IPSASBENEFITS TO WHO

1

2

©World Health Organization, 2013. All rights reserved. Created by WHO/GRA Graphic Design and Layout

Printed by the WHO Document Production Services, Geneva, Switzerland.

1

A Message from the Director-General

I am pleased to announce that WHO has successfully implemented the International Public Sector Accounting Standards (IPSAS) for financial accounting and reporting. This is a significant achievement for WHO and raises further the standard of financial reporting. Financial reporting is a critical element of governance and of sound management, both of which are central parts of the WHO Reform. The main benefits of IPSAS are increased transparency which provides a better understanding of WHO’s financial performance, greater accountability to make informed decisions about resource utilization, and improved financial information to support governance, management of assets, and decision-making.

IPSAS accounting and financial reporting standards are internationally recognized and are being adopted by all United Nations organizations. Complying with IPSAS necessitates an enhanced system of internal control to support the additional reporting needs and requires WHO to recognize and disclose information that is both useful and relevant to users of its financial statements.

This document provides information about the following:

• IPSAS and how this differs from WHO’s previous accounting standards under the United Nations System Accounting Standards (UNSAS)

• The differences in financial reporting resulting from the adoption of IPSAS• The benefits derived from IPSAS adoption• Some of the challenges WHO faced while implementing IPSAS

The Financial Report and Annual Audited Financial Statements for the year ended 31 December 2012 are the first to have been prepared using the IPSAS standards, and will be presented at the 66th World Health Assembly in May 2013.

Dr Margaret ChanDirector-General

2

What is IPSAS?The International Public Sector Accounting Standards (IPSAS) are a series of 32

financial reporting and accounting standards issued by the International Public Sector Accounting Standards Board (IPSASB), which represents more than 160 member bodies in 120 countries.

IPSAS provides high-quality, independently produced accounting standards, underpinned by strong due process and supported by governments, professional accounting bodies, and international development organizations, representing best practices for governments and not-for-profit organizations.

IPSAS replaces the United Nations System Accounting Standards (UNSAS), which were the accounting standards previously used by WHO.

IPSAS Conversion at WHOWHO began implementing IPSAS in 2006. IPSAS was a key requirement of WHO’s

Enterprise Resource Planning project, the Global Management System (GSM), which went live in 2008. The alignment of the changes required by IPSAS to the design and implementation of GSM was an important step towards introducing accrual accounting and avoided costly additional system modifications. WHO achieved partial IPSAS compliance by 2010, and proceeded toward full implementation when GSM was adopted by all WHO Regional Offices. In 2012, WHO’s Financial Report and Audited Financial Statements fully complied with IPSAS.

WHO used its existing staff for IPSAS implementation rather than recruiting a specialized IPSAS team that would leave WHO once IPSAS implementation was complete. Using existing staff has ensured that IPSAS information and knowledge is embedded into WHO’s finance and accounting teams.

As a result of the above steps, the cost of implementing IPSAS at WHO was limited to US$ 500 000 and consisted of short-term staffing and some external consultancy support in more complex accounting areas. However, there will be ongoing costs associated with maintaining IPSAS compliance including the costs of annual audits rather than biennial audits, the costs of having an annual actuarial valuation of future staff liabilities, and staff costs associated with the tracking, maintaining and recording of property, plant and equipment (PP&E) and inventory. There are also additional costs associated with maintaining reporting requirements. In total, these ongoing costs are estimated to be about US$ 150 000 a year.

IPSAS and the WHO ReformThere is a strong link between the implementation of IPSAS and the WHO Reform.

A key goal of the WHO Reform is to improve managerial accountability, internal controls and the dissemination of financial information to stakeholders. Improvements in the accounting and reporting of financial information arising from IPSAS implementation have facilitated the achievement of this goal.

With the adoption of IPSAS, Member States and contributors can rely on WHO’s financial statements adhering to the highest international

standards of accounting.

