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Can the International Public Sector Accounting Standard IPSAS 41 Financial Instruments help us in Australia?
Can it help us for public sector issues in the absence of additional guidance in AASB 9 Financial Instruments?
Public sector entities are finalising their preparations for the implementation of AASB 9, the Australian equivalent to the International Accounting Standards Board’s IFRS 9.
AASB 9 started for financial years commencing on or after 1 January 2018, however doesn’t include public sector specific guidance. Some entities are grappling with public sector issues that are not quickly resolved by using the private sector guidance.
The International Public Sector Accounting Standards Board (IPSASB) recently issued IPSAS 41, which is based on IFRS 9. I have contributed to the development of IPSAS 41 by responding to draft proposals, to try and have it address the public sector issues that I have come across.
So how can IPSAS 41 help us in Australia?
IPSAS 41 includes some public sector guidance that will be useful in Australia. In the absence of specific guidance in AASB 9, the guidance in IPSAS 41 is a useful starting point for Australian public sector and not-for-profit entities that want to determine an appropriate accounting policy for those issues.
These changes are incorporated in IPSAS 41 through additional material in the:
- Application Guidance (technically part of the standard)
- Implementation Examples (accompany but are technically not part of the standard)
- Implementation Guidance (accompanies but is technically not part of the standard).
However, the guidance must be considered with care, as IPSASs have different requirements to our IFRS-based standards for the public sector. For example, IPSASs use a different revenue and income recognition framework. IPSASs also do not have an equivalent to IFRS 13 Fair Value (in Australia, AASB 13).
The main areas in IPSAS 41 where additional the guidance provided may be of greatest assistance are (also refer to the IPSAS 41 Illustrative Examples and Implementation Guidance):
Application Guidance AG118—AG127 Concessionary Loans
- Guidance on concessionary loans:
- concessionary loans are often referred to as interest-free loans, or below-market rate loans.
- Distinguishing concessionary loans from originated credit-impaired loans:
- originated credit-impaired loans include loans to borrowers who are not expected to repay all contractual cash flows. An example is issuing loans to a sector of the economy that is facing hardship and expecting that not all will be able to repay all of their commitments. Originated credit-impaired loans have slightly different interest revenue recognition requirements to non-impaired loans.
- Dealing with concessionary loans that are also originated credit-impaired loans:
- expanding on the example above, these might be interest-free loans, where not all borrowers are expected to repay all of their commitments.
- Guidance on concessionary loan commitments.
- this includes the accounting for moving from the recognition of an expense for the grant commitment to when the loan is issued.
Application Guidance AG128 – AG130 Equity instruments from non-exchange transactions
- Valuing equity instruments in not-for-profit entities:
- AASB 9 requires that all equity instruments are valued at fair value. In the past, some preparers claimed that their unlisted equity investments could not be reliably measured and therefore cost was used. Under AASB 13, cost (i.e. replacement cost) can be used to determine fair value in some circumstances.
Application Guidance AG131 – AG136 Valuing financial guarantees issued through a non-exchange transaction
- Guidance on financial guarantees issued for below-market consideration
If considering the guidance on concessionary loans, you should consider the additional disclosures IPSASB require, that are located in IPSAS 30 (IPSASB’s version of AASB 7). These include disclosures of a reconciliation of concessionary loans, including reference to nominal value, separately for amortised cost and fair value.
I personally would have liked additional guidance included in IPSAS 41 for:
- impairment of loans from public sector entities to other public sector entities.
- determining interest rates on concessionary loans
- guidance on non-recourse loans, particularly for concessionary loans. and the solely payments of principal and interest (SPPI) test. Non-recourse loans may be issued by public sector entities for social or policy objectives. The SPPI test is used to determine whether the loan is accounted for using the amortised cost method, or fair value through profit or loss method
In the meantime, I think that the IPSAS 41 guidance (adjusted for Australian standards) should be included in AASB 9 as not-for-profit amendments.