2016 IPSAS Course Eurostat, 15-17 November 2016 PwC

2016 IPSAS Course Eurostat, 15-17 November 2016 PwC

2016 IPSAS Course Eurostat, 15-17 November 2016 PwC 1 Eurostat Eurostat Eurostat Eurostat Introduction of the PwC Trainers DE GREEF Anton Director, Global Public Finance & Accounting PwC Belgium LENAIN Marie-Pierre Manager, Global Public Finance & Accounting PwC Belgium PwC 2

Eurostat Eurostat Overall Course Objectives By the end of the course, you will be better positioned to: Have a better understanding of the IPSAS financial statements Learn about the recognition and the measurement of items in the financial statements Understand the key issues under discussion and development as part of the EPSAS work programme Day 1 Day 2 Day 3 Overview of IPSAS financial statements Recognition and measurement of items in the financial statements Further core IPSAS/EPSAS considerations PwC 3 Eurostat Eurostat Overview of IPSAS financial

statements PwC 1 4 Eurostat Eurostat Eurostat Eurostat Session Objectives By the end of this session, you will be better positioned to : 1 Understand the differences between cash-based accounting and accrual-based accounting Have an overview of the status of IPSAS adoption across the globe

Understand the challenges and benefits of IPSAS Understand the elements of Financial Statements under IPSAS Better understand the principles of IPSAS 4 and 13 as well as consolidated financial statements Grasp the key concepts of revenue from non-exchange transactions PwC 5 Eurostat Eurostat Eurostat Eurostat

Schedule Day 1 9.30h 9.45h Introduction (learning objectives of the day) 9.45h 10.45h Introduction to IPSAS 10.45h 11.00h Coffee break 11.00h 12.30h The elements of IPSAS financial statements 12.30h 14.00h Lunch break 14.00h 15.30h Presentation of IPSAS 3 and 14 & Consolidated financial statements 15.30h 15.45h

Coffee break 15.45h 16.45h Revenue from non-exchange transactions 16.45h 17.00h Wrap-up (review of key learning points) PwC 6 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements 1. Introduction to IPSAS Setting the scene Implementation of IPSAS across the world Accrual versus cash accounting Benefits and challenges 2.

Elements of IPSAS financial statements 3. Presentation of the principles of IPSAS 3 and IPSAS 14 4. Consolidated financial statements 5. Revenue from non-exchange transactions PwC 7 Eurostat Eurostat Setting the scene What is IPSAS The International Public Sector Accounting Standards (IPSAS) constitute the international accounting framework for public sector entities. Governments, public institutions and

international organisations without commercial purposes Public and private companies carrying out commercial activities, including commercial public sector entities IPSAS IFRS PwC 8 Eurostat Eurostat Setting the scene IFAC and IPSASB The producer: International Public Sector Accounting Standards Board (IPSASB). IPSASB identity:

Independent private body created by the accountancy profession. One of the standard-setting bodies of the International Federation of Accountants (IFAC). Tasks of IPSASB Tasks of IFAC 175 members and associates (primarily national accountancy public bodies) Represent almost 3m professional accountants Develops international standards on ethics, auditing and assurance, education, and public sector accounting standards Issues guidance to support professional accountants in business, small and medium practices, and developing nations. PwC Issues International Public Sector Accounting Standards (IPSASs) Promotes their acceptance and the international convergence Publishes documents which provide guidance on issues and experiences in financial reporting in the public sector

9 Eurostat Eurostat Setting the scene Standard-setting process Conceptual Paper (CP) Comment period Exposure Draft (ED) Final standard Comment period Approval by 2/3 of the 18 IPSASB members To date, 39 accrual-based IPSAS have been issued, as well as one cash-based standard.

Note that IPSAS 39 will supersede IPSAS 25 as from January 2018. PwC 10 Eurostat Eurostat Setting the scene Accrual-based IPSAS standards 1 Presentation of Financial Statements 14 Events after the Reporting Date 2 Cash Flow Statements 15 Financial Instruments: Disclosure and Presentation2) 3

Accounting Policies, Changes in Accounting Estimates and 16 Errors Investment Reporting 4 The Effect of Changes in FX-rates 17 Property, Plant and Equipment 5 Borrowing Costs 18 Segment Reporting 6 Consolidated and Separate Financial Statements1) 19

Provisions, Contingent Liabilities and Contingent Assets 7 Investments in Associates1) 20 Related party disclosures 8 Interests in Joint Ventures1) 21 Impairment of Non-Cash-Generating Assets 9 Revenue from Exchange Transactions 22 Disclosures of Financial Information about the General Government Sector 10

Financial Reporting in Hyperinflationary Economies 23 Revenue for Non-Exchange Transactions 11 Construction Contracts 24 Presentation of Budget Information in the Financial Statements 12 Inventories 25 Employee Benefits3) 13 Leases

26 Impairment of Cash-Generating Assets 1) IPSAS 6-8 will be superseded by IPSAS 34-37, for application in periods beginning on or after January 1, 2017. 2) IPSAS 15 has been superseded by IPSAS 28-30, for application in periods beginning on or after January 1, 2013. 3) IPSAS 25 will be superseded by IPSAS 39, for application in periods beginning on or after January 1, 2018. PwC 11 Eurostat Eurostat Setting the scene Accrual-based IPSAS standards 27 Agriculture 34 Separate Financial Statements 28 Financial Instruments: Presentation 35

Consolidated Financial Statements 29 Financial Instruments: Recognition and Measurement 36 Investments in Associates and Joint Ventures 30 Financial Instruments: Disclosures 37 Joint Arrangements 31 Intangible Assets 38 Disclosure of Interests in Other Entities 32

Service Concession Arrangements 39 Employee benefits 33 First-time Adoption of Accrual Basis IPSASs PwC 12 Eurostat Eurostat Setting the scene Oversight and enforcement The accounting framework gains its credibility and legitimacy through issuance of accounting principles which are of a high quality, set independently in the context of a robust due process and sound oversight mechanism.

Public Interest Committee (PIC) created in 2015: oversees governance & standard-setting activities. Consultative Advisory Group (CAG) created in 2016: advises IPSASB on key project issues, strategy, work plan. Public Sector Conceptual Framework published in 2014: enables the IPSASB to further improve the consistency of its standardsetting, enhances the IPSASBs accountability. PwC 13 Eurostat Eurostat Setting the scene IPSAS and IFRS, IPSAS and GFS guidelines IPSAS are inspired by IFRS and adapted to take into account public sector specificities (specific terminology, specific concepts, specific guidance or standards).

Commercial public sector entities report under IFRS. GFS (Government Finance Statistics) guidelines used to analyze and evaluate fiscal policy options and outcomes and to make national and international comparisons. Financial statements prepared in accordance with statistical bases of reporting are primarily accrualbased. Benefits to further align the two frameworks. IPSASB CP on IPSAS and GFS reporting guidelines (2013), Policy paper Process for Considering GFS Reporting Guidelines during Development of IPSASs (2014) IPSAS and IFRS

IPSAS and GFS guidelines PwC Eurostat Eurostat 14 Setting the scene Current IPSASB work programme Key projects PwC 15 Eurostat Eurostat Setting the scene Characteristics of the Public Sector that influence Public Sector Accounting IPSASB Public Sector Conceptual Framework

PwC 16 Eurostat Eurostat Implementation of accrual accounting Diversity of government accounting practices (current) Cash basis Modified Cash Modified Accrual Accrual basis 31% PwC Global Survey 2015 PwC 17 Eurostat Eurostat Implementation of accrual accounting Trend toward accrual accounting (5-year forecast) Cash basis

Modified Cash Modified Accrual Accrual basis Do not know (6) 71% PwC Global Survey 2015 PwC 18 Eurostat Eurostat Cash versus accrual accounting The accounting spectrum Cash basis Cash receipts and disbursements are recorded as they occur Modified cash basis Cash receipts and

disbursements committed in the budget year are recorded and reported until a specified period after year-end PwC PwC Modified accrual accounting Accrual accounting is used but certain classes of assets or liabilities are not recognised Accrual accounting Transactions and economic events are recorded and reported when they

occur, regardless of when cash transactions occur The accrual basis measures a public entitys financial performance and changes in its financial position 19 Eurostat Eurostat Cash versus accrual accounting Objectives of IPSAS financial statements Demonstrate transparency and accountability in the use of public resources. Provide useful information to a wide range of users for making and evaluating resource allocation decisions. Provide information about an entitys resources and obligations at the reporting date and the flow of resources between reporting periods. Financial position Financial performance Cash flows PwC

Focus of the primary financial statements 20 Eurostat Eurostat Cash versus accrual accounting IPSAS is a catalyst for wider PFM reform Implementing IPSAS is a catalyst to providing highquality financial information and, more importantly, improving public finance management. Harmonised & internationally recognised Accrual financial reporting accounting (IPSAS)

Cost accounting, performance management and long-term planning Cash accounting Accrual budgeting Cash budgeting PwC 21 Eurostat Eurostat Key learnings from the EPSAS study Most cited benefits of IPSAS adoption Accountability and transparency - Harmonisation, enhanced transparency and accountability, intergenerational fairness

- Better data quality for fiscal surveillance Better decision-making - Accrual accounting used as a tool to provide better management information and improve decisionmaking in the context of wider finance reform PwC 22 Eurostat Eurostat Key learnings from the EPSAS study Most cited benefits of IPSAS adoption Controls and administrative processes - Audit and internal control enhancement - Efficiency gains following introduction of modern IT systems

Labour market - More professionalised finance function, higher staff qualifications - Recruitment and mobility facilitated PwC 23 Eurostat Eurostat Key learnings from the EPSAS study Challenges of IPSAS adoption Policies Adapting existing financial rules and regulations Documenting accounting policies Developing comprehensive guidance and manuals, as well as concise implementation rules for the most complex topics

Processes Managing the transition period and monitoring the implementation phases Checking data quality during the reform process, designing quality control procedures Setting up data collection procedures, in particular in respect of fixed assets Ensuring compliance with existing regulatory framework People Systems Inspiring change of mentalities/cultural change Ensuring political commitment, and increasing staff and public awareness Building up public sector accountants expertise in terms of new practices and procedures Developing training programmes and allowing knowledge transfer on key accounting areas Adapting existing IT systems, and/or developing

new IT solutions/modules tailored to the reform requirements Translating organisational processes into the IT environment PwC 24 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements 1. Introduction to IPSAS 2. Elements of IPSAS financial statements Components of financial statements Segment reporting Related party disclosures 3. Presentation of the principles of IPSAS 3 and IPSAS 14

4. Consolidated financial statements 5. Revenue from non-exchange transactions PwC 25 Eurostat Eurostat Components of the financial statements Six key components are included in the IPSAS financial statements COMPONENT IPSAS Statement of Financial Position (balance sheet) 01 Statement of Financial Performance (income statement) 01

Statement of Changes in Net Assets/Equity 01 Cash Flow Statement 02 Comparison of Budget and Actual Amounts (when approved budgets are publicly available) 24 Notes to the Financial Statements all PwC 26 Eurostat Eurostat Components of the financial statements A combined picture of financial position and performance Statement of financial performance

Statement of financial position Revenue (Rev) Liabilities (L) Assets (A) Expenses (Exp) Net Assets (NA) Surplus /(Deficit) A = L + NA Rev Exp = S / (D) PwC 27 Eurostat Eurostat Components of the financial statements Statement of financial position: a periodic record of revenues earned and expenses incurred (flows) Revenue (Rev)

Recorded as they occur regardless of when the cash receipts or payments take place. Expenses (Exp) Include estimates for non-cash items (e.g. depreciation of fixed assets). Surplus (S) / Deficit (D) Residual value (i.e. not an account) > 0: net resources available to provide goods or services in the future < 0: future resources committed to paying off debt and other liabilities. 28 Rev Exp = S / (D)

PwC Eurostat Eurostat Components of the financial statements Statement of financial position: a continual record of resources and obligations (stocks) External sources (Borrowing / Debt) Liabilities (L) What you own How it was financed Assets (A) Net Assets (NA) PwC Internal sources 29

Eurostat Eurostat Components of financial statements Statement of financial position The items below, as a minimum, are presented on the face of the statement of financial position. Further sub-classification is possible if relevant. Assets: property, plant and equipment; investment property; intangible assets; financial assets; investments accounted for using the equity method; inventories; recoverables from non-exchange transactions (taxes and transfers); receivables from exchange transactions; cash and cash equivalents; Liabilities: taxes and transfers payable; payables under exchange transactions; provisions; financial liabilities; Net assets/equity: minority interests; and capital and reserves attributable to the owners of the controlling entity. Current and non-current assets and current and non-current liabilities are presented separately. Current assets/liabilities are items expected to be realized/settled within 12 months after the reporting date or in the entitys normal operating cycle. PwC 30 Eurostat Eurostat Components of financial statements Statement of financial position

As at December 31, 2016 (in thousands of currency units) ASSETS Non-current assets Intangible assets Land and buildings Infrastructure, plant and equipment Investments in associates Receivables Other financial assets Current assets Inventories Receivables Prepayments and other current assets Cash and cash equivalents Total assets 2016 2015 X X X X

X X X X X X X X X X X X X X X X X X X X X X X

X 2016 2015 NET ASSETS/EQUITY Capital Reserves Accumulated surpluses/(deficits) X X X X X X Minority interest Total net assets/equity X X X X

X X X X X X X X X X X X X X X X X X X X X 31 X LIABILITIES

Non-current liabilities Employee benefits Long-term borrowings Long-term provisions Payables Current liabilities Current portion of long-term borrowings Short-term borrowings Employee benefits Short-term provisions Payables PwC Eurostat Eurostat Components of financial statements Government of New Zealand - Statement of financial position Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http:// www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 32 Eurostat