3

UNSAS vs. IPSASThe main differences between UNSAS and IPSAS are as follows:

4

Advantages of Accrual AccountingThe most significant change arising from IPSAS is the requirement for WHO to move

from a cash basis to an accrual basis of accounting. The major advantages of accrual accounting are summarized in the following diagram:

Why WHO is Adopting IPSASThe benefits to WHO as a result of adopting IPSAS are numerous. IPSAS improves

comparability, harmonization, transparency and accountability in the financial reporting of UN system organizations. Furthermore, international accounting standards require that more information be provided and disclosed in an organization’s financial statements, leading to better information availability and transparency for decision-making. The major benefits to WHO are summarized in the following categories:

• Use of Best Practices to Bring Comparability and Consistency• Improved Senior Management Decision-Making• Increased Transparency and Controls• Annual Audits and Reporting • Enhanced Financial and Resource Stewardship

5

The Benefits of IPSAS to WHOUse of Best Practices to Bring Comparability and Consistency

Aligning WHO’s accounting with best accounting practices through the application of credible, independent accounting standards on a full accrual basis allows WHO to report its results on a consistent and comparable basis - not only between WHO’s reporting periods, but also on a comparable basis with other UN system organizations.

By following accounting standards that have been rigorously reviewed by independent third parties, WHO’s financial statements can be viewed with increased confidence within the international community. At the same time, the adoption of IPSAS results in improved financial reports, allowing WHO to provide more meaningful information to users of its financial statements.

Improved Senior Management Decision-MakingSound financial information provides senior management with insights into WHO’s

complex operations and can improve decision-making, especially when it comes to allocating and reallocating resources among regions and competing operational priorities. For example, accrual accounting provides a clearer picture of WHO’s liabilities, such as employee salaries. Better knowledge of liabilities supports better management of WHO’s assets and liabilities.

Furthermore, IPSAS provides a clearer indication of how financial resources have been used in a given period. This helps to assess managerial performance and the effectiveness of the use of resources.

The financial reporting and disclosure requirements under IPSAS provide useful information to WHO’s senior management for more

informed decision-making.

Increased Transparency and Internal Controls IPSAS increases transparency since it requires more financial transactions to be

recognized or disclosed either in financial statements (such as inventory, intangible assets, PP&E, accounts payable, accrued staff benefits) or in notes to financial statements.

Reliable financial and operational information promotes trust among contributors and Member States, and results in increased fiscal and political support.

The strengthening of internal control mechanisms has been integral to the IPSAS project since IPSAS forces certain additional operational and financial controls onto WHO to ensure that the new accounting requirements are met. For example, with the requirement to recognize items of PP&E in its financial statements, WHO must ensure that proper tracking and recording mechanisms are consistently in place across all of WHO to capture accurate data and ensure that the asset is properly managed and depreciated over its useful life. A strong and functioning system of internal control also ensures enhanced programme delivery and the attainment of WHO’s objectives.

IPSAS additionally enhances the role and profile of financial management in general, and the finance function in particular, since it raises awareness of WHO’s financial performance, leading to improved accountability and decision-making.

6

Annual Audits and ReportingUnder IPSAS, the External Auditor audits WHO’s financial statements and reports on

the results of the audit to the World Health Assembly every year instead of every two years. This enhances the accountability of WHO and permits a more timely assessment of financial reporting.

Enhanced Financial and Resource Stewardship IPSAS requires WHO to have a complete and documented account of its assets,

liabilities, revenue and expenses in its financial statements, leading to enhanced financial and resource stewardship. The following summarizes the changes to WHO’s assets, liabilities, revenue and expenses as a result of adopting IPSAS:

Assets

� Better Receivables Management

Under IPSAS, a receivable is recognized upon signature of a binding agreement. By recognizing receivables when revenue is earned, WHO is able to better manage collection on a timely basis.

� Better Matching of Allowances to Historical Payment Experience

Previously, a full allowance for doubtful accounts receivable was made for any assessed contributions that were not paid by the end of the year. Based on its historical payment experience and guidance provided under IPSAS, WHO has revised this allowance method to only reflect amounts which may be doubtful. This opening adjustment has resulted in a US$ 63 million one-time increase in the fund balance of “Members States – regular budget”.

