Page 45 - CMA Journal (May-Jun 2026)

F oc us S ec t ion
Strengthening Public Accounts with
IPSAS and IFRS Amid FX Volatility
The move from cash-based to accrual-based public IAS 21 The E ects of
sector reporting, instituted in line with International Changes in Foreign
Public Sector Accounting Standards (IPSAS), represents Exchange Rates
a pivotal shift in the eld of public sector accounting in (International Accounting
Pakistan, aiming for greater transparency and Standards Board, 2025).
accountability (Gondal, 2025; Auditor General of
Pakistan, 2025). But the ongoing transition is against a Numerous public sector
continued backdrop of Pakistani rupee (PKR) entities in a scenario of
devaluation and volatility in the foreign exchange (FX) PKR that is weak and
market (Ali & Khan, 2025; Fitch Ratings, 2025). This volatile are battling
article discusses the challenges faced in public sector three key dilemmas.
accounting presented by PKR depreciation and Many government Muhammad Musab
Mirza
suggests speci c policy/ capacity building steps that projects and SOEs PhD Scholar in
will help in answering these. Corporate Finance
operate with dual
Introduction currency revenue and
expenditure. Determining whether the functional
The New Accounting Model in Pakistan has been currency should be PKR or a foreign currency has
functioning on the basis of cash for decades, and had become a complex and contentious issue.
the advantage of creating a simple model, but at the
same time, it led to concealment of public assets and • Translation of foreign-currency denominated
liabilities and scal risks. The Auditor General of debt: Foreign debt denominated in foreign
Pakistan (AGP) started a pioneering change towards currency (such as from IMF, World Bank or bilateral
using accrual-based accounting which is similar to lenders) needs to be re-translated on every
International Financial Reporting Standards (IFRS), but statement date at the closing rate. A 10%
will include public sector characteristics in December depreciation of PKR adds 10% to the liability side of
2025 (Auditor General of Pakistan, 2025; Daily Times, the balance sheet (assuming there is no additional
2025). The reforms would have a positive e ect on borrowing) – resulting in signi cant balance-sheet
improving the quality, completeness and reliability of volatility (Ministry of Finance, Pakistan, 2025).
government nancial statements (Gondal, 2025).
• The lack of exchangeability: In 2025, the
But there is a tough economic reality facing the new International Accounting Standards Board (IASB)
accounting system. In mid-2025, one PKR cost about issued recent amendments in IAS 21, which guide in
278 USD, with its value decline by almost 90% since the case of unavailability of exchangeability of the
1995 (Masud et al., 2025). While exchange rate volatility currency. Although the PKR is currently
has remained elevated, sovereign external debt exchangeable, ‘recurring episodes of liquidity
continues to hurt the scal balances (Ministry of squeeze’ in the Pakistani interbank market at times
Finance, Pakistan, 2025, The News, 2025). This is a approaches the ‘lack of exchangeability' scenario
setting that is directly challenging the faithful
representation as required by IPSAS/IFRS (Ocansey et (SBP, 2025).
al., 2025). One practical risk is that the same public entities might
Foreign Exchange Translation and use di erent rates or estimation methods in
developing nancial statements, which can result in
Functional Currency Determination: non-comparability of such statements, thereby
IAS 21 & IPSAS 4 negating the transparent aspect of IPSAS goal.
Foreign currency transactions and nancial statements (Ocansey et al., 2025; Center for Peace and
should be translated in accordance with the standard Development Initiatives, 2026).
ICMA’s Chartered Management Accountant, May-Jun 2026 43
Financial Instruments, Expected Credit Measurement of Assets and Revaluation
Losses and Public Debt: IAS 39 and IFRS – IAS 16
9
Public sector units (PSU) have nancial assets ( nancial The revaluation model, which writes assets up to or
down to fair value without their revaluation surplus
liabilities of PSUs) and Pakistan has nancial liabilities being recorded in pro t or loss, is allowed under IAS 16
(Property, Plant and Equipment) (International
(external sovereign bonds, foreign commercial loans). Accounting Standards Board, 2025). During a
This accounting reform (SBP 2025) from IAS 39 to IFRS hyper-in ationary or high-volatility scenario, the fair
9 can be called a big transition. The incorporation of values of goods and services purchased or used for the
IFRS 9 will change how future credit losses are construction of imported capital assets, such as a
recognized in the books of accounts by public sector power plant constructed with imported equipment,
accountants, subsidiary the expired incurred-loss may experience signi cant uctuations as a result of
model to an expected-credit-loss (ECL) model, which exchange rate variations even though no actual
would involve predictions of future credit losses change in the good or service has taken place (Auditor
through forward-looking scenarios (Pakistan Today, General of Pakistan, 2025).
2025). The observations from audit reports in other countries
More and More ECL with Devaluation of indicate that the omissions of asset 'understated'
PKR depreciation expenses negatively impact on the
nancial statements (Tsholotsho Council, 2025).
