International Perspectives on Sovereign Financial Reporting

22nd January 2012

Prepared by the Financial Reporting Council (FRC) 2012

Overview

Governments worldwide seek access to external funding other than taxation – bonds, direct loans, aid etc
These fund flows make up a significant part of world capital markets
Continued fund flows depend on retaining the confidence of those providing the funding – lenders, donors etc
This in turn depends to a great extent on funders having access to high quality sovereign financial information

The Global Financial Crisis, in particular the situation in Europe
The issue is a concern about the fiscal position of several countries and their ability to repay borrowings
Even where further credit is extended there are consequences such as higher interest rates and/or financial austerity measures
Europe has an internal mechanism for dealing with such situations, resulting in recent bailouts. Not all countries are in the same position and may seek the assistance of the IMF or aid donors

Intermediaries play a key facilitating role in the international sovereign financial market. Some include:
The International Monetary Fund (IMF) is established to foster global monetary co-operation and secure financial stability
Ratings agencies provide assessments of the bond issues of individual governments
Various development banks that provide project finance on favourable terms
Intermediaries require high quality financial information to undertake their roles effectively

The observation is that funders, and intermediaries, find it important to understand that a country demonstrates fiscal responsibility
Financial reporting plays a key part in this – both the budget and the actual outcome
It is increasingly expected that there will be consideration of the long term fiscal position

Address the key objectives of financial information – accountability and decision-making
Qualitative characteristics – relevance, timeliness, understandability, verifiability, faithful representation, comparability
Importance of transparency and open-ness
Independently-set accounting standards
Independent audit
Comparison of budget and actual, prepared on the same basis

The decision about the actual system are currently decided by each government
The precise details of the system used should be appropriate for the country considering culture, stage of development and available resources
The system may be developed and enhanced over time
The key attributes (earlier slide) should be used to decide on a high quality system
IPSAS in particular is designed for governments and it contains different “entry points” – for cash or accrual
Other systems may have a role to play:
- A small number of countries use International Financial Reporting Standards as their base (e.g. Australia)
- Some countries have their own system (e.g. Federal Accounting Standards Advisory Board in the USA)
- International statistical standards (System of National Accounts and Government Finance Statistics) may provide useful information at a macro-economic level, particularly with supplementary disclosures