� Better Inventory Management

Previously under UNSAS, WHO did not recognize inventories (such as medicines, vaccines, humanitarian supplies or publications) in the Statement of Financial Position. By reporting inventories, WHO is able to better understand the extent of inventories held, leading to better stewardship and logistics management (e.g. the use of vaccines by their expiry date).

Furthermore, as a result of recognizing inventory under IPSAS, WHO conducted a physical verification of all stock on hand, the first time WHO engaged in a global inventory count. In the process of understanding and valuing its inventory, WHO was able to develop a documented account of some 80 locations and US$ 67 million worth of assets under its control, and has implemented common procedures across WHO for managing these assets.

The recognition of receivables and inventories leads to better asset management which assists in better resource-allocation decisions.

7

� Better Management of Property, Plant and Equipment

IPSAS requires WHO to recognize assets relating to property, plant and equipment (PP&E). Because WHO had not previously recognized PP&E in its financial statements, a central repository containing full PP&E data was unavailable.

WHO has elected to use the transitional provision under IPSAS, which allows it to recognize PP&E for the first time over a period of five years. However, WHO has started the task of identifying and recognizing PP&E in its financial statements, resulting in a better understanding of the following:

• PP&E held across WHO

• Which items of PP&E are owned and operated exclusively by WHO and which relate to common arrangements - specifically land and buildings

• Which items of PP&E contain financing or operating lease agreements

• Restrictions on the use of PP&E

• The estimated costs of maintaining infrastructure through an annual depreciation charge to PP&E

By knowing what assets WHO owns as well as the remaining useful life of these assets, WHO is better able to prepare and plan for upcoming capital requirements. WHO is also able to recognize the value of in-kind contributions from Member States where the use of premises has been given for free.

� Enhanced Awareness of Existing Intangible Assets

Historically, WHO has not recognized assets that were “intangible” in nature. However, IPSAS requires that these assets be recognized if certain criteria are met. In the process of accounting for and understanding what kind of intangible assets exist within WHO, WHO identified several items that met the criteria for recognition including patents, copyrights, licenses, and various internally developed and externally acquired software products. By understanding which assets meet the definition of an intangible asset, WHO is better able to track and control these assets, particularly those assets where there is no physical form.

By identifying and recognizing PP&E and intangible assets, WHO is better able to plan for its future capital requirements.

� Enhanced Disclosure of Financial Instruments

IPSAS requires WHO to recognize and disclose the strategies it takes to mitigate its risks and uncertainties, including its hedging strategies, currency exposures and any investment risks. By disclosing and recognizing these instruments in the financial statements, WHO’s users are able to better understand the risk and uncertainties inherent in WHO’s operations.

8

Liabilities

� Improved Visibility of Liabilities

As a result of IPSAS, WHO has a better knowledge of what it owes. For example, WHO now recognizes future staff liabilities, which include:

• Terminal payments including annual leave obligations in the amount of US$ 147 million

• WHO’s portion of the after-service health insurance obligation of US$ 1365 million out of which US$ 823 million remains unfunded

Better knowledge of existing liabilities supports better management of WHO’s resources, contributing to improved budgeting and fund-raising in order to ensure that all obligations are met.

IPSAS has also enabled WHO to better distinguish between assets and liabilities under its direct responsibility as opposed to those that are managed by hosted entities. Several of these entities will now also produce full IPSAS-compliant financial statements subject to a separate external audit.

A better understanding of WHO’s obligations leads to improved budgeting decisions and fund-raising efforts.

Revenue

� Timely Revenue Recognition

With the adoption of IPSAS, revenue is recognized when a binding agreement is signed by a contributor. By recognizing revenue when it is earned, WHO is better equipped to understand its revenue inflows, leading to enhanced cash-flow management and forecasting, and a better understanding of balances carried over from one period to the next.