Eurostat Components of financial statements Government of New Zealand - Statement of financial position PwC Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf Eurostat Eurostat 33 Components of financial statements Statement of financial performance The items below, as a minimum, are presented on the face of the statement of financial performance. Further sub-classification is possible if relevant. revenue; finance costs; share of the surplus or deficit of associates and joint ventures accounted for using the equity method; pre-tax gain or loss recognized on the disposal of assets or settlement of liabilities attributable to discontinued operations; and surplus or deficit for the period. Surplus or deficit for the period is allocated in the statement of financial performance to the amounts attributable to minority interests and to the

owners of the controlling entity. The nature and amount of items of revenue and expense are disclosed separately where they are material. PwC 34 Eurostat Eurostat Components of financial statements Statement of financial performance Year ended December 31, 2016 (Illustrating the classification of expenses by function) (in thousands of currency units) Revenue Taxes Fees, fines, penalties, and licenses Revenue from exchange transactions Transfers from other government entities Other revenue Total revenue Expenses General public services

Defense Public order and safety Education Health Social protection Housing and community amenities Recreational, cultural, and religion Economic affairs Environmental protection Other expenses PwC Finance costs Total expenses 2016 2015 X X X X X X X X

X X X X (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X)

(X) (X) (X) (X) (X) 2016 2015 Share of surplus of associates X X Surplus/(deficit) for the period X X Attributable to: Owners of the controlling entity X Minority interests X by

(Illustrating the classification of expenses X nature) 2016 Expenses Wages, salaries, and employee benefits (X) Grants and other transfer payments (X) Supplies and consumables used (X) Depreciation and amortization expense (X) Impairment of property, plant, and equipment (X) Other expenses (X) Finance costs (X) Total expenses (X) X X X

2015 (X) (X) (X) (X) (X) (X) (X) (X) 35 Eurostat Eurostat Components of financial statements Government of New Zealand - Statement of financial performance Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 36 Eurostat Eurostat Components of financial statements Government of New Zealand - Statement of financial

performance Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 37 Eurostat Eurostat Components of financial statements Government of New Zealand - Statement of financial performance Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 38 Eurostat Eurostat Components of the financial statements Statement of cash flows Inflows Cash received from revenues

Cash flows from... Outflows +/- Operating Activities Sale of operational assets Sale of investments +/- Investing Activities Purchase of operational assets Purchase of investments Loans to others +/- Financing Activities Payment of dividends Repurchase of shares Repayment of debt Collections of loans Issuance of shares Issuance of bonds and notes

Cash paid for expenses = Change in cash* (* includes ash and cash equivalents) PwC 39 Eurostat Eurostat Components of financial statements Cash flow statement: direct method Year ended December 31, 2016 (in thousands of currency units) (direct method) 2016 CASH FLOWS FROM OPERATING ACTIVITIES Receipts Taxation Sales of goods and services Grants Interest received Other receipts Payments

Employee costs Suppliers Interest paid Other payments Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant and equipment Proceeds from sale of plant and equipment Proceeds of sale of investments Purchase of foreign currency securities Net cash flows from investing activities PwC 2015 X X X X X X X X

X X (X) (X) (X) (X) (X) (X) (X) (X) X X (X) (X) X X (X) (X) X X

(X) (X) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings Repayment of borrowings Distribution/dividend to government Net cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 2016 2015 X (X) (X) X X (X) (X) X

X X X X X X 40 Eurostat Eurostat Components of financial statements Cash flow statement: indirect method Year ended December 31, 2016 (in thousands of currency units) (indirect method) 2016 2015 Surplus/(deficit) Non-cash movements X

X Depreciation and amortization Increase in provision for doubtful debts X X X X Increase in payables Increase in borrowings X X X X Increase in provisions relating to employee costs (Gains)/losses on sale of property, plant and equipment X (X) X (X)

(Gains)/losses on sale of investments Increase in other current assets (X) (X) (X) (X) Increase in investments due to revaluation Increase in receivables (X) (X) (X) (X) X X CASH FLOWS FROM OPERATING ACTIVITIES Net cash flows from operating activities PwC

41 Eurostat Eurostat Components of financial statements Government of New Zealand - Cash flow statement Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 42 Eurostat Eurostat Components of financial statements Government of New Zealand - Cash flow statement Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 43 Eurostat Eurostat Components of financial statements

Government of New Zealand - Cash flow statement Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.g ovt.nz/government/fi nancialstatements/ye arend/jun16/fsgnz-ye ar-jun16.pdf PwC 44 Eurostat Eurostat Year ended December 31, 2016 (in thousands of currency units) Components of financial statements Changes in net assets

Balance at December 31, 2014 Changes in accounting policy Restated balance Changes in net assets/equity for 2015 Gain on property revaluation Loss on revaluation of investments Exchange differences on translating foreign operations Net revenue recognized directly in net assets/equity Surplus for the period Total recognized revenue and expense for the period Balance at December 31, 2015 carried forward Attributable to owners of the controlling entity Accumulate Contributed Other Translatio d surpluses/ capital reserves n reserve (deficits) Total X X (X) X X

(X) (X) X X (X) X X X (X) (X) X X (X) X (X) X (X) X (X) (X) (X)

(X) X X X X X X X X (X) X X X X

X (X) X X X X Attributable to owners of the controlling entity Accumulate Contributed Other Translatio d surpluses/ capital reserves n reserve (deficits) Total Balance at December 31, 2015 brought forward Changes in net assets/equity for 2016 Gain on property revaluation Loss on revaluation of investments Exchange differences on translating foreign operations Net revenue recognized directly in net

assets/equity Surplus for the period Total recognized revenue and expense for the period Balance at December 31, 2016 PwC X X (X) X X (X) (X) X X Total net Minority assets/ interest equity X X

(X) (X) X X (X) Total net Minority assets/ interest equity X X X X (X) X (X) X (X) (X)

(X) (X) X X X X X X X X (X) X X X

X X (X) X X X X 45 Eurostat Eurostat Components of financial statements Government of New Zealand - Statement of changes in net assets Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.go

vt.nz/government/fina ncialstatements/yeare nd/jun16/fsgnz-year-ju n16.pdf PwC 46 Eurostat Eurostat Components of financial statements Notes to the financial statements Accounting principles, rules and methods: Statement of compliance with IPSAS (the financial statements should comply with the requirements of applicable standards). Where no specific guidance, accounting policies need to be developed and applied consistently year on year. Notes contain information in addition to that presented in the statement of financial position, the statement of financial performance, the statement of changes in net assets/equity and the cash flow statement. financial and non-financial information (narratives, etc.).

PwC 47 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements 1. Introduction to IPSAS 2. Elements of IPSAS financial statements Components of financial statements Segment reporting Related party disclosures 3. Presentation of the principles of IPSAS 3 and IPSAS 14 4. Consolidated financial statements

5. Revenue from non-exchange transactions PwC 48 Eurostat Eurostat Segment reporting Identifying and reporting segments IPSAS 18 requires operating segments to be identified based on the components of the operations that are considered to be important for internal management reporting purposes. On this basis, a segment is generally either: a) A service segment: an identifiable component of an entity that is engaged in providing related outputs or achieving particular operating or policy objectives Example: health, education, defence, etc. (government) b) A geographical segment: an identifiable component of an entity that is engaged in providing outputs or achieving particular operating objectives within a particular geographical area. Example: region, district, etc.

PwC 49 Eurostat Eurostat Segment reporting Identifying and reporting segments When both dimensions are included in the internal reporting, either adopt a matrix presentation or provide primary segment information for one dimension and secondary reporting information (more limited disclosures) for the 2nd dimension. PwC 50 Eurostat Eurostat Segment reporting Disclosures Mandatory disclosures include: segment expenses as well as segment revenue (split between revenue from budget appropriation, revenue from external sources, and revenue from transactions with other segments) derived from the entitys operating activities; the carrying amount of segment assets and segment liabilities;

a reconciliation of segment revenue, expenses, assets and liabilities and total amounts disclosed in the financial statements; the cost to acquire long-term segment assets; the share of net surplus/deficit of investment in equity accounted entities; the basis of pricing inter-segment transfers. PwC 51 Eurostat Eurostat Segment reporting Disclosures (in thousands of currency units) Segment A Segment B 2016 2015 2016 2015

Appropriation x x x x Fees from external sources x x Inter-segment transfers x x x Total segment revenue x

x Salaries and wages (x) Depreciation Eliminations 2016 2015 x (x) (x) x x (x) (x) (x)

(x) (x) (x) (x) (x) (x) Other expenses (x) (x) (x) (x) Total segment expenses (x) (x)

(x) (x) Consolidated 2016 2015 x x (x) (x) (x) (x) x x Interest expense

(x) (x) Interest revenue x x x x x x SEGMENT REVENUE SEGMENT EXPENSE Unallocated central expenses Surplus/(deficit) from operating activities Share of net surpluses of associates x

x Net surplus/(deficit) PwC 52 Eurostat Eurostat Segment reporting Practical considerations Availability of systems to report segment information Convergence with IFRS 9: management approach In order to generate segment information in an efficient and reliable way, the accounting system (chart of accounts, cost accounting) needs to be adapted accordingly so as to derive as many data as possible directly from the system. In addition, relevant allocation keys should be determined to apportion between segments those revenue, expenses, assets and liabilities that cannot be directly attributed to a segment.

PwC 53 Eurostat Eurostat Segment reporting Government of New Zealand (extract) Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 54 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements 1. Introduction to IPSAS 2. Elements of IPSAS financial statements Components of financial statements

Segment reporting Related party disclosures 3. Presentation of the principles of IPSAS 3 and IPSAS 14 4. Consolidated financial statements 5. Revenue from non-exchange transactions PwC 55 Eurostat Eurostat Related Party Disclosures Background and objective IPSAS 20 Related party disclosures. Transactions may occur between government entities or other public sector entities. The existence of related party relationships means that one party can control the other party or exercise significant influence over it. This provides the basis for having

transactions concluded at conditions that may potentially advantage one party at the expense of another. In order to promote clear accountability and transparency, entities are required to make key disclosures regarding related party relationships and transactions. PwC 56 Eurostat Eurostat Related Party Disclosures Definitions Related parties include the parent entity and other controlling entities, individuals owning a significant interest in the entity and their close family members, key management personnel and their close family members, direct and indirect subsidiaries, associates and entities in which a significant interest is held by the above individuals or key management personnel. Key management personnel include all directors or members of the governing body of the entity as well as other persons having the authority and responsibility for planning, directing and controlling the activities of the reporting entity. PwC 57

Eurostat Eurostat Related Party Disclosures Disclosures Related party relationships where control exists, irrespective of whether there have been transactions between the related parties. Information on related party transactions other than those within a normal supplier/client relationship at normal terms and conditions: nature of the relationship, type and amount of the transactions, etc. Information on transactions with key management personnel and their close family members: remuneration and compensation split by major classes of key management personnel, and details of loans to them. PwC 58 Eurostat Eurostat Related Party Disclosures Government of New Zealand Financial Statements of

the Government of New Zealand for the year ended 30 June 2016 http://www.treas ury.govt.nz/gove rnment/financial statements/year end/jun16/fsgnzyear-jun16.pdf PwC 59 Eurostat Eurostat Related Party Disclosures Example: European Commission Related For the purposes of presenting information on related party transactions concerning the key management of the EC, such persons are shown under 5 categories: Category 1: The President of the European Council, The President of the Commission and the President of the Court of Justice Category 2: The Vice President of the Commission and High Representative of the European Commission for Foreign Affairs and Security Policy and the other Vice-Presidents of the Commission Category 3: The Secretary-General of the Council, the Members of the

Commission, the Judges and Advocates General of the Court of Justice, the President and the Members of the General Court,. Category 4: The President and Members of the Court of Auditors Category 5: The highest ranking civil servants of the Institution and Agencies PwC 60 Eurostat Eurostat Related Party Disclosures Example: European Commission PwC 61 Eurostat Eurostat Related Party Disclosures Example: European Commission PwC 62 Eurostat Eurostat

Q&A Open questions? Further discussion? PwC 63 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements 1. Introduction to IPSAS 2. Elements of IPSAS financial statements 3. Presentation of the principles of IPSAS 3 and IPSAS 14 4.

Consolidated financial statements 5. Revenue from non-exchange transactions PwC 64 Eurostat Eurostat IPSAS 3 Changes in Accounting Policies Changes in accounting policies = change from one allowed basis of accounting to another allowed basis of accounting Example: initial adoption of a policy to carry assets at revalued amounts Normally applied retrospectively - restate comparative information Fundamental errors Changes in accounting estimates PwC 65 Eurostat

Eurostat IPSAS 3 Prior period errors Material errors in a prior years financial statements as a result of Mathematical mistakes, Mistakes in applying accounting policies, Misinterpretation of facts, Fraud or oversights Example: omission of a major class of expenses in the financial statements Normally correct retrospectively restate comparative information PwC 66 Eurostat Eurostat

IPSAS 3 Changes in Accounting Estimates Many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. Recognise the effect in the period of the change PwC 67 Eurostat Eurostat IPSAS 14 Events after the reporting date IPSAS 14 Events after the reporting date Adjusting events Non-adjusting events Events that provide evidence of conditions that existed at end of the reporting period

Events that are indicative of conditions that arose after end of the reporting period E.g. clients bankruptcy which confirms its bad financial position and therefore the risk of recovery of the receivable at the reporting date, outcome from a lawsuit confirming the companys liability as of reporting date E.g. decrease of market value of investments, dividends to holders of equity instruments that are proposed or declared after the reporting date PwC 68 Eurostat Eurostat Events after the reporting date Government of New Zealand Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf

PwC 69 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 70 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements 1. Introduction to IPSAS 2. Elements of IPSAS financial statements

3. Presentation of the principles of IPSAS 3 and IPSAS 14 4. Consolidated financial statements Main concepts Consolidation procedures Discussion on application of control concept 5. Revenue from non-exchange transactions PwC 71 Eurostat Eurostat Consolidated financial statements Objective & relevant standards Objective The objective of presenting consolidated financial statements for a controlling entity is to present financial information about the activities of its controlled entities as if it was a single economic entity.

