## _cr14353 — Preface and Executive Summary (IMF FAD TA mission, November 5–18, 2013) ## Source details **Canonical URL:** [_cr14353 — Preface and Executive Summary (IMF FAD TA mission, November 5–18, 2013)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14353.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14353.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14353.pdf.json) --- ### Mission, scope, and context - FAD technical assistance mission visited Reykjavik during November 5–18, 2013 to advise on reforming accounting and reporting consistent with IPSAS. - Mission led by Abdul Khan with Johann Seiwald and Frans van Schaik (PFM expert); worked with an IPSAS Working Group and met senior MoF, INAO, Central Bank, StatIce, line agencies, and parliamentary Budget Committee. - Gap analysis focused on major differences with IPSAS while preserving alignment with GFSM 2001-based budgets. ### Key conclusions and strategic decisions - Government of Iceland (GoI) proposes a new organic budget law (OBL) requiring financial statements in accordance with IPSAS and statistical reports in accordance with GFSM 2001. - A phased implementation strategy is recommended with preparation of opening balance sheets as at January 1, 2014 and trial financial statements for 2014 and 2015 in parallel with existing reports. - INAO review of opening balance sheet and trial financial statements is required; assuming OBL enactment in 2014: - The budget of 2016 would be the first to include depreciation as an expense. - IPSAS-based statements would replace existing financial statements from 2016. ### Consolidation and whole-of-government financial statements - IPSAS requires consolidated accounts including all government-controlled entities. - Current GoI practice: consolidation confined to budget sector; key figures from selected entities are disclosed but not consolidated. - Recommendation: identify entities controlled by government and classify into classes A, B, and C; prepare consolidated financial statements and eliminate intra-government transactions and balances. - Practical note: Fjársýsla collects virtually all state entities’ financial statements by end-April; most controlled entities use IFRS or similar standards. ### Recognition of physical assets (PP&E) and balance sheet implications - Current practice: physical assets (roads, bridges, tunnels, land, buildings) are expensed when acquired. - IPSAS requires recognition of PP&E on the balance sheet; such assets are likely to constitute "probably in excess of 60 percent of GDP" and could nearly double gross assets shown on 2011 financial statements. - Specific register/value examples: - Iceland Road and Coastal Authority estimate: replacement cost could exceed ISK 1,000 billion (ISK 1 trillion, 61.4 percent of GDP); authority holds 13,000 km of roads, bridges, and tunnels. - Registers Iceland Agency: depreciated replacement cost totaling approximately ISK 120 billion (7.4 percent of GDP). - Recommendation: identify and value all PP&E, apply IPSAS 17 choices (cost or revaluation model by asset class), apply component approach, and have INAO review completeness and valuation. ### Financial instruments, pensions, and public debt valuation - Financial instruments disclosures currently limited; revise policies to meet IPSAS 28, IPSAS 29, and IPSAS 30 (disclose accounting policies, concessions, guarantees, market/credit/liquidity risks). - Public debt: long-term borrowings for central government part of general government sector amounted to ISK 1.4 trillion as per December 31, 2012 (87 percent of GDP). - Current practice measures debt at face value; IPSAS 29 requires amortized cost using effective interest method where material. - Amortized cost example (Box 4) assumptions and outcome: - Coupon rate of 4 percent; face value 100; initial consideration 90; transaction costs 1; duration five years. - Effective interest rate calculated as 6.66 percent; carrying amounts evolve from 89 to 0.00 over 2010–2014 as shown in the table. ### Employee benefits and contingencies - Pension arrangements: statutory contributions insufficient for benefits; some funds may be multi-employer defined benefit plans. - IPSAS 25 requires recognition of defined benefit liabilities equal to the present value of obligations minus fair value of plan assets, with options for actuarial gains/losses recognition. - Recommendation: analyze multi-employer plans to determine whether to apply defined benefit accounting or disclose why insufficient information necessitates defined contribution accounting. - Paid leave: GoI does not recognize accumulated vacation leave; recommendation to accrue accumulating paid leave per IPSAS 25. - Provisions/contingent liabilities: balance sheet currently presents no provisions; IPSAS 19 requires recognition where probable and reliably measurable and separate disclosure of contingent liabilities (not as part of equity). ### Presentation, classification, and disclosures - Balance sheet presentation: consider showing assets less liabilities equaling equity given negative equity; classify current and non-current consistently with IPSAS 1 and GFSM 2001. - Statement of Changes in Net Assets/Equity should be a primary financial statement, not a note. - Operating statement should distinguish revenue from non-exchange and exchange transactions; expenses should be reported on a gross basis (current netting practice hides material amounts: ISK 35,104 million or over 6 percent of total expenditure ISK 575,950 million and over 12 percent of total operating expenditure ISK 277,349 million). - Cash flow statement: GoI currently uses indirect method; direct method is more informative — mission prepared direct method illustration for FY 2011 (Appendix IV). Key numbers from Appendix IV (ISK million): - Surpus/(deficit): (89,424) - Tax revenues and social security contributions: 441,397 (15,715) 425,682 - Total other revenues: 35,611 10,570 46,181 - Revenue from monetary assets: 3,535 314 3,849 - Operating expenditure excl. financing cost: (211,761) 29,711 (182,050) - Operating and consumption transfers: (241,896) 14,409 (227,487) - Financing cost: (65,588) - Net cash flows from operating activities — Indirect method: (50,135); Direct method: (37,918) - Net cash flows from investing activities — Indirect method: 108,195; Direct method: 95,978 - Net cash flows from financing activities — Indirect & Direct method: 146,469 - Net increase/(decrease) in cash and cash equivalents: 204,529 - Cash and cash equivalents at the beginning of the period: 317,486 - Effects of exchange rate changes on the balance of cash held in foreign currencies: 11,870 - Cash and cash equivalents at the end of the period: 533,885 ### Alignment between budget, financial statements, and statistics - Maintain alignment between budgets and accounts; budget documents should include a full set of projected/estimated financial statements for budget and forward years fully comparable to ex post IPSAS statements. - Recommendation: harmonize presentation so the operating statement displays both net lending/borrowing (GFSM 2001) and operating result (IPSAS) on the face of the statement, avoiding separate reconciliations. - Depreciation treatment for appropriation purposes: - Recommendation for Iceland: include depreciation as an expense in estimated financial statements but do not appropriate for depreciation initially; continue appropriation for purchase of assets only and revisit after experience is gained. - Timetable for budget alignment: - MoF should adopt presentation commending with the 2016 budget including full estimated financial statements. ### Phased implementation strategy, milestones, and timelines - Phased approach recommended (avoid big bang); key milestones and targets: - Phase I: 2014 Jan–Jun — prepare detailed implementation plan; start opening balance sheet work. - Trial opening balance sheet as at January 1, 2014 — target: September 2014. - Phase II: 2014 Jul–Dec — prepare trial financial statement templates and system adaptations. - Phase II/III: 2015 — trial financial statements for 2014; draft 2016 budget inputs. - Trial financial statements for 2014 available by June 30, 2015 to inform 2016 budget (drafts to Parliament by September 2015). - Phase IV: 2016 — second trial financial statements for 2015 (target: June 2016); formal budget incorporating IPSAS adjustments for 2016. - Phase V: 2017 — official IPSAS-based financial statements for 2016 including comparisons with budget (target: June 2017). - Specific deliverables and deadlines (summary of paragraph 111 recommendations): - Develop detailed implementation plan by March 2014. - Develop balance sheet as at January 1, 2014 by September 2014. - Analyze IT requirements by end-2014. - Issue guidelines for 2014 trial financial statements by September 2014 and update by September 2015 for 2015 statements. - Prepare full sets of separate and consolidated financial statements for 2014 by June 2015 and for 2015 by June 2016. - Prepare first official full IPSAS statements for 2016 by June 2017. - Develop communication and training strategy by June 2014. - INAO to review opening balance sheet and trial statements and commence auditing official IPSAS financial statements from 2016. ### Systems, procedures, and capacity development - System implications: - Oracle E-Business Suite already used and can record nonfinancial assets and calculate depreciation if reconfigured; initial consolidation may be done in Excel; consider further development of Oracle or acquisition of consolidation-specific software. - Some asset data reside in other registers and need to be transferred to accounting systems. - Training and communication: - Targeted training for Fjársýsla core team, INAO auditors, MoF budget analysts, accounting staff in ministries/agencies, and B/C class entities; training needs expected to be modest but focused. - Communication strategy to inform Althingi members and stakeholders should start early. - Legal and governance: - New OBL envisages an accounting standards board to approve standards; draft accounting policy should be approved by June 2014. - Identify and amend legal requirements to enable IPSAS implementation. ### Audit and role of INAO - 2012 audit not conducted in accordance with ISA or ISSAI; INAO is implementing ISSAI and plans to audit 2013 financial statements in accordance with ISSAI. - Mission recommends INAO apply ISSAIs commencing 2014 financial statements and prepare for expanded audit scope for consolidated statements (refer ISSAI 1600 on group audits and ISSAI 1220 on quality control). - INAO to review and report on trial opening balance sheets and trial financial statements and later audit official IPSAS financial statements from 2016. ### Summary of prioritized actions (selected recommendations) - Fjársýsla to: - Undertake analysis to identify controlled entities vs associates/joint ventures. - Identify, value, and record all assets and liabilities for opening balance sheet (including PP&E, software, inventories, employee benefits, financial instruments, public debt, provisions). - Establish consolidation procedures and eliminate intra-government balances. - Revise presentation of financial statements (balance sheet, statement of changes in net assets/equity as primary statement, expense classification by nature, gross reporting of revenues/expenses, comparative information). - Prepare direct method cash flow statement. - Prepare segment reporting using GFS sectors. - Include original and final budget in financial statements and explain differences; disclose budgetary basis. - Determine treatment of service concession arrangements and recognize assets/liabilities as required by IPSAS 32. - MoF to: - Adopt harmonized presentation for 2016 budget; include depreciation in estimated financial statements but not appropriate depreciation initially; revisit after experience. - INAO to: - Review opening IPSAS balance sheet as at January 1, 2014 and trial IPSAS financial statements for 2014 and 2015 and commence auditing IPSAS statements from 2016. *Source: IMF FAD TA mission report — Preface, Executive Summary, and selected chapters/excerpts from _cr14353.