Foreign receivables (e.g., loan to domestic power Ensuring that revaluation is done regularly (standard
company in USD) re-translated at a higher closing rate recommends 3–5 years) and the revaluation for an
of PKR will lead to higher nominal PKR value of the asset class is done in the same way, are the issues that
asset. But, the borrower's ability to pay back (PD) could the public sector needs to solve in Pakistan's context
(The Express Tribune, 2025). Revaluation of assets can
potentially be a ected negatively when the be subject of volatability if not applied 'stringently'
envisioned change in PKR further deteriorates its leading to a lack of transparency (Baloch, 2025).
nancial health (Ali & Khan, 2025). According to IFRS 9,
ECL should be determined on a forward-looking basis Revenue Recognition (now, for most
taking account of reasonable and supportable part superseded by IFRS 15): IAS 18
information about the future economic conditions Historically, IAS 18 (Revenue) had the guidance of
(International Accounting Standards Board, 2025). A recognising revenue when the risks and rewards of
devaluation scenario would lead to an increased ECL ownership of the assets transferred, while IFRS 15
provision, which due to the direct impact would lead recognises revenue based on the transfer of control,
to a decrease in government’s net assets presented which is evaluated for each performance obligation
(K-Electric, 2025). (International Accounting Standards Board, 2025). In
Governmental Receivables - IFRS 9 Pakistan, there are numerous non-exchange
transactions of the public sector which are not scope of
exemption typical IFRS 15 such as taxes, grants or fees. The IPSASB
has been working on a public-sector speci c revenue
The Securities and Exchange Commission of the recognition standard (International Public Sector
Pakistan (SECP) has awarded an exemption on Accounting Standards Board, 2025).
implementation of the IFRS 9 model for ECL on
nancial assets nally due from the Government of Also from a PKR-volatility point of view, a government
Pakistan (GoP) to implement the IFRS 9 model of ECL grant of USD 100m, disbursed at a rate of 200 per USD,
may have a smaller PKR value if it is disbursed later
for such nancial assets till 31 December 2025 when the rate of USD is 280. In the case of accrual
(K-Electric, 2025). It was argued that it might resulting accounting, the revenues should be recorded when
in volatile nancial statements and breach of loan the government has control of the resources, rather
covenants due to IFRS 9 (Pakistan Today, 2025). But the than when cash is received (World Bank, 2025). While
Government of Pakistan has proposed to not increase devaluation has no e ect on control, it does result in a
the exemption after 2025 (Ministry of Finance,
measurement di erence which needs to be disclosed.
Pakistan, 2025). As of that date, public sector entities Presently, there are no e ective policies and
would also have to switch to IFRS 9 which would hence approaches in place to tackle non-exchange revenue
require them to model ECL at volatile exchange rates measurement in the face of high exchange rate
posing a signi cant challenge technically and in data
volatility within the public entities of Pakistan (IMF,
collection (State Bank of Pakistan, 2025). 2025).
Employee Bene ts—IAS 19, Public time value of money if it is material. The discount rate
Sector Pensions should be a pre-tax rate and represent market
judgements about the time value of money, including
For de ned bene t obligations, including government judgments about the additional risks that exist for the
liability (International Accounting Standards Board,
pension schemes, liabilities must be calculated using
actuarial assumptions, one of which is the discount 2025). Chosen discount rates are very judgmental in
rate required by IAS 19 (Employee Bene ts) (Príma high-volatility environments. Adopting sensible
changes to IAS 37 that the IASB is currently proposing,
Consulting, 2025). In Pakistan, where unfunded and may provide necessary clarity on the measurement of
partially funded pension schemes dominate, the
liabilities are enormous (PIDE, 2025), and increasing the provisions when uncertainty exists, and, therefore,
devaluation further raises the cost of pensions. Linking could be an area of focus for all Pakistani public sector
discount rates to government bond yields, particularly accountants (International Accounting Standards
when those yields rise due to currency risk premiums, Board, 2025).
reduces the present value of pension obligations, since Don't let the above-mentioned challenges mean that
a higher discount rate lowers the liability. Conversely, IPSAS/IFRS has gone wrong. On the other hand, with
when the nance ministry applies a lower risk-free rate, accrual accounting, transparency is required as risks
such as PKR government securities, pension liabilities are evidenced that you may otherwise have not
increase (Ministry of Finance, Pakistan, 2025). In an noticed (International Federation of Accountants,
illiquid market like the PKR bond market, however, 2025). For Pakistan, however, three vital steps need to
some degree of judgment is inevitable in determining be taken to extract bene ts.
