Transcript ADB Grant 0133-CAM: Public Financial Management in Rural

ADB Grant 0133-CAM: Public Financial
Management in Rural Development
Ministries (Component 1)
Advanced Accounting 1 - The Conceptual Basis
of Government Accounting
Day 3: June 09, 2010: Producing financial
statements to international standards
ADB Grant No.0133-CAM/Component 1:
PFMRD
Day 3
Producing Financial Statements to International
Standards
Content
Accounting
Policies
Accounting
standards
The IPSAS
Cash Basis
Standard
Progression
to Accrual
Accounting
ADB Grant No.0133-CAM/Component 1:
PFMRD
Financial
Management
Information
System
2
Accounting Policies
For many aspects of accounting there is a choice in the basis
or method used...
Possible
bases of
accounting...
‘Straight Line’ or
‘Reducing Balance’
basis of
depreciation?
‘End of year’ or
‘Average for the
Year’ computation
of currency
exchange rate?
Cash Basis or
Accrual Basis of
accounting?
Examples
Inventories valued
on the ‘First In
First Out’ basis or
the ‘Average Cost’
basis?
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Accounting Policies
In each case you must make a choice of the basis used....:
The choices you make are called your ‘Accounting Policies’...
Accounting
Policies...
‘Straight line’
basis of
depreciation
‘Average for
the Year’
currency
exchange rate
Accrual basis
of accounting
Examples
Inventories
valued on the
‘First In First
Out’ basis
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Accounting Policies
When you have chosen your accounting policies....
They should be the same
each year
You should list them in a
‘Statement of Accounting
Policies’, attached to the
financial statements
Consistency
Transparency
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Accounting Policies
Some accounting
policies are better
than others
e.g. Accounting results
should be compared
with a budget prepared
on the same basis, not
on a different basis
Therefore: Accounting
Standards have been
developed
Accounting Standards
show which accounting
policies are preferred
and which are not
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Accounting Standards
• Aim is to ensure that organisations
show a true and fair view of their
financial position
Show which
accounting policies
are preferred, and
which are not...
• To ensure consistency of policies
from year to year
• And to enable a fair comparison to
be made between organisations
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Accounting Standards: National and International
Each country has
the right to
develop its own
National
Accounting
Standards
But for the last 40
years,
International
Accounting
Standards have
been progressively
developed
International
Accounting
Standards
For private
sector
enterprises
Convergence of
the Standards
used by different
countries
And for
government
organisations
Convergence
between Private
Sector and Public
Sector standards
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International Bodies that set Accounting Standards
International
Accounting
Standards Board
International Public
Sector Accounting
Standards Board
• Sets International
Financial Reporting
Standards
• Sets International
Public Sector
Accounting Standards
Private Sector Standards
Public Sector Standards
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International Accounting Standards Board
International Accounting Standards Committee (IASC) was founded in 1973
Members were Accountancy Bodies from
104 countries
IASC produced
International Accounting Standards (IAS)
In 2001, IASC was replaced by the International Accounting Standards Board (IASB)
An independent organisation, financed by
large companies with an interest in
Accounting Standards, especially banks
IASB has updated IAS
and set new International Financial Reporting
Standards (IFRS)
There are now 30 IAS and 9 IFRS
Also exposure drafts
And interpretations
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International Public Sector Accounting Standards
Board
International Federation of Accountants (IFAC) was founded in 1977
Members from 124 countries, public and
private sector
Has boards for Public Sector Accounting
Standards, Auditing Standards, Accounting
Education
International Public Sector Accounting Standards Board (IPSASB)
One of the Boards of IFAC
Sets International Public
Sector Accounting Standards
Based on IAS /IFRS adapted to
Public Sector
There are now 31 IPSAS for accrual accounting and one cash basis IPSAS
Also exposure drafts
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And guidelines and interpretations
Most Accrual Basis IPSAS are based on IFRS..... e.g.