* ### Preface ................................................................................................................ ### _cr14353 - Preface ### Mission and context - A Fiscal Affairs Department (FAD) technical assistance (TA) mission visited Reykjavik during the period November 5–18, 2013 to advise the government on reforming accounting and reporting policies and practices in accordance with International Public Sector Accounting Standards (IPSAS). - The mission was led by Abdul Khan, and included Johann Seiwald and Frans van Schaik (PFM expert). - The mission worked with an IPSAS Working Group led by Mr. H. Hall and including Mr. Stefán Kjærnested, Mr. Pétur Jónsson, Ms. Helga Viðarsdóttir (Fjársýsla), Mr. Jóhann Rúnar Björgvinsson, Mr. Ingþór Karl Eiríksson (MoF), and Mr. Albert Ólafsson (INAO). - Meetings were held with Mr. Bjarni Benediktsson (Minister of Finance); Mr. Guðmundur Árnason (General Secretary); Mr. Thórhallur Arason (Deputy Secretary, MoF); Mr. Gunnar Hall (Director General, Fjársýsla); Mr. Nökkvi Bragason (Director General, MoF); INAO officials including Mr. Sveinn Arason, Mr. Ingi K. Magnússon, and Mr. Jón Loftur Björnsson; Central Bank of Iceland; Statistics Iceland (StatIce); Icelandic Road and Coastal Administration; Real Estate Agency; Landsvirkjun; Icelandic State Electricity; Student Loan Fund; Association of Local Authorities in Iceland; and the Budget Committee of the Althingi. ### Key conclusions from the Executive Summary - The government of Iceland has decided to reform its legal framework for budgeting by introducing a new organic budget law (OBL). The proposed OBL requires that fiscal reports follow internationally accepted standards: financial statements in accordance with IPSAS and statistical reports in accordance with Government Finance Statistics Manual of 2001 (GFSM 2001). - A gap analysis was undertaken to identify major reforms required to implement IPSAS while maintaining alignment with GFSM 2001-based budgets and budgetary reports. ### Consolidation and whole-of-government financial statements - IPSAS requires the central government to prepare consolidated accounts that include the central government and all entities it owns or otherwise controls. - Consolidated “whole-of-government” financial statements will provide a more complete view of resources controlled by the government and of liabilities, contingent liabilities, and fiscal risks. - Most government-controlled entities produce timely financial statements; larger entities follow International Financial Reporting Standards (IFRS) or similar standards, which reduces some consolidation challenges. ### Recognition of physical assets and balance sheet implications - Under the current framework, physical assets (roads, bridges, tunnels, land, buildings) are treated as expenses and written off in the year acquired. - Under IPSAS, these items are recognized as assets and included on the balance sheet. - Preliminary discussions indicate such assets are likely to constitute a material amount—"probably in excess of 60 percent of GDP"—and could nearly double the gross assets shown on 2011 financial statements. - Registers of these assets exist and in some cases show values, providing a solid foundation for IPSAS incorporation. ### Financial instruments, pensions, and debt valuation - Revisions to recognition and measurement of pension and debt liabilities are required. - Other material financial instruments should be reviewed in detail and IPSAS-required accounting and disclosures (including on credit, interest rate, and other risks) should be introduced. ### Cash flow statement and presentation - The current cash flow statement is prepared using the indirect method and does not show operating revenues and expenses such as tax revenues, employee emoluments, and transfer payments. - The direct method provides more useful information; the Iceland government cash flow statement using the direct method is illustrated in Appendix IV. ### Alignment between budget, financial statements, and statistics - Alignment of budget and financial statements must be maintained; budget documents should include a full set of projected or estimated financial statements for each budget and forward year that are fully comparable to ex post financial statements. - Budgets are expected to focus on GFSM 2001 indicators such as net lending/borrowing; IPSAS statements usually focus on surplus or deficit (operating result). A harmonized presentation of the operating statement should be adopted for both budgets and accounts. - The budget should recognize depreciation as an expense but need not appropriate for depreciation initially. Depreciation should be included in the budgeted operating statement to determine the operating result, but appropriation for depreciation is suggested to be deferred. ### Phased implementation strategy and key milestones - A phased approach is recommended, recognizing many existing accrual concepts are already broadly consistent with international standards. - Key transition steps include preparation of opening balance sheets as at January 1, 2014 and trial financial statements for 2014 and 2015 in parallel with existing reports. - The opening balance sheet and trial financial statements should be reviewed by the Icelandic National Audit Office (INAO), which should provide detailed comments. - Assuming the proposed OBL is enacted in 2014: - The budget of 2016 would be the first to follow IPSAS requirements, notably inclusion of depreciation as an expense. - IPSAS-based statements would replace existing financial statements from 2016 and be used to compare budgets with actuals. - System implications should be identified and addressed: the existing Oracle system has functionality for nonfinancial assets; initial consolidated statements may be produced in Excel; a more sophisticated solution should be considered based on experience (further development of existing system or acquisition of a consolidation-specific system). The budget system may also require changes. - Training needs are expected to be modest given tradition of accrual-based accounts, but a targeted training plan and a communication strategy are recommended for stakeholders including ministers and members of Althingi. ### Table 1 — Summary of Key Recommendations and Indicative Implementation Timelines (Phases) - Phases and timing headings as presented: - Phase I: 2014 Jan - Jun - Phase II: 2014 Jul - Dec - Phase II/III: 2015 - Phase IV: 2016 - Phase V: 2017 - Selected actions tied to phases (as presented in Table 1): - Prepare detailed implementation plan including communication and training strategy (Fjársýsla, MoF) - Prepare opening balance sheet as at January 1, 2014 incorporating values for all assets and liabilities (Fjársýsla) - Establish mechanisms to eliminate intra-government (including class A–C) transactions and balances (Fjársýsla) - Revise financial statements including notes in accordance with IPSAS (Fjársýsla) - Prepare consolidated financial statements (Fjársýsla) - Trial financial statements (2014 and 2015) - Official financial statements, including comparison with budget (2016) - Include both original and final budget in financial statements and explain the differences (Fjársýsla, MoF) - Review and report on opening balance sheet and trial financial statements (INAO) - Audit and report on financial statements in accordance with ISSAI (INAO) - Adopt harmonized presentation of budget and financial statements displaying net lending/borrowing and operating result (Fjársýsla, MoF) - Include estimates of depreciation in budget as part of operating expenses but not appropriations (MoF) - Prepare first budget (2016) aligned with IPSAS financial statements (MoF) ### Implementation support and next steps - The mission recommends: - A phased approach starting with opening balance sheet at January 1, 2014 and trial statements for 2014–2015. - INAO review of opening balance sheet and trial statements. - Adoption of a harmonized budget/accounts presentation. - Development of system, training, and communication plans. - Table 1 and Appendix VI provide further indicative implementation timelines and a phased approach to IPSAS implementation. *Source: IMF FAD TA mission report — Preface and Executive Summary (mission period November 5–18, 2013).* ### 2. A new organic budget law (OBL) is expected to be enacted to reform the legal ### 2. A new organic budget law (OBL) is expected to be enacted to reform the legal framework for budgeting ### Purpose and design of the proposed OBL - Designed to improve fiscal discipline, codify existing good practices, support sustainable fiscal policy, and put Iceland at the forefront of international budget practice. - Requires improvement of the fiscal reporting framework consistent with internationally accepted standards. ### Current reporting framework (strengths) - Based primarily on the Financial Reporting Act (FRA) of 1997. - Requires the reporting of an operating statement, a balance sheet, and a cash flow statement. - Close alignment of budgets and financial statements. - Iceland introduced accrual concepts in budgeting early and maintains an accrual budgeting framework with some modifications. ### Rationale for implementing international standards - Implementation of international standards will provide a more informed basis for fiscal policy and further improve transparency. - Since 1997, progress in international reporting standards includes: - Government Finance Statistics Manual (GFSM) of 2001 introducing accrual basis for statistical reports. - Issuance of International Public Sector Accounting Standards (IPSAS) on a wide range of issues. - The European Commission considering developing public sector accounting standards using IPSAS as a reference. - Expected improvements from IPSAS implementation: - Broader coverage of fiscal reports by including companies and other enterprises controlled by the government. - More comprehensive balance sheet recognition of nonfinancial assets. - These improvements would put Iceland at the forefront of public sector fiscal reporting practice. ### Mission review: scope and focus - Mission reviewed existing accounting policies and practices and identified the main differences with IPSAS. - Worked with the working group set up by the Government Financial Management Agency (Fjársýsla). - Gap analysis focused on major issues with material departures from international standards; other issues covered as practicable. - Developed an implementation strategy supported by a detailed plan. - Report structure referenced: - Chapter II: analysis of existing reporting policies and differences with IPSAS. - Chapter III: proposed general improvements to financial statements. - Chapter IV: alignment of budget and financial reports and harmonization of accounting and statistical reports. - Chapter V: issues related to audit. - Chapter VI: strategy for implementation with detailed implementation plan. ### Gap analysis — consolidated financial statements (key findings and recommendations) - Finding: GoI financial statements do not present consolidated information on all government-controlled entities; consolidation is confined to the budget sector. - Current practice: Key figures from selected entities’ operating statements, balance sheets, and cash flow statements are disclosed but not consolidated. - IPSAS requirements: - IPSAS 6 Consolidated and Separate Financial Statements requires consolidated financial statements of all entities controlled by the government. - IPSAS 7 Investments in Associates and IPSAS 8 Interests in Joint Ventures address related reporting for associates and joint ventures. - Recommendation: GoI should undertake an analysis to identify entities controlled by the government and distinguish associates or joint ventures as defined by IPSAS. - New OBL classification: entities divided into classes A (central government part of the general government sector), B (mainly public nonfinancial corporations), and C (mainly public financial corporations). - Practical notes: - Fjársýsla collects financial statements of virtually all listed “state entities” by the end of April (within four months after reporting date); some minor entities submit in May; one entity had not submitted 2012 financial statements by November 2013. - Controlled entities generally apply accounting policies broadly consistent with IPSAS because most government-owned business enterprises apply accrual accounting complying with IFRS or national accounting standards in accordance with European Directives. - Preparation of consolidated statements requires elimination of all inter-entity transactions and balances. - IPSAS transitional provision: entities adopting IPSAS for the first time are not required to eliminate balances and transactions between entities within the economic entity for a period of three years from first-time adoption. ### Definition and boundary of control (IPSAS guidance) - IPSAS 6 basis: consolidation boundaries determined by control for financial reporting purposes—control defined as “the power to govern the financial and operating policies of another entity so as to benefit from its activities.” - Judgment required