WELCOME YOU TO THE PRESENTATION

TOPIC: PUBLIC SECTOR ACCOUNTING:

A COMMON REPORTING FRAMEWORK?
A REJOINDER
 Mehnaz Leena
ID-20064
INTRODUCTION

 Should there be a common reporting framework for both public

and private sector or not?

 Yes. (According to former Public Sector Accounting Standards

Board)

 No. ( According to Wolnizer, Carnegie and Barton) Because,

they argued that there are some types of reporting entities in the
public sector that need separate consideration.
 Mehnaz Leena
ID-20064

 Newberry argued that while the PSASB claimed it used a common

framework, it had in fact two conceptual frameworks because it
applied different interpretations to the standards in each sector; and,
second, that the critics have ignored these interpretational
differences. So, She challenged Wolnizer, Carnegie and Barton to
clarify their positions.

 In this article, Barton tried to clarify his position and to explain

some fundamental differences between the markets for private
goods and for public goods.
 Mehnaz Leena
ID-20064
THE NEWBERRY CRITICISM
 Newberry draws a sharp distinction between the definitions of key concepts
and their interpretation. Particularly, the concept of an asset, which is open
to several interpretations. The definition (SAC 4 1992, para. 12) is a broad
one based on the capacity of an item to provide “future economic benefits or
service potential” to the entity.
 Newberry argues that this broad concept allows two interpretations of an
asset –
1. producing future economic benefits, i.e. cash flows
2. producing service potential, which is noncash flow benefits.
 She condemns the provision of two interpretations of assets, accusing the
accounting profession of “misleading and deceptive conduct” when it
produces financial statements that look the same and use the same
terminology “when it knows very well that the interpretations underlying the
elements in those statements are significantly different”
CRITICISM OF FUTURE ECONOMIC
BENEFIT INTERPRETATION

 A criticism of the definition is that it states that assets are the

“future economic benefits”. This is an example of confused
thinking. The definition should state that assets are the resources
controlled by the firm which generate the future economic
benefits.

 Future economic benefits are the source of financial values for

assets.

In the apt analogy given by Chambers the definition confuses

the fruit with the tree.
Mehnaz Leena
ID-20064
 Mehnaz Leena
CRITICISM OF SERVICE POTENTIAL ID-20064
INTERPRETATION

 Carnegie and Wolnizer focused on whether collections of public museums

and art galleries were assets under the SAC 4 definition, and they were
rightly critical of the application of the vague service potential interpretation
of assets which the PSASB used to justify treating such collections as assets.
 In this article, Barton focused on differences in the nature of the goods
provided by the business sector and some segments of the public sector, and
the markets in which they are provided. For public or social goods, the
PSASB wished to apply the service-potential interpretation of assets. The
concept of public goods and its implications for accounting information
systems has been completely neglected in the accounting literature relating to
the public sector. These differences underlie the Carnegie and Wolnizer
analysis of why it is not appropriate to apply business accounting standards
to public heritage collections.
 Bibi Ayesha Begum
ID-20005

THE RELEVANCE OF
MARKETS FOR ASSET
ACCOUNTING
 Bibi Ayesha Begum
ID-20005

 Markets are essentials of accounting for assets

and their financial management.
 Future cash flows and other service potentials are
generated in markets.
 Bibi Ayesha Begum
ID-20005
TWO BASIC CONCEPTS OF FINANCIAL
VALUE BY ADAM SMITH

 Value in use – the measure of expected economic

benefits from future use of assets.
 Value in Exchange – the measure of price of an
asset in a market exchange.
 Same asset can have different value due to being
used in different types of markets.
 Bibi Ayesha Begum
ID-20005
BUSINESS MARKETS AND PRIVATE GOODS

 Major concerns are to earn profit and to attract

investors fund.
 Operates on User- pays basis.