Relevant standards IPSAS 6 Consolidated and separate financial statements IPSAS 7 Investments in associates IPSAS 8 Interests in joint ventures IPSAS 6-8 will be superseded by IPSAS 34-37, for application in periods beginning on or after January 1, 2017. PwC 72 Eurostat Eurostat Consolidated financial statements Comparison old and new IPSAS standards Title Old Standard New Standard 1 Separate Financial Statements IPSAS 5 IPSAS 34

2 Consolidated Financial Statements IPSAS 6 IPSAS 35 3 Investments in Associates and Joint Ventures IPSAS 7 IPSAS 36 4 Joint Arrangements IPSAS 8 IPSAS 37 5

Disclosure of Interests in Other Entities IPSAS 38 IPSAS 5-8 will be superseded by IPSAS 34-37, for application in periods beginning on or after January 1, 2017. PwC 73 Eurostat Eurostat Consolidated financial statements Controlled entities Scope Joint ventures Scope of consolidated financial statements Associates Exclusive control under IPSAS Joint control under IPSAS IPSAS 6-8

Significant influence under IPSAS PwC 74 Eurostat Eurostat IPSAS 6-8 Consolidated financial statements What is a controlled entity? Control = the power to govern financial and operating policies of an entity so as to obtain benefits from its activities CONTROL Control : 1 Power condition + 1 Benefit condition exist PwC 75 Eurostat Eurostat

IPSAS 6-8 Consolidated financial statements Power conditions Majority voting interest (directly or indirectly). Power to appoint/remove the majority of the governing body. Benefit conditions Power to cast the majority of votes at meetings of the governing body. Power to cast the majority of votes at a general meeting.

Power to dissolve the entity and obtain a significant level of the residual economic benefits (or bear significant obligations). Power to extract distributions of assets from the other entity, or a guarantee given for certain obligations. When at least one power condition and one benefit condition do not exist, power and benefit indicators can, individually or collectively, indicate control. PwC 76 Eurostat Eurostat IPSAS 6-8 Consolidated financial statements Power indicators

Benefit Indicators Ability to veto operating and capital budgets. Ability to veto, overrule, or modify governing body decisions. Holding of direct or indirect title to the net assets/equity of the other entity with an ongoing right to access these. Right to a significant level of the net

assets/equity in the case of liquidation/distribution. Ability to impose co-operation in achieving ones objectives. Exposure to the residual liabilities. Ability to approve the hiring, reassignment and removal of key personnel. Legislation establishing and limiting the other entitys mandate. Holding of a specific class of shares that confer the right to govern the financial and operating policies. PwC 77 Eurostat Eurostat IPSAS

35-37 Consolidated financial statements New concept of control: IPSAS 35 CONTROL IPSAS 35 supersedes the requirements in IPSAS 6 regarding consolidated financial statements. This standard still requires that control be assessed having regard to benefits and power, but the definition of control has changed. The definition of control focuses on an entitys ability to influence the nature and amount of benefits through its power over another entity. This new definition of control may impact previous assessments of control, and therefore whether certain entities should be consolidated. PwC 78 Eurostat Eurostat IPSAS 35-37 Consolidated financial statements New concept of control: IPSAS 35 POWER

Link between Power and Benefits BENEFITS 1. Power 2. Benefits 3. Link between power and benefits Requires judgement No quantitative threshold To be assessed both at inception & over time as facts and circumstances PwC 79 Eurostat Eurostat IPSAS 35-37 Consolidated financial statements New concept of control: IPSAS 35 POWER Power arises from rights. Power exists when

the entity has rights that give it the current ability to direct the relevant activities of another entity. Such rights can be voting rights (e.g. arising from shareholdings) or other types of rights conferred by binding arrangements (administrative or contractual arrangements, etc.). Substantive rights are considered in assessing whether an entity has power, however not protective rights which are designed to protect the interests of their holder without giving them the ability to direct the relevant activities of the other entity. PwC 80 Eurostat Eurostat IPSAS 35-37 Consolidated financial statements New concept of control: IPSAS 35 Benefits that the entity can derive from its involvement with other entities can be:

financial e.g. dividends, exposure to increases or decreases in the value of an investment in another entity residual interests in another entitys assets and liabilities on liquidation non-financial e.g. activities of the other entity that assist the entity in achieving its objectives, more efficient or effective production and delivery of goods and services, higher level of service quality, improved outcomes, etc. PwC BENEFITS 81 Eurostat Eurostat IPSAS 35-37 Consolidated financial statements New concept of control: IPSAS 35 Link between Power and

Benefits In order to have control, the entitys ability to use its power to generate benefits from its involvement in the other entity is key. An entity that acts as an agent on behalf or for the benefit of another entity does not control that entity, as its decision-making power benefits the other entity. PwC 82 Eurostat Eurostat Scope of consolidation Government of New Zealand PwC Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf Eurostat Eurostat 83 Consolidations procedures Step 1

Step 1 - Harmonize accounting policies throughout the economic entity. Restate the accounts of all entities included in the scope of consolidation (including associates) using uniform accounting policies for like transactions and other events in similar circumstances. Align the closing dates. Maximum difference allowed with the closing date of the controlling entity is 3 months + adjust for significant transactions between the two dates. Need for an accounting manual: -comprehensive, -clear and user-friendly, -illustrated by real-life examples relevant to the entity, -booking entries of the most common and most complex transactions, making the link with the chart of accounts. PwC 84 Eurostat Eurostat Consolidation procedures Step 2, Step 3 & Step 4 Step 2 - Translate financial statements of foreign operations into the presentation currency of the entity. Step 3 - Combine line by line the statement of financial performance and statement of financial position items of the controlling and controlled entities.

Step 4 - Eliminate balances and transactions between entities within the economic entity in full, including revenues, expenses and dividends or similar distributions. Intra-group surpluses or deficits that are recognized in assets (e.g. in inventory or fixed assets) are eliminated in full except where a deficit indicates an impairment that must be recognized. PwC 85 Eurostat Eurostat Consolidation procedures Step 5 & Step 6 Step 5 - Account for minority interests in the consolidated statement of financial position within net assets (equity), separately from the controlling entitys net assets (equity), and disclose the minority interests in the surplus or deficit of the economic entity. Minority interest is the portion of the interest in the consolidated financial statements of the economic entity that is not controlled by the controlling entity. Step 6 - Eliminate the investment of the controlling entity in the controlled entity against the net assets (equity) of the economic entity. Need for a consolidation and reporting manual: -to document the process and provide guidance on how to complete the reporting package, -would complement the accounting manual. PwC

86 Eurostat Eurostat Consolidation for governments Practical considerations Harmonisation of accounting policies Consolidation scope: materiality constraints versus accountability objectives. Materiality thresholds and reduced reporting for small entities? Direct consolidation at the top level versus several sub-consolidations (e.g. at the level of each Ministry). Reporting and consolidation timelines. Documentation of policies and processes: accounting manual; consolidation and reporting manual. PwC 87 Eurostat Eurostat Consolidation for governments Practical considerations Systems and tools: new system or existing system to be overhauled?

consolidation software included in an integrated IT solution; other standard consolidation software package; spreadsheet (only possible for simple consolidations) + validation rules to ensure basic checks, automated link to the general ledger of entities, etc. ! Integration between the consolidation software tool and the accounting software Capacity building: organisation of teams and training. PwC 88 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 89 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements

1. Introduction to IPSAS 2. Elements of IPSAS financial statements 3. Presentation of the principles of IPSAS 3 and IPSAS 14 4. Consolidated financial statements 5. Revenue from non-exchange transactions What is a revenue? Revenue from non-exchange transactions Revenue from exchange transactions PwC 90 Eurostat Eurostat

What is a revenue? Illustrative examples Statutory allocations Grants received Personal income taxes Corporate income taxes Value added taxes Donations received Sale of land Provision of housing facilities against payment Debt forgiveness

Real estate taxes Goods in kind received PwC Customs and excise duties Sale of publications Provision of medical services in public sector hospitals against payment 91 Eurostat Eurostat What is a revenue? Definitions

Revenue is the gross inflow of economic benefits or service potential that results in an increase in net assets/ equity, other than one relating to contributions from owners Receivables are defined as rights or revenue entitlements that the entity expects to receive from third parties, arising from past events. Exchange transactions receivable Non-exchange transactions recoverable Receivables are financial instruments ! PwC 92 Eurostat Eurostat What is a revenue? Definitions IPSAS 9 Revenue from exchange transactions

IPSAS 23 Revenue from non-exchange transactions Exchange transactions are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange. Non-exchange transactions are where an entity receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. PwC 93 Eurostat Eurostat What is a revenue? Exercise Which of the following items represent revenue from non-exchange transactions that should be recognized under IPSAS 23 Revenue from non-exchange transactions? Select all that apply. A. A gain on the sale of an investment in a public corporation.

B. Interest on a loan granted to a certain category of the population at a below-market rate. C. Corporate income tax. D. Property taxes. E. Rental income from the lease of a real estate property owned by the government. PwC 94 Eurostat Eurostat Revenue from non-exchange transactions Approach 1. Determine whether an asset should be recognised in respect of the inflow of resources in a non-exchange transaction. 2. Revenue is then recognised except to the extent that a liability is recognised for the same inflow. 3. It is the increase in the net assets which is recognised as revenue. PwC 95 Eurostat Eurostat

Revenue from non-exchange transactions Recognition and initial measurement of assets An inflow of resources from a non-exchange transaction, other than services in-kind, that meets the definition of an asset is recognized as an asset when, and only when: It is probable that the future economic benefits or service potential associated with the asset will flow to the entity; and The fair value of the asset can be measured reliably. An asset acquired through a non-exchange transaction is initially measured at its fair value as at the date of acquisition. PwC 96 Eurostat Eurostat Revenue from non-exchange transactions Performance obligations and recognition of liabilities Assets may be transferred with expectation or understanding to be used in a particular way with laws, regulation or binding arrangements imposing specific terms and performance obligations. Terms imposed on the use of a transferred asset are called stipulations. Stipulations may either be conditions or restrictions. Conditions require returning the transferred asset or future economic benefits/service potential to the transferor in the event that the conditions are breached. Restrictions do not.

When an entity recognizes an asset subject to condition, it also incurs and recognizes a liability: recognition of revenue is deferred and a performance obligation (liability) is recognized until such time as the conditions are met. PwC 97 Eurostat Eurostat Revenue from non-exchange transactions Recognition of transfers An asset in respect of transfers is recognized when the transferred resources meet the definition and the recognition criteria of an asset. Type of transfer Triggering event for transfer Members contribution. Receipt of contribution or enforceable decision/ right to receive it. Grant. Receipt of grant or enforceable claim to receive it.

Fine. Breach of law or regulation giving rise to the fine. Bequest. Death of the testator or granting of probate. Gift and donation (including good in-kind). Receipt of the gift or donation and transfer of legal title. For goods in-kind, receipt of the goods or binding agreement to receive them. When an entity receives resources (e.g. cash) before a transfer arrangement becomes binding, it recognizes an asset together with an advance receipt liability. The liability is released and revenue is recognized when all conditions under the agreement are fulfilled. PwC 98 Eurostat Eurostat Revenue from non-exchange transactions Contributions in-kind Goods in kind are recognised as revenue and measured at the fair value of the goods received at reception date.

Services in kind - the entity can (accounting policy choice): - revenue and a corresponding expense at the fair value of the service received in the statement of financial performance, - decide not to reflect services in kind in its financial statements. PwC 99 Eurostat Eurostat Revenue from exchange transactions Recognition Rendering of services Sale of goods Performance of an agreed task over an agreed period. Goods produced for sale or purchased for resale

Provision of social housing for monthly payment, medical service against payment. Sale of land Publication sales Interest Use by others of a public resource Deposits Financial assets Assets under lease PwC Royalties Use by others of a public resource

Oil and gas Trademarks Patents 100 Eurostat Eurostat Revenue from exchange transactions Recognition The key issue is the timing of revenue recognition, depending of the type of transaction. In general, revenue is recognised when: An increase in the net assets/equity has arisen It can be measured reliably Measurement: revenue and the corresponding receivables should be measured at the fair value of the consideration received (in general corresponding to the amount of the original invoice). Cut-off: revenue should be accounted for in the period to which it relates. PwC 101 Eurostat Eurostat Revenue from exchange transactions Revenue from the rendering of services

Revenue relating to the rendering of services is recognised on basis of the percentage of completion method. Reliable estimate of outcome Outcome not estimable Expected loss Recognise revenue according to stage of completion* Recognise revenue to extent of recoverable costs Recognise immediately *The straight-line method can often be used as a good approximation of the stage of completion

PwC 102 Eurostat Eurostat Revenue from exchange transactions Revenue from other sources Sale of goods recognised at the time the following conditions are met (often when the transaction takes place): Significant risks and rewards are transferred; No continuing managerial involvement/effective control; Revenue can be measured reliably; Probable that economic benefits will flow to the entity; Costs can be measured reliably. Interest Time proportion basis to take into account effective yield on the asset Royalties Accrual basis

PwC 103 Eurostat Eurostat Components of financial statements Government of New Zealand - Statement of financial performance Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http://www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 104 Eurostat Eurostat Revenue and Non-Exchange Expenditure IPSASB project Single CP to address need for common approach between Non-Exchange Revenue and Expenditure (e.g. grants) Address issues identified with application of IPSAS 23 Assessment of extent that IFRS 15 performance obligation approach can be applied to public sector revenues Non-exchange expenses outside Social Benefits project e.g.

Education, Health and Defence expenditure Consistency / links with Social Benefits and existing IPSASs PwC 105 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 106 Eurostat Eurostat Key Learning Points Input from participants PwC 107 Eurostat Eurostat

Thank you ! PwC 108 Eurostat Eurostat Introduction to key concepts PwC 2 109 Eurostat Eurostat Eurostat Overall Session Objectives By the end of this session, you will have a better understanding of: 2

Property, plant and equipment Intangible assets Provisions Payables and expense Employee benefits Financial Instruments PwC 110 Eurostat Eurostat Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Assets Asset accounting PP&E

Heritage assets Intangible assets Impairment of cash and non-cash generating-assets PwC 111 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Liabilities Provisions, contingent liabilities and contingent assets Expenses and payables Employee benefits Financial instruments PwC 112 Eurostat Eurostat Schedule Day 2 9.30h 9.45h

Introduction (learning objectives of the day) 9.45h 10.45h Introduction to key concepts: Assets 10.45h 11.00h Coffee break 11.00h 12.30h Introduction to key concepts: Provisions, contingent liabilities, contingent assets, expenses and payables 12.30h 14.00h Lunch break 14.00h 15.30h Introduction to key concepts: Employee benefits 15.30h 15.45h Coffee break

15.45h 16.45h Introduction to key concepts: Financial instruments 16.45h 17.00h Wrap-up (review of key learning points) PwC 113 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Assets Asset accounting PP&E Heritage assets Intangible assets Impairment of cash and non-cash generating-assets PwC 114 Eurostat Eurostat

Asset accounting Definition and recognition criteria Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. Assets are recognized for financial reporting purposes only when they meet all elements of this definition and the recognition criteria for assets: is probable that future economic benefits or service potential will flow to the entity the cost (or other value) can be measured reliably. PwC 115 Eurostat Eurostat Asset accounting Concept of control Assets are resources controlled by an entity Control arises when an entity assumes the risks and rewards of ownership. The controlling entity can: use or benefit from an asset in the pursuit of its objectives, and can exclude or regulate access of others to that benefit.

