Accounting for Citizens vs. Accounting for Shareholders
Public and private sector accounting are fundamentally different because their objectives are opposite: public welfare versus private profit. The public sector uses International Public Sector Accounting Standards (IPSAS) to ensure accountability for taxpayer money, while the private sector uses International Financial Reporting Standards (IFRS) to report to shareholders. Key differences include revenue sources (taxes vs. sales), the fact that public entities can survive financial crises that would bankrupt private companies, and the legal requirement for public bodies to disclose their budget performance externally.
Differences between Public Sector and Private Sector Accounting
The fundamental differences stem from their opposing core objectives: one serves the public good, while the other seeks profit. Some of the differences are:
Basis of Difference | Public Sector Accounting (for Governments) | Private Sector Accounting (for Businesses) |
| Primary Objective | To serve the welfare of society and deliver public services effectively. | To maximize profit and increase shareholder value. |
| Reporting Standards | IPSAS (International Public Sector Accounting Standards) | IFRS (International Financial Reporting Standards) |
| Source of Revenue | Primarily from taxes, fines, and transfers collected from citizens. | Primarily from the sale of goods and services to customers. |
| Accountability | Accountable to the public (citizens) and legislative bodies. | Accountable to shareholders, owners, and investors. |
| Going Concern | Entities are expected to continue operating even during a severe financial crisis, as their services are essential. | A severe financial crisis (high debt, low profit) threatens the company's existence and can lead to closure. |
| Budget Disclosure | Mandatory public disclosure of the budget vs. actual expenditure is required by law. | Budget vs. actual comparison is a confidential, internal tool for management and is not disclosed externally. |
| Assets | Both Cash generating and Non-Cash generating (Service Potential) assets. | Only Cash generation assets. |
| Non-Exchange Transactions | Social benefits, Taxes, Transfers etc | No Non-exchange transactions |
What is difference between IPSAS VS IFRS?
There is a close relationship between IPSAS and International Financial Reporting Standards (IFRS) since IPSAS standards are largely based on the principles of IFRS. The rationale for drawing from IFRS is to ensure greater comparability between private and public sector reporting when accounting for similar types of transactions.
However, IFRSs are developed primarily for profit-oriented entities, whereas IPSASs are written for public sector entities that provide services to enhance and maintain the well-being of the citizens of a state.
These differences between the two reporting frameworks stem primarily from the following three sources:
- Changes made by the IPSASB when developing an equivalent IPSAS based on an IFRS, to reflect differences between the public and private sectors
- Differences in the range of topics covered by the two sets of standards because of differences in the prevalence of types of transactions, such as non-exchange transactions
- Differences in the timing of when new or amended requirements are introduced into each set of standards
Frequently Asked Questions:
What is the main difference between the reporting standards used in the public sector and the private sector?
Answer: The public sector uses International Public Sector Accounting Standards (IPSAS) issued by the IPSASB, while the private sector uses International Financial Reporting Standards (IFRS) issued by the IASB.
How do the sources of revenue differ between the public and private sectors, and why does this affect accounting treatment?
Answer: Public sector revenue comes from taxes, fines, and government collections, while private sector revenue is generated from sales of goods and services.
What is a non-exchange transaction in the context of public sector accounting?
Answer: A non-exchange transaction occurs when an entity receives or gives value without directly exchanging approximately equal value in return, such as taxes, grants, and donations.