STAFF QUESTIONS AND ANSWERS
August 2018
ACCOUNTING FOR SOVEREIGN DEBT
RESTRUCTURINGS UNDER IPSAS
This Questions and Answers (Q&A) publication is issued by the staff of the International Public Sector
Accounting Standards Board® (IPSASB) to highlight how International Public Sector Accounting
Standards™ (IPSAS™) reflect the accounting consequences of
sovereign debt restructuring transactions.
“The objective of this document is to
indicate how IPSAS deal with This publication does not constitute an authoritative
transactions and events which arise pronouncement of the IPSASB, nor does it intend to amend
through sovereign debt or override the requirements of existing IPSAS or provide
restructurings.” further implementation guidance. This publication is not
meant to be exhaustive and is not a substitute for reading the
related IPSAS on financial instruments.
Background
There has been considerable recent discussion about sovereign debt issues, including restructurings. The
objective of this document is to indicate how IPSAS deal with transactions which may arise through
sovereign debt restructurings.
Recent discussions on sovereign debt restructurings
emphasize the need for improved public sector financial
reporting, through the adoption and implementation of
transparent, high-quality, conceptual-based accrual
accounting standards, designed for the public sector,
such as IPSAS.
This Q&A highlights issues which may be encountered
in a sovereign debt restructuring. It illustrates how
IPSAS capture the economic consequences of debt
restructurings. It does not reference any specific
transaction, nor is it intended to be used as application
or implementation guidance during sovereign debt
restructurings. The terms and conditions of specific
restructurings are highly complex and voluminous. These terms and conditions may include, but are not
limited to, the extension of maturities, reductions in interest rates, changes in counterparties and the
issuance of additional complex financial instruments.
This document has been prepared by IPSASB staff. It is a non-authoritative document issued for information purposes
only.
STAFF QUESTIONS AND ANSWERS
Q1. Under IPSAS, which standards deal with accounting for financial instruments?
The suite of IPSAS includes comprehensive financial instruments standards: IPSAS 28, Financial
Instruments: Presentation, IPSAS 30, Financial Instruments: Disclosures, and IPSAS 41, Financial
Instruments 1.
Q2. Are the requirements of IPSAS for financial liabilities consistent with International Financial
Reporting Standards?
Yes, IPSAS 28, 30 and 41 were developed with reference to the IFRS financial instruments
standards 2 with modifications for public sector specific issues 3. Public sector illustrative examples
and implementation guidance was included for concessionary loans 4 and large scale financial
guarantees 5.
The IPSASB approved IPSAS 28 and 30 in 2009 and IPSAS 41 in 2018.
Q3. What are the recognition and measurement requirements for financial liabilities in IPSAS?
IPSAS 41 provides the requirements for recognition and measurement of financial instruments. The
recognition and measurement requirements for financial liabilities are most relevant for sovereign
debt restructurings.
The standard requires that financial liabilities, which include loans and debt securities, are measured
initially at fair value with subsequent measurement at amortized cost using the effective interest
method 6. IPSAS 41 provides limited exceptions to subsequent measurement at amortized cost, but
these exceptions would rarely be applicable for loans and debt securities.
1
Similar to the superseded IFRS financial instruments recognition and measurement standard, the approval of IPSAS 41 resulted
in the revision of IPSAS 29, Financial Instruments: Recognition and Measurement. IPSAS 29 continues to apply, however its
guidance has been limited to hedge accounting.
2 IPSAS 28, 30 and 41 were developed with reference to the IFRS financial instruments standards IAS 32, IFRS 7 and IFRS 9.
3
The IPSASB has a policy paper, Process for Reviewing and Modifying IASB Documents, which was published in October
2008. The IPSASB followed the guidance in the policy paper when considering departures from the IASB requirements for
public sector issues.
4 IPSAS 41 AG118–AG127 contain detailed requirements for accounting for concessionary loans.
5
IPSAS 41 AG131–AG136 contain detailed requirements for accounting for financial guarantees issued through a non-
exchange transaction, including the valuation of such guarantees
6 IPSAS 41.57 contains requirements for the initial measurement of financial assets and financial liabilities and IPSAS 41.64
contains requirements for the subsequent measurement of financial liabilities.
2
Q4. What are the requirements for loans provided at non-market terms in IPSAS?
IPSAS 41 contains public sector specific application guidance on concessionary loans, which are loans
granted at non-market terms 7. These requirements are not drawn from IFRS.
Sovereign debt restructurings should be assessed to determine if a concessionary loan has been
received or granted. A loan is deemed to be concessionary when the transaction price, based on the
contractual terms, is not equivalent to the fair value of the loan. Concessionary loans are recognized
at fair value, with the difference between the transaction price and fair value accounted for in
accordance with IPSAS 23, Revenue from Non-Exchange Transactions (Taxes and Transfers). The
loan is subsequently measured at amortized cost using the effective interest method.
The application guidance distinguishes concessionary loans from waivers of debt 8. This is important
because it impacts whether the non-market terms of the agreement are considered as part of the
initial measurement of the concessionary loan, rather than as part of the subsequent measurement
or derecognition of the existing loan. Concessionary loans from the outset are intended to provide
resources at non-market rates. Waivers of debt result from modifications to existing loan agreements,
initially granted at market terms and the derecognition requirements of IPSAS 41 apply.
Q5. What are the derecognition requirements for financial liabilities in IPSAS?
Financial liabilities are derecognized 9 when they are extinguished under the following circumstances:
• The obligation is settled through payment;
• The obligation is assumed by a third party; or
• The terms and conditions of the arrangement are substantially modified.
A substantial modification in terms occurs when the discounted present value of the cash flows
including fees, is at least 10 percent different from the discounted present value of the remaining
cash flows of the original financial liability 10.