IPSAS
Name
IPSAS 1
IPSAS 2
IPSAS 3
Presentation of Financial Statements
Cash Flow Statements
Net Surplus or Deficit for the Period - Fundamental Errors and
Changing in Accounting Policies
The Effects of changes in Foreign Exchange Rates
Borrowing Costs
Consolidated Financial Statements – Accounting for
Controlled Entities
Accounting for Investments in Associates
Financial Reporting of Interests in Joint Ventures
Revenue from Exchange Transactions
Financial Reporting in Hyperinflationary Economies
Construction Contracts
Inventories
Leases
Events after the Reporting Date
Financial Instruments: Disclosure and Presentation
Investment Property
Property, Plant and Equipment
Segment Reporting
IPSAS 4
IPSAS 5
IPSAS 6
IPSAS 7
IPSAS 8
IPSAS 9
IPSAS 10
IPSAS 11
IPSAS 12
IPSAS 13
IPSAS 14
IPSAS 15
IPSAS 16
IPSAS 17
IPSAS 18
Based on
IAS 1/IFRS 1
IAS 7
IAS 8
IAS 21
IAS 23
IAS 27
IAS 28
IAS 31
IAS 18
IAS 29
IAS 11
IAS 2
IAS 17
IAS 10
IAS 32
IAS 40
IAS 16
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IAS 14
Other IPSAS have been developed to meet specific
public sector problems... e.g.
IPSAS 22: Disclosure of Financial Information About the
General Government Sector
IPSAS 23: Revenue from Non-Exchange Transactions
(Taxes and Transfers)
IPSAS 24: Presentation of Budget Information in Financial
Statements
ADB Grant No.0133-CAM/Component 1:
PFMRD
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There is also one Cash Basis IPSAS
• ‘Financial Reporting under the Cash Basis of
Accounting’
• But concepts in the accrual basis IPSASs will also
be relevant to Cash Basis Accounting.
ADB Grant No.0133-CAM/Component 1:
PFMRD
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Which standards should Governments use for their
general purpose financial statements?
Profit Seeking
Government
Enterprises
Use IFRS
Non- Profit
Government
Organisations
Able to
account well
on an accrual
basis
Unable to
account well
on an accrual
basis
Use accrual
basis IPSAS
Use IPSAS
cash basis
ADB Grant No.0133-CAM/Component 1:
PFMRD
Add supplementary
accrual statements
where possible
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Which standards should Governments use for their
general purpose financial statements?
Profit Seeking
Government
Enterprises
Non- Profit
Government
Organisations
Many
donor
financed
projects
Use IFRS
Able to
account well
on an accrual
basis
Unable to
account well
on an accrual
basis
Use accrual
basis IPSAS
Use IPSAS
cash basis
ADB Grant No.0133-CAM/Component 1:
PFMRD
Most
operations
of
government
ministries
Add supplementary
accrual statements
where possible
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What about reporting on the modified cash or
modified accrual basis?
• IPSAS Board does not recommend reporting of general
purpose financial statements on a modified cash or modified
accrual basis.
• If a government organisation can report on a full accrual basis
then it should do so...(e.g. donor financed projects).
• If not, then it should report on the full cash basis with the
cash flow statement as the main financial statement.
• Supplementary statements of fixed assets, debtors and
creditors, loans, etc can be included, if available.
• In this way, a government can have a staged progression
towards accrual accounting, as envisaged under PFMRP.
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What about reporting on the modified cash or modified
accrual basis?
In other words....
• A government which has plans to move towards accrual
accounting will probably maintain its accounting records on a
modified accrual basis for a number of years.
• But it should not produce its general purpose financial
statements on the modified accrual basis. It should report the
Cash Statement as its main report, with supplementary
accrual based reports, until the time that it is fully able to
report according to accrual based standards.
• To do this properly it needs a staged plan for progression to
accrual accounting (see later).
• The modified cash basis of accounting is not recommended, as
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it does not assist progression towards IPSAS.
