International Public Sector Accounting Standards Board has published ED 69 Amendment to IPSAS 41 Financial Instruments

Summary

On 27th August 2019, the International Public Sector Accounting Standards Board (IPSASB) issued an Exposure Draft (ED) 69 proposing some amendments to be made to IPSAS 41 Financial Instruments. The proposed amendment aims at ensuring representativeness and comparability of the information that a reporting entity provides in its financial statements.

Specific Matters for Comments

This ED does not cover statutory receivables and payables because they are considered to be non-financial instruments due to lack of contractual element. Further, it recognizes that concessionary loans and financial guarantee contracts issued through non-exchange transactions were addressed in the application guidance in IPSAS 41, therefore they do not form part of this ED.

In a nutshell, this ED covers monetary gold, currency in circulation, IMF quota subscriptions and Special Drawing Rights by proposing the following areas for comments;

1.    Monetary gold: Is gold bullion a financial instrument (like cash) or is it a commodity? Is monetary gold a financial instrument (like cash)?

IPSASB Perspective: IPSASB proposes that gold bullion is not a financial asset because it has no contractual right to receive cash although bullion is highly liquid. On the other hand, despite the fact that monetary gold also lack contractual rights to receive cash IPSASB considers them as financial assets since they meet many characteristics of financial assets.

2.    Currency in circulation: Does issuing currency as legal tender create a financial liability for the issuer?

IPSASB Perspective: IPSASB proposes that in determining whether financial liability is created or not, entities should consider existence of contractual obligation of which it shall be based on substance of arrangement rather than legal form. In addition to that, the said currency should be issued to evidence that two willing parties have agreed to the terms of the arrangement. That is to say unissued currency does not meet the definition of a financial instrument.

3.    Special Drawing Rights: Do Special Drawing Rights Holdings meet the definition of a financial asset? Do Special Drawing Rights Allocations meet the definition of a financial liability?

IPSASB Perspective: IPSASB proposes that both Special Drawing Rights Holdings (SDRH) and Special Drawing Rights Allocations (SDRA) meet the definition of financial assets and liability respectively on the ground that SDRH represent claims on currencies and liquidity is guaranteed by a mechanism requiring participants to deliver cash in exchange for SDRs. Similarly, SDRA represents a contractual obligation to deliver cash provided that SDR holdings are distributed to members.

Conclusion

Comments on the proposed changes are to be received by 31 December 2019.

For details on the exposure draft, see: Exposure Draft 69