to determine control; strategic control (ability to decide the strategy of another organization) is essential rather than routine operational control. - Boxed guidance: examples illustrating control (e.g., appoint/remove majority governing body members and power to dissolve the entity and obtain significant residual economic benefits). ### Investments in controlled entities and associates (policy and recommendation) - In separate financial statements, GoI should continue accounting for controlled entities and associates (class B and C) at cost (Note 1.2 Accounting Principles 3 and in Note 38). - IPSAS permits three accounting approaches in separate financial statements: a) Using the equity method as described in IPSAS 7 Investments in Associates; b) At cost; or c) As a financial instrument in accordance with IPSAS 29 Financial Instruments: Recognition and Measurement. - Mission recommendation: apply the cost method in GoI separate financial statements to ensure no gains and losses appear in the operating statement and to help maintain alignment of actual and budget figures in the operating statement. - Consolidated financial statements requirement: associates should be accounted for using the equity method; current GoI practice of accounting associates at historic cost is not IPSAS-compliant. - Equity method description: initial recognition at cost adjusted for post-acquisition changes in investor’s share of net assets/equity of the investee; investor’s surplus or deficit includes its share of the investee’s surplus or deficit (IPSAS 7, paragraph 7). ### Property, plant, and equipment (PP&E) — findings and required changes - Importance: PP&E are vital for service delivery; require proper recording, maintenance, safeguarding, and comprehensive reporting to support asset management and cost determination. - Risks of inadequate asset management: misuse, pilferage, loss, sub-optimal utilization, and excessive maintenance and replacement costs. - Finding: GoI’s class A entities do not recognize PP&E on their balance sheets—this is inconsistent with IPSAS 17 Property, Plant, and Equipment which requires recognition on the balance sheet. - IPSAS 17 accounting model choices: - Cost model: asset carried at cost less accumulated depreciation and impairment losses. - Revaluation model: asset carried at revalued amount (fair value at revaluation date less subsequent depreciation and impairment losses); revaluations should be carried out regularly. - IPSAS requires a consistent choice for an entire class of PP&E but allows different choices for different classes. - Revaluation increases are credited to a revaluation account in equity, with specific rules for recognition in surplus/deficit when reversing prior decreases. - Recommendation: GoI should analyze by class of PP&E which model is most suitable and apply the component approach to PP&E (depreciate each significant part separately). - Depreciation guidance: charge systematically over the asset’s useful life; method must reflect consumption pattern (e.g., straight-line, diminishing balance, units of production). ### Asset registers and valuation (examples and figures) - Existing asset registers: Iceland Road and Coastal Authority maintains a register of most central government transport infrastructure assets (register does not show values). - Authority estimate: replacement cost of its infrastructure assets could exceed ISK 1,000 billion (ISK 1 trillion, 61.4 percent of GDP). - Authority holds 13,000 km of roads, bridges, and tunnels. - Registers Iceland Agency keeps a register of central government land and buildings showing both market values and depreciated replacement cost, the latter totaling approximately ISK 120 billion (7.4 percent of GDP). - Key challenge: complete identification of all material existing assets, systematic recording, and valuation. - Recommendation: the INAO should review the existence and completeness of the assets and their valuation. ### Proposed centralization of PP&E accounting (arrangement and implications) - GoI is considering recognition of PP&E of all class A entities on the balance sheet of a new agency under the MoF. - Agency responsibility: maintenance of assets and renting assets to other class A entities (agency as lessor; other class A entities as lessees). - Expected benefit: simplify asset recognition and accounting required under IPSAS by centralizing accounting of assets and avoiding the need for class A entities to undertake this function. - Accounting implications: - If individual entities are not required to prepare IPSAS-based financial statements, they would report rent expense only. - If an entity prepares IPSAS-based financial statements, it may have to report the asset on its balance sheet and a corresponding liability if the lease transfers substantially all risks and rewards of ownership (finance lease). - Consolidated central government financial statements would eliminate leasing transactions and balances between class A entities. *Iceland: Gap analysis and recommendations on aligning Government of Iceland accounting policies and practices with IPSAS (excerpts).* ### 21. IPSAS contains transitional provisions allowing the government to not recognize ### _cr14353 - 21. IPSAS contains transitional provisions allowing the government to not recognize ### Property, Plant, and Equipment (IPSAS transitional provision) - IPSAS contains transitional provisions allowing the government to not recognize property, plant, and equipment for reporting periods beginning on a date within five years following the date of first-time adoption of IPSAS. - By not recognizing all assets at transition date and gradually adding classes of assets during an extended period of time, the integrity and transparency of the financial statements will only improve over the years. - The mission does not recommend applying this transitional provision. ### Intangible Assets (IPSAS 31) - Finding: The GoI does not present intangible assets in its financial statements. - IPSAS 31 Intangible Assets requires recognition of intangible assets, defined as identifiable non-monetary assets without physical substance. - GoI’s intangible assets mainly consist of computer software licenses such as Oracle E-Business Suite and internally developed software. - IPSAS 31 does not apply to rights sold by the government to third parties, e.g. fishing rights and rights to use the radio spectrum (3G). - Transitional provision: IPSAS allows a government that has not previously recognized intangible assets to apply IPSAS 31 prospectively; no intangible assets would be recognized on the opening statement of financial position and the intangible assets item would be populated gradually in future years as new intangible assets are acquired. - Recommendation: The mission does not recommend applying the prospective transitional provision because it limits transparency and understandability—some, but not all, intangible assets held by the government would be recognized. ### Leases (IPSAS 13) - Finding: The GoI does not report on finance leases in accordance with IPSAS. - IPSAS 13 Leases requires, among other things, lessees to recognize an asset and a liability in the case of a finance lease (a lease that transfers substantially all the risks and rewards incidental to ownership of an asset). - Recommendation: The GoI should amend its accounting policies for finance leases to comply with IPSAS 13. ### Inventories (IPSAS 11) - Current GoI practice: The GoI measures inventories at cost, taking into account impairment. - IPSAS 11 requires inventories to be measured at the lower of cost and net realizable value. - For inventories acquired through a non-exchange transaction (e.g., a donation), cost should be measured at fair value as at the date of acquisition. - Inventories held for: - Distribution at no charge or for a nominal charge; or - Consumption in the production process of goods to be distributed at no charge or for a nominal charge; - are required to be measured at the lower of cost and current replacement cost (the cost the government would incur to acquire the asset on the reporting date). - Recommendation: The GoI should amend its accounting policies for inventories to align with IPSAS 11. ### Employee Benefits (IPSAS 25) - Finding: The GoI is legally liable for obligations of Division B of the Pension Fund for State Employees and the Nurses' Pension Fund; liability includes obligations of other parties who belong to the funds, including various companies and organizations funded primarily by the GoI. - The statutory contributions to these funds are insufficient to cover fund members’ benefits earned. - Recommendation: A careful analysis of these arrangements is recommended to determine appropriate accounting and actuarial treatment. - IPSAS 25 defined benefit accounting requires recognition of a liability equal to the net total of: - The present value of the defined benefit obligation; - Plus any deferred actuarial gains minus any deferred actuarial losses minus any deferred past service costs; - Minus the fair value of any plan assets at the reporting date. - Actuarial gains and losses may be: - Recognized immediately in surplus or deficit; or - Deferred up to a maximum, with any excess amortized in surplus or deficit (the “corridor approach”); or - Recognized immediately directly in net assets/equity (in the statement of changes in net assets/equity). - Multi-employer plans: The GoI’s pension arrangements may qualify as multi-employer plans and a brief review indicated these plans are defined benefit plans. - If a multi-employer plan is a defined benefit plan, the government should account for its proportionate share of the defined benefit obligation, plan assets, and cost associated with the plan. - If sufficient information is not available to use defined benefit accounting, the government should account for the plan as if it were a defined contribution plan and disclose why sufficient information is not available. - Specific liabilities: - Note 45(d) provides information about pension liabilities due to Division A of the Pension Fund for State Employees (LSR). - The governing law, Act No.1/1997, appears to contain contradictory provisions regarding the wage-payers’ liability. - The note concludes that the overall negative position of the Fund indicates contributions need to be increased. - The note is shown as part of contingent liabilities, but the mission finds these appear to be liabilities to the extent accrued liabilities exceed relevant assets and should be recognized in accordance with IPSAS 25. - Paid leave: - The GoI does not recognize vacation earned, but not taken. A maximum number of six weeks can be carried over to the next year. - Recommendation: An accrual for accumulating paid leave should be recognized on the GoI’s balance sheet in accordance with IPSAS 25, paragraph 17. ### Financial Instruments (IPSAS 28, 29, 30) - Finding: The GoI’s financial statements provide limited insight into its financial instruments and fall short of the requirements of IPSAS 28, IPSAS 29, and IPSAS 30. - The standards are complex and extensive; the GoI should revise its accounting policies and notes accordingly. - Box 3 — Summary of key IPSAS requirements related to financial instruments: - Accounting policies, key definitions, and methods adopted, including criteria for recognition and the basis for measurement for each class of financial asset and financial liability should be disclosed, usually in the note on significant accounting policies. - Details of concessionary loans and financial guarantee contracts entered into at nil or nominal consideration. - Net income, expense from, and other changes (other economic flows) related to, financial assets. - Description of financial management objectives and market risk (including interest rate risk, currency risk, and other price risk), credit risk, and liquidity risk. Risks associated with each major class of finance instruments need to be discussed. - The GoI has not entered into any swap agreements (confirmed by GoI’s debt management unit, led by the Central Bank of Iceland). - The government is considering swaps to guard against: - Interest rate risk on borrowings with a variable interest rate; and - Foreign currency risk on borrowings denominated in foreign currencies, notably Euro and US dollar. - Recommendation: When considering swaps, the GoI should take IPSAS 28, 29, and 30 reporting guidance into account. ### Public Debt Valuation (IPSAS 29) - Long-term borrowings for the central government part of the general government sector amount to ISK 1.4 trillion as per December 31, 2012 (87 percent of GDP). - Finding: The GoI measures its