Reporting on the cash basis (IPSAS statement: Financial
Reporting under the Cash Basis of Accounting)
The standard has two parts:
• Part 1 is mandatory. It sets out the requirements which
are applicable to all entities preparing general purpose
financial statements under the cash basis of accounting.
• ‘The requirements in this part of the Standard must be
complied with by entities which claim to be reporting in
accordance with the International Public Sector
Accounting Standard Financial Reporting Under the Cash
Basis of Accounting.’
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Reporting on the cash basis (IPSAS statement: Financial
Reporting under the Cash Basis of Accounting)
• The standard has two parts:
• Part 2 is not mandatory. ‘It identifies additional
accounting policies and disclosures that an entity is
encouraged to adopt to enhance its financial
accountability and the transparency of its financial
statements. It includes explanations of alternative
methods of presenting certain information.’
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Reporting on the cash basis (IPSAS statement: Financial
Reporting under the Cash Basis of Accounting)
PART 1: (MANDATORY)
An entity should prepare and present general purpose financial
statements which include the following components:
1. Statement of Cash Receipts and Payments which:
(i) Recognizes all cash receipts, cash payments and cash balances
controlled by the entity; and
(ii) Separately identifies payments made by third parties on behalf
of the entity;
2. Accounting Policies and Explanatory Notes; and
3. Comparison of Budget and Actual Amounts either as a separate
additional financial statement or as a budget column in the
statement of cash receipts and payments.
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
1. Information to be Presented in the Statement of Cash
Receipts and Payments:
(a) Total cash receipts of the entity showing separately a subclassification of total cash receipts using a classification basis
appropriate to the entity’s operations;
(b) Total cash payments of the entity showing separately a subclassification of total cash payments using a classification basis
appropriate to the entity’s operations; and
(c) Beginning and closing cash balances of the entity.
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
• Total cash receipts and total cash payments, and cash receipts
and cash payments for each sub-classification of cash receipt
and payment, should be reported on a gross basis, not a net
basis...
• For example, show:
Sale of fixed assets
Purchase of fixed assets
60,000
(250,000)
• Do not simply report:
• Net purchase of fixed assets: (190,000)
(‘gross figure’)
(‘gross figure’)
(‘net figure’)
• (There are some exceptions to this general rule)
ADB Grant No.0133-CAM/Component 1:
PFMRD
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
• Payments made by third parties on behalf of the reporting entity
should be disclosed in separate columns on the face of the
statement of cash receipts and payments
– This includes amounts paid by donors on behalf of the
reporting entity
– Use the normal classification basis appropriate to the entity’s
operations.
ADB Grant No.0133-CAM/Component 1:
PFMRD
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Illustration: Statement of Cash Receipts and Payments: Receipts
2009
2008
3rd
3rd
Total
Govt parties
Total
Govt parties
$ million $million $ million $million $million $million
RECEIPTS
Tax Receipts
Income tax
Domestic sales tax
Import sales tax
Excise duties
Import duty
Non-Tax Receipts
Administrative fees and charges
Grants
Bilateral Agencies
Loans Received
Domestic
Foreign Multilateral
Capital Receipts
Disposal of land
Total receipts
2,540
2,540
600
600
370
370
820
820
100
100
650
650
250
250
250
250
900
900
900
900
850
350
500
350
350
500
500
20
20
20
20
3,160 1,400
ADB Grant4,560
No.0133-CAM/Component
1:
PFMRD
2,248
531
327
726
88
575
221
221
796
796
752
310
442
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18
4,035
2,248
531
327
726
88
575
221
221
310
310
796
796
442
442
18
18
2,796
1,239
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Illustration: Statement of Cash Receipts and Payments: Payments
2009
2008
3rd
3rd
Total
Govt
parties
Total
Govt
parties
$ million $million $ million $million $million $million
PAYMENTS
Operations
Salaries, wages & personnel cost
Travel expenses
Utilities and rental of property
Transport and maintenance costs
Office materials
Other materials
Other operational expenditure
Transfers
Grants to government institutions
Capital expenditure
Construction
Purchase of equipment
(continued on next page..)
