Thursday 20 October 2022
How far can public sector jurisdictions account for the natural resources that contribute so much to their societies and economies? Public Financial Management is considering this topic as the International Public Sector Accounting Standards Board (IPSASB) has recently issued a consultation paper on Natural Resources as its first step in developing guidance on the recognition, measurement, presentation and disclosure of natural resources in the public sector. Natural resources are, in this context, generally resources such as sunlight, air, water, land, animals and minerals that exist on our plant without the actions of humankind. They may have the capacity – either naturally or after intervention – to be used for societal and economic gain.
Natural resources have always been used in agriculture, such as water and sunlight to grow crops and breed livestock and, more recently, industrialisation; for example, water and wind and horses to power mills. Different communities face different challenges in obtaining and getting benefits from natural resources, and there can also be considerable uncertainty around even the existence of some of them. Some natural resources such as precious and rare earth metals are highly sought after, with advanced markets for them. Increasing competition is also likely for resources essential for life, such as water.
Natural resources also contribute to economic growth strategies, such as to replace the use of sources like fossil fuels and nuclear energy. United Nations Sustainable Development Goal 12 - to ensure sustainable consumption and production patterns - includes a target by 2030 to ensure the sustainable management and efficient use of natural resources. The Paris Agreement on climate action requires nations to substantially reduce global “greenhouse gas” emissions to limit the global temperature increase in this century to two degrees Celsius while pursuing efforts to limit it to 1.5 degrees. Jurisdictions therefore have adopted policies on natural resources that contribute to these goals. The United Kingdom has enshrined the net zero target by 2050 in law, with a target for at least a 100% reduction of greenhouse gas emissions (compared to 1990 levels) by 2050. The Natural Resources Policy of the Government of Wales says that natural resources from land, sea and air provide both benefits and opportunities in societal priorities such as prosperity and health, and support other industries directly and indirectly, including energy.
There has historically been limited guidance in the public sector on the recognition and measurement of resources in their natural state. The Conceptual Framework for General Purpose Financial Reporting (GPFR) by Public Sector Entities defines a resource as an item with service potential or the ability to generate economic benefits and that natural resources are assets as natural and other resources such as mineral reserves, water, fishing grounds, forests and the electromagnetic spectrum, that entities often have powers over. These powers allow governments to grant licenses for their use or to obtain royalties and taxes from their use. Economic benefits can arise directly from a resource or from rights to use it. The framework also identifies barriers to recognition and measurement, such as ability to control, ownership and rights of access.
The recognition and measurement of worth of natural resources can therefore help entities to obtain fair value for resources. IPSASB identifies that the value of natural resources is important in resource rich settings and to inform decisions such as granting licences. There is growing demand for information to help these resources be valued accurately and fairly. The Consultation Paper includes proposals for disclosures for natural resources in GPFR and also wider information within this reporting according to IPSASB guidelines.
The preliminary view is that a natural resource is a resource as defined in the Conceptual Framework, is naturally occurring and in its natural state, with this last point being what delineates natural resources from other resources. There is currently no IPSAS for accounting for natural resources in their original state although some IPSAS address human intervention, for example, IPSAS 27 addresses agriculture with a scope of living plant or animals and agricultural produce at the point of harvest, but not products of processing after harvest. The paper asks for view on supplementing existing IPSAS – also such as IPSAS 12 on inventories – and applying existing guidance from other fields such as International Financial Reporting Standards and International Accounting Standards related to natural resources.
IPSASB has also issued a consultation paper on Advancing Public Sector Sustainability Reporting, which has an initial focus on general disclosure requirements for sustainability-related information and climate-related disclosures. IPSASB takes the view that the two are connected because sustainability reporting may include consideration of how natural resources may be used in a sustainable manner.
As well as ensuring that jurisdictions have information that helps to ensure fair value is obtained for resources, recognition and measurement of them where appropriate will contribute substantially to other parts of the economy, such as developing strategies for energy and resource security. It will also help to achieve sustainability objectives relating to natural resources, global social equity and intergenerational fairness by allowing communities to benefit from their natural resources without impacting others in the present or future.
 Consultation Paper, Natural Resources - International Federation of Accountants (ipsasb.org)
 Sustainable Development Goals – United Nations Department of Social and Economic Affairs Sustainable Development
 The Paris Agreement – United Nations
 Net zero and the different official measures of the UK's greenhouse gas emissions
 Natural resources Policy – Llwodraeth Cymru Welsh Government
 The Conceptual Framework for General Purpose Public Financial Reporting by public sector entities International Public Sector Accounting Standards Board (ifac.org)
 IPSAS 27 Agriculture -International Federation of Accountants
 IPSAS 12 inventories -International Federation of Accountants
 Consultation Paper, Advancing Public Sector Sustainability Reporting - International Federation of Accountants (ipsasb.org)
About the Author
Victoria Bainbridge is a consultant and trainer with a specialism in public financial management. Most recently technical advisor and business development manager on international public financial management projects, alongside assignments in local commerce and academia in Germany. Qualified UK accountant (Chartered Institute of Public Finance and Accountancy) and has Certified Internal Auditor qualification. Other expertise includes audit, governance and control, financial systems and processes, and project management and implementation.