public debt including Treasury bills at face value and any premium or discount is taken to surplus or loss at the moment of issue of the Treasury bill. - IPSAS requires many assets and liabilities, including public debt, to be measured at amortized cost. - Amortized cost should be used rather than historical cost or face value if the difference is material. - Amortized cost definition: amount at which a financial asset or liability is measured at initial recognition, less principal repayments and plus or minus any unamortized original premium or discount. - IPSAS 29 requires the amortized cost to be calculated using the effective interest method. - The effective interest rate exactly discounts the expected stream of future cash payments or receipts through maturity to the net carrying amount at initial recognition; it is the internal rate of return. - Recommendation: The mission recommends measuring public debt liabilities in accordance with IPSAS 29. ### Amortized Cost Example (Box 4) - Assumptions: - Coupon rate of 4 percent; - Face value of the bond of 100 (redemption amount); - An initial consideration (actual receipts from issuing the bond) of 90; - Transaction costs of issuing the bond of 1; - Duration of five years. - The effective interest rate is calculated as 6.66 percent which is the internal rate of return (=IRR function in Excel) of a cash inflow of 89, followed by annual cash outflows of 4 and a redemption amount of 100. - Carrying amount table (measured at amortized cost): - Initial consideration 90 - Transaction cost and discount or premium -1 - 01-01-2010: 6.66% 89 - 2010: 89.00 — Interest charge at 5.93 — Cash flow -4 — Carrying amount carried forward 90.93 - 2011: 90.93 — Interest charge at 6.05 — Cash flow -4 — Carrying amount carried forward 92.98 - 2012: 92.98 — Interest charge at 6.19 — Cash flow -4 — Carrying amount carried forward 95.17 - 2013: 95.17 — Interest charge at 6.34 — Cash flow -4 — Carrying amount carried forward 97.51 - 2014: 97.51 — Interest charge at 6.49 — Cash flow -104 — Carrying amount carried forward 0.00 ### Presentation of Financial Statements (IPSAS 1) - Balance sheet presentation: - Finding: The GoI presents the balance sheet showing that total assets equal total liabilities and equity. - Recommendation: A more informative presentation may be to show assets less liabilities equaling equity, particularly since Iceland’s equity is negative; the current presentation could lead users to interpret equity as a “negative liability.” - Classification of assets and liabilities could be made consistent with GFSM 2001. - Current classification: Assets are classified into “high-risk assets and long-term receivables” and “current assets.” - IPSAS 1 (paragraphs 76 to 87) requires current and non-current assets to be separately classified on the face of the statement of financial position, except where a liquidity-based presentation is reliable and more relevant. - Recommendation: Revise presentation of the balance sheet. - Statement of Changes in Net Assets/Equity: - Finding: The GoI presents changes in net assets/equity as part of the note disclosure on equity. - IPSAS 1 requires presenting a Statement of Changes in Net Assets/Equity as one of the primary financial statements rather than as a note disclosure. - Accumulated surplus/deficit should be shown as a separate component of equity. - Classification of expenses: - Finding: The GoI provides classification of expenses by nature as a note disclosure (Note 25). - IPSAS allows providing this classification on the face of the operating statement as an allowed alternative (IPSAS 1, paragraphs 109, 115); this would facilitate consolidation. - Statement of Financial Performance: - Finding: The GoI operating statement does not distinguish between revenue from non-exchange transactions (taxes and transfers) and revenue from exchange transactions for some items. - IPSAS 1 requires a distinction between the two in the statement of financial performance. - Example: Fines and compensation (Note 21) — fines seem to be revenues from non-exchange transactions and compensations relate to revenues from exchange transactions. Alternatively, if amounts do not include compensation revenue, the note title should be revised. The 2011 financial statements do not appear to include any amounts that may be considered in the nature of compensation. - Offsetting: - Finding: Some revenues and expenditure of government entities are not reported on a gross basis; expenditures are recognized net of institutions’ independent revenues (mandated by the Act, Art. 12) and consistent with budget presentation. - Materiality: ISK 35,104 million or over 6 percent of total expenditure (ISK 575,950 million) and over 12 percent of total operating expenditure (ISK 277,349 million). - IPSAS 1 (paragraphs 48-50) does not allow offsetting; IPSAS requires all revenues and expenses to be included on a gross basis. - Recommendation: All revenues should be accounted for on a gross basis to ensure transparency and accountability. - Notes and reconciliations: - Finding: Notes to the balance sheet items follow the format of reconciliation between the balance at the beginning and closing of the year. This is an IPSAS requirement for some assets and liabilities but may cause information overload for many other balance sheet items. - Comparative information: - Finding: The GoI financial statements do not present comparative information for all amounts reported. - IPSAS requires comparative presentation except where an IPSAS permits or requires otherwise (IPSAS 1, paragraph 53). - Example: Providing the reconciliation for the year 2011 triggers the requirement to also provide the reconciliation for the year 2010 in the 2011 financial statements. ### Cash Flow Statement - Method: - The GoI reports the cash flow statement according to the indirect method. - IPSAS allows both direct and indirect methods but encourages the direct method as more informative. - For entities using the direct method, IPSASB also encourages providing a reconciliation of the surplus/deficit from ordinary activities with the net cash flow from operating activities (usually in notes). - Action taken: The mission supported the GoI in preparing a direct method cash flow statement for FY 2011. Appendix 4 illustrates preparation using the GoI’s 2011 indirect cash flow statement. - Specific revisions recommended: - From the cash flow statement in the 2011 financial statements the line item “the translation difference and revaluation of cash and bank accounts (Gengismunur og endurmat sjóðs- og bankareikninga)” under “financing activities” should be removed. - The description of the line item “translation difference and revaluation of cash and bank accounts” should be replaced by “effects of exchange rate changes on the balance of cash held in foreign currencies.” *Source: _cr14353 - 21. IPSAS contains transitional provisions allowing the government to not recognize* ### 46. The GoI recognizes impact of exchange-rate movements on loan accounts ### 46. The GoI recognizes impact of exchange-rate movements on loan accounts ### Exchange-rate revaluation and IPSAS requirements - The GoI recognizes impact of exchange-rate movements on loan accounts through a revaluation account. - IPSAS 4, paragraph 35, requires exchange differences to be recognized in surplus or deficit in the period in which they arise. - This requirement applies to exchange differences arising: - (a) on the settlement of monetary items; or - (b) on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements. - Note: "6 Note 1.2.3 to the 2011 financial statements." ### M. Events after the Reporting Date ### Non-reporting and IPSAS 14 implications - The GoI does not report on events after the reporting date. - IPSAS 14 Events after the reporting date establishes criteria for deciding whether the financial statements should be adjusted for an event occurring after the reporting date. - IPSAS 14 distinguishes between: - Adjustable events (evidence of conditions that existed at the reporting date; e.g., a lost court case that was pending at the reporting date). - Non-adjustable events (indicative of conditions that arose after the reporting date; e.g., a decrease in the value of real estate after the reporting date). ### N. Segment Reporting ### Current practice and IPSAS expectations - The GoI does not provide segment reporting. - IPSAS requires reporting financial information by segments to achieve objectives including: - To better understand the entity’s past performance; - To identify the resources allocated to support the major activities of the entity; - To enhance the transparency of financial reporting; and - To enable the entity to better discharge its accountability obligations. - An entity normally looks to its organizational structure and internal reporting system for identifying service and geographical segments. - A primary and secondary segment reporting structure may be adopted with limited disclosures about secondary segments. - The government should disclose: - Segment revenue and segment expense for each segment; - Segment revenue from budget appropriation or similar allocation, segment revenue from other external sources, and segment revenue from transactions with other segments separately; - Total carrying amount of segment assets and segment liabilities for each segment; - Total cost incurred during the period to acquire segment assets that are expected to be used during more than one period for each segment. - In consolidated financial statements, the GoI should distinguish between three segments: - general government (class A), - public non-financial corporation’s (class B), - public financial corporation’s (class C). ### Presentation practices recommended - The GoI financial statements present “next year’s installments transferred to short-term receivables” as a negative amount under the long-term receivables (installments on long-term receivables due within 12 months). - The mission recommends not including negative amounts in this breakdown on the face of the financial statements because this is not common practice. - The same recommendation applies to next year’s installments transferred to short-term liabilities, shown as a negative amount under the long-term liabilities. ### O. Provisions, Contingent Liabilities, and Contingent Assets ### Recognition and disclosure issues - The GoI’s balance sheet does not present any provisions. - IPSAS 19 Provisions, Contingent Liabilities, and Contingent Assets requires provisions and prescribes recognition criteria and measurement bases for provisions to ensure sufficient disclosure of their nature, timing, and amount. - Provisions may be required for onerous contracts, restructuring, guaranties, court cases, refunds, and site restoration. - If payments are likely in respect of guarantees or court cases and amounts can be measured reliably, provisions should be included in the balance sheet. ### Contingent liabilities presentation - The GoI discloses information about guarantees and long-term agreements as part of the note on equity (Note 45) and separately in Special Summary 16 Binding long-term agreements. - IPSAS 19 requires disclosures of contingent liabilities including guarantees and long-term agreements in a separate note. - Contingent liabilities: - Typically arise when there is a possible obligation to be confirmed by a future event outside the control of the entity; - Require disclosure only; they are not recognized as a liability on the statement of financial position except when it is considered probable that payments would have to be made; - Require no disclosure if the possibility of outflow is remote. - Mission recommendation: disclose contingent liabilities and commitments as separate notes, not as part of the note on equity. ### P. Related Party Disclosures ### Current omission and IPSAS 20 requirements - The GoI does not include any information about related parties in its financial statements. - IPSAS 20 Related Party Disclosures requires entities to disclose the existence of related-party relationships and transactions between the entity and its related parties for accountability and to facilitate better understanding of financial position and performance. ### Definition and disclosure requirements - Related parties include parties that control or have significant influence over the reporting entity and parties that are controlled or significantly influenced by the reporting entity. - Examples: - The former includes controlling entities, owners, major investors, and key management personnel. - The latter includes controlled entities, joint ventures, associates, and postemployment benefit