 Purpose of using assets is to generate cash flows

through a productive process.
 The cash flows forms the basis for financial
valuation of assets.
PUBLIC SECTOR MARKETS AND PUBLIC
GOODS

 Markets are more diverse and complex than the

business ones
 The goods and services include: law, order,
defense facilities, social facilities, promotional
facilities for culture and heritage, recreational
facilities etc.
 User access differs in public goods and private
goods.
 Bibi Ayesha Begum
ID-20005

 Public goods are non-rival and non-excludable in

nature.
 Public goods are not provided on full cost user-
pays basis.
 Public goods does not satisfy the definitional and
controlling requirements assets of SAC 4.
 Bibi Ayesha Begum
ID-20005

 The supply of public goods does not need to be

increased to satisfy the increased demand due to
its non-rivarly nature and fixed costs.
 To ensure efficient use of resources, private firm
are not allowed to operate in public market.
 Saima Jerin Anika
ID-20011
IMPACT OF MARKETS ON ACCOUNTING
INFORMATION SYSTEMS
 Saima Jerin Anika
ID-20011

WHAT IS ACCOUNTING
INFORMATION SYSTEMS?

 a structure
 Used to collect, store, manage, process, report its financial
data
 Make data useful to accountants, business analysts,
managers, CFOs, auditor, regulators and tax agencies..
 Saima Jerin Anika
ID-20011
MARKET CLASSIFICATION

Market for
private goods

Market for
public goods
 Saima Jerin Anika
ID-20011

PRIVATE-GOOD
MARKET
IMPLICATIONS

 Assets must generate economic benefits

 Definition of asset is similar to SAC 4
 Saima Jerin Anika
ID-20011

PUBLIC-GOOD MARKET IMPLICATION

 Assets generate a wide range of social and

community benefits which are non-cash kind.
 Can’t be converted into cash
 No financial measure of value-in-use
 No measure of value-in-exchange
 Historical prices are not relevant in accounting
information systems
 Saima Jerin Anika
ID-20011

ARE THE BUSINESS PRACTICES ACCEPTABLE OR

UNACCEPTABLE?
 Saima Jerin Anika
ID-20011

ALLAN D. BARTER’S OPINION

 Commercial markets and public-good markets vary
 Business firms cant operate in public good market because
of differences in their motives
 Accounting practices developed for commercial markets
cant be directly implemented in public-good market.
 Hence business practices are not appropriate for public-
goods markets
 Saima Jerin Anika
ID-20011
SUGGESTIONS

 Separate accounting standards for

the two sets of markets
 Separate accounting systems will
satisfy the requirements of SAC
3(1990).
 Saima Jerin Anika
ID-20011

DO THE SAME
ACCOUNTING
STANDARDS FOR
PUBLIC AND
PRIVATE SECTOR
SATISFY THE
REQUIREMENTS OF
SAC 3?
 Saima Jerin Anika
ID-20011
TWO PERSPECTIVE
 Sayeeda Sadia Afrin
ID-20060
A REJOINDER
 Newberry focused on the different interpretations of the SAC 4 definition of an
assets, specially the difference between assets as future economic benefits
associated with cash flows and assets as service potential that presumably may
not be associated with the generation of future cash flows

 She condemns the multiple interpretations as misleading and deceptive

 Wolnizer and Carnegie also agreed with Newberry .

 If SAC 4 definition of an assets only contemplated future economic benefits

that generated future cashflows then Carnegie and Wolnizer and Barton might
decide that they no longer to argue against recognition of heritage properties
and collections, land under roads, and other items held in the public sector.
 Sayeeda Sadia Afrin
ID-20060

 Some of these items might not be classed as assets of the sort to be

included in financial statements if the business sector
interpretation of the definition were applied.

 Carnegie & Wolnizer have suggested that public collections

should not be recognized as financial assets in public sector
balance sheets.

 Requiring collection managers to place a financial value on

collection enhances their accountability and efficiency, none offers
evidence of the usefulness of such valuation for financial decision
making.
 Sayeeda Sadia Afrin
ID-20060

CRITICAL ANALYSIS
 Sayeeda Sadia Afrin
ID-20060

 Introduce governance and business-style reporting

practices in governments whose quality of work becomes
open to the citizens (Grubisic et al, 2008)
 Government should be held accountable to act in the best
interest of the citizens with respect to the preservation,
employment and value enhancement of public assets.
 For the purpose of efficient public asset management ,
there should be an accounting and reporting systems that
facilitates the accounting and accountability of public
assets which can lead to better governance of public
assets (Ouda, 2016)
 Sayeeda Sadia Afrin
ID-20060

 Some believe that heritage assets are

commercially quantifiable even though they may
not be for sale.
 But the arguments is that collections cannot be
measures in financial terms because they do not
have financial attributes (Hooper et al, 2005)
 Sayeeda Sadia Afrin
ID-20060