Expenses

� Better Expense Management

IPSAS requires the recognition of expenses on the basis of the “delivery principle”. Under this principle, expenses are recognized when goods and/or services are delivered rather than when cash is exchanged. Thus, WHO reports expenses when they are incurred and when the benefit to WHO is received rather than when the expense is paid. This will help WHO to better understand the cost of operating in the financial period when the activity takes place, leading to improved budget management.

By having an enhanced understanding of its assets, liabilities, revenue and expenses, WHO is better able to understand and manage its future

resource requirements, risk and uncertainties.

9

Extract from IPSAS-Compliant StatementsThe following is a summary of IPSAS-related impacts to WHO’s Statement

I –Statement of Financial Position which have occurred throughout WHO’s IPSAS implementation:Statement I. Statement of Financial Position As at 31 December 2012 (In US dollars)

10

The following is a summary of IPSAS-related impacts to WHO’s Statement II- Statement of Financial Performance which have occurred throughout WHO’s IPSAS implementation:

Statement II. Statement of Financial PerformanceFor the year ended 31 December 2012 (In US dollars)

11

IPSAS requires that entities that prepare a budget to present the results of their actual performance against budgeted performance in a separate statement. The following is a summary of certain impacts to WHO’s Statement V- Statement of Comparison of Budget and Actual Amounts, as a result of adopting IPSAS:

Statement V. Statement of Comparison of Budget and Actual AmountsFor the year ended 31 December 2012 (In US dollars)

12

The Challenges of IPSASAlthough there are various benefits to IPSAS implementation, there are also some

ongoing challenges that WHO faces when it comes to its IPSAS implementation project. These challenges include:

Organization-Wide ParticipationRequirements under IPSAS go beyond financial records. The involvement of

many teams (procurement, human resources etc.) and collaboration across locations (Regional Offices, Country Offices etc.) is required for the successful implementation of IPSAS.

TrainingWHO has provided IPSAS training to its employees. However, changes resulting

from IPSAS implementation require that ongoing and focused training is provided to key staff as they report under the new standards.

Time and ResourcesIPSAS requires additional tasks to be completed in preparing and maintaining WHO

financial records. These tasks need to be completed each year, which is significantly more demanding than in the former biennial process.

Bugdet-To-Actual ComparisonsIPSAS requires a comparison of budget amounts and the actual amounts arising

from the execution of the budget to be included in financial statements. This comparison is to be performed on an annual basis and presents two challenges to WHO. Firstly, WHO produces a biennium budget covering a two-year period rather than separate annual budgets. Furthermore, WHO’s financial statements are prepared on an accrual basis, while the budget is presented on a modified cash basis. In order to provide a meaningful comparison, WHO is required to provide additional note support in its financial statements explaining these basis and timing differences. This increases the length and complexity of the information contained in the notes.

13

Glossary of TermsAccrual basis is the accounting basis under which transactions and other events

are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses.

Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. Assets used to deliver goods and services in accordance with an entity’s objectives, but which do not directly generate net cash inflows, are often described as having a service potential.

Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrence of liabilities that result in decreases in net assets/equity, other than those relating to distributions to owners.

Intangible assets are identifiable non-monetary assets without physical substance.

Inventories are assets: (a) in the form of materials or supplies to be consumed in the production process; (b) in the form of materials or supplies to be consumed or distributed in the rendering of services; (c) held for sale or distribution in the ordinary course of operations; or (d) in the process of production for sale or distribution. Care should be taken to avoid confusion when using the word “inventory”. PP&E are not inventory as defined above, although they may be inventoried by being counted and physically verified.

Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential.

Modified cash basis is the accounting basis under which revenue and expenses are usually reported when cash is received or a payment is made, but with some exceptions. Notably, expenditures can be reported prior to the payment of cash on the basis that the cash will need to be paid out soon after the end of the financial year. Under this basis, investments in physical assets and intangibles are expensed immediately, and employee benefit liabilities are not required to be reported in the financial statements.

Property, plant and equipment, or PP&E, are tangible items that are: (a) held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and (b) expected to be used during more than one reporting period. PP&E should not be confused with inventories as defined above, although they may be counted and physically verified.

Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity, other than increases relating to contributions from owners.