plans. - If the reporting entity and another entity are subject to common control, these entities are also considered related parties (meaning class A, B, and C entities, and any associates would be related parties). - IPSAS requires disclosure of: - Relationships involving control, even when there have been no transactions; - Related-party transactions; - Remuneration of key management personnel. ### Q. Budget Information in Financial Statements ### Current budget presentation and IPSAS 24 - The Althingi approves a budget document which includes appendix tables for both cash flow statement and operating statement. - The GoI applies cash budgeting and a form of modified accrual budgeting—modified because the operating statement reports capital expenditure rather than depreciation and amortization as an expense. - In accordance with IPSAS 24 Presentation of Budget Information in Financial Statements, the GoI presents a comparison of the budget amounts and actual amounts for both the cash flow statement and the operating statement. - IPSAS 24 offers two alternatives for disclosing the comparison: a separate statement or an additional column in the financial statements. The GoI applies the additional column alternative. - Example: the cash flow statement presents actual increase in cash (the “accounts 2011” column) and compares this to the budgeted increase in cash (the “budget/supplementary budget 2011” column). ### Areas of non-compliance and recommendations - The GoI presents a comparison of the final budget amounts (labeled budget/supp. budget) and actual amounts but does not show the original budget. - IPSAS requires both the original and final budget amounts in separate columns. - The GoI does not explain whether changes between the original and final budget are a consequence of reallocations within the budget or other factors. - IPSAS 24 requires such an explanation unless the explanation is included in a report disclosed prior to, at the same time as, or in conjunction with the financial statements and the notes refer to such a report. - The GoI does not comply with this requirement. - Mission recommendations: - Present both original and final budget figures; - Provide an explanation of material differences between actual and budget figures; - Explain whether changes between original and final budget are due to reallocations within the budget or other factors. ### Budgetary basis disclosure - The GoI’s financial statements do not explain the accounting basis used in the preparation and presentation of the budget. - IPSAS 24, paragraph 39 requires an explanation of the budgetary basis (cash, accrual, or some modification thereof) and classification basis adopted in the approved budget. - This explanation should be included in the notes to the financial statements. - The government should also identify in the notes the entities included in the approved budget. ### R. Service Concession Arrangements ### Current status and IPSAS 32 guidance - The GoI currently does not include any service concession arrangements in its financial statements. - IPSAS requires recognition of the service concession asset and related liability if certain conditions are met, relating to control over the asset during and at the end of the arrangement. - Recognition of service concession assets and related liabilities in accordance with IPSAS is likely to have only a limited impact on the statement of financial position at this stage, but this may change if more such contracts are entered into. - The mission recommends adoption of IPSAS 32 Service Concession Arrangements: Grantor and: - Analyze existing and future service concession arrangements; - Recognize service concession assets if required by the standard; - Recognize liabilities under the financial liability model or grant of a right to the operator model, as appropriate; - Account for arrangements not within the scope of IPSAS 32 using other IPSASs, as appropriate to their specific terms and conditions. - Additional guidance on accounting for service concession arrangements is provided in Appendix VI to the report at the request of the authorities. ### S. Summary of Recommendations ### Strategic and technical actions recommended for Fjársýsla - Undertake an analysis of entities to identify those that are controlled by the government and those that are more in the nature of associates or joint ventures as defined by IPSAS. - Determine accounting practices applied by controlled entities, associates and joint ventures, and identify any adjustments needed at consolidation. - Establish mechanisms to identify, reconcile, and eliminate transactions and balances between the government and controlled entities. - Identify and determine a value for all assets and liabilities to be recognized on the opening balance sheet in accordance with IPSAS, including: - entities accounted for using the equity-method; - property, plant, and equipment, including finance leased assets; - software; - inventories; - employee benefits liabilities; - financial instruments; - public debt; and - provisions. - Revise the presentation of the financial statements, including: - balance sheet; - changes in net assets/equity as a primary statement rather than a note; - classification of expenses by nature; - distinguish between revenue from exchange and non-exchange transactions; - report revenues and expenses on a gross basis rather than net basis; and - previous period comparative information for all amounts. - Prepare the cash flow statement in accordance with the direct method. - Prepare segment reporting using the GFS sectors as segments. - Include related party disclosures. - Include both the original and final budget in the financial statements and explain the differences between them. - Explain the accounting basis applied for the preparation of the budget. - Determine the nature of the service concession arrangements and recognize an asset and a liability if appropriate. - Determine transitional provisions to be applied, if any. ### Implementation timing - The timeline for the implementation of these recommendations is discussed in Chapter VI and set out in more detail in Appendix VII Indicative plan for implementation of IPSAS. ### III. GENERAL IMPROVEMENTS TO FINANCIAL STATEMENTS ### A. Analysis of Expenses (paragraphs 60–61) - Summary 2 (not part of financial statements) and the operating statement combine administrative and economic classifications. - Examples of mixed classification: - Summary 2 shows expenditures classified partly by administrative units, partly by economic categories, and partly by projects. - The operating statement shows expenditures mainly by administrative classification but includes an extra line, “financing cost,” which is not an administrative category. - Note 25’s last table mixes administrative classification, economic classification (pension), projects, and reverts to economic classification (services purchased, transfers, and special expenditures including interest). - The mission agrees these analyses are useful and recommends supplementing them with a standard analysis of expenditure by functional, economic, and administrative classification. ### B. Functional Classification (paragraphs 62–63) - Functional classification is not entirely consistent with COFOG or GFSM 2001. - At the highest level, an additional category, "irregular expenditure," has been added to the 10 major COFOG functions; Notes 25 and 33 explain this category includes “special state expenditures that fluctuate strongly from one year to the next,” such as expenditures on guarantees, pension liabilities, tax paid on financial income, tax claims written-off, and equalization of invalidity burden of pension funds. - The mission considers introducing a new function at this level as not good practice; these items should be classified under one of the ten main COFOG functions. - The mission supports a proposed new structure being considered by the authorities to provide clearer mapping with COFOG. ### C. Summary of Recommendations (paragraph 64) - Recommendations: - Supplement existing special analyses of expenditures with analyses of expenditure in accordance with standard economic, functional, and administrative classifications. - MoF and Fjársýsla should develop economic and functional classifications consistent with GFS/COFOG and avoid departures from these standards at high levels of the classification system; in particular, discontinue “irregular expenditure” as a highest level function. ### IV. ALIGNMENT OF BUDGET, FINANCIAL STATEMENTS, AND STATISTICAL REPORTS ### A. Introduction (paragraphs 65–66) - One strength of the existing budgeting framework is close alignment between budget and annual accounts. - Financial reforms in the 1990s, including the Financial Reporting Act (FRA) of 1997, introduced accrual accounting reforms and similar concepts for budgeting to achieve consistent comparison of plans and outcomes. - Iceland implemented accrual concepts in both budgets and accounts, achieving a level of alignment uncommon internationally. - This alignment must be maintained following implementation of IPSAS. - Significant changes required to implement IPSAS include preparation of consolidated financial statements for the central government and its controlled entities and recognition of nonfinancial assets. - Consolidation is not expected to impact the budget. - Requirements related to nonfinancial assets have implications for the budget. - Valuation policies for assets and liabilities may affect budgets by quantifying full financial implications of policy decisions. ### B. Estimated Financial Statements (paragraphs 67–68) - Budget documents should include full estimated financial statements for the budget year and preferably the next five years. - Coverage should be consistent with the budget; in IPSAS context these are the "separate" financial statements of the central government (budget sector). - Estimated financial statements should include: - an operating statement, - a balance sheet, - a cash flow statement, - a statement of changes in net assets/equity, and related notes. - Estimated statements should apply the same accounting policies as ex post financial statements. - Where reliable measurement is not possible (e.g., some tax accrual estimates), budget estimates may be closer to cash estimates; such cases and uncertainties should be disclosed in notes. - Full consolidated estimated financial statements for the central government and its controlled entities are not required. - Although fiscal policy should be informed by a comprehensive view, consolidated ex post financial statements are expected to be inputs to high-level reports by the budget department of the MoF. - There is no requirement to produce full estimated consolidated financial statements in accordance with IPSAS for the budget and forward years. *Source: _cr14353 - 46. The GoI recognizes impact of exchange-rate movements on loan accounts* ### 69. The recognition of nonfinancial assets will have a significant effect on the ### _cr14353 - 69. The recognition of nonfinancial assets will have a significant effect on the ### Recognition of nonfinancial assets and budgetary impact - Under the existing framework purchase of such assets is treated as an expense both in the budget and the annual accounts. - Recognition of nonfinancial assets means purchases would no longer be treated as an expense but as acquisition of assets, or a balance sheet transaction. - Instead a new expense—depreciation—would be recognized in the operating statement. - Important implication: this change alters the operating result and the total balance in the Treasury operating statement included in current budget documentation. ### Depreciation in estimated financial statements and fiscal indicators - Depreciation should be recognized as an expense in the estimated financial statements. - Implication: the purchase of assets would no longer be treated as an expense in estimated financial statements. - Under the proposed OBL the GFSM 2001 based net lending/borrowing will be the primary fiscal indicator. - Net lending/borrowing is calculated by excluding depreciation and including net acquisition of assets as expenditure; therefore: - This indicator will be unaffected by the inclusion of depreciation as an expense in the estimated financial statements. ### Presentation harmonization - A common harmonized format should be adopted to present estimated and ex post financial statements. - The operating statement should be presented in a format that enables the generation of both IPSAS and GFSM 2001 based key indicators. - Benefit: one operating statement format and no separate reconciliations