1,540
780
90
170
160
80
90
170
220
220
1,450
1,300
150
1,220
605
90
130
130
80
90
95
220
220
370
340
30
320
175
40
30
75
1,080
960
120
1,363
690
80
150
142
71
80
150
195
195
1,283
1,150
133
1,080
535
80
115
115
71
80
84
195
195
327
301
27
283
155
35
27
66
956
850
106
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Illustration: Statement of Cash Receipts and Payments: Payments
2009
2008
3rd
3rd
Total
Govt
parties
Total
Govt
parties
$ million $million $ million $million $million $million
PAYMENTS (continued...)
Loans
Domestic debt interest
Foreign debt interest
Repayment of domestic debt
Repayment of foreign debt
Other payments
Movement in advances/deposits
Total payments
INCREASE IN CASH
Cash at 1 January
Cash at 31 December
1,280
400
320
110
450
15
15
4,505
1,280
400
320
110
450
15
15
3,105
1,400
55
50
105
ADB Grant No.0133-CAM/Component 1:
PFMRD
1,133
354
283
97
398
13
13
3,987
1,133
354
283
97
398
13
13
2,748
1,239
49
44
93
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
2. Accounting Policies and Explanatory Notes
The notes to the financial statements of an entity should:
(a) Present information about the basis of preparation of the
financial statements and the specific accounting policies selected
and applied for significant transactions and other events; and
(b) Provide additional information which is not presented on the
face of the financial statements but is necessary for a fair
presentation of the entity’s cash receipts, cash payments and
cash balances.
Notes to the financial statements should be presented in a
systematic manner. Each item on the face of the statement of cash
receipts and payments and other financial statements should be
cross referenced to any related
information in the notes.
ADB Grant No.0133-CAM/Component 1:
PFMRD
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
2. Accounting Policies and Explanatory Notes
Selection and Disclosure of Accounting Policies:
• General purpose financial statements should present information
that is:
(a) Understandable;
(b) Relevant to the decision-making and accountability needs of
users; and
(c) Reliable:
(i) Represents faithfully cash receipts, cash payments and
cash balances of the entity and the other information
disclosed;
(ii) Neutral, that is, free from bias; and
(iii) Complete in all material respects.
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
3. Presentation of Budget Information in Financial
Statements
• An entity should present a comparison of budget and actual
amounts, either as a separate additional financial statement, or
as additional budget columns in the statement of cash receipts
and payments.
• All comparisons of budget and actual amounts shall be presented
on a comparable basis to the budget.
• If the comparison of budget and actual is shown as a separate
additional financial statement, it must be reconciled to the
statement of cash receipts and payments.
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
3. Presentation of Budget Information in Financial
Statements
The comparison of budget and actual amounts shall show
separately:
(a) The original and final budget amounts;
(b) The actual amounts on a comparable basis; and
(c) By way of note disclosure, an explanation of material differences
between the budget for which the entity is held publicly
accountable and the actual amounts.
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EXAMPLE: STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNT
For Government X for the Year Ended December 31, 200X
Budget Approved on the Cash Basis - Classification of Payments by Functions
Actual
Original
(in thousands of currency units)
Amounts Final Budget Budget
CASH INFLOWS
Taxation
X
X
X
Aid agreements
International agencies
X
X
X
Other grants and aid
X
X
X
Proceeds: borrowing
X
X
X
Proceeds: disposal of plant and equipment
X
X
X
Trading activities
X
X
X
Other receipts
X
X
X
Total receipts
X
X
X
CASH OUTFLOWS
Health
(X)
(X)
(X)
Education
(X)
(X)
(X)
Public order/safety
(X)
(X)
(X)
Social protection
(X)
(X)
(X)
Defense
(X)
(X)
(X)
Housing and community amenities
(X)
(X)
(X)
Recreational, cultural and religion
(X)
(X)
(X)
Economic affairs
(X)
(X)
(X)
Other
(X)
(X)
(X)
Total payments
(X)
(X)
(X)
NET CASH FLOWS
(X)
(X)
(X)
Difference
X
X
X
X
X
X
X
X
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
(X)
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
Other General Considerations
Reporting Period
• General purpose financial statements should be presented at least
annually.