the appropriate market-based discount rate for IAS 19 Foreign-currency translation, calculation of ECLs and
compliance (Príma Consulting, 2025). revaluation of assets can be automated with digital
Devaluation also interacts with other actuarial systems. Pakistan currently has an integrated nancial
management information system (IFMIS) in place to
assumptions, such as salary growth and mortality or track actual expenditures at real-time, using the PIFRA
early retirement rates. When the PKR weakens, salary SAP. New programs include the “Open Budget &
adjustments often accelerate to match in ation, which Expenditure Initiative” (DDO Dashboard), which seeks
in turn raises future bene t payments (PIDE, 2025). This to better equip citizens to monitor and oversee
dynamic underscore the urgency for Pakistan’s public (Ministry of Planning Development and Special
sector entities to strengthen actuarial capacity and Initiatives, 2025). Restructuring and scaling these
align with IAS 19, particularly as institutions like systems across all public entities, along with inserting
Pakistan Railways (2025) move toward IFRS 9 exchange rates information from the State Bank of
compliance. Pakistan (SBP), is the best approach to minimize
Share-based Payment: IAS 22 manual errors and apply standards in a consistent
manner (NIPA delegation, 2025; PPRA, 2025).
Responding to this, IAS 37 (Provisions, Contingent Improve Audit, PAC Oversight and
Liabilities and Contingent Assets) stipulates that a
provision should be recognized if there is a present Whistleblower Protection
obligation that results from a past event, and an
estimate of the obligation's costs can be made with The Public Accounts Committee (PAC) should account
reasonable accuracy (International Accounting on this issue of misappropriation of funds by public
entities with IPSAS/IFRS (Auditor General of Pakistan,
Standards Board, 2025). In a devaluation scenario the 2025). A Civil Society Governance Diagnostic
contingent liabilities that may come back upon the Assessment carried out by the Transparency
Pakistani government may: International Pakistan in 2025 shows that the public
If the government guarantees a foreign currency loan grievance mechanism is dysfunctional and will suggest
for an SOE, and as a result of subsequent events, the a strengthening of PACs at the national and provincial
Pakistan Rupee depreciates, the guarantee liability (in level. Furthermore, under the Whistleblower
PKR terms) will increase, possibly forming a condition Protection and Vigilance Commission Bill, 2025 (Senate
in IAS 37 (Ministry of Finance, Pakistan, 2025). passed) an Independent Commission will be formed to
whistleblowers
safeguard
reporting
nancial
Because of this, the legal claims also need to be irregularities (Senate of Pakistan, 2025). The
disclosed and sometimes recognized as provisions – as promulgation of such a law and formalization of its
there could be claims from contractors or foreign
investors for an exchange-rate loss (Ali & Khan, 2025). enforcement would go hand in hand with
standard-setting.
IAS 37 requires the accounting for provisions with the
The Capacity of Actuarial, Data and Re
Training •
For making the implementation of IAS 19, IAS 37 and
IFRS 9, it demands expertise which is not available
far in the public sector of Pakistan in the era of
FX. The current sta and provincial accountants as
as the nance teams of the SOEs, including Pakistan
Railways, should be provided with a speedy skill
development program. Institute of Cost and •
Management Accountants of Pakistan (ICMA) could be
a front runner in designing these programs and •
certi cation of IPSAS/IFRS accountants in public se
Climate Finance Transparency •
The IPSASB also released a new Climate-related
disclosures Standard (IPSASB SRS 1) which mandates
that governments make climate-related disclosures i
their general-purpose nancial statement •
(International Public Sector Accounting Standards
Board, 2025). Pakistan is extremely vulnerable to
climate shocks and climate nance is generally
foreign currency (World Bank, 2025). The costs of
climate grants and/or climate loans in PKR are dire
impacted by devaluation. Climate disclosure along
with existing standards will aid citizens and •
development partners in interpreting the impacts of
FX uctuation on climate investments (International
Public Sector Accounting Standards Board, 2025). •
Conclusion •
The transition from conventional cost accounting an
accounting systems to IPSAS/IFRS in the public sect
is bold reform which would serve as model for •
developing countries, if implemented successfully
(International Federation of Accountants, 2025
Ocansey et al., 2025). But the route is riddled wit
technical hurdles, most tellingly the issue of the
ongoing devaluation of the Pakistani rupee and •
volatility in the foreign exchange market (Ali & Kh
2025; Fitch Ratings, 2025). To overcome these
challenges, it is not only essential to adhere to I
IAS 39/ IFRS 9, IAS 16, IAS 18, IAS 19, and IAS 37,
concerted e orts are also needed to invest in digit
infrastructure, audit oversight, actuarial capabili
and transparent disclosure (PIFRA, 2025; Senate of
Pakistan, 2025). The Centre for Peace and Developme
Initiatives writes that, if achieved, Pakistan's su
will show how high-volatility economies can develop
credible public nancial management that is
transparent and based on trust (2026). IMF (2025)
writes in a paper that, if successful, Pakistan wil
that high-volatility economies can foster credi
public nancial management based on transparency
and trust. It is important that over the next 24 mo
they be crucial, and the global public sector
community will also be keeping a close watch on the
(Wealth Pakistan, 2025; The News, 2025).