between net lending/borrowing and operating result will be required. - The FAD TA Report of January 2012 discussed this issue and provided an example of the presentation. ### Options for treatment of depreciation for appropriation purposes (examples of country practice) - Appropriate depreciation and allow agencies to use this appropriation for routine asset replacement; any additional capital expenditure being separately appropriated — New Zealand uses this approach; - Appropriate depreciation and capital expenditure, but prohibit the use of the appropriation for depreciation for any cash expenditure under other budget items — Switzerland uses this approach; - Appropriate both accrual based expenses and cash expenditure and impose legal controls on both — the U.K. uses this approach; and - Appropriate capital expenditure, but not depreciation; estimated financial statements include depreciation as an expense — Australia uses this approach. ### Recommendation on appropriation of depreciation for Iceland - At this stage, depreciation need not be appropriated. - Rationale: - The first option (appropriating depreciation for routine replacement) maintains maximum alignment but can introduce complexities during initial IPSAS implementation. - Swiss and U.K. approaches add controls but may introduce complexities best avoided at this stage. - Suggested framework for Iceland: - Treat depreciation as an expense in the estimated financial statements and other relevant budget documents. - Continue appropriation for purchase of assets (not depreciation). - Advantage: avoids a major change to the existing appropriation framework while ensuring budgets and annual accounts are fully aligned by treating depreciation as an expense in estimated financial statements. - MoF should revisit the issue after a few years when adequate experience and data on depreciation estimation have been accumulated. ### Summary of key recommendations (paragraph 74) - MoF should adopt a presentation of the budget (commencing with the 2016 budget) that includes a full set of estimated financial statements—including an operating statement, a balance sheet, a cash flow statement, a statement of changes in net assets/equity, and relevant notes; - MoF and Fjársýsla should adopt a presentation of the estimated and ex post operating statement that displays on the face of the statement both the net lending/borrowing and the operating result, showing the relationship between these two indicators; - MoF should include accrual based revenues and expenses, particularly depreciation, in accordance with IPSAS based accounting policies adopted for ex post financial statements; Fjársýsla should provide necessary information to the MoF to facilitate this process; and - Depreciation need not be appropriated at this stage. MoF should revisit this issue after a few years based on experience of dealing with depreciation—particularly estimating depreciation for future years. ### Auditing standards and role of INAO - The independent audit of the 2012 financial statements was not conducted in accordance with internationally accepted auditing standards. - The audit report on the 2012 financial statements issued by the Icelandic National Audit Office (INAO) states the audit was carried out in accordance with the Act on the National Audit Office and good auditing practices for state entities; this Act does not require compliance with International Standards on Auditing (ISA) or International Standards of Supreme Audit Institutions (ISSAI). - INAO is in the process of implementing ISSAI and plans to carry out the audit of the 2013 financial statements in accordance with ISSAI; INAO may not refer to ISSAI in the audit opinion until it is satisfied that full compliance has been achieved. - Parliament is expected to decide shortly on an updated Act on INAO; under the proposed new Act it will remain the Auditor General’s responsibility to choose the auditing standards applied. - Mission recommendation: apply ISSAIs to ensure high-quality audits (commencing 2014 financial statements). - Consolidated financial statements will expand the scope of work of the Auditor General and the INAO considerably; guidance is provided by ISSAI 1600 and related practice notes on group audits and by ISSAI 1220 on quality control. - Mission recommendation: INAO should prepare for extended responsibilities in a timely manner. ### Strategy and phased implementation plan for IPSAS - Implementation should be carefully planned and managed to avoid undue disruption while resolving key issues in timely sequence. - Implementation strategy builds on existing accrual-based accounting (since 1998) and existing IT systems and skills; proposed as a phased implementation focusing first on consolidated financial statements and reporting of nonfinancial assets. - Two general approaches: - Big bang: switch to full IPSAS compliance from a particular date (identified as higher risk). - Phased approach: progressive implementation in a planned sequence (recommended). - Use of IPSAS transitional provisions can reduce opening-balance work but limits short-term benefits and may affect fair presentation and audit opinion. - Implementation should initially focus on ex post reporting; apply IPSAS to financial statements first, then use experience and data (e.g., for depreciation) to inform budgeting. - IPSAS-based financial statements should initially be prepared on a trial basis in parallel with official accounts on the existing basis. ### Phased approach timeline and milestones (paragraph 88 and Table 2) - Trial opening balance sheet as at January 1, 2014 – target: September 2014; - Trial financial statements for 2014 – target: June 2015; - Formal budget incorporating relevant IPSAS adjustments for 2016 – drafts should be ready for parliament by September 2015; - Second more refined trial financial statements for 2015 – target: June 2016; - Official IPSAS-based financial statements for 2016 including comparisons with budget – target: June 2017. ### Roles and review during implementation - INAO should support Fjársýsla and Ministry of Finance during implementation while maintaining independence. - INAO to issue review reports on: - Trial opening balance sheets (as at January 1, 2014); - Trial annual financial statements for 2014 and 2015; - Fjársýsla and MoF should consider INAO comments systematically and make appropriate improvements to financial statements, accounting policies, systems, and processes. ### Phase I specifics (Trial opening balance sheet as at January 1, 2014) - Prepare two balance sheets to be completed by September 2014: - A balance sheet for the budgetary central government (class A) (“separate balance sheet”) including nonfinancial assets and restatements of other assets and liabilities in accordance with IPSAS; - A balance sheet of the government and its controlled entities (class B and C) (“consolidated balance sheet”) eliminating inter-entity balances at least within the A class and between A and B as well as A and C classes, including nonfinancial assets and restatement of assets and liabilities in accordance with IPSAS; - INAO should review these balance sheets and provide a review report to the Fjársýsla and the MoF. *Source: _cr14353 - 69. The recognition of nonfinancial assets will have a significant effect on the (IMF PDF chapter).* ### 91. The balance sheets would be prepared in addition to the financial statements ### _cr14353 - 91. The balance sheets would be prepared in addition to the financial statements ### Preparation of an opening IPSAS balance sheet (paragraphs 91–93) - Opening balance sheet to be prepared in addition to financial statements according to existing accounting practices. - Necessary first step: stocktaking of assets and liabilities and valuation according to IPSAS standards to arrive at an opening balance sheet prepared in accordance with IPSAS. - This step should contain: - (i) a revaluation of already recognized items, if necessary (see Chapter II); - (ii) the recognition and initial valuation of nonfinancial assets; and - (iii) the consolidation of controlled entities. - Acknowledgement that the first balance sheet may not be fully compliant with IPSAS and further improvements may be required during preparation of trial financial statements for 2014 and 2015. - Main implementation activities required for the opening balance sheet: - (i) use existing databases to provide information for nonfinancial and intangible assets to calculate values for the balance sheet; - (ii) collect information on inter-entity balances to enable preparation of the consolidated balance sheet of A, B, and C classes; - (iii) revalue pension liabilities and recognize provisions in the balance sheet. - Detailed activities are outlined in Appendix VII. The process and outcome of developing the trial opening balance sheet should be documented. - Preparation does not require revision of the IT-system; information prepared for current statements can be combined and, if necessary, revalued (e.g., pension liabilities) with additional required information (e.g., non-financial assets) in an Excel spreadsheet. - This process would introduce staff in Fjársýsla and in the MoF to challenges involved with IPSAS implementation. ### Phase II: First trial financial statements (2014) (paragraphs 94–97) - The first full set of financial statements in accordance with IPSAS should be prepared for 2014. - Both separate financial statements (for the budgetary central government) and consolidated financial statements (for A, B, and C class of entities) should be prepared10 according to IPSAS to the extent practicable. - Statements should include: balance sheet, operating statement, cash flow statement, and statement of changes in net assets/equity. - IPSAS 24 constraints: - Operating statement and cash flow statement cannot include budget figures (IPSAS 24 Budget information in the financial statements, paragraph 21). - Official financial statements of 2014 should include a comparison of budget and actuals on a comparable basis (IPSAS 24, paragraph 14). - Financial statements should be available by June 30, 2015 as they provide the basis for development of the budget for 2016. - Operating statement should present both operating result and net lending/borrowing and include reconciliation between the two on the face of the operating statement.11 - Consolidation expectations: - First set of consolidated statements may not achieve full consolidation (elimination of all transactions and balances among consolidated entities). - 2014 consolidated statements may eliminate only some material transactions and balances, with objective of full consolidation in the following year. - Authorities considering initially eliminating transactions and balances among A and B, and A and C class of entities, while aggregating transactions and balances among B and C class of entities. - INAO review: - Central government and consolidated financial statements should be subject to review by the INAO to assess consistency with IPSAS. - INAO should report departures from IPSAS and make recommendations. - Financial statements with INAO report could be published but not essential provided existing financial statements and related audit reports are published. ### Systems and procedural changes (paragraphs 97, 102–104) - During 2014, assess requirements for systems and procedures to record transactions and balances in accordance with IPSAS. - Recording changes: - Purchase and sale of nonfinancial assets should be recorded as transactions in assets rather than expenses (current system records as expenses). - A consolidation system and related procedures should be developed. - System implications: - Implementation strategy envisages initial consolidation using simple systems (perhaps Excel); consider Oracle E-Business Suite for consolidation or specialized consolidation software. - Fjársýsla has used Oracle E-Business Suite for more than ten years; Fjársýsla performs accounting for most class A entities; 8 percent of agencies use other systems and transfer accounting data to Oracle monthly. - Oracle can record nonfinancial assets and calculate depreciation; key requirement is to activate functionality after necessary reconfiguration. - Some asset information (particularly equipment) is recorded in the asset module but not integrated with the general ledger module. - Important classes of nonfinancial assets are registered in other applications; data can be transferred to Oracle for IPSAS-based financial statements. - For infrastructure assets (roads, bridges, tunnels), land and buildings: registers exist with detailed information; historical or depreciated replacement