IPSAS Implementation in the EC
- Practical challenges
Rosa Aldea Busquets European Commission DG BUDG / Accounting Unit
27/ 02/ 2007
AGENDA
Why modernise?
The implications of the project
Approach taken by EC
Challenges involved
Page 3
Why modernise?
Internal needs and external expectations
Improve transparency To position the Commission at the forefront of modernisation Facilitate comparison between public entities Management needs: better financial information and better
monitoring An exhaustive follow up of Assets, Liabilities and Ownership A compliment to the budget: multi-annual vision
Towards better governance Towards better governance
General General Accounting Accounting Beneficiaries: Beneficiaries: Internal users: Management & Administrators External users: Decision Makers
The European Commission decided to provide the administration with a modern accounting system
Brussels, December 17, 2002
The European Commission adopts an ambitious plan to implement full accrual accounting by 2005.
"Today's action plan is the latest step in this long term strategy of modernisation: it maps the Commission's progress towards the wholesale implementation of the most up-to-date public sector accounting standards by 2005, taking into account all the constraints and necessary detailed changes. With these measures the Commission will be far ahead of most administrations in the world."
Commissioner Michaele Schreyer
Basis: Financial Regulation of June 2002, art. 124 (Council Regulation 1605/2002)
"The Financial statements shall be drawn up in accordance with the generally accepted accounting principles"
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AGENDA
Why modernise?
The implications of the project Approach taken by EC
Challenges involved
The main keys to the success of the project
Two types of accounts :
Budgetary Budgetary Accounts Accounts General General Accounts Accounts
Priority: To develop a reference framework for general accounting that is in line with the private
company accounting and that is internationally accepted.
Choice: The adoption of IPSAS Consequence: Accrual accounting
Page 7 • Complete re-engineering of management of the transactions in general accounting • Training
• New practices & procedures • Impact on human & financial
resources RULES IT TOOLS USERS (DGs, Agencies, Institutions) • 15 new accounting rules
• New chart of accounts • New accounting procedures • Financial Statements with accrual
opening balances • Accounting manuals
• Adaptation of existing system to new recording needs
• Ability to capture a wide range of information
• Introduction of new modules (for registering contracts, invoices, assets etc.)
• Progressive integration into one system
Modernisation project has impact on 3 levels
AGENDA
Why modernise?
The implications of the project
Approach taken by EC Challenges involved
Page 9
APPROACH TAKEN BY THE EC
IPSAS used as basis (IAS/IFRS if necessary)
EC transactions analysed
15 EC accounting rules developed
Detailed accounting manual prepared
1 January 2005 rules in force
2005 accounts prepared using new accounting rules. Positive reaction from the Court and from the budgetary authority.
AGENDA
Why modernise?
The implications of the project
Approach taken by EC
Challenges involved
Page 11
CHALLENGES INVOLVED
IPSAS are general principles
The Budget
Starting from way back
Not a perfect fit
EC Specificities, Accounting issues
CHALLENGE 1:
IPSAS are general principles not detailed rules
Anglo-Saxon approachGenerally EC rules are very prescriptive
Comply with the Financial Regulation
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CHALLENGE 2:
The Budget
Budget is the basis for everythingEstablished long before accrual accounting
Budget rules very prescriptive
Confusion with jargon – e.g. "commitments"
Conflicting rules – e.g. provisions
Have to maintain dual-accounting, the budget is in cash basis + commitments
CHALLENGE 3:
Starting from way back
Not the same as an IAS conversionHad to develop most rules from zero
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CHALLENGE 4:
Not a perfect fit
We are different!Certain IPSAS not relevant
IPSAS 10 Hyperinflationary economies IPSAS 16 Investment property
Other areas not covered by IPSAS Pension
IAS 39
How relevant are IAS as a fallback solution? Large volume of financial activities disclosures
giving a misleading picture of their significance?
CHALLENGE 5:
EC specificities- accounting issues
Who to compare with?Cut-off/year-end accruals (€ 66.7 billion)
Pre-financing (€ 29.4 billion)
Consolidation – control concept different
Net Assets : Amounts to be called from Member States €65 billion
Political sensitivities – although negative net assets, the EC is not bankrupt nor does it need to request more money from MS
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Accounting issues: NET ASSETS
What is Assets minus Liabilities in the EC?
It is a negative €62 billion!
How can this be best represented?
Look at how the EC operates…
Amounts to be called from Member States €65 billion
A fair representation of the difference between cash & accruals (62,145) NET ASSETS 2,808 Reserves (64,953)
Amounts to be called from Member States
(120,851) TOTAL LIABILITIES
(82,528)
Accounts Payable
(33,156) Staff pensions (long-term)
(1,920)
Financial liabilities
(1,853)
Other long-term liabilities
(82,825) CURRENT LIABILITIES
(275)
Provisions for risks and charges
(22)
Financial liabilities
31/12/2005 (EUR millions)
BALANCE SHEET
(1,097)
Provisions for risks and charges
(33,156)
Employee benefits
(38,026) NON CURRENT LIABILITIES
58,706 TOTAL ASSETS
11,854
Cash & cash equivalents
7,238 Short-term receivables 6,633 Short-term pre-financing 1,440 Short-term investments 126 Stocks 27,291 CURRENT ASSETS 244 Long-term receivables 22,732 Long-term pre-financing 2,397 Loans 1,874 Investments 4,141
Tangible Fixed Assets
27
Intangible fixed assets
31,415 NON CURRENT ASSETS:
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Accounting issues: PENSIONS
Liability OK (IAS 19 actuarial valuation)
No pension fund for staff, no employer contribution
Staff contributions are an administrative revenue
Guarantee from Member States to pay when due (Budget)
Previously an asset was recognised
A guarantee is not an asset
Do we recognise all future revenues then?
Prudence
Auditors opinion
OECD example
AGENDA
Why modernise?
The implications of the project
Approach taken by EC
Challenges involved
Page 21
The main keys to the success of the project
• Rapid decision-making
• High level support from the hierarchy • Availability of resources
• Good planning for the project
• Establishing communication/continuous dialogue • Mobilising the different actors for the changes • Explaining well the advantages of the new system