Simple, when control is aligned with the legal title or ownership, bearing all risks and rewards. Complex, when control arrangements unclear, many parties can regulate access, right to use is given without conferring title, PwC 116 Eurostat Eurostat Asset accounting Asset life cycle Purchase Recognition of an asset is based on the delivery principle: Sale Donation *When does an entity have control over an asset? Disposal Transfers

*The delivery/receipt/inspection determines the accounting period! Transfers tx tx+y Recognition Budget Allocation t Derecognition Approved credit/ contract authority Purchase Orders Goods & Services Delivered Invoice

Payment Cash can flow in an earlier or later period than the delivery (when goods or services are received) and related revenue is recognized. PwC 117 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 118 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Assets Asset accounting PP&E Heritage assets Intangible assets

Impairment of cash and non-cash generating-assets PwC 119 Eurostat Eurostat Property, plant & equipment Definition and scope IPSAS 17 defines Property, plant and equipment (PP&E) as tangible assets that: Are held by the entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and Are expected to be used during more than one reporting period. Tangible fixed assets that are investment properties and heritage assets are excluded from the scope of IPSAS 17. This standard also does not consider assets that are held for sale. PP&E can either be acquired from third parties or constructed by an entity. PwC 120 Eurostat Eurostat Property, plant & equipment

Illustrative examples Fixtures & Fittings Land Buildings Military equipment Infrastructure assets (such as bridges, tunnels, roads, electricity/gas/water supply or communication networks, power plants) Specialised technical equipment (such as satellites, etc.) Computer hardware Ships, aircrafts, motor vehicles, bicycles, trains Machinery and industrial equipment Furniture & Office equipment PwC

121 Eurostat Eurostat Property, plant & equipment Elements of PP&E in Government Financial Statements UK Whole of Government Accounts 31/03/2015 Government of New Zealand Accounts 30/06/2016 1. Infrastructure 1. Infrastructure 2. Military equipment 2. Military equipment 3. Heritage assets 3. Assets under construction 4. Land

4. Land 5. Buildings 5. Buildings Other Other PwC 122 Eurostat Eurostat Property, plant & equipment PP&E life cycle Recognition Initial Measurement De-recognition Upgrades

Purchase Donation Subsequent Measurement Goods & Services Delivered Receipt & Inspection Use Donate Retirement Disposal Sale Depreciation Transfers Selfconstructed

Scrap Wear & Tear Repairs & Maintenanc e Assembly / Installation PwC Deinstallation 123 Eurostat Eurostat Property, plant & equipment Donation Transfers Recognition Statement of financial performance

REVENUE/EXPENSE Purchase Statement of financial position ASSET/LIABILITIY Evolution of an asset value Asset Sale Disposal Transfers tx tx+1 tx+2 tx+3 Tx+4 Tx+5

tx+6 t Derecognition Expense Initial/Subsequent Measurement PwC 124 Eurostat Eurostat Property, plant & equipment Recognition The cost of an item of PP&E shall be recognized as an asset if: It is probable that future economic benefits or service potential associated with the item will flow to the entity; The cost or fair value of the item can be measured reliably. The date of acquisition is the date on which the risks and rewards pertaining to ownership get transferred generally corresponds to the acceptance of delivery of the asset. DELIVERY PRINCIPLE

CONTROL PwC 125 Eurostat Eurostat Property, plant & equipment Measurement rules over the life time of PP&E Initial measurement at cost First acquisition of PP&E items Subsequent expenditure expensed unless brings enhanced economic benefits [major overhaul], or a major component of the asset is replaced Benchmark treatment

continue to carry at cost* less depreciation and impairment provisions * Option to carry at Fair Value less subsequent depreciation and impairment provisions under the revaluation model. PwC 126 Eurostat Eurostat Property, plant & equipment Initial measurement PP&E assets are initially measured at acquisition, which includes: The purchase price Plus any directly attributable costs to bring the asset to the location and working condition necessary for it to be capable of operation in the manner intended by management (including those to test whether the asset is properly functioning). Costs of employees participating in the construction of the asset, costs of site preparation, installation and assembly costs, professional fees such as for architects and engineers, estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is recognised as a provision under IPSAS 19, etc.

! Not all costs are included in the acquisition cost of the assets ! PwC 127 Eurostat Eurostat Property, plant & equipment Net Book Value (NBV) Gross Book Value (GBV) tx tx+1 tx+2 tx+3 Tx+4 Tx+5 Reasons that cause a reduction in the value of an asset during

its life include: usage, wear and tear or physical deterioration, technological outdating or obsolescence. PwC tx+6 Depreciation charge Statement of financial performance REVENUE/EXPENSE Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life Statement of financial position ASSET/LIABILITIY Subsequent measurement: depreciation 128 Eurostat

Eurostat Property, plant & equipment Subsequent measurement: depreciation All the asset: following factors are considered in determining the useful life of an Expected usage of the asset; Expected physical wear and tear; Repair and maintenance program; Technical, commercial or operational obsolescence; Legal or similar limits in the use of the asset (such as expiry date of related leases). [useful life] [economic life] PwC 129 Eurostat Eurostat

Property, plant & equipment Subsequent measurement: future expenditures Subsequent expenditure on property, plant and equipment is only recognised as an asset when the expenditure increases the future economic benefits in excess of the standard of performance of the asset assessed immediately before the expenditure is made E.g.: modification of an item of plant to extend its remaining useful life or to increase its capacity, upgrading machine parts to achieve a substantial improvement in the quality of output, development of a new production process enabling a substantial reduction in operating costs, etc. Expenditure on repairs or maintenance of property, plant and equipment made to restore or maintain the future economic benefits should be recognised as an expense when incurred. PwC 130 Eurostat Eurostat Property, plant & equipment Recognition: component approach

Major components of some items of property, plant and equipment that require replacement at regular intervals and that have useful lives different from those of the items of property, plant and equipment to which they relate (e.g. resurfacing of a road every few years, replacement of an engine in a plane, refurbishment of the ceiling of a building etc.) should be accounted for as separate assets and depreciated over their own useful life. Expenditure incurred in replacing or renewing the component is accounted for as the acquisition of a separate asset and the replaced asset is written off. PwC 131 Eurostat Eurostat Property, plant & equipment Component approach Example Source: Financial Statements of the New Zealand government as of 30 June 2016 (http:// www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-yearjun16.pdf) The surfacing of the pavement is depreciated over a useful life of 7 years, while the other parts of the pavement are depreciated over a period of 50 years. PwC

132 Eurostat Eurostat Property, plant & equipment First-time adoption Determination of opening balances includes: The collation of historic cost data includes the identification of all costs to make an asset operational or an estimation of such costs where historic information is not available. A fair value approach can be applied with fair value being taken as the deemed cost in the opening IPSAS statement of financial position. The valuation of assets includes: a) Deciding whether to value all assets or whether to use a sampling approach. b) The identification of appropriate valuers for each class of asset. c) The preparation of instructions for valuers and operational staff. d) The collection of information required by valuers. e) A management review of valuations. PwC 133 Eurostat Eurostat Property, plant & equipment First-time adoption

Initial IPSAS adoption Fair value as deemed cost Cost (tangible supporting historic cost evidence or historic market information exists) Historical fair value as at acquisition date (historic market information exists) Fair value a fist time adoption date (current market information exists) DCR (depreciated replacement cost) PwC 134 Eurostat Eurostat

Property, plant & equipment Practical considerations Identification of categories of assets focus on major categories with high value assets completeness of the analysis, categories and sub-categories what about military assets? also include assets held under leases Physical inventory of PP&E (economic/legal) ownership? availability of data? harmonised approach and instructions focus on high value assets involve operational and technical people collect information on physical state and usage, and on components PwC 135 Eurostat Eurostat

Property, plant & equipment Practical considerations PwC Determination of cost initial recognition determination and completeness of cost elements current replacement cost for existing assets methodology for assets under construction price inflation Depreciation rates and methods analyse per category, sub-category and type of assets (including major components identified) determine useful lives with input of operational and technical people (should reflect economic reality) assess appropriateness of technical depreciation method versus straight-line method for certain types of assets (e.g. roads) determine assets with a potential significant residual value at the end of their useful life 136 Eurostat Eurostat

Property, plant & equipment Practical considerations First-time adoption rules select per category/type of asset the approach to determine the cost in the opening balance sheet: historical cost or fair value (historical fair value, current fair value or depreciated replacement cost) as deemed cost reconcile pragmatic (namely considering availability of data) and reliable approach link with physical inventory of fixed assets for the collection of information on physical state and usage, and on components select potential (independent) appraiser PwC 137 Eurostat Eurostat Infrastructure assets IPSASB project Objective: Issue a revised IPSAS 17 (or other IPSAS), with additional requirements and/or more detailed guidance on infrastructure assets. Project background: IPSAS 17 limited guidance on infrastructure

assets No universally accepted definition of infrastructure assets: road networks, water and power supply systems, communication network Some or all of the following characteristics: part of a system or network, specialized in nature and no alternative users, immovable, subject to constraints on disposal PwC 138 Eurostat Eurostat Property, plant & equipment Infrastructure assets Importance to governments Financial statements Infrastructure assets in % of total assets UK 31/03/2015 23.2 % New Zealand 30/06/2016 14.7 %

France 31/12/2015 12.9 % Infrastructure assets represent a huge part of the total assets of governments. PwC 139 Eurostat Eurostat Property, plant & equipment Case study: infrastructure assets in Austria Federal assets were included in the opening balance sheet based on the concept of control, that is, where the government entity possesses, uses, and has the power to dispose of the asset, and bears the associated risk of loss and destruction. The goal was to fully report federal assets minimising the administrative costs associated with the production of the opening balance sheet. Given the challenges of measuring and valuing public sector assets, pragmatic approaches were taken with a view to reduce the administrative burden without reducing the quality of information. The Austrian Opening Balance Sheet Regulation specified a number of exceptions and simplifications, including: Land: simplified land raster method based on land registry data, with categorisation derived from the land register (e.g. forest, agricultural use, building

lands, etc.) and price per square meter (/m 2) determined based on tax agency data of land sales. Reference values were then reduced to reflect areas of limited use (e.g. bodies of water, alpine lands, military lands, etc.). For example, 80% reduction was applied to mountains and wetlands and 50% reduction applied to the non-profitable (i.e. not used in cash-generating activities) portion of forest lands. PwC 140 Eurostat Eurostat Property, plant & equipment Case study: infrastructure assets in Austria Land improvements: roads, railways, airports, and port facilities were measured at depreciated cost or based on specified reference values or average values determined based on neighbouring countries (i.e. Germany) or literature sources. For roads, a value reduction was applied to the replacement cost to obtain the depreciated replacement cost. This adjustment was based on current road condition: poor (90% reduction); medium (30% reduction); or good (10% reduction). Linear depreciation is applied based on useful lives for either paved roads (33 years) or unpaved roads (10 years) as specified in a Decree by the Austrian Federal Ministry of Finance. PwC

141 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 142 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts : Assets Asset accounting PP&E Heritage assets Intangible assets Impairment of cash and non-cash generating-assets PwC 143 Eurostat Eurostat

Heritage assets Definition and examples Heritage assets are the assets that are described as such because of their cultural, environmental or historical significance. Historical buildings Conservation areas Monuments Works of art PwC Nature reserves Archeological sites 144 Eurostat Eurostat Heritage assets Common characteristics

Governments and other public sector entities may hold items that contribute to the historical and cultural character of a nation or region for example, art treasures, historical buildings, and other artifacts. They may also be responsible for national parks and other areas of natural significance with native flora and fauna. Such items and areas are not generally held for sale, even if markets exist. Rather, governments and public sector entities have a responsibility to preserve and maintain them for current and future generations. PwC 145 Eurostat Eurostat Heritage assets Accounting treatment There is currently no specific guidance on the accounting of heritage assets other than that included in IPSAS 17. IPSAS 17 does not require recognition of heritage assets. Anyway, if such assets are recognised, the entity: must follow IPSAS 17 disclosure requirements; may choose whether or not to apply IPSAS 17 measurement rules. PwC

146 Eurostat Eurostat Heritage assets IPSASB project Accounting treatment Current discussions: Project to develop accounting requirements for heritage assets, including definitions of and different types of heritage assets recognition and measurement of heritage assets depreciation and/or impairment disclosures The IPSASB is currently preparing a consultation paper discussing several approaches regarding recognition and measurement of heritage assets. PwC 147 Eurostat Eurostat

Heritage assets Case study: Government of New Zealand PwC 148 Eurostat Eurostat Heritage assets Accounting treatment: Examples Pronouncement No recognition Partial recognition Full recognition France Standard 17 X South Africa, GRAP 103 X

Australia AASB 116 X UK - FRS 30 X USA FASB SFFAS 29 X US GASB GASBS X Canada Canada PS 3150 X Source: https://www.ipsasb.org/system/files/meetings/files/Agenda-Item-6-Combined.pdf PwC 149 Eurostat Eurostat

Q&A Open questions? Further discussion? PwC 150 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Assets Asset accounting PP&E Heritage assets Intangible assets Impairment of cash and non-cash generating-assets PwC 151 Eurostat Eurostat Intangible assets Illustrative examples

