companies since 2005. The EU is also consulting on amendments to its Accounting Directives as it seeks to further harmonise the accounting arrangements for non-listed companies across member states.

CIPFA is supportive of the IPSAS implementation proposals, given they are the only globally recognised set of high quality financial reporting standards developed specifically for the public sector.  Given the commonality between many transactions that both governments and private sector organisations enter into, IPSASs often take the equivalent IFRS as their starting point and then include additional or amended requirements and examples to meet the needs of the public sector. There are also a number of examples where IPSASs have been developed from scratch for the public sector since there is no appropriate or equivalent IFRS.

Adoption of IPSASs across Europe would provide a great opportunity to improve public financial management by making better, more complete, audited information available to decision makers.  CIPFA does not believe that cash accounting can provide adequate information for managing a country’s finances; accruals accounting is required.

In order to ensure consistency across member states, internationally set standards designed for the public sector rather than local standards are also required.  As the only public sector focused international standard, IPSAS is the logical choice.

Paul Mason is assistant director for professional services at the Chartered Institute of Public Finance and Accountancy.

CIPFA’s submission to Eurostat’s consultation on IPSAS implementation is available here.