 There are some supporters for the recognition of

all governmental capital assets (including
infrastructure and heritage facilities) in the
balance sheet and they assume that they do not
differ largely from the other assets (Micallef and
Peirson, 1997)
 Sayeeda Sadia Afrin
ID-20060

 Infrastructural assets require important decisions

in terms of maintenance, repair and assets
management, therefore they suggest to combine
supplementary financial with non-financial
disclosure (Christiaens et al, 2008)
 Sayeeda Sadia Afrin
ID-20060

 FRS-3 requires all reporting entities to account

for all governmental capital assets as they would
any other item of property, plant and equipment
and depreciate such assets as normal business
assets.
 Sayeeda Sadia Afrin
ID-20060

 In the private sector where accrual accounting is

in use, all fixed assets acquired are included in
the balance sheet and written down progressively
over their useful lives by means of charges in the
operating statement for depreciation which
reflects the costs of using up the assets
(Rutherford, 1992)
So there need a separate accrual accounting
framework for Public sector.
 Asma Tabussum Bushra
ID-20013

Government owned capital assets can be classified as

follows: (Christiaens et al, 2012)
1. Business-like governmental assets.

2. Non-Business-like governmental assets

Capital assets-Infrastructure assets

-Heritage assets
-Defense assets
-Community assets
-Natural resources
 Asma Tabussum Bushra
ID-20013

 In paragraph 9 of IPSAS 17 it is stated that some

assets are described as “heritage assets” because of
their cultural environmental or historical significance
and in paragraph 84 to 94 it requires the
governmental entities to make disclosures about
recognized assets.
 The entities that recognize heritage assets are
required to disclose the measurement basis,
depreciation method, gross carrying amount (Ouda,
2014)
 Asma Tabussum Bushra
ID-20013

 There is no consensus about a unified accounting

approach for government assets. Till now there is
a lack of general approach where the recognition
of all kinds of government capital goods is
examined (Ouda, 2016)
 Asma Tabussum Bushra
ID-20013

 (Ouda, 2016) has taken a holistic approach for the

treatment of government assets.
 Holistic approach is not consistent with the asset
recognition criteria determined by IPSAS 16 &
17.
 Asma Tabussum Bushra
ID-20013

 Public sector accounting literature in the last three

decades has shown an agreement about the
accounting treatment of business-like government
capital assets where they are treated by the same way
of private sector (Capitalized in the balance sheet
and depreciated in the income statement).
 There is a lack of unanimity of accounting treatment
of the specific governmental capital assets such as
heritage and defense assets (West and Carenie 2010).
 Asma Tabussum Bushra
ID-20013

 Christiaens et al (2012) and Ouda (2016) have

proposed a Holistic Approach which addresses
the recognition of public sector capital assets.
 Asma Tabussum Bushra
ID-20013

HOLISTIC APPROACH FOR PUBLIC SECTOR

ASSETS:

Expenses and
Economic Recognized as revenues included
“Business-like” capital assets in in statement of
assets the balance sheet financial
performance
 Asma Tabussum Bushra
ID-20013

A PRACTICAL ACCOUNTING APPROACH

FOR GOVERNMENTAL ASSETS
 Asma Tabussum Bushra
ID-20013

HOLISTIC APPROACH FOR PUBLIC SECTOR

ASSETS:

Social, cultural and Expenses and

Defense/Security Recognized as revenues included
Unrestricted Assets: capital assets in in statement of
Assets-Liability- the balance sheet financial
Matching Approach performance
 Asma Tabussum Bushra
ID-20013

HOLISTIC APPROACH FOR PUBLIC SECTOR

ASSETS:

Social, Cultural and

Defense/Security Heritage Assets:
Restricted Assets: Not Capitalized and Create a Trust Fund
recognized in
Non-Assets- Defense assets:
Social and defense
Liability-Matching reports Create Defense
Approach Assets Statements
 Asma Tabussum Bushra
ID-20013

Assets Recognition Criteria according to IPSAS 16

& 17: An assets should be recognized in the
statements of financial position when and only
when-
 It is probable that future economic benefits or
service potential associated with the asset will
flow to the entity;
 The cost or fair value of the assets to the entity
can be measured reliably.
 Asma Tabussum Bushra
ID-20013

In addition to the two recognition criteria stated by

IPSAS 16 & 17, Practical Holistic Approach
include two more recognition criteria:
 There are no legal, cultural/social and national
security/defense restrictions on the disposal of
assets;
 Recognized assets should be matched against
liabilities to avoid misleading.