In line with the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities issued by International Public Sector Accounting Standards Board (IPSASB) explain the difference, if any, between a General-Purpose Financial Report and a Special Purpose Financial Report.

GPFR are financial reports prepared primarily to respond to the information of users who do not possess the authority to require a public entity to disclose the information they need for accountability and decision-making purposes. GPFR must be prepared in compliance with the IPSAS. On the other hand, SPFR are those reports prepared to respond to the information requirements of the users that have the authority to require the preparation of financial reports that disclose the information they need for their particular purpose. SPFR are prepared in compliance with the requirement of the user and need not comply with IPSAS.

Measurement Bases for assets in line with the Conceptual Framework of General-Purpose Financial Report.

 

i) Measurement objective

The objective of measurement is to select those measurement bases that most fairly reflect the cost of services, operational capacity, and financial capacity of the entity in a manner that is useful in holding the entity to account and for decision-making purposes.

The selection of a measurement basis for assets and liabilities contributes to meeting the objectives of financial reporting in the public sector by providing information that enables users to assess:

• The cost of services provided in the period in historical or current terms.
• Operational capacity—the capacity of the entity to support the provision of services in future periods through physical and other resources; and
• Financial capacity—the capacity of the entity to fund its activities.

ii) Bases of Measurement of Assets

 Historical cost

Historical cost for an asset is the consideration given to acquire or develop an asset, which is the cash or cash equivalents, or the value of the other consideration given at the time of its acquisition or development.

Under the historical cost model, assets are initially reported at the cost incurred on their acquisition. Subsequent to initial recognition, this cost may be allocated as an expense to reporting periods in the form of depreciation or amortization for certain assets, as the service potential or ability to generate economic benefits provided by such assets are consumed over their useful lives. In addition, under the historical cost model, the amount of an asset may be reduced by recognizing impairments.

 Market value

Market value for assets is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

At acquisition, market value and historical cost will be the same if transaction costs are ignored and the transaction is an exchange transaction. The extent to which market value meets the objectives of financial reporting and users’ information needs partially depends on the quality of the market evidence.

 Replacement cost

Replacement cost is the most economical cost required for the entity to replace the service potential of an asset (including the amount that the entity will receive from its disposal at the end of its useful life) at the reporting date.

Replacement cost reflects the replacement of service potential in the normal course of operations, not the costs that might be incurred if an urgent necessity arose due to some unforeseeable event, such as a fire.

 Net selling price

Net selling price is the amount that the entity can obtain from the sale of the asset after deducting the costs of sale.

Net selling price differs from market value in that it does not require an open, active, and orderly market or the estimation of a price in such a market and includes the entity’s costs of sale. Net selling price, therefore, reflects constraints on sales. It is entity-specific.

 Value in Use

Value in use is the present value to the entity of the asset’s remaining service potential or ability to generate economic benefits if it continues to be used and the net amount that the entity will receive from its disposal at the end of its useful life.

Value in use is an entity-specific value that reflects the amount derived from an asset through its operation and its disposal at the end of its useful life. Value in use is also not an appropriate measurement basis when the net selling price is more significant than the value in use. In this case, the most resource-efficient use of the asset is to sell it, rather than continue to use it.

Question

Some accountants hold the view that the development of a Conceptual Framework for General Purpose Financial Reporting (simply, the Conceptual Framework) in the Public Sector is needless and a mere information overload on the accountants. This argument is predicated on the fact that the Conceptual Framework does not establish authoritative requirements for financial reporting by public sector entities that adopt IPSAS, nor does it override the requirements of the International Public Sector Accounting Standards (IPSAS) or the Recommended Practice Guides (RPGs).

Required:

i) Explain the connection between the Conceptual Framework on one hand and IPSAS and

RPGs on the other hand.

 ii) Illustrate a practical case where the Conceptual Framework would be useful to an accountant in the preparation and presentation of a General-Purpose Financial Report for his organisation.

iii) Explain TWO (2) constraints on information included in the General Purpose Financial Reports

i)

The role of the Conceptual Framework is to establish the concepts that underpin financial reporting in the public sector entities that adopts the accrual basis of accounting. The IPSASB applies these concepts in developing the IPSAS and RPGs applicable to the preparation and presentation of general-purpose financial reports of public sector entities.

In relation to authority, the Conceptual Framework does not establish authoritative requirements for financial reporting by public sector entities that adopt IPSAS. It does not also override the requirements of IPSAS and RPGs.

ii) Primarily, the Conceptual Framework provides a conceptual foundation for developing the IPSAS and the RPGs and therefore is relevant to standard setters.

However, the preparers of the GPFR based on the IPSAS will also find the conceptual framework useful in some instances. In particular, the conceptual framework will provide guidance to preparers in dealing with financial reporting issues not dealt with by the IPSAS or the RPGs. The preparer can refer to and consider the applicability of the definitions, recognition criteria and measurement principles, and other concepts in the Conceptual Framework.

For example, a preparer of a financial report finds that there is a peculiar transaction of the entity in which there is no specific IPSAS in force to deal with the matter and therefore has to use his own judgement. In solving the problem, the prepare may rely on the definitions, recognition criteria, and measurement principles in the Conceptual Framework to arrive at a treatment of the transaction which will largely conform with the spirit of the IPSAS, if one had existed.

iii) The constraints on information included in GPFRs are materiality, cost-benefit, and balance between the qualitative characteristics.

      Materiality

Information is material if its omission or misstatement could influence the discharge of accountability by the entity, or the decisions that users make on the basis of the information provided in the GPFR. In developing the IPSAS and RPGs, the IPSASB will consider the materiality of the consequences of the application of a particular accounting policy, basis of preparation or disclosure of a particular item or information. Thus, materiality is a constraint on the information included in the GPFR and thus entities consider the materiality of the information in making the decision on disclosure.

      Cost-benefit

Financial reporting involves costs to both the preparer and the user. The benefit of the financial reporting should justify the cost involved in producing that information. Thus, judgment of cost -benefit analysis is required. The standard setters and preparers of financial reports considers the cost in relation to the benefits of the information in making a decision on information to be included in the GPFR.

      The balance between the Qualitative characteristics

The qualitative characteristics work together to contribute to the usefulness of the information. For example, faithfully representing irrelevant information in the

GPFR does not achieve the use of the information. Thus, in some instances, balancing or tradeoff between qualitative characteristics may be necessary to achieve the objectives of financial reporting.

Source – ICAG past papers (www.icag.org )