cost and/or market value information is available; systems have information about depreciation — for these assets no immediate major changes to Oracle are expected. ### Phase III–V timeline and objectives (paragraphs 98–101) - Phase III: Budget of 2016 (paragraph 98) - First budget aligned with IPSAS financial statements expected to be prepared for 2016. - Implementation requires recognition of depreciation as an expense; 2016 is first year depreciation can realistically be estimated for the budget and forward years. - 2014 financial statements expected to be ready by June 2015 to give time to prepare estimates to be submitted to the Althingi by September 2015. - From 2016 budgets and financial statements would be aligned; operating statement for both budget and financial statements would include comparable revenues and expenses, including depreciation. - Phase IV: Refined trial financial statements (2015) (paragraphs 99–100) - 2015 financial statements should make further progress toward IPSAS requirements and act on INAO findings with objective of full compliance. - All material nonfinancial assets should be included and material intra-government transactions and balances identified and eliminated. - INAO to conduct detailed review and report findings to the Minister of Finance and Fjársýsla; Minister to give directions to resolve issues before first official IPSAS statements for 2016. - Phase V: First official IPSAS based financial statements (2016) (paragraph 101) - 2016 financial statements should be subject to audit by the INAO. - Traditional financial statements can be discontinued and replaced by IPSAS-based financial statements prepared in accordance with IPSAS and relevant laws and regulations. - Any material departures from standards should be disclosed and explained and, where possible, quantified. - INAO will provide an audit opinion on the financial statements in accordance with the ISSAI. ### Training, communication, and capacity development (paragraphs 105–108) - Training strategy should reflect strengths of existing systems and procedures; staff already familiar with accrual-based accounting and reporting. - Training needs: - Core Fjársýsla team and INAO auditors: broad general knowledge of IPSAS and GFS; specialist expertise can be sought externally; training activities should be initiated as soon as possible. - Budget analysts in the MoF: training to understand IPSAS reports to prepare the budget in new format; a core MoF staff should be trained comprehensively on IPSAS standards. - Accounting and budget/finance staff in ministries and agencies: specific training on system changes and conceptual issues. - Staff in B and C class entities preparing consolidated information: documentation of requirements and some training where necessary; many officials are familiar with IFRS so training requirements not expected to be extensive. - Relevant staff in line ministries: specific training to understand IPSAS-based statements. - Communication: - Develop and execute a communications strategy to secure support of key stakeholders. - Members of Althingi and key advisors should be provided explanations of IPSAS-based financial statements and their oversight uses. - MoF, INAO, and key ministry officials should be briefed on objectives and progress, focusing on how reforms help perform functions better. - Early start of communication during the preparatory phase recommended. ### Legal, technical assistance, and other implementation issues (paragraphs 109–110) - Legal requirements must be identified and amended accordingly. - New OBL foresees an accounting standards board to decide whether a standard should be applied; board must formally approve standards before financial statements implementation in 2016. - Draft of the accounting policy should be approved by June 2014 to guide implementation. - Full accounting policy should be approved well in advance of formal implementation. - Fjársýsla should develop necessary guidelines so trial financial statements and financial statements as of 2016 can be prepared. - Other legal requirements should be identified and amended accordingly. - Further technical assistance (TA) may be helpful, particularly on IPSAS-related issues and developing form and content of financial statements that meet IPSAS and GFS requirements. Any TA needs would be considered by FAD management. ### Summary of Recommendations (paragraph 111) - Fjársýsla should develop a detailed implementation plan by March 2014. - Fjársýsla should develop, by September 2014, a balance sheet as at January 1, 2014 based on IPSAS. - Fjársýsla should analyze IT-requirements by the end of 2014. - Fjársýsla should issue the necessary guidelines by September 2014 in connection with the preparation of the trial financial statements for 2014; these instructions should be updated and reissued by September 2015 for the 2015 financial statements. - Fjársýsla should prepare, by June 2015, full sets of separate financial statements of the government and consolidated financial statements for 2014. - Fjársýsla should prepare, by June 2016, full sets of separate financial statements of the government and consolidated financial statements for 2015. - Fjársýsla should prepare, by June 2017, the first official full sets of separate financial statements of the government and consolidated financial statements for 2016. - Fjársýsla and the MoF should include comparison of budget and actual results in the operating statement showing both net lending/borrowing and operating result. - Fjársýsla should develop a communication and training strategy by June 2014. - INAO should review the opening IPSAS balance sheet as at January 1, 2014 and the trial IPSAS financial statements for 2014 and 2015. - INAO should commence auditing the official IPSAS financial statements and issuing audit opinions from 2016. *Source: _cr14353 - 91. The balance sheets would be prepared in addition to the financial statements* ### Appendix IV. Preparation of Direct Method Cash Flow Statement (2011) ### Appendix IV. Preparation of Direct Method Cash Flow Statement (2011) ### Cash flow statement — comparison (Indirect method as included in 2011 financial statements vs Direct method) - Cash flows from operating activities (ISK million) - Surpus/(deficit): (89,424) - Receipts - Tax revenues and social security contributions: 441,397 (15,715) 425,682 - Contributions: 1,642 1,642 - Total other revenues: 35,611 10,570 46,181 - Sale of tangible assets: 4,341 4,341 - Revenue from monetary assets: 3,535 314 3,849 - Payments - Operating expenditure excl. financing cost: (211,761) 29,711 (182,050) - Operating and consumption transfers: (241,896) 14,409 (227,487) - Financing cost: (65,588) (65,588) - Maintenance: (9,159) (9,159) - Capital transfers: (35,329) (35,329) - Net cash flows from operating activities - Indirect method: (50,135) - Direct method: (37,918) - Cash flows from investing activities - Capital expenditure: (12,217) (12,217) - Long-term loans granted: (11,162) (11,162) - Instalments on long-term loans granted: 121,176 121,176 - Payment in advance towards long-term cost: (1,138) (1,138) - Purchase of equities and capital contributions: (1,446) (1,446) - Sale of equities and holdings: 765 765 - Net cash flows from investing activities - Indirect method: 108,195 - Direct method: 95,978 - Cash flows from financing activities - Net short-term loans taken: (13,170) (13,170) - New loans this year: 386,392 386,392 - Loan instalments: (226,753) (226,753) - Net cash flows from financing activities - Indirect method: 146,469 - Direct method: 146,469 - Surpus/(deficit): (89,424) - Net increase/(decrease) in cash and cash equivalents: 204,529 204,529 - Cash and cash equivalents at the beginning of the period: 317,486 317,486 - Effects of exchange rate changes on the balance of cash held in foreign currencies: 11,870 11,870 - Cash and cash equivalents at the end of the period: 533,885 533,885 ### Notes and reconciliation - Cash surplus/deficit (GFS) - Capital expenditure amounted to 12.217. These are included in the net cash flows from operating activities in the cash flow statement as included in the 2011 financial statements. - In the cash flow statement according to the direct method (right-hand column), these are presented as investing activities. --- ### Appendix V. Accounting for Service Concession Arrangements ### A. Introduction - Purpose: guidance on accounting treatment of service concession arrangements (a type of public-private partnerships). - Context: The GoI has currently only few service concession arrangements in place but is considering entering into more such arrangements in the near future. - Reference: IPSAS 32 Service Concession Arrangements: Grantor prescribes the accounting for service concession arrangements by the grantor. - Definition characteristics: - The operator uses the service concession asset to provide a public service on behalf of the grantor for a specified period of time; and - The operator is compensated for its services over the period of the service concession arrangement. - Parties: - Grantor (the government): grants the right to use the service concession asset to the operator. - Operator (the company): uses the service concession asset to provide public services subject to the government’s control of the asset. ### B. Typical Features of Service Concession Arrangements - Common form: “build-operate-transfer” arrangement (operator constructs, operates, maintains infrastructure for a specified period; operator paid over the period). - Variant: “rehabilitate-operate-transfer” (operator upgrades existing infrastructure then operates and maintains it). - Outsourcing internal services (e.g., employee restaurant, building maintenance, accounting, IT) does not constitute a service concession arrangement. - Common features: - The grantor is a public sector entity; - The operator is responsible for at least some management of the service concession asset and does not merely act as an agent; - The arrangement sets initial prices to be levied by the operator and regulates price revisions over the period; - The operator is obliged to hand over the service concession asset to the government in a specified condition at the end of the period, for little or no incremental consideration, irrespective of which party initially financed it; - The arrangement is governed by a binding arrangement that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes. - Examples of arrangements falling within IPSAS 32 scope: - Road and water treatment concession arrangements; - Provision of transport services; - Construction and operation of waste treatment plants; - Provision of public airport services; - Construction and maintenance of hospitals; - Generation of renewable energy; - Production of electricity; - Construction and operation of public transport systems, schools, prisons etc. - Determination of appropriate accounting requires analysis of specific facts and circumstances. ### C. When Should the Government Recognize a Service Concession Asset? - Recognition conditions under IPSAS 32: - The government controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and - The government controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the asset at the end of the term of the arrangement. - For a “whole-of-life” asset, only the first condition needs to be met. - Scope of assets recognized: - Only assets provided by the operator (existing asset of the operator, constructed or developed, purchased or an upgrade to an existing asset of the government) are recognized. - Existing assets of the government (other than upgrades thereto) used in a service concession arrangement are reclassified as service concession assets—no additional asset and related liability are recognized in such cases. - Measurement and timing: - IPSAS 32 refers to IPSAS standards for timing of recognition and measurement; it provides application guidance (e.g., how assets constructed or developed by the operator are recognized in accordance with IPSAS 17 Property, Plant, and Equipment or IPSAS 31 Intangible Assets). - The government must recognize the service concession asset and related liability if the conditions for asset recognition in IPSAS 17 or IPSAS 31 are also met. ### D. Treatment of the Liability - Depends on how the government compensates the operator. - Financial liability model: - Government compensates by making a predetermined series of payments to the operator. - The transaction meets the definition of a financial liability and is accounted for in accordance with IPSAS 28, IPSAS 29, and IPSAS 30, except as required by IPSAS 32. - Grant of a right to the operator model: - Government