This presentation was made by Giovanna Dabbicco, Italy, at the 19th OECD Senior Financial Management and Reporting Officials Symposium held at the OECD Conference Centre, Paris, on 4-5 March 2019

1. 19th Annual Meeting of OECD Senior
Financial Management Officials -
Accruals Symposium
Consolidation issues for local
administrations
Giovanna Dabbicco
ISTAT
Paris, 4-5 March 2019
The views expressed are those of the author and not necessarily of ISTAT or
other organizations

2. Where is consolidation relevant for Local
Governments?
Substantial discussion on consolidated financial reports
(CFR) at central government level but growing focus at the
local level
A process of externalization of public services lead to
reorganization of state-owned enterprises:
• Decentralization and Corporatization
Based on the need to contain public expenditure and keep
decentralized entities under control > debate on the use,
materiality, and comparability of CFR, i.e. especially in a
number of more complex municipalities
Despite growing interest by academic and professionals, local
governments struggle with CFR

3. Challenges for LGs consolidated reports
• Identification of the reporting entity (sometimes compex
structures of entities)
• Interpretation of the concept of control
• Different GAAP by entity (public/private)
• Lack of (trained) human resources
• Significant costs for preparers, including those associated
with developing and maintaining accounting systems,
auditing and report preparation
• Issues with boundaries of government financial reporting
and intra-group eliminations
• Convergence with statistical standards

4. A clear standard addressing (all) LGs issues?
1/3
 Level at which consolidated financial statements should be
prepared
• Often determined by national, state or local laws
• Differences between central and local government:
Existence in local government of ‘legislative accounting’ and
of ‘control accounting’ based on the hierarchical
relationships with central/ regional level
• Local interpretation of the usefulness of consolidated
financial statements with regard to accountability and
decision-making objectives:
– i.e. providers of services that are not formally owned, or whose ownership is
fragmented, excluded from the reporting but may have relevant financial
and contractual relationships with the municipality

5. A clear standard addressing (all) LGs
issues? 2/3
• Large proportion of LGs assets might be funded by central
government. Is consolidation needed?
• Consider alternative control forms, funding and financial dependence
relationship, and
– “The role of residual claims of governments even when bailout is
apparently excluded” (Grossi & Steccolini, 2015)
• Problems of evaluation of assets and liabilities according to accrual
principles
• Different measurement basis for assets in central governments and
local governments
Illustrative case of roads:
• Often reported on the balance sheet of local governments at current cost
– but impact on value of government assets: Local governments may also
decide not to value roads at current cost because it would make too big
values

6. A clear standard addressing (all) LGs
issues? 3/3
• Specific standards for each local government or one
standard to apply to all?
• Should CFS be elaborated applying the same standards?
• There are countries where there are specific standards for
the elaboration of consolidated statements but there is no
uniformity because each country establishes its own
criteria.
• Several controlled entities adopt a full accrual accounting
system, public sector entities in several countries embrace
cash or modified-cash approaches: difficult to consolidate!
• When and how the entities would be deemed to be
considered compatible in term of accounting practices,
policies and standards to allow such a consolidation and
need to address the quality of the underlying data across
a wide range of entities if all of them have to be included.

7. Broader scope of consolidation ?
• A central or a federal government can include in the consolidation area only
central public sector entities (such as ministries and their agencies)
or
• All the other local public sector entities as well?
 Interpretation of the concept of control: Central government does not “control” some
local entities…
Experiences in countries (OECD Survey, 2017) :
• UK WGAs : include all the Govt levels (both central and LGs, in the light of fiscal planning) and public
corporations, but do not include the Parliament, the National Audit Office, and the public-owned banks
• Estonia’s WGAs include Whole-of-Government Accounts on a quarterly basis, and audited annual
consolidated financial statement of the public sector and the government sector including he National
Bank.
• New Zealand WGAs for Central Government extended to public corporations and to other government
entities but local government and universities are excluded
• Australia WGAs based on a ‘jurisdictional’ boundary of individual states rather than a WGA for the
whole government: WGA available for the federal (commonwealth government), six states and two
government territory similar to states. WGA do not include either LGs or universities.
Spain: Independency of the central, regional, and LGs  each level of government prepares its own CFS.
Italy: CFS became mandatory for all LGs starting from 2018

8. Two complex cases
• Complex portfolio of ‘a’ municipality
– Shareholder in a number of corporations which may have:
– Different legal forms (public or private)
– Different ownership structures (totally public or mixed public-private), and
– Responsible for providing different public services, such as pharmacies,
schools and nurseries, water, gas, waste, and housing.
– Contractual relationships with several entities mainly in charge of social
services delivery
• Universities
– Not consolidated into government financial statements when unclear as
to which government ‘control’ the universities or, alternatively, whether
universities are independent.
– However, other may argue that universities should be consolidated with
government for financial reporting purposes on accountability grounds as
they receive significant sums of public money.
 Use of the accountability criterion :
• Power to control the day-to-day operating policies of universities (even though,
universities must have strategic plan according to the educational policy objectives of
governments).

9. Main objectives?
• A tool for the accountability of governments to citizens: value for
money of the resources managed by public managers and
politicians.
• Users gain an overall understanding of a government’s assets and
liabilities, revenues and expenses, and cash flows.
• More likely to reflect economic substance and legal form: A
consolidated/whole-of-government approach provides a
comprehensive account of the use of resources and its assets and
liabilities.
• Annual reports of local governments disclose only a partial view of
their economic and financial activities if the financial consequences
of subsidiaries, joint ventures and associates are not included in
annual report

10. Differences between IPSAS and ESA/GFS in
term of boundary of reporting
Many accountants would not consider a consolidated entity to cover the
entire government or public sector
ESA/GFS versus IPSAS control concept
ESA institutional sector approach and relationship of control/functions versus
IPSASs control (power/benefit) approach
IPSASB's approach: Financial statements and reports on either a compulsory or
voluntary basis Vs ESA/GFS requirement in Europe of classification of each
government (resident) institutional unit to the GGS for statistical purposes
– Central government a single unit under ESA/GFS whereas may not be separate reporting
entities under IPSAS.
– GBEs excluded by IPSAS from scope of reporting, but consolidated when “controlled”
– Hybrid forms of financial institutions and cases of entities rescued from financial distress or
controlled by financial intervention
– Central Bank assumed public financial corporation in ESA whereas in financial reporting it may
or may not be consolidated
– Residence approach in ESA/GFS
10

11. CFR: Differential reporting?
Size, complexity and accountability  When would DR be useful?
Costs and benefits of financial reporting for smaller entities
• In the WGA and in the consolidated accounts of the central government, certain
smaller and less risky entities may be left out of the consolidation scope based on
materiality grounds.
• In the WGA, entities with assets, liabilities, income and expenditure below determined
‘ceiling’ in monetary terms may be excluded.
 Reduced Disclosure Requirements (RDR) for reporting.
• Central to the DR debates is the degree of subjectivity involved in its
application.
– Whether concepts such as the reporting entity and control are truly
delivering consistent reporting
• Guidelines to preparers to consider in its application including the economic
and social significance of the entity, whether and to what extent there is a
separation of management and economic ownership, as well as some
general indicators (thresholds) including financial and non-financial
information