Certain development costs (e.g. the cost to develop an ERP system or certain technology) IT software Concessions Trademarks and brand names Exploration licenses Patents Copy rights Licenses (e.g. 3G licence) PwC 152 Eurostat Eurostat Intangible assets Intangible assets business life cycle Recognition

Initial Measurement Subsequent Measurement De-recognition Donate Purchase Sale Donation Goods & Services Delivered Installation Use Wear & Tear Amortization Retirement Disposal

Scrap Transfers Selfconstructed Maintenance Repairs Research Destallation Development Upgrades PwC 153 Eurostat Eurostat Intangible assets Definition IPSAS 31 Intangible assets. An intangible asset is an identifiable non-monetary asset without physical substance controlled by an entity as a result of past events and from which future economic benefits or service

potential are expected to flow to the entity. There are two types of intangible assets: internally generated intangible assets; separately acquired intangible assets. PwC 154 Eurostat Eurostat Intangible assets Recognition Recognition of an item as an intangible asset required if all of the following criteria are met: Identifiability. An intangible asset is identifiable when it: is separable, i.e. capable of being sold, transferred, licensed, rented or exchanged, or arises from contractual or other legal rights. Control over a resource. Probability that future economic benefits (i.e. profit increase or cost reduction) (nb: criterion always met when separate acquisition or in a business combination) or service potential will flow to the entity. Ability to measure the cost reliably. PwC

155 Eurostat Eurostat Intangible assets R&D costs Recognition: internally generated Research phase Expenditure on research should be recognised as an expense when it is incurred Development phase Research phase Development phase NO! Only if strict

criteria met Specific and general conditions should be met recognise development phase costs as an intangible asset: in order to Technical feasibility of completing the intangible asset; Intention to complete it; Able to use/sell the asset; Availability resources to complete the development and to use/sell; Analysis of how the intangible asset will generate future economic benefits or service potential; Analysis of how the development costs can be reliably measured. PwC 156 Eurostat Eurostat Intangible assets

Net Book Value (NBV) Gross Book Value (GBV) tx tx+1 tx+2 tx+3 Tx+4 Tx+5 tx+6 Depreciation charge Statement of financial performance REVENUE/EXPENSE Statement of financial position ASSET/LIABILITIY Subsequent measurement: amortisation

Initial/subsequent measurement PwC 157 Eurostat Eurostat Intangible assets Practical considerations Identification of categories of intangible assets focus on major categories with high value assets availability of data for completeness of the analysis? Rules for capitalising or expensing expenditure on intangible assets capitalisation threshold analyse against recognition criteria and determine those intangible items that must be capitalised and those that cannot be capitalised PwC 158

Eurostat Eurostat Intangible assets Practical considerations Internally generated intangible assets identify those assets that are internally generated (IT developments, etc.) understand the process and distinguish research from development and maintenance activities determine direct development costs that should be capitalised and costing methodology consider accounting policy for borrowing costs what about data availability? Does the cost accounting and the time-tracking system allow an IPSAS-compliant costing? PwC 159 Eurostat Eurostat Intangible assets Practical considerations

Depreciation rates and methods analyse per category, sub-category and type of assets (including major components identified) determine useful lives with input of operational and IT specialists (should reflect economic reality) First-time adoption rules determine opening balance sheet positions (cost less accumulated depreciation) reinstate internally developed intangible assets only if information available reconcile pragmatic (namely considering availability of data) and reliable approach PwC 160 Eurostat Eurostat Q&A Open questions? Further discussion? PwC

161 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Assets Asset accounting PP&E Heritage assets Intangible assets Impairment of cash and non-cash generating-assets PwC 162 Eurostat Eurostat Impairment of cash and non-cash-generating assets Due to the inherent character of their activities, public sector entities mainly hold non-cash generating assets, but may also hold cash-generating assets. While cash-generating assets are generating measurable future economic benefits based on return from commercial transactions, the value of non-cashgenerating assets is based on their service potential. Impairment rules are therefore included in two separate standards. IPSAS 21 Impairment of non-cash-generating assets.

IPSAS 26 Impairment of cash-generating assets. PwC 163 Eurostat Eurostat Impairment Indicators Assess at each reporting date if any indication of impairment. If an indication exists, estimate the recoverable amount of the asset. External sources of information: Internal sources of information: Cessation of the demand or need for services provided by the asset Significant long-term changes with an adverse effect on the entity have take place during the period or will take place

in the near future, in the technological, legal or government policy environment Physical damage of an asset Significant long-term changes with an adverse effect on the entity have taken place during the period or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or expected to be used A decision to halt the construction of the asset before it is complete or in a usable condition Evidence from internal reporting that indicates that the service performance of an asset is/will be worse than expected PwC 164

Eurostat Eurostat Statement of financial position ASSET/LIABILITIY Statement of financial performance REVENUE/EXPENSE Impairment : financial statement impact tx tx+1 tx+2 tx+3 Tx+4 Tx+5 tx+6 t That reduction is an impairment loss to be immediately recognised as an expense in the

revenue statement. If the estimated impairment loss is greater than the carrying amount of the asset, the carrying amount of the asset is reduced to zero. PwC 165 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: liabilities Provisions, contingent liabilities and contingent assets Expenses and payables Employee benefits Financial instruments PwC 166 Eurostat Eurostat Provisions

Recognition IPSAS 19: A provision should be recognised as a liability in the statement of financial position and as an expense in the statement of financial performance when: An entity has a present obligation (legal or constructive) as a result of a past event; and A reliable estimate can be made of the amount of the obligation; and It is probable that an economic outflow of economic resources embodying economic benefits or service potential will be required to settle the obligation. PwC 167 Eurostat Eurostat Provisions Examples Provisions for litigation, restructuring provisions, environmental provisions (provisions for decommissioning, dismantling, depollution or site restoration) Procedures for collecting information from non-financial staff (e.g. in-house or external lawyer) in respect of provisions must be set up. Collected data need to be communicated to the financial staff in a timely manner in order to prepare IPSAS 19 compliant

information. PwC 168 Eurostat Eurostat Provisions Legal and constructive obligations Legal obligation = an obligation that derives from: A contract (through its explicit or implicit terms), Legislation or other operation of law. Constructive obligation = an obligation that derives from an entitys action where: By an established pattern of past practice, published policies or sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities, As a result, the entity has created a valid expectation on the part of those other parties that it will discharge its responsibilities.

PwC 169 Eurostat Eurostat Provisions Environmental provisions Example of constructive obligation A government has a record of honouring a published policy that it cleans up all contamination/environmental damage that it causes. When a pollution arises for which the government is responsible, it has a constructive obligation to clean up the contamination. PwC 170 Eurostat Eurostat Provisions Restructuring provisions A public sector entity may undertake a planned and controlled program that materially changes the scope of its activities or

the manner in which they are conducted. This may entail termination or fundamental reorganization of certain activities, dismissal of staff, etc. In this case, the following two conditions need to be met to be recorded as provision: Detailed plan identifying key features of programme and its implementation must exist at reporting date Must be valid expectation that business will undergo restructuring Can only include direct expenses associated with restructuring programme; cannot relate to ongoing operation of business PwC 171 Eurostat Eurostat Provisions Onerous contracts Public sector entities may enter into contracts for the exchange of assets or services under which the unavoidable costs of meeting the obligations exceed the economic benefits or service potential to be received. Unavoidable costs of meeting obligation greater than economic benefits expected to be received.

A provision should be made for the least net cost of exiting from the contract, which is the lower of: The cost of fulfilling it; and Any compensation or penalties arising from failure to fulfil it. PwC 172 Eurostat Eurostat Provisions Measurement One-off events Best estimate at reporting date of amount needed to settle the obligation. If range is predicted with all the same likelihood of occurrence, the mid point must be selected. Recurring events For a large population of items - expected value measurement. Time value of money Anticipated cash flows must be discounted at risk free rate where changing value of money over time is material. PwC

173 Eurostat Eurostat Provisions Additional considerations Changes in provisions Provisions should be reviewed at each reporting date and adjusted to reflect the current best estimate. Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an enterprise tests these assets for impairment. PwC 174 Eurostat Eurostat Provisions Government of New Zealand (extract) Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http:// www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf

PwC 175 Eurostat Eurostat Provisions & contingent liabilities Start no no Present obligation as a result of an obligating event? yes Possible obligation? no ye s Probable

Outflow? yes yes Remote? no Reliable estimate? no yes Disclose contingent liability Provision PwC Do nothing 176 Eurostat Eurostat Provisions & contingent liabilities

Terminology PwC 177 Eurostat Eurostat Contingent liabilities Recognition Contingent liabilities are: a) Possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Should not be recognised in the financial statements. b) Present obligations that arise from past events but are not recognised because: It is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation, The amount of the obligation cannot be measured with sufficient reliability. PwC 178 Eurostat Eurostat

Contingent assets Disclosure Contingent assets = possible assets that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Should not be recognised in the statement of financial position. Where an entity is due to receive reimbursement from a third party for the settlement of an obligation, and the reimbursement is virtually certain, the asset is recognised in the statement of financial position. PwC 179 Eurostat Eurostat Provisions & contingent liabilities/assets Practical considerations Identify categories/types of provisions and types of expenditure that may potentially give rise to a provision: litigation, warranty, restructuring, environmental, onerous contract, etc.)

For each category identified, assess against the IPSAS recognition criteria determine whether an (legal or constructive) obligation exists assess the criteria strictly for constructive obligations assess the probability of outflow involve legal and operational people PwC 180 Eurostat Eurostat Provisions & contingent liabilities/assets Practical considerations For each category identified, determine measurement: - determine the best estimate of the cost required to settle the obligation - assess the need for discounting (for long-term provisions) based on materiality considerations, and determine an appropriate discount rate

Identify major contingent assets and liabilities PwC 181 Eurostat Eurostat Provisions & contingent liabilities/assets Practical considerations For each category identified, determine measurement: - determine the best estimate of the cost required to settle the obligation - assess the need for discounting (for long-term provisions) based on materiality considerations, and determine an appropriate discount rate Identify major contingent assets and liabilities PwC 182 Eurostat

Eurostat Q&A Open questions? Further discussion? PwC 183 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Liabilities Provisions, contingent liabilities and contingent assets Expenses and payables Employee benefits Financial instruments PwC 184 Eurostat Eurostat

Expenses and payables Illustrative examples Salaries Maintenance expenses Fuel cost Service fees for external advisors Postal service expenses Insurance premiums Grants to beneficiaries PwC 185 Eurostat Eurostat Expenses and payables Definition

Expenses = decreases in economic benefits or service potential during the reporting period that cause a decrease in net assets/equity. Expenses may be incurred through: Outflows Consumptions of assets Incurrence of liabilities Liabilities = present obligations arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential. PwC 186 Eurostat Eurostat Expenses and payables Recognition

According to the delivery principle, expenses are recognised when the economic event occurs: when goods are delivered and services rendered. Expenses should be accounted for in the period to which they relate. At year-end, cut-off accruals and deferrals are used to reflect differences between the timing of cash payment/receipt. Accrue: services was rendered (or supplies delivered) but invoice not received/paid. Defer: invoice was received/paid but service not yet rendered (or supplies delivered). PwC 187 Eurostat Eurostat Expenses and payables Processes implications Procedures have to be put in place to identify best estimates, best practices to identify accruals based on: information from budget owners close to year end, perform

an analysis of outstanding commitments not consumed; historical analysis trend analysis of costs consideration for automation PwC 188 Eurostat Eurostat Expenses and payables Practical considerations Establish appropriate cut-off procedures at year-end for major types of expenditure information from budget owners close to year end, perform an analysis of outstanding commitments not consumed historical analysis trend analysis of costs PwC 189 Eurostat Eurostat Q&A

Open questions? Further discussion? PwC 190 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Liabilities Provisions, contingent liabilities and contingent assets Expenses and payables Employee benefits Financial instruments PwC 191 Eurostat Eurostat Employee benefits Examples

Paid annual leave and paid sick leave Wages, salaries and social security contributions Short-term compensated absences Short-term performance-related bonuses Pension plans Post-employment life insurance Medical plans Rapatriation grants Jubilee premiums Long service leave or sabbatical leave Dismissal indemnities PwC Long-term disability benefits 192

Eurostat Eurostat Employee benefits General principle An employee benefit is any form of consideration given by an entity in exchange for service rendered by employees. IPSAS 25 requires an entity to recognize: a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and an expense when the entity consumes the economic benefits or service potential arising from service provided by an employee in exchange for employee benefits. PwC 193 Eurostat Eurostat Employee benefits Definition There are four types of employee benefits: Short-term employment benefits Other long-term

employee benefits Post-employment benefits Termination benefits PwC 194 Eurostat Eurostat Employee benefits Short-term benefits Wages, salaries and social security contributions Paid annual leave and paid sick leave Housing allowance Accounting is generally straightforward as: No actuarial assumptions.

No discounting. An expense is recognised as the undiscounted amount of benefits payable during the accounting period Any unpaid amount liability. Any overpaid amount asset. PwC 195 Eurostat Eurostat Employee benefits Short-term benefits: exercise Which of the following benefits is not a short-term employee benefit under IPSAS 25? A. Dismissal indemnity paid to a civil servant working for a government department. B. Social security contributions paid on employees salaries. C. Free housing granted to employees. D. Employees wages and salaries. PwC 196

Eurostat Eurostat Employee benefits Post-employment benefits Pensions Post-employment life insurance and post-employment medical care Other retirement benefits Employee benefits (other than termination benefits) payable after the completion of service. PwC 197 Eurostat Eurostat Employee benefits Post-employment benefit plans Pension Plan Defined benefit

Defined contribution Post-employment benefits plans other than defined contribution plans. Fixed contributions: no legal or constructive obligation to pay further contributions PwC 198 Eurostat Eurostat Employee benefits Post-employment benefit plans Defined contribution plan Defined benefit plan Defined contribution plans are postemployment benefit plans under which an enterprise pays fixed contributions into a separate entity (an insurance company or a pension fund) and will have no legal or constructive (when there is an

established pattern of past practice) obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Defined benefit plans are postemployment benefit plans other than defined contribution plans: The benefit is defined in the rules of the plan. The retirement benefit is determined by reference to a formula usually based on an employees remuneration (salary and other benefits), years of service, or other factors. The actuarial risk falls on the public sector entity. Surplus/Deficit Expense PwC 199 Eurostat Eurostat

Employee benefits Defined contribution plans Under defined contribution plans, the entity pays fixed contributions into a separate entity (an insurance company or a pension fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating employee services rendered in the current and prior periods. The contributions or premiums are defined in the rules of the plan (e.g. an annual premium of 5% of salary). PwC 200 Eurostat Eurostat Employee benefits Defined contribution plans For defined contribution plans: The benefit is the result of the total contributions paid and the return on investments obtained. Straightforward accounting treatment: Expense is recorded in the statement of financial performance as the contributions fall due. No actuarial assumptions required to measure the obligation or expense and no actuarial gains or losses.