Timeliness
• An entity should be in a position to issue its financial statements
within six months of the reporting date, although a timeframe of
no more than three months is strongly encouraged.
Information about the Entity
• An entity should disclose its domicile and legal form, the
jurisdiction within which it operates, a description of its principal
activities, reference to relevant legislation and the name of its
controlling entity and the ultimate controlling entity.
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
Other General Considerations
Restrictions on Cash Balances and Access to Borrowings
• An entity should disclose the nature and amount of: significant
cash balances that are not available for use, or subject to external
restrictions.
• It should also disclose undrawn borrowing facilities, indicating any
restrictions on the use of these facilities.
Consistency of Presentation
• The presentation and classification of items in the financial
statements should be retained from one period to the next unless
there is a significant change in the nature of the operations of the
entity.
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
Other General Considerations
Comparative information
• Comparative information for the previous period should be
disclosed for all numerical information required by the Standard.
Identification of Financial Statements
• Each component of the financial statements should be clearly
identified and distinguished from other information in the same
published document. The following information should be
prominently displayed:
–
–
–
–
Name of the reporting entity
Reporting date or period
Reporting currency; and
Level of precision used (e.g. ‘000, millions, etc)
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Reporting on the full cash basis (IPSAS statement:
Financial Reporting under the Cash Basis of Accounting)
PART 2: ENCOURAGED ADDITIONAL DISCLOSURES
– Encouraged to Present the Statement of Cash Receipts &
Payments in the format of IPSAS Accrual Standard 2: Cash Flow
Statement (as illustrated in yesterday’s session, showing
operating cash flows, investment cash flows and financing cash
flows.) – see next slide
– Encouraged to disclose Memorandum Statements of Fixed
Assets, Other Assets, Liabilities, Public Debt, and other items
that are discussed in the IPSAS Accrual accounting standards.
– These additional disclosures will facilitate the gradual
progression to accrual based accounting.
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Statement of receipts and payments on slides 25-27
shown as Cash Flow Statement, IPSAS 2
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts
Taxation
Sales of goods and services
Grants
Payments
Employee costs
Suppliers
Interest paid
Grants to government institutions
Other payments
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Construction & purchase of plant and equipment
Proceeds from sale of land
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings
Repayment of borrowings
Net cash flows from financing activities
Net increase/(decrease) in cash
Cash at January 1
Cash at December 31
3690
2540
250
900
(2,495)
(780)
(760)
(720)
(220)
(15)
1,195
(1,450)
20
(1,430)
850
-560
290
55
50
105
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Consolidating results of government organisations
using different bases of accounting
Problem:
• A ministry keeps its
accounting records
on the cash basis and
has projects which
keep their records on
the accrual basis.
• How can the results
of the ministry and
its projects be
consolidated?