compensates by granting the operator the right to earn revenue from third-party users of the service concession asset or another revenue-generating asset. - The transaction is an exchange transaction involving dissimilar assets (a service concession asset for the government and an intangible asset for the operator) that gives rise to revenue for the government. - Because the arrangement covers a period of time, the government does not recognize the revenue immediately. - The government recognizes a liability for any portion of the revenue that is not yet earned. ### E. Treatment of Revenues and Expenses - Financial liability model: - Payments to the operator are allocated and accounted for according to their substance as a reduction in the liability, a finance charge, and charges for services provided by the operator. - If asset and service components are separately identifiable, amount allocated to each component is determined by reference to their relative fair values. - If not separately identifiable, components are determined using estimation techniques. - The finance charge and charges for services provided by the operator are accounted for as expenses. - Grant of a right to the operator model: - The government earns the benefit associated with the assets received in exchange for the right granted to the operator over the period of the arrangement. - A liability is recognized for any portion of the revenue that is not yet earned. - Revenue related to recognition of the service concession asset is recognized according to the economic substance of the arrangement, and the liability is reduced as revenue is recognized. --- ### Appendix VI. Indicative Plan for Implementation of IPSAS ### Overview - Phases and timing: - Phase I: Jan – June 2014 - Phase II: July – Dec 2014 - Phase II/Phase III: 2015 - Phase IV: 2016 - Phase V: 2017 ### Consolidation (Actions 1a–1c) - 1a. Consolidation within class A, between A and B classes and A and C class (Transactions and balances between B and C classes aggregated) - Phase I: Identify relevant B and C entities; Inform accountants in agencies and line ministries; Agree method of capturing inter-entity transactions; Train staff who consolidate. - Phase II: Develop form and content of separate (A entities) and consolidated financial statements; Document procedures for consolidation; Issue instructions to B and C entities to submit financial statements and supplementary information for 2014 by March 31, 2015; Consolidate balance sheet as at January 1, 2014. - Phase II/Phase III: Prepare first trial consolidated financial statements for 2014 including notes according to IPSAS; Issue instructions to B and C entities to submit financial statements and supplementary information for 2014 by March 31, 2016. - Responsible agency: Fjársýsla - 1b. Consolidation within class A, between A and B classes, A and C classes, and B and C classes - Phase II/Phase III: Refine and improve accounting policies, processes, and data quality and completeness based on experience and comments of INAO; Prepare second trial consolidated financial statements for 2015 including notes. - Responsible agency: Fjársýsla - 1c. Consolidation — finalization - Phase IV: Refine and improve accounting policies, processes, and data quality and completeness based on experience and comments of INAO; Prepare official consolidated financial statements for 2016 including notes and submit for audit. - Responsible agency: Fjársýsla ### Non-financial assets, leases, PPPs, software, inventories (Actions 2a–2f) - 2a. Land and buildings, roads and other infrastructure, other equipment (OBL effective 1.1 2015) - Phase I: Review quality and completeness of data in registers; Review existing valuation policies; Prepare technical requirements for Oracle; Specify useful lives for assets other than land; Establish cost or values; Impairment test. - Phase II: Adapt Oracle asset module; Data transfer to Oracle (recording assets as both assets and expense in two parallel systems); Prepare template for notes; Complete identification, recording, and valuation of any missing items. - Phase II/Phase III: Prepare information for IPSAS financial statements for 2014; Calculate estimated depreciation for budget 2016 and future years, based on investment plans. - Phase IV/Phase V: Refine and improve data; Record assets and related transactions in official system; Refine and improve data for financial statements and estimates for budget and future years. - Responsible agencies: Fjársýsla, Real Estate Agency, Road Administrative Agency - 2b. Finance and operating leases - Phase I: Identify and review leases and classify as finance or operating leases; Prepare technical requirements for Oracle. - Phase II: Adapt Oracle in a parallel system; Data transfer to Oracle; Prepare template for notes; Register in the system. - Phase II/Phase III: Prepare information for IPSAS statement for 2014; Calculate amortization, depreciation for budget 2016 and subsequent years. - Phase IV/Phase V: Record assets and related transactions in official system; Refine and improve data. - Responsible agency: Fjársýsla - 2c. Public-private partnerships - Phase I: Identify and review public-private partnerships arrangements; Treat as assets under appropriate categories and liabilities. - Phase II: Adapt Oracle in a parallel system; Data transfer to Oracle (record transactions as assets); Prepare template for notes; Register within the system. - Phase II/Phase III: Prepare information for IPSAS statement for 2014; Calculate depreciations under appropriate asset categories for budget 2016 and future years. - Phase IV/Phase V: Record assets and related transactions in official system; Refine and improve data. - Responsible agencies: Fjársýsla, Statistics Iceland - 2d. Software and databases - Phase I: Collect and review any available data; Transfer data to Oracle (for available data); Estimate useful lives. - Phase II: Adapt Oracle in a parallel system; Transfer data to Oracle (record transactions as assets); Prepare template for notes; Impairment test. - Phase II/Phase III: Prepare information for IPSAS statement for 2014; Calculate depreciation for budget 2016 and future years. - Phase IV/Phase V: Record assets and related transactions in official system; Refine and improve data. - Responsible agency: Fjársýsla - 2e. Inventories - Phase I: Review available data; In case of significant data gaps, register material inventories. - Phase II: Adapt Oracle in a parallel system; Data transfer to Oracle (record transactions as assets); Prepare template for notes. - Phase II/Phase III: Prepare information for IPSAS statements for 2014 and for budget 2016 and future years. - Phase IV/Phase V: Record assets and related transactions in official system; Refine financial statements and estimates for budget and future years. - Responsible agency: Fjársýsla - 2f. Accounting for associates - Phase I: Identify relevant entities; Develop methodology for equity accounting; Continue to account for associates at cost in separate financial statements of class A entities. - Phase II: Identify missing entities; Include associates on equity basis in consolidated balance sheet as at January 1, 2014. - Phase II/Phase III: Include associates in first trial consolidated financial statements for 2014 including notes; Refine and improve accounting policies, processes, and data quality and completeness of associates based on experience and comments of INAO. - Phase IV: Include associates in second trial consolidated financial statements for 2015 including notes; Refine and improve accounting policies, processes, and data quality and completeness. - Phase V: Include associates in official consolidated financial statements for 2016 including notes and submit for audit. - Responsible agency: Fjársýsla ### Liabilities, provisions, contingent liabilities, commitments (Actions 3a–3d) - 3a. Pension liabilities - Phase I: Specify accounting policy and new methodology for calculation; Recalculate according to new methodology. - Phase II: Data transfer to Oracle; Record transactions as assets; Prepare template for notes. - Phase II/Phase III: Prepare information for IPSAS financial statements for 2014; Prepare estimates for budget 2016 and future years. - Phase IV/Phase V: Record revised liabilities and related transactions in official system; Refine and improve data. - Responsible agency: Fjársýsla - 3b. Other provisions - Phase I: Identify need for other provisions (e.g. leave entitlements, guarantees); Analyze circumstances; Develop methodology. - Phase II: Prepare template for notes; Recognize in opening balance sheet. - Phase II/Phase III: Improve methodologies; Supplement with additional material provisions not identified in opening balance sheet; Prepare input for budget 2016. - Phase IV/Phase V: Record revised liabilities and related transactions in official system; Refine and improve data. - Responsible agency: Fjársýsla - 3c. Contingent liabilities - Phase I: Review completeness and quality of existing data. - Phase II: Review probability of payments related to guarantees and other contingent liabilities, and if payments are probable, estimate provisions. - Phase II/Phase III: Recognize provisions as estimated; Revise presentation and disclose all contingent liabilities as a separate note, not as part of equity. - Ongoing: Continue to recognize and disclose according to IPSAS 19. - Responsible agency: Fjársýsla - 3d. Commitments - Phase I: Review completeness and quality of existing data. - Phase II: Revise presentation and disclose significant commitments as a separate note, not as part of equity. - Ongoing: Continue to disclose as a separate note, not as part of equity. - Responsible agency: Fjársýsla ### Financial assets, receivables, presentation, audit (Actions 4–6) - 4a. Financial assets and debt - Phase I: Categorization of financial assets according to IPSAS 28; Analysis of arrangements; Develop accounting policy; Prepare revaluation; Analyze new requirements in the LIBRA debt management system. - Phase II: Develop accounting policy; Prepare revaluation; Analyze new requirements in the LIBRA debt management system; Prepare template for notes. - Phase II/Phase III: Prepare information for IPSAS financial statements for 2014; Prepare estimates for budget 2016 and future years. - Phase IV/Phase V: Record revised assets and liabilities and related transactions in official system; Refine and improve data. - Responsible agencies: Fjársýsla, Central Bank - 4b. Receivables and doubtful debts - Phase I: Analyze receivables to identify doubtful items; Revaluate receivables. - Phase II: Prepare template for notes. - Phase II/Phase III: Prepare information for IPSAS financial statements for 2014; Prepare estimates for budget 2016 and future years. - Phase IV/Phase V: Record revised assets and provisions and related transactions in official system; Refine and improve data. - Responsible agency: Fjársýsla - 5a. Presentation of financial statements - Phase I: Develop template for revised statements; Develop statement of changes in net assets/equity; Develop template for direct method cash flow statement; Implement necessary IT-changes. - Phase II: Use revised presentation for 2016 budget; Use revised budget for IPSAS 2014 financial statements. - Phase II/Phase III onward: Refine and improve presentation; Prepare official IPSAS financial statements using new presentation. - Responsible agency: Fjársýsla - 5b. Harmonized presentation of budget and accounts - Phase I: Develop common template for budget and ex-post operating statement, showing net lending/borrowings and operating result; Review other needs for harmonization. - Phase II: Prepare 2016 budget using harmonized presentation; Prepare trial financial statement for 2014 using harmonized presentation. - Phase II/Phase III: Prepare 2017 budget using harmonized presentation; Prepare trial financial statement for 2015 using harmonized presentation. - Phase IV/Phase V: Prepare official IPSAS financial statements using harmonized presentation and compare budget and actual. - Responsible agencies: Statistics Iceland, Ministry of Finance, Fjársýsla - 6a. Audit - Phase I: review and comment on trial balance sheet as at January 1, 2014. - Phase II: Review and report on first trial IPSAS financial statements for 2014; Review and report on second trial IPSAS financial statements for 2014. - Phase IV: Audit official financial statements for 2016 and issue formal audit opinion and recommendations for improvements. - Responsible agency: INAO *Source: _cr14353 - Appendix IV. Preparation of Direct Method Cash Flow Statement (2011)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14353.pdf_