PwC 201 Eurostat Eurostat Employee benefits Defined benefit plans Defined benefit plans are post-employment benefit plans other than defined contribution plans: The benefit is defined in the rules of the plan. The retirement benefit is determined by reference to a formula usually based on an employees remuneration (salary and other benefits), years of service, or other factors. The actuarial risk falls on the public sector entity. PwC 202

Eurostat Eurostat Employee benefits Defined benefit plans For defined benefit plans: recognise a defined benefit liability (DBL) when the plan is under funded Recognise a defined benefit asset (DBA) (deferral of costs) when the plan is overfunded Amounting to the net total of: the present value of the defined benefit obligation (DBO) (using the Projected Unit Credit method); plus any actuarial gains (less any actuarial losses) not recognised; less any past service cost not yet recognised less the fair value of plan assets (if any) Measurement at each reporting date is required. PwC 203

Eurostat Eurostat Employee benefits Defined benefit plans The Actuarial Method required by IPSAS is the Projected Unit Credit method, under which the Defined Benefit Obligation (DBO) is equal to: The present value of the future benefits payable at due date (retirement or departure) Based upon projected salary and on past service. The DBO is calculated as follows: Benefit at retirement (estimate based on inflation, future salary increase,) x Pro-rata based on past service (= number of years in service / number of years for the full career)

x PwC Adjustment for probability of withdrawal, mortality, disability, x Present value factor (based on a discount rate) 204 Eurostat Eurostat Employee benefits Defined benefit plans Actuarial assumptions must be determined for the measurement of the DBO. Demographic assumptions Financial assumptions

Mortality Discount rate Rates of employee turnover Future benefit level or salary trends Election of payment options Pension indexation PwC 205 Eurostat Eurostat Employee benefits Defined benefit plans One assumption has an important impact on the value of the DBO: the discount rate. The discount rate should reflect the time value of money but not the actuarial or investment risk. The entity should exercise its judgment in assessing whether the time value of money is best approximated by reference to

market yield on government bonds, corporate bonds or another financial instrument. PwC 206 Eurostat Eurostat Employee benefits Defined benefit plans Actuarial gains and losses may result from increases or decreases in either the present value of a defined benefit obligation or the fair value of any related plan assets. Actuarial gains and losses originate from: experience adjustments effects of changes in assumptions An entity must select a method both for the recognition and the presentation of actuarial gains and losses (accounting policy choice). Depending on the accounting policy selected, either all or part of the actuarial gains or losses are recognized in the amount of the DBL (or DBA). PwC 207 Eurostat Eurostat

Employee benefits Termination benefits Employee benefits payable as a result of either: Entitys decision to terminate an employment before the normal date; Employees decision to accept voluntary redundancy in exchange of such benefits. Recognition of a liability and a cost if the employer is demonstrably committed to: Terminate the employment of an employee or group of employees, or Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. Immediate recognition as an expense in the period in which the obligation arises. PwC 208 Eurostat Eurostat Employee benefits IPSAS 39 new model IPSAS 39 will supersede IPSAS 25 as from January 2018, to maintain

convergence with IAS19. Main differences between IPSAS 39 and IPSAS 25 are the following: Recognition IPSAS 39 removes the corridor approach which under IPSAS 25 allowed public sector entities to defer the recognition of certain actuarial gains and losses arising from defined benefit plans. Presentation IPSAS 39 eliminates presentational options on actuarial gains and losses that previously existed in IPSAS 25. Disclosure IPSAS 39 introduces for defined benefit plans disclosure objectives according to the characteristics, risks associated with the plan and their relationship with the entitys financial statements. PwC 209 Eurostat

Eurostat Pension liabilities Government of New Zealand (extract) Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http:// www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 210 Eurostat Eurostat Employee benefits Practical considerations Identify types of employee benefits within each of the four categories: short-term benefits post-employment benefits other long-term benefits termination benefits involve HR department

Short-term employee benefits establish cut-off procedures to recognise any unpaid liability at year-end and an asset in respect of any service paid in advance Termination benefits set up procedure to identify them PwC 211 Eurostat Eurostat Employee benefits Practical considerations Post-employment benefits involve actuarial specialists classify pension and other post-employment plans between defined benefit plans and defined contribution plans for each type of defined benefit plans: determine appropriate actuarial assumptions and an appropriate discount rate select the accounting policy for recognising actuarial assumptions: immediate recognition either in the statement of financial performance or in the statement of changes in equity,

deferred recognition in the statement of financial performance using the corridor approach, deferred but faster recognition in the statement of financial performance identify any plan assets and determine their fair value PwC 212 Eurostat Eurostat Employee benefits Practical considerations Other long-term benefits involve actuarial specialists classify pension and other post-employment plans between defined benefit plans and defined contribution plans for each type of defined benefit plans: determine appropriate actuarial assumptions and an appropriate discount rate identify any plan assets and determine their fair value PwC 213 Eurostat Eurostat

Q&A Open questions? Further discussion? PwC 214 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Liabilities Provisions, contingent liabilities and contingent assets Expenses and payables Employee benefits Financial instruments PwC 215 Eurostat Eurostat

Financial instruments Applicable standards IPSAS 28: Financial instruments: presentation IPSAS 29: Financial instruments: recognition and measurement IPSAS 30: Financial Instruments: disclosures PwC 216 Eurostat Eurostat Financial instruments Definitions Financial instrument = any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Any asset that is: Cash; A contractual right to receive cash or another financial asset from another entity; A contractual obligation to exchange financial instruments with another entity under favourable conditions; An equity instrument of another

entity. PwC Any liability that is: A contractual obligation to deliver cash or another financial asset to another entity; A contractual obligation to exchange financial instruments with another entity under unfavourable conditions. 217 Eurostat Eurostat Financial instruments Applicable standards Equity instrument: any contract that evidences a residual interest in the assets of the enterprise after deducting all of its liabilities. Debt instrument: financial assets with fixed or determinable payments Key is that there is a contractual relationship: an asset on one side and liability (or equity) on the other. PwC 218

Eurostat Eurostat Financial instruments Examples Liabilities Assets Loans to banks, term deposits, cash in bank. Shares and other variable income securities Bonds and other fixed income securities Amounts owed to banks Debt evidenced by a certificate Financial guarantees Loans and advances to other than banks

Derivatives Derivatives Other liabilities PwC 219 Eurostat Eurostat Financial instruments Classification and measurement: financial assets Category Acquired principally for the purpose of generating a profit from short -term fluctuations in price or from a dealers margin Fair value (FV changes in S/ D) Loans and receivables Financial assets with fixed or determinable payments not quoted in an active market

Amortised cost (effective interest method ) Held-to-maturity Financial assets with fixed or determinable payments and fixed maturity and that the enterprise has the positive intent and ability to hold to maturity Amortised cost (effective interest method) Everything that does not fit in one of the other three categories Fair value, FV movements to equity until the asset is derecognized or impaired (it impacts S/ D at that time)

Trading FV through S/ D Assets Measurement Designated Available-for-sale PwC Eurostat Eurostat 220 Financial instruments Classification and measurement: financial liabilities Category Liabilities Trading FV through S/ D

Designated Other financial liabiliti es Measurement Acquired principally for the purpose of generating a profit from short -term fluctuations in price or from a dealers margin Other financial liabilities not held for trading purposes. PwC Fair value (FV changes in S/ D) Amortised cost (effective interest method) 221 Eurostat Eurostat Financial instruments Fair value Fair value is the amount for which an asset could be exchanged, or

a liability settled, between knowledgeable, willing parties in an arms length transaction Fair value hierarchy Level 1 Level 2 Level 3 Quoted prices Observable inputs Unobservable inputs Quoted prices in active market for the same instrument Similar instruments Inactive market Reporting entitys assumptions and own data Interest rates, yields, volatilities, credit risk

Eg: quoted shares Eg: interest rate swap PwC Eg: private equity 222 Eurostat Eurostat Financial instruments Amortised cost Amortised cost = Cash paid - Principal repayments +/-

Unamortised premiums or discounts - Impairment Use effective interest method which is the rate that exactly discounts the expected stream of future cash payments or receipts through maturity to the net carrying amount at initial recognition. No option to use straight line method PwC 223 Eurostat Eurostat Financial instruments Impairment: financial assets An impairment loss should be recognised when an objective indication of impairment exists: For loans, debt instruments, unquoted equity instruments: Indication: decline in the expected cash flows based on deterioration

of creditworthiness of borrowers, etc. Recognition of loss: in the statement of financial performance. Reversal of impairment: permitted For quoted equity instruments: Indication: significant or prolonged decrease in fair value Recognition of loss: in the statement of financial performance (recycling from the fair value reserve in equity) Reversal of impairment: not permitted PwC 224 Eurostat Eurostat Financial instruments Impairment: exercise Which of the following would provide objective evidence of impairment of a financial asset when considered in isolation? Select all that apply. A. Indications that it is probable that the borrower will become bankrupt. B. The disappearance of an active market in a quoted financial asset. C. A temporary decline in the fair value of an unquoted equity instrument classified as available for sale. D. A downgrade of the credit rating of the borrower.

PwC 225 Eurostat Eurostat Financial instruments Classification The issuer of a financial instrument should classify it, or its components, as a liability or as equity in accordance with the substance of the contractual arrangement rather than on the legal form. If there is an obligation to pay cash or to deliver another financial asset liability Classification as equity when it represents a residual interest in the net assets of the issuer. PwC 226 Eurostat Eurostat

Financial instruments Embedded derivatives An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable. For example: convertible bonds, structured loans, and inflation-linked or equity-linked instruments. IPSAS 29 requires organizations to search for embedded derivatives in contracts and to determine if the derivative must be separated from the host contract and accounted for as a derivative at fair value through surplus or deficit. Bifurcation (separation) is required if the economic risks and characteristics of the embedded derivative are not closely related to those of the host contract. PwC 227 Eurostat Eurostat Financial instruments Embedded derivatives Some examples are provided below. Closely related

Not closely related Cap and floors Equity linked debt instruments Prepayment option (most cases) Credit linked debt instruments Inflation linked debt instruments (most cases) Commodity-linked debt instruments PwC 228 Eurostat Eurostat Financial instruments Concessionary loans Concessionary loans are loans that either bear no interest or bear

interest below the market interest rate. An entity first needs to assess whether the substance of the concessionary loan is in fact a loan, a grant, a contribution from owners. If it is a loan, the difference between the fair value of the loan and the transaction price at initial recognition is treated as follows: in the books of the holder: at its fair value together with a corresponding amount of revenue; in the books of the issuer: an expense is recognized in surplus or deficit. After initial recognition, concessionary loans are subsequently measured at amortized cost. PwC 229 Eurostat Eurostat Financial instruments Financial guarantees Financial guarantee contracts are those contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original terms of a debt instrument. Financial guarantee contracts that are treated as financial instruments should be measured by the issuer at fair value on

initial recognition plus transaction costs that are directly attributable to the issue of the financial liability. After initial recognition, an issuer of such a contract should measure it at the higher of the amount determined in accordance with IPSAS 19 Provisions, contingent liabilities and contingent assets and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IPSAS 9 Revenue from exchange transactions. PwC 230 Eurostat Eurostat Financial instruments Disclosures Requires entities to provide disclosures, which enable users to evaluate: the significance of financial instruments for the entitys financial position and performance; the nature and extent of risks arising from financial instruments to which the entity was exposed during the period and at the reporting date and how the entity manages those risks. Information required on carrying amount and fair value of financial assets and financial liabilities by classes, collaterals, nature and extent of financial risks, defaults and breaches, credit risk, liquidity risk, market risks, failed derecognition,

etc. PwC 231 Eurostat Eurostat Financial instruments Government of New Zealand (extract) Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http:// www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 232 Eurostat Eurostat Financial instruments Government of New Zealand (extract) Financial Statements of the Government of New Zealand for the year ended 30 June 2016 http:// www.treasury.govt.nz/government/financialstatements/yearend/jun16/fsgnz-year-jun16.pdf PwC 233

Eurostat Eurostat Financial Instruments Practical considerations Identify all financial assets, classify them first per type of assets (term deposits, bonds, shares, etc.) and then classify them into one of the following IPSAS categories derivatives loans and receivables held-to-maturity financial assets available-for-sale financial assets Establish procedure to measure financial assets either at amortised cost or at fair value (level 1, level 2 or level 3 fair value) Establish procedure to measure financial liabilities either at amortised cost or at fair value (only for certain derivatives) PwC 234

Eurostat Eurostat Financial Instruments Practical considerations Determine accounting policy for impairment if financial assets at amortised cost debt instruments equity instruments recognise revenue cumulatively as the net balance between the asset and the (potential) liability Identify transactions with potential complex issues in respect of derecognition rules financial assets: factoring arrangements, etc. financial liabilities: modification of terms of financial liabilities Identify instruments issued by the entity and assess equity versus liability classification based on existing contractual arrangements PwC 235 Eurostat Eurostat Financial Instruments Practical considerations Identify concessionary loans by assessing the terms of the loans against market conditions, and determine their fair value for the initial recognition Assess accounting treatment of loans granted by international institutions Financial guarantees

identify them in contracts establish a methodology to value them PwC 236 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 237 Eurostat Eurostat Key Learning Points Input from participants PwC 238 Eurostat Eurostat