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Consolidating results of government organisations
using different bases of accounting
Solution:
The Ministry and its
projects will all produce
cash flow statements as
part of their accounts
The cash flow statements
can be added together to
produce a consolidated
cash flow statement for
the whole of the
ministry's operations
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Progress towards accrual accounting
• In order to progress from cash based accounting to
accrual based accounting, the government needs to
follow a staged transition, such as the following:
Phase 1:
Phase 2:
• Presentation of
Information that
is relatively easily
available
• Priority areas
for accrual
based
accounting
Phase 3 and
beyond:
• More
complex
areas
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Progress towards accrual accounting
Phase 1: Presentation of information that is relatively easily available
• Presentation of Financial Statements
• Shows the format of the financial statements
IPSAS 1
• Cash Flow Statements
• Shows the need for, and format of, the Cash Flow Statement
IPSAS 2
• Accounting Policies, Changes in Estimates and Errors
• Identifies areas requiring accounting policies
IPSAS 3
• Disclosure of Financial Information about the General Government Sector
• Prescribes disclosure requirements for governments which present information
IPSAS 22
about the general government sector in their financial statements
• Presentation of Budget Information in Financial Statements
• Statement of original and revised budget figures required in order to place the
IPSAS 24
actual expenditure figures in better context
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Progress towards accrual accounting
Phase 2: Priority areas for accrual based accounting
• Construction Contracts
• Provides guidance on the types of construction contracts that can arise in the
IPSAS 11
public sector, and specifies the basis for accounting
• Inventories
• Provides guidance on accounting for inventory cost and its subsequent
IPSAS 12
recognition as an expense, including any write-down to net realisable value.
• Property Plant and Equipment
• Valuation of assets, determination of their carrying amounts and depreciation /
IPSAS 17
impairment charges. Requires a major project to value all government assets.
• Provisions, Contingent Liabilities and Contingent Assets
• Identifies when provisions should be made, how they should be measured and
IPSAS 19
shown in the accounts. Also contingent liabilities and contingent assets.
• Revenue from Non-exchange Transactions (Taxes and Transfers)
IPSAS 23 • Prescribes requirements for the financial reporting of such revenue.
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Progress towards accrual accounting
Phase 3 and beyond: Other standards to be introduced, where relevant...
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
IPSAS 4—The Effects of Changes in Foreign Exchange Rates
IPSAS 5—Borrowing Costs
IPSAS 6—Consolidated and Separate Financial Statements
IPSAS 7—Investments in Associates
IPSAS 8—Interests in Joint Ventures
IPSAS 9—Revenue from Exchange Transactions
IPSAS 13—Leases
IPSAS 14—Events After the Reporting Date
IPSAS 16—Investment Property
IPSAS 18—Segment Reporting
IPSAS 20—Related Party Disclosures
IPSAS 21—Impairment of Non–Cash-Generating Assets
IPSAS 25—Employee Benefits
IPSAS 26—Impairment of Cash-Generating Assets
IPSAS 27—Agriculture
IPSAS 15, 28, 29, 30 —Financial Instruments
IPSAS 31—Intangible Assets
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How the Financial Management Information System
(FMIS) will change the processes of budget execution and
accounting
• Automated Support
• Transactions Processed Through FMIS System…
– Not Captured After the Event
• Timely Production of Accounts
• Accurate Calculations and Accounting….. But
– Dependent on Correct Data Entry
• Consolidation of Information From Multiple Sources
• Transaction Information Entered Only Once
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How the Financial Management Information System
(FMIS) will change the processes of budget execution and
accounting
• Informed Decisions
• System Enforced Controls (e.g. Budgetary Control)
• Transparent Procurement, Payments & Receipts Processes
• Best Practice Embedded in System
• FMIS Configured for RGC Specific Requirements
• Flexible Analysis and Reporting
• On-line Secure Access to Information
• Strong Audit Trails
• Improved Compliance, e.g. Automated Bank Reconciliation
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The Financial Management Information System
(FMIS)
• The FMIS will be specified so as to be capable of
recording transactions on the accruals basis
• Initially it will be set up to use cash basis accounting
• Modules and processes will be progressively ‘switched
on’ to facilitate continuous improvement in budget
execution and accounting.
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Financial Management Information System (FMIS)
Budget
Module
Treasury/
Cash
Management
All Accounting
Undertaken in
General Ledger
(GL)
Other Modules
Subordinate/
Supporting
Fixed
Assets
Purchasing
Requisition:
Earmark Funds
Supplier Order:
Commitment
Accounts
Payable
Supplier Invoice:
Obligation
General
Ledger
Core
Accounting
Payroll
Financial
Accounting
Reporting
Accounts
Receivable
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