The magnitude of the change depends on the specific terms of the restructuring. If the modification
is substantially different, the original debt is derecognized as it is deemed to be extinguished, and
any costs or fees incurred are recognized as part of the gain or loss on that extinguishment. Following
derecognition of the original liability, the substantially modified liability is then subject to initial
recognition requirements under IPSAS 41.
If a modification is not considered substantial, there is not an extinguishment and the original financial
liability is not derecognized. There will, however, be a change in the carrying amount of the financial
liability, based the modified future cash flows. Any costs or fees incurred adjust the carrying amount
and are amortized over the remaining term of the modified financial liability.
7 IPSAS 41 AG118–AG127 contain detailed requirements for accounting for concessionary loans.
8 IPSAS 41 AG118–AG119 contain guidance on distinguishing between a concessionary loan or a waiver of debt and the
different accounting treatments for each.
9 IPSAS 41.35–38 contain requirements for accounting for derecognition of financial liabilities.
10 IPSAS 41 AG46 contains requirements for assessing the extent of modifications.
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Q6. Do financial instrument requirements in IPSAS define “debt” or “net debt”?
No, IPSAS do not specifically define debt or net debt.
IPSAS require entities to present a comprehensive statement of financial position, including all assets
and liabilities of an entity (financial and non-financial). IPSAS do not emphasize individual line items,
such as financial liabilities, or components of individual line items, such as debt in isolation from other
liabilities. This is because IPSAS emphasize fair presentation, which is the complete view of the
financial position of an entity, including its resources and the claims on those resources. IPSAS have
been developed so that a full set of general purpose financial statements present a fair view of an
entity’s finances. Although debt is not a defined term in IPSAS, the measurement of financial liabilities
and their presentation in IPSAS-compliant general purpose financial statements provide the
information users need for accountability and decision-making purposes.
The IPSASB considered the broader need for general purpose financial reports (GPFRs) and
included guidance on presentation of non-IPSAS measures in Recommended Practice Guideline
(RPG) 2, Financial Discussion and Analysis. RPG 2 notes that where non-IPSAS measures are
presented, this fact should be disclosed, and they should be explained, and reconciled to the related
IPSAS measures presented in the financial statements 11.
Q7. Are IPSAS requirements consistent with government finance statistics reporting guidelines
for loans and debt securities (e.g., SNA, GFS or ESA)?
No, IPSAS and government finance statistics (GFS) reporting guidelines have different objectives.
The objectives of financial reporting by public sector entities are to provide information about the
reporting entity that is useful to users of GPFRs for accountability and decision-making purposes.
GFS reports are used to (a) analyze fiscal policy options, make policy and evaluate the impact of
fiscal policies, (b) determine the impact on the economy and (c) compare fiscal outcomes nationally
or internationally. The focus is on evaluating the impact of the general government sector and broader
public sector on the economy, within the complete macroeconomic statistics framework.
The common GFS reporting frameworks are:
• System of National Accounts (SNA) 2008;
• Government Finance Statistics Manual (GFSM) 2014;
• Balance of Payments and International Investments Position Manual-Sixth Edition (BPM6); and
• European System of National Accounts (ESA) 2010.
A key difference between the IPSAS and GFS reporting frameworks relates to measurement. Under
GFS, debt securities are measured at market value 12. Loans are measured at nominal 13 value for
11
RPG 2.24 provides requirements for using non-IPSAS measures in GPFRs.
12 Paragraph 7.67 of ESA 2010. Paragraph 13.58 of SNA 2008. Paragraph 7.154 of GFSM 2014.
13 Paragraph 3.157 b–d notes nominal value refers to the amount the debtor owes to the creditor, which comprises the
outstanding principal amount including any accrued interest. Amortized value reflects the amount at which the financial asset or
liability was measured at initial recognition minus the principal repayments. Excess payments over the scheduled repayments
reduce the amortized value whereas payments that are less than the scheduled principal repayments or scheduled interest
increase the amortized value. On each scheduled date, amortized value is the same as nominal value, but it may differ from
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both debtors and creditors 14. Concessionary loans 15 are measured at nominal value, with the
difference between the contract value and the present value of the loans, presented as a
memorandum item (note disclosure). SNA has concessionary loans on the current research agenda.
Q8. Are the requirements of IPSAS consistent with Maastricht Treaty requirements?
No, the measurement requirements in IPSAS 41 are not consistent with the Excessive Deficit
Procedure (EDP), which stemmed from the Maastricht Treaty in 1992.
Discussions of sovereign debt restructurings in Europe often cite debt measures based on the EDP.
The EDP is the legal requirement to assess fiscal compliance of government debts and deficits for
European Union member countries. The EDP uses data and terminology from ESA 2010. However,
for EDP purposes, government debt securities are measured at face value, unlike ESA 2010 which
measures such instruments at market value. Under the EDP government debt includes:
• Currency and deposits;
• Securities other than shares (excluding derivatives); and
• Loans.
the nominal value on other dates due to the accrued interest being included in the nominal value. Face value is the
undiscounted amount of principal to be repaid.
14 Paragraph 7.70 of ESA 2010. Paragraph 13.62 of SNA 2008. Paragraph 7.163 of GFSM 2014.
15 Paragraph 20.242 of ESA 2010. ESA 2010 is consistent with SNA 2008 and GFSM 2014.
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Key Contacts STAFF QUESTIONS AND ANSWERS
Dave Warren, Manager, Standards Development and Technical Projects ([email protected])
John Stanford, IPSASB Technical Director ([email protected])
Copyright © August 2018 by the International Federation of Accountants (IFAC). All rights reserved. Written
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