Thank you ! PwC 239 Eurostat Eurostat Further core IPSAS/EPSAS considerations PwC 3 240 Eurostat Eurostat Eurostat Eurostat Overall Session Objectives By the end of this session, you will: 3

Get to know most notable options within IPSAS Have a clear understanding of accounting for tax revenue Better understand the social benefits project PwC 241 Eurostat Eurostat Eurostat Eurostat Schedule Day 3 9.30h 9.45h Course Overview

9.45h 10.45h Most notable options within IPSAS 10.45h 11.00h Practical exercise: Group discussion Approach relevant for future standard setting 11.00h 11.15h Coffee break 11.15h 12.15h Accounting for tax revenue 12.15h 12.30h Practical exercise: Case study EU tax revenue 12.30h 14.00h Lunch break 14.00h 15.30h

Social benefits project 15.30h 15.45h Coffee break 15.45h 17.00h Course recap & End of course quiz Summary of key learning points Wrap-up and feedback questionnaire PwC 242 Eurostat Eurostat Course Outline Day 3 Further core IPSAS/EPSAS considerations 1. Most notable options within IPSAS 2. Accounting for tax revenue

3. Social benefits project PwC 243 Eurostat Eurostat Most notable options within IPSAS Background IPSAS contain various accounting policy choices. - Accounting policies have to be selected and applied consistently for similar transactions, other events and conditions. - If categorization is required or permitted, accounting policies have to be applied consistently to each category. - If alternatives are allowed under IPSAS, the applied accounting policy should be disclosed. The IPSAS options are mainly in line existing policy choices in IFRS. Entities can choose the policy which best reflects the economics. However, some complain that options might lead to a lack of

comparability. PwC 244 Eurostat Eurostat Most notable options within IPSAS Overview* Separate & consolidated financial statements Heritage assets IPSAS 17: recognition optional measurement: IPSAS 17 optional Property, plant and equipment IPSAS 17: cost model, or revaluation model Intangible assets IPSAS 31: cost model, or revaluation model * The most notable options were identified in the Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y. The assessment was based on the criteria Literature,

Presentation, Practical relevance, and Materiality. PwC 245 Eurostat Eurostat Most notable options within IPSAS Overview* Separate financial statements Investments in controlled entities, jointly controlled entities/joint ventures, and associates IPSAS 6/IPSAS 34: equity method, at cost, or as financial instrument Consolidated financial statements Joint ventures IPSAS 8: proportionate consolidation, or equity method * The most notable options were identified in the Issue Paper Approach for narrowing down of options

within IPSAS as of June 22, 2016, prepared by E&Y. The assessment was based on the criteria Literature, Presentation, Practical relevance, and Materiality. PwC 246 Eurostat Eurostat Most notable options within IPSAS Heritage assets Recap Day 2: Accounting treatment There is currently no specific guidance on the accounting of heritage assets other than that included in IPSAS 17. IPSAS 17 does not require recognition of heritage assets. Anyway, if such assets are recognised, the entity: must follow IPSAS 17 disclosure requirements; may choose whether or not to apply IPSAS 17 measurement rules.

PwC 247 Eurostat Eurostat Most notable options within IPSAS Heritage assets Pronouncement No recognition Partial recognition Full recognition France Standard 17 South Africa, GRAP 103 Australia AASB 116 UK - FRS 30

Comments X May use different measurement bases X Measurement at cost or fair value. Rebuttable assumption that fair value is possible. X Measure initially at cost or fair value of donated assets Recognize if information available. Do not if cost or value not available & cost exceeds benefits X Source: https://www.ipsasb.org/system/files/meetings/files/Agenda-Item-6-Combined.pdf PwC

248 Eurostat Eurostat Most notable options within IPSAS Heritage assets Pronouncement No recognition USA FASB SFFAS 29 US GASB GASBS Canada Canada PS 3150 Partial recognition Full recognition Comments

X Multi-use heritage assets are recognized, but not donated or other heritage X Recognize if not in collections. Encourages but does not require recognition of assets in collections. Estimate of future benefits not possible X Source: https://www.ipsasb.org/system/files/meetings/files/Agenda-Item-6-Combined.pdf PwC 249 Eurostat Eurostat Most notable options within IPSAS Heritage assets Examples of current accounting treatment: Austria*

Recognition based on acquisition cost or expert opinions Recognition only to the extent that reliable data is available (otherwise listed in the notes) Recognized tangible heritage assets: over 100 million Recognized intangible heritage assets: over 3,6 billion * Extract from the study Collection of information related to the potential impact, including costs, of implementing accrual accounting in the public sector and technical analysis of the suitability of individual IPSAS standards as of August 1, 2014, prepared by PwC. PwC 250 Eurostat Eurostat Most notable options within IPSAS Heritage assets

Examples of current accounting treatment: France* Central Government Accounting Standard dedicated to heritage assets (applicable for periods beginning on 1 January 2013) Measurement on initial recognition at acquisition cost, tax value, expert appraisal value, or symbolic value Measurement at the reporting date: same amount as at initial recognition (no depreciation, impairment, or revaluation) In the event of substantial changes: description in the notes * Extract from the study Collection of information related to the potential impact, including costs, of implementing accrual accounting in the public sector and technical analysis of the suitability of individual IPSAS standards as of August 1, 2014, prepared by PwC. PwC 251 Eurostat Eurostat

Most notable options within IPSAS Heritage assets Examples of current accounting treatment: South Africa The valuation of heritage assets is dependent on the type of assets and the availability of reliable information. Management makes estimates and assumptions about factors such as the restoration cost, replacement cost and cash flow generating ability in estimating its fair value. PwC 252 Eurostat Eurostat Most notable options within IPSAS Heritage assets The (non-)recognition of heritage assets might have a major impact on the balance sheet. A reliable measurement of heritage assets might not be possible. Resulting questions:

Should (all) heritage assets be recognized? If heritage assets are recognized, how should they be measured? PwC 253 Eurostat Eurostat Most notable options within IPSAS Heritage assets Current discussions at IPSASB Project to develop accounting requirements for heritage assets, including - definitions of and different types of heritage assets - recognition and measurement of heritage assets - depreciation and/or impairment - disclosures The IPSASB is currently preparing a consultation paper discussing several approaches regarding recognition and measurement of heritage assets. PwC

254 Eurostat Eurostat Most notable options within IPSAS Property, plant and equipment Recap Day 2: IPSAS 17 Subsequent measurement Choice between: Cost model: measurement at cost less accumulated depreciation less accumulated impairment losses Revaluation model: measurement at fair value at the date of revaluation less any subsequent accumulated depreciation less any subsequent accumulated impairment losses PwC 255 Eurostat Eurostat

Most notable options within IPSAS Property, plant and equipment Country Current accounting treatment France Cost method Exceptions: residential property, offices and land (fair value); properties specific to the Ministry of Defence (fixed amount); prisons, roads, motorways, dams and related structures (depreciated replacement cost); certain military equipment (token amount) Lithuania Cost method Exceptions: land and cultural objects (fair value) UK No cost model Assets held for service potential and in use: current value in existing use (market value, present value of service potential, or fair value using IFRS 13) Assets not held for service potential: IFRS 5, IAS 40, or fair value using IFRS 13

Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 32-33. PwC 256 Eurostat Eurostat Most notable options within IPSAS Property, plant and equipment Country Cost-oriented approach Market value-oriented approach France X Lithuania X UK X Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 35. PwC 257

Eurostat Eurostat Most notable options within IPSAS Intangible assets Recap Day 2: IPSAS 31 Subsequent measurement Choice between: Cost model: measurement at cost less accumulated amortisation less accumulated impairment losses Revaluation model (very rare) PwC 258 Eurostat Eurostat Most notable options within IPSAS Intangible assets Country

Current accounting treatment France Cost model Lithuania Cost method UK No cost model Generally: current value in existing use (market value, the lower of depreciated replacement cost and value in use, or depreciated replacement cost) Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 33-34. PwC 259 Eurostat Eurostat Most notable options within IPSAS Intangible assets Country

Cost-oriented approach Market value-oriented approach France X Lithuania X UK X Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 35. PwC 260 Eurostat Eurostat Most notable options within IPSAS Separate financial statements: Investments IPSAS 6: In separate financial statements, investments in controlled entities, jointly controlled entities, and associates shall be accounted for - using the equity method,

- at cost, or - as a financial instrument. Equity method: - Initial recognition at cost - Subsequent adjustment for post-acquisition changes in the venturers share of net assets/equity PwC 261 Eurostat Eurostat Most notable options within IPSAS Separate financial statements: Investments IPSAS 34 will supersede IPSAS 8 for periods beginning on or after January 1, 2017. IPSAS 34: In separate financial statements, investments in controlled entities, joint ventures, and associates shall be accounted for

- at cost, - as a financial instrument, or - using the equity method. After the initial application of IPSAS 34, there will still be an accounting policy choice. PwC 262 Eurostat Eurostat Most notable options within IPSAS Separate financial statements: Investments Country Current accounting treatment France Entities controlled by Central Government: equity method Entities not controlled by Central Government: cost method Lithuania Accounting provisions on investments are IPSAS compliant. The cost method, the equity method, or the treatment as financial instrument is applicable under certain circumstances (but no policy choice).

UK Cost method or treatment as financial instrument Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 30-31, 35. PwC 263 Eurostat Eurostat Most notable options within IPSAS Consolidated financial statements: Joint ventures IPSAS 3: A venturer shall recognize its interest in a jointly controlled entity using proportionate consolidation or the equity method (alternative method). Proportionate consolidation: The venturers share of assets, liabilities, revenue and expenses is - combined line by line with similar items or - reported as separate line items.

Equity method: - Initial recognition at cost - Subsequent adjustment for post-acquisition changes in the venturers share of net assets/equity PwC 264 Eurostat Eurostat Most notable options within IPSAS Consolidated financial statements: Joint ventures IPSAS 37 will replace IPSAS 8 for periods beginning on or after January 1, 2017. - IPSAS 37 distinguishes between joint operations and joint ventures. - Joint operations: recognition of the entitys share of the assets, liabilities, revenue and expenses - Joint venture: equity method (proportionate consolidation is not permitted) After the initial application of IPSAS 37, there will not be an accounting policy choice regarding the accounting for interests in

joint ventures. PwC 265 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 266 Eurostat Eurostat Course Outline Day 3 Further core IPSAS/EPSAS considerations 1. Most notable options within IPSAS 2. Accounting for tax revenue

3. Social benefits project PwC 267 Eurostat Eurostat Accounting for tax revenue Background Taxes = major source of revenue for many governments Accounting treatment depends on tax legislation which - establishes a government's right to collect tax and - identifies the basis on which tax is calculated Significant practical difficulties in producing reliable estimates of total tax due: - detailed data required - subject to complex legislation

- time gap between the occurrence of the taxable event and the administrative handling of the taxes payable PwC 268 Eurostat Eurostat Accounting for tax revenue Categories of taxes (in % of total EU tax revenue 2012) not necessarily in scope of IPSAS 23; not covered by the IPSASBs project on revenues most important tax revenues (in addition to social contributions) Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 7-8. PwC 269 Eurostat Eurostat Accounting for tax revenue

Timing of recognition of revenue from taxes Source: Study Collection of information related to the potential impact, including costs, of implementing accrual accounting in the public sector and technical analysis of the suitability of individual IPSAS standards as of August 1, 2014, prepared by PwC, p. 110. PwC 270 Eurostat Eurostat Accounting for tax revenue Timing of recognition of revenue from taxes Example: Recognition of tax revenue in France Recognition criteria Parliament has passed the budget authorising tax collection Taxable events have taken place Revenues can be reliably measured Taxable event: timing of recognition

when taxable event occurs (e.g. oil tax, value added tax) when taxable event is reported in tax return (e.g. personal and corporate income tax). Recognised amount amounts due based on material evidence (tax by assessment, VAT declarations, tax return or other documents constituting an obligation to pay the taxes) Source: Study Collection of information related to the potential impact, including costs, of implementing accrual accounting in the public sector and technical analysis of the suitability of individual IPSAS standards as of August 1, 2014, prepared by PwC, p. 111. PwC 271 Eurostat Eurostat Accounting for tax revenue Recap Day 1: Revenue from non-exchange transactions

Approach of IPSAS 23 1. Determine whether an asset should be recognised in respect of the inflow of resources in a non-exchange transaction. 2. Revenue is then recognised except to the extent that a liability is recognised for the same inflow. 3. It is the increase in the net assets which is recognised as revenue. PwC 272 Eurostat Eurostat Accounting for tax revenue Recap Day 1: Revenue from non-exchange transactions Recognition and initial measurement of assets according to IPSAS 23 An inflow of resources from a non-exchange transaction, other than services in-kind, that meets the definition of an asset is recognized as an asset when, and only when: It is probable that the future economic benefits or service potential associated with the asset will flow to the entity; and The fair value of the asset can be measured reliably. An asset acquired through a non-exchange transaction is initially measured at its fair value as at the date of acquisition. PwC 273 Eurostat

Eurostat Accounting for tax revenue Recognition of tax revenue according to IPSAS 23 An asset in respect of taxes is recognized together with an equivalent amount of revenue when the taxable event occurs. Type of tax Taxable event Income tax Earning of assessable income during the taxation period Value added tax Undertaking of taxable activity during the taxation period Goods and services tax Purchase or sale of taxable goods or services during the taxation period Customs duty Movement of dutiable goods or services across the customs boundary

Death duty Death of a person owning taxable property Property tax Passing of the date on which the tax is levied or the period for which the tax is levied PwC 274 Eurostat Eurostat Accounting for tax revenue Different approaches to account for taxes Taxable event approach Approach underlying IPSAS 23 Identification of taxable event is crucial for revenue recognition Tax revenue needs to be estimated Tax assessment approach

Revenue recognition when tax assessment is issued to the tax payer High certainty of tax revenues Timeadjusted cash method Revenue recognition based on cash received from tax payers Time adjustments to attribute tax payments to the period when the activity generating the liability took place Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 12-13. PwC 275 Eurostat Eurostat Accounting for tax revenue Difficulties regarding the accounting for tax revenue Insufficient guidance in IPSAS 23 for practical application

