Prof. Dr. Andreas Bergmann Institute of Public Management ivm@zhwin.ch

1. National Summit on Consolidation – Siena 23 May 2007Consolidated financial reporting: IPSAS approach and implementation in Switzerland • Prof. Dr. Andreas Bergmann • Institute of Public Management • ivm@zhwin.ch

2. Consolidated financial reporting • The „whole-of-government“ financial reports • The control criterion (IPSAS 6 to 8) • Elements of control • Accounting treatment • Implementation in Switzerland • Issues • Solutions • Findings

3. „Whole of government“ financial reports • The idea behind • Very material and risky activities are NOT within the General Government Sector, but (increasingly!) outside • Mergers, acquistions, sale of entities • Service concessions • Exploration of natural resources • Public utilities • But still often under public control • Neither adequately represented in traditional Financial Reports, nor in Government Financial Statistics

4. „Whole of government“ financial reports • The answer: consolidated financial reports • Controlled entities  consolidation (IPSAS 6) • Entities under significantinfluence = associates  equity method (IPSAS 7) • Joint Ventures  proportionate consolidation or equity method (IPSAS 8) • Others: Financial Instruments  only disclosure/presentation requirements (IPSAS 15); thus at cost if not impaired orfair value (voluntarily using IAS 39)

5. Does the entity benefit from the activities of the other entity? (Paragraphs 29, 39 and 40) Yes Does the entity have the power to govern the financial and operating policies of the other entity? (Paragraphs 30, 33,34,39 and40) No Yes Is the power to govern the financial and operating policies presently exercisable? (Paragraphs 28-30) No Yes Control does not appear to exist. Consider whether the other entity is an associate, as defined in IPSAS 7, or whether the relationship between the two entities constitutes “joint control” as in IPSAS 8. Entity controls other entity. No „Whole of government“ financial reports • Control = Benefit + Power

6. „Whole of government“ financial reports • Consolidation: Accounting treatment • Uniform accounting policies • Government: IPSAS • Controlled Government Business Entities: IFRS or similar • Line-by-line aggregation • Elimination of balances and transactions between entities • Separate presentation of minority interest in equity and result

7. „Whole of government“ financial reports • Equity method: Accounting treatment • Recognition of participation as financial instruments/investments • Measurement initially at cost • Subsequent increase or decrease of the investor‘s share of the surplus or deficit • Deduction of distributions (i.e. dividends) received • Other investment/proceedings

8. Consolidated financial reporting • The „whole-of-government“ financial reports • The control criterion (IPSAS 6 to 8) • Elements of control • Accounting treatment • Implementation in Switzerland • Issues • Solutions • Findings

9. IPSAS Legislation referring to IPSAS National accounting standards Legislation referring to national accounting standards Accounting Manual Implementation Implementing IPSAS in Switzerland • Direct or indirect implementation

10. Implementing IPSAS in Switzerland • Current status • Federal government • Adopting IPSAS for separate financial statements from 2007 • Few exceptions, thus no IPSAS certificate • Consoldidated reporting from 2009 • State of Geneva • Adopting IPSAS with very few exceptions from 2008, but including consolidation (no certificate) • State of Zurich • Adopting IPSAS with very few exceptions from 2009, but including consolidation (no certificate)

11. Implementing IPSAS in Switzerland • Issues related to consolidation • Three groups of issues  Scope of consolidation • Democratic governance structure • At which level is „control“? Government? Parliament? …? • Autonomy • What about legally autonomous parts of the state? Courts? Universities? …? • Distortions due to GBEs • Especially Public Sector Financial Corporations, i.e. State Banks, are like to distort the financial reports

12. Implementing IPSAS in Switzerland • Issues related to consolidation • Three groups of issues  Scope of consolidation • Democratic governance structure • At which level is „control“? Government? Parliament? …? • Autonomy • What about legally autonomous parts of the state? Courts? Universities? …? • Distortions due to GBEs • Especially Public Sector Financial Corporations, i.e. State Banks, are like to distort the financial reports

13. Implementing IPSAS in Switzerland • IPSAS 6 leads to strange results in Switzerland „benefit and power“ Ministries (political tasks) Ministries (services,administration) „benefit, but no power“Government Entities (i.e. courts, state universities,hospitals) „benefit and power“ Government Business Entreprises/State Owned Enterprises (i.e. government owns > 50% of shares)

14. Financial Performance Balance sheet 16 100 14 90 80 12 70 ZKB (Bank) 10 ZKB (Bank) 60 8 EKZ (Utility) EKZ (Utility) 50 6 40 GGS GGS 30 4 20 2 10 0 0 -2 Result Revenues Expense Equity Assets Liabs Implementing IPSAS in Switzerland State of Zurich In billions CHF Source:State of Zurich MoF

15. Implementing IPSAS in Switzerland • Solutions • Additional criterion • Similarly in Sweden and – until 2005 – in Canada • Similarly: Spanish study by Bastido/Benito • Criterion based on close financial relationship? • Concept of „economic entity“ (IPSAS 6.12) remains convincing, despite some critical remarks from academics

16. Implementing IPSAS in Switzerland • Other criterion assessed for the Federal Government SourceIVM/PwC

17. Implementing IPSAS in Switzerland • Solution chosen by Zurich/Geneva and perhaps Federal Govt • Budget criterion as a third criterion Power, Benefit andBudget Ministries (political tasks) Ministries (services,administration) Government Entities (i.e. state universities,hospitals) Government Business Entreprises/State Owned Enterprises (i.e. government owns > 50% of shares)

18. Findings • From science and practice • Consolidation is only feasible option to include all material transactions • Accounting treatment is rather undisputed, but scope is highly controversial • Governance in public sector is substantially different from governance in the private sector • IPSAS 6 is not providing sufficient guidance • Guidance provided is to some extent damaging the effort • Concept of economic entity (IPSAS 6.12 ff.) might be more promising • IPSASB is addressing this issue in the Conceptual Framework project

19. References • BASTIDA, F./BENITO, B. (2006) Financial reports and decentralization in municipal governments. In: International Review of Administrative Sciences, Vol 72(2), 223-238. • BERGMANN, A./BAUR, A. et.al. (2006) Expertengutachten Konsolidierungskreis Bund. EFV. • GROSSI, G. (2001) Consolidated Financial Reporting in Local Governments: a comparative study between Italy and Sweden: In: Proceedings from the 8th Biennal CIGAR Conference "Innovations in Governmental Accounting„, Valencia. 1-24. • MUSSARI, R. (2005) Public Sector Financial Reform in Italy. In: J. GUTHRIE, C. HUMPHREY, O. OLSON, K.L. JONES: International Public Financial Management Reform: Progress, Contradictions and Challenges. Information Age. 139-168. • NEWBERRY, S./PALLOT, J. (2005) A wolf in a sheeps clothing. Wider consequences of the financial management system of the New Zealand government. In: Financial Accountability & Management, Vol 21(3), 263-277.