Notion of accruals insufficiently developed for taxation Reliable estimate of tax revenue based on statistical models might not always be possible. No parameters for developing and implementing statistical models in IPSAS 23 Approach of IPSAS 23 might be hard to understand (recognition when asset is recognized). Due to characteristics of tax payers: extensive set of data required Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 13-18. PwC 276 Eurostat

Eurostat Accounting for tax revenue Difficulties regarding the accounting for tax revenue High complexity of calculation/estimation of tax revenue Gross or net presentation of tax receivables Countrys underlying tax legislation needs to be considered IT implementation issues Accounting treatment of tax incentives Timing of revenue recognition

Source: Issue Paper Approach for narrowing down of options within IPSAS as of June 22, 2016, prepared by E&Y, pp. 13-18. PwC 277 Eurostat Eurostat Accounting for tax revenue Current discussions at IPSASB Project - to develop one or more IPSASs covering revenue transactions (exchange and non-exchange) - to maintain convergence with IFRS since IFRS 15 will replace current guidance The IPSASB is currently preparing a consultation paper. PwC 278 Eurostat Eurostat

Accounting for tax revenue Current discussions at IPSASB What are the similarities and differences between the approach in IPSAS 23 and IFRS 15? How should time requirements in nonexchange transactions be accounted for? Issues discussed Should the distinction between exchange and non-exchange transactions be retained? To what extent would an approach based on performance obligations, rather than present obligations, be appropriate for non-exchange

transactions? What type of modifications would be required for IFRS 15 to be suitable for application to a wide range of revenue transactions in the public sector? PwC 279 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 280 Eurostat Eurostat Accounting for tax revenue Case study Task

In groups: 1. Outline the practical and technical challenges in the recognition of each revenue stream. Type of tax Challenges Income tax Value added tax Goods and services tax. Customs duty. Death duty. Property tax. PwC 281 Eurostat Eurostat Accounting for tax revenue Case study Task In groups: 2. Suggest practical solutions to enable materially true and fair reporting of

revenue at year-end. Type of tax Solutions Income tax Value added tax Goods and services tax. Customs duty. Death duty. Property tax. PwC 282 Eurostat Eurostat Accounting for tax revenue Case study solution 1. Outline the practical and technical challenges in the recognition of each revenue stream. Type of tax Challenges

Income tax Earning of assessable income during the taxation period. Self-employed individuals: tax returns are typically completed many months after the year-end; determining accurate figure may therefore be difficult. Tax year may not be aligned to financial year. Fraudulent income reporting may result in incorrect presentation between revenue and write-offs. Incomplete number of taxpayers relies on self-registration. Treatment of advance receipts.

Netting off other benefits within tax benefits/allowances payable to citizen). Conversely, taxation revenue shall not be grossed up for the amount of tax expenditures. (e.g. homeowners deducting mortgage interest and property taxes from their gross income when calculating taxable income). PwC returns is not permitted (e.g. 283 Eurostat Eurostat Accounting for tax revenue Case study solution

1. Outline the practical and technical challenges in the recognition of each revenue stream. Type of tax Challenges Value added tax Undertaking of taxable activity during the taxation period. Goods and services tax. Large delays in the reporting of VAT collection from businesses. Purchase or sale of taxable goods or services during the taxation period. Large delays in the reporting of goods and services tax collection from businesses. Agent vs. principal: If a single entity collects taxes on behalf of several other entities, it is acting as an agent for all of them. For example, where a state taxation agency collects income tax for the state government and several city governments, it does not recognize revenue in respect of the taxes collected rather, the individual governments that impose

the taxes recognize assets and revenue in respect of the taxes. PwC 284 Eurostat Eurostat Accounting for tax revenue Case study solution 1. Outline the practical and technical challenges in the recognition of each revenue stream. Type of tax Challenges Customs duty. Movement of dutiable goods or services across the customs boundary Death duty. Determination of when goods and services cross the customs boundary. Application of correct taxation rates.

Death of a person owning taxable property. Timing of between death and valuation of estate measurement may not be reliable until many years after death for large estates. PwC 285 Eurostat Eurostat Accounting for tax revenue Case study solution 1. Outline the practical and technical challenges in the recognition of each revenue stream. Type of tax Challenges Property tax. Passing of the date on which the tax is levied or the period for which the tax is levied.

Property sales: may be relatively straight forward as tax is usually paid on date of sale. Difficulties may arise for year-end sales where information is not transmitted quickly. Business rates and domestic rates: may be straight-forward as usually paid in advance, based upon annual formula. PwC 286 Eurostat Eurostat Accounting for tax revenue Case study solution 2. Suggest practical solutions to enable materially true and fair reporting of revenue at year-end. Type of tax Income tax Solutions Links to payroll records of companies to determine employee element. Alignment of tax and accounting years. Completion of tax returns on a gross basis (i.e. showing tax receivable and

benefits/allowances payable separately). Use of statistical models based on demographic, economic and historic assumptions to determine estimate tax income, fraud rate, etc. IPSAS 23 para 68: Measurement models will also take account of other factors such as: (a) The tax law allowing taxpayers a longer period to file returns than the government is permitted for publishing general purpose financial statements; (b) Taxpayers failing to file returns on a timely basis; (c) Valuing non-monetary assets for tax assessment purposes; (d) Complexities in tax law requiring extended periods for assessing taxes due from certain taxpayers; (e) The potential that the financial and political costs of rigorously enforcing the tax laws and collecting all the taxes legally due to the government may outweigh the benefits received; (f) The tax law permitting taxpayers to defer payment of some taxes; and (g) A variety of circumstances particular to individual taxes and jurisdictions. Revisions to estimates are made in accordance with IPSAS 3, Accounting Policies, Changes in Accounting Estimates and Errors. PwC 287 Eurostat Eurostat

Accounting for tax revenue Case study solution 2. Suggest practical solutions to enable materially true and fair reporting of revenue at year-end. Type of tax Income tax Solutions Study 14 suggestions: Use alternative potential recognition points: (a) At the end of the income year; (b) When the tax returns are filed; (c) When tax is assessed; (d) When a tax liability is recognized by the taxpayer; or (e) When payment is received. The nature of taxes and other non-exchange revenues and the procedures and systems used to collect and record revenues vary greatly between jurisdictions. It is therefore possible that the initial points of recognition will also vary. In considering alternative recognition points for items, it is helpful to: (a) Investigate whether it is possible to reliably estimate revenues at an appropriate earlier recognition point; and (b) Calculate the amount of revenue that would be recognized using different recognition points and see if there is any material difference. In some jurisdictions, tax revenues may be recognized at the time when tax payments are due and payable according to legislation or when an assessment is issued by the relevant taxation

authority. An alternative approach is to recognize tax revenue based upon the tax liabilities that will arise (in any period) with respect to the transactions and balances occurring during that reporting period, even where an assessment has not yet occurred. Under this method, current year revenue is also affected by variations between prior year estimates and the associated actual transactions during the current year. The first approach generally provides more certainty in the recording of revenue and less possibility of material misstatement. 288 PwC Eurostat Eurostat Accounting for tax revenue Case study solution 2. Suggest practical solutions to enable materially true and fair reporting of revenue at year-end. Type of tax Solutions Value tax added

Regular reporting from businesses through electronic interfaces. Goods and services tax. Regular reporting from businesses through electronic interfaces. Customs duty. Integrated border and customs systems that report customs revenue immediately. Death duty. Use of statistical models based on demographic, economic and historic assumptions to determine estimate value of death estate. Recognition of death duty revenue at point at which measurement is reliable (i.e. at payment of duties, or settlement of estate).

Property tax. Integrated property tax systems that can interface with central system instaneously. PwC 289 Eurostat Eurostat Course Outline Day 3 Further core IPSAS/EPSAS considerations 1. Most notable options within IPSAS 2. Accounting for tax revenue 3. Social benefits project

PwC 290 Eurostat Eurostat Social benefits project Definition and illustrative examples Social benefits are goods, services and other benefits provided by a government in the pursuit of its social policy objectives and for which it does not receive consideration that is approximately equal to the value of goods and services provided, directly in return from the recipients of those benefits. Health Housing Education Transportation Benefits paid to families, aged, disabled or unemployed persons, veterans and other (groups of) individuals to access services to meet their particular needs, or to supplement their income

PwC 291 Eurostat Eurostat Social benefits project Comparison with employee benefits Employee benefits Social benefits Scope Entitys personnel Selected individuals, group of individuals or the wider population Counterpart of the benefits Services rendered by the employee assumed to be

approximately equal in value to the benefits provided The consideration, if any, received by the entity is not approximately equal in value to the goods or services provided PwC 292 Eurostat Eurostat Social benefits project Differentiation of social benefits programs Public sector provides a wide variety of social benefit programs. These programs are different in terms of: -Benefits they provide -Their administration -Their funding mechanisms used to provide the benefits The latest discussion about social benefits occurred in September 2016. The IPSASB intends to issue an ED in summer 2017. Matters presented in the following slides might be subject to modifications according to future developments. PwC

293 Eurostat Eurostat Social benefits project Differentiation of social benefits programs: Types of benefit Categories of social benefit provided by public sector entities or by third parties on their behalf include: Social Protection Health Education Hospital services (Pre-) primary education Sickness and disability Outpatient services Secondary education

Old age Medical products (including drugs), appliances and equipment Tertiary education Survivors Family and children Unemployment Housing As of Draft Consultation Paper September 2014 PwC Social exclusion arising for other reasons Source: Draft Consultation Paper, IPSASB Agenda Item 10 Social Benefits, September 15-18, 2014 - Brussels Eurostat Eurostat 294 Social benefits project

Accounting treatment There is currently no requirement related to the recognition and measurement of provisions for social benefits. Where an entity elects to recognize such provisions, it discloses the basis on which the provisions have been recognized and measured. Where a public sector entity elects to recognise social benefits, disclosure requirements applicable to provisions also apply to such benefits. It should be noted that some liabilities that do not meet the definition of provisions may need to be recognized in respect of social benefits to be paid (e.g. amounts due to entitled beneficiaries under an existing legislation). PwC 295 Eurostat Eurostat Social benefits project Obligating event Potential recognition points PwC 296 Eurostat Eurostat

Social benefits project Obligating event Potential recognition points PwC 297 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Retirement benefits: Denmark Universal scheme Social insurance scheme Provides an annual basic amount to citizens Provides fixed contributions which vary only depending on the number of hours worked instead of the income Managed by a government Ministry Administered by an independent institution (Labor Market Supplementary Pension Institution)

Funded through general taxation Funded through contributions from employers and employees PwC 298 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Retirement benefits: Denmark: The two schemes will have different accounting treatments Universal scheme Social insurance scheme The Ministry will include amounts related tot the universal scheme in its financial statements The Labor Market Supplementary Pension Institution will include amounts related to the social insurance scheme

in its financial statements A liability will be recognised using one of available options. A liability will be recognised using one of available options. The Ministry will have to consider whether it has any interest in the Labor market Supplementary Pension Institution. - If it is the case: recognition of the interest in the Ministrys financial statements - If it is not the case: the retirement benefit under the social insurance scheme will not be included in the Ministrys financial statements PwC 299 Eurostat Eurostat Social benefits project Categories of social benefits: Examples

Unemployment benefits: Canada Unemployment benefits are paid by the federal Employment Insurance program. Benefits paid to individuals depending on some criteria: -Timing: The individual should have worked a minimum number of hours during a defined period (previous 52 weeks). -Region: the minimum number of hours depends on the level of unemployment in the region (higher in regions with low unemployment rate). -Income: weekly average insurable earnings -Rate: 55% (or higher for low income families) PwC 300 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Unemployment benefits: Canada Category: Managed by the federal Employment Insurance program Funded through mandatory contributions from employers and employees treated as general taxation by the Government. PwC

301 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Unemployment benefits: Canada When people lose their job independently of their own will, they receive during a defined period a contribution. Both the length of the period and the amount of the contribution rely on defined criteria. Eligibility criteria are determined by: - The regional unemployment level PwC 302 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Unemployment benefits: Canada -Amounts relating to Employment Insurance will be included in the financial statements of the government. This one will have to

recognise a liability. -Estimates of future benefit payments: required under some variants of the obligating event approach. -Estimates of future cash flows: required under the social insurance approach. -Where estimates are prepared on a regional basis -Information to disclose. PwC 303 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Injury benefits: New Zealand Accident Compensation Corporation (ACC) : a public sector entity Claims are managed through five separate accounts PwC

304 Eurostat Eurostat Social benefits project Categories of social benefits: Examples Injury benefits: New Zealand The ACC will include the program in its financial statements. Recognition and measurement criteria will depend on future IPSASB decisions. PwC 305 Eurostat Eurostat Q&A Open questions? Further discussion? PwC 306 Eurostat Eurostat

www.pwc.com Workshop overview Course Wrap-Up Day 1 Overview of IPSAS financial statements Day 2 Recognition and measurement of items in the financial statements Day 3 Further core IPSAS/EPSAS considerations PwC 307 Eurostat Eurostat Course Outline Day 1 Overview of IPSAS financial statements

1. Introduction to IPSAS 2. Elements of IPSAS financial statements 3. Presentation of the principles of IPSAS 3 and IPSAS 14 4. Consolidated financial statements 5. Revenue from non-exchange transactions PwC 308 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Assets 1. Asset accounting 2. PP&E 3. Heritage assets 4. Intangible assets 5. Impairment of cash and non-cash generating-assets PwC 309 Eurostat Eurostat Course Outline Day 2 Introduction to key concepts: Liabilities

7. Provisions, contingent liabilities and contingent assets 8. Expenses and payables 9. Employee benefits 10. Financial instruments PwC 310 Eurostat Eurostat Course Outline Day 3 Further core IPSAS/EPSAS considerations 1. Most notable options within IPSAS 2. Accounting for tax revenue 3. Social benefits project PwC 311 Eurostat Eurostat Thank you ! PwC 312

Eurostat Eurostat Contact details Anton De Greef Global Public Finance & Accounting Director, PwC Belgium [email protected] Marie-Pierre Lenain Global Public Finance & Accounting Manager, PwC Belgium [email protected] PwC 313 Eurostat Eurostat

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