Transcript How FAD is implementing the MTS

Financial Reporting Systems
Including a Unified Chart of Accounts
John Zohrab
Fiscal Affairs Department
Presentation at the Regional Workshop
on Financial Reporting and Management of Fiscal Risks
in Astana, Republic of Kazakhstan, May 21-23, 2014
Contents
•
•
•
•
•
•
Definitions of a UCOA
Purposes of UCOA
Issues in Designing UCOA
Automation
Implications for Reporting
Conclusions
Japan IMF Sub Acc
2
Narrow Definition of UCOA
• Uzbekistan & Tajikistan good examples of
narrowly-defined UCOA (ND-UCOA)
• Unified for the general government sector
• Integrates three structures:
– COA required for financial accounting
– GFSM 2001 economic classification (revenue
classification, economic classification of expense,
transactions in assets and liabilities by
instrument)
– Economic segment of budget classification
3
Broad Definition of UCOA
• Kyrgyz Republic good example of
broadly-defined UCOA (BD-UCOA)
• Also unified for the general government
sector
• Comprises all classifications relevant for
financial reporting, including:
–
–
–
–
–
Economic segment, which is the ND-UCOA
Functional segment of budget classification
Administrative segment
Fund (source of financing) segment
Program segment
4
UCOA Purposes (1)
• Improves accounting & reporting quality
by:
– Removing the need for manual reconciliations
between budgetary and financial accounting and
ensuring their consistency
– Bringing the greater legal compliance discipline
of budgetary accounting to financial accounting
– Bringing the discipline of double-entry accounting
of financial accounting to (one segment of)
budgetary accounting
– Standardizing the categorization by economic
type in the COA and budget classification
5
UCOA Purposes (2)
• Improves accounting & reporting quality
by:
– Increasing transparency of accounting structure &
how reports are generated from accounts
– Increasing transparency of accounting and
reporting basis across different parts of the
general government sector
– Increasing understanding of international public
sector accounting standards and related reports
– Increasing understanding of GFSM 2001
framework basis and related reports
6
UCOA Purposes (3)
• BD-UCOA also improves accounting &
reporting quality by improving:
– Transparency: by making explicit other
segments with which the economic segment
(narrowly defined UCOA) interacts
– Efficiency: by helping to remove redundancy
and improve homogeneity and independence
of segments
– Coverage: by identifying any missing
classification dimensions that are needed
7
FOR DISCUSSION
• Can you think of any other purposes of a
UCOA?
• If you can, please write them down and we
will discuss them following this
presentation
• Also, please write down any questions
you might have about:
– The experience of countries that have designed
UCOAs; and
– The purposes of a UCOA that I have just outlined
8
A PROBLEM?
• If UCOA has so many advantages, why do
some countries with good PFM systems
(e.g. British heritage systems) not have
UCOAs? Perhaps:
– Unification at reporting level & similar IT systems
& effective accounting ethics, auditing, legal
framework = similar result; or
– Those countries will some day adopt UCOAs as
they discover needed improvements in their
accounting and reporting systems
– If you can think of more possible explanations,
please write them down and we can discuss them
after the presentation
9
UCOA Design Stages
• Possible stages of ND-UCOA design:
– Stage 1: Transformation of legacy COA to
support international-standard financial
accounting and reporting i.e. IPSAS
– Stage 2: Incorporation of GFSM 2001 structure
into transformed, IPSAS-supporting COA
– Stage 3: Integration of economic segment of
budget classification into COA
• The design of the Uzbekistan, Tajikistan
and Kazakhstan ND-UCOAs followed this
sequence
10
ND-UCOA Design 1
• Stage 1:
– Driven by reporting requirements, which is what
international accounting standards (IPSAS) are
– Uses legacy double-entry accrual accounting in
Central Asia & Caucasus as foundation for this
transformation – major advantage compared with
countries moving from a cash basis of accounting
– Uses structure of private sector COA designed for
IFRS-based reporting compliance, as IPSAS is
closely related to IFRS
– Keeps legacy COA’s individual accounts and their
names as much as possible
11
ND-UCOA Design (2)
– Legacy methodological documents used as a
model for new methodological documents (e.g.
bridge table from old COA to new ND-COA; table
showing accounting entries, and therefore
correspondences between accounts, for all types
of transactions and events recognized in the
accounts)
– Often, incorrectly, excludes stocks and flows that
do not “belong to” budget institutions but to the
government e.g. Treasury Single Account, taxes,
debt, pensions and social allowances
– Not consolidated to whole-of-government –
typically only to line ministry level, with public
corpoations treated as investments
12
FOR DISCUSSION
• Can participants from countries that
have designed IPSAS-compliant COAs
please write down the key differences
they have found between them and the
legacy COAs (derived ultimately from
the USSR Instruction #61 of 1987)?
• We can then discuss these after the
presentation.
13
ND-UCOA Design (3)
• Stage 2:
– Incorporates GFSM 2001 ‘economic’ classification (=
revenue classification & economic classification of
expense & classification of assets and liabilities by
instrument)
– Driven by accrual GFSM 2001 reporting needs
– Expands the number of accounts, e.g.
• IPSAS current/non-current distinction for each GFSM 2001
financial asset and liability distinction by instrument
• IPSAS net asset/revenue & expense distinctions for
revaluation gains & losses also for the GFSM 2001
distinctions between holding gains and other volume
changes and for each GFSM 2001 asset and liability
distinction by instrument
14
FOR DISCUSSION
• The draft GFSM 2014 (see www.imf.org)
integrates IPSAS and GFSM 2001. Please
consider the following questions and be
ready to discuss them following the
presentation:
– When GFSM 2014 is finalized, will it affect
UCOAs?
– If so, how?
– From the perspective of an optimal UCOA, do
you think that the GFS framework and IPSAS
should be further rationalized?
– If so, how?
15
ND-UCOA Design (4)
• Stage 3:
– Two main options for integrating economic
segment of cash budget classification into
COA:
A. Additional parts of the COA for economic
segment (e.g. in Kyrgyz Republic: 3 parts
respectively for cash revenues, cash expenditures
and cash transactions in assets and liabilities); or
B. Separate budget accounting record linked to the
main parts of the COA, as a subsidiary ledger
(manual) or budget module (software solution) via
a bridge table (Tajikistan) or common coding
16
ND-UCOA Design (5)
– Option A is illustrated by the Kyrgyz UCOA. It:
• Is transparent
• Applies double-entry accounting fully to budgetary
accounting
• Involves two sets of double entries for each
transaction, e.g. when a liability is incurred: DR
Cash expenditure CR Payables; when payment is
made: DR Cash expenditure CR TSA
• Has implementation problems:
– Likely to require customization in a computerized
environment
– More bookkeeping entries in a manual environment
17
ND-UCOA Design (6)
– Option B is illustrated by the Tajikistan UCOA. It :
•
•
•
•
•
Does not require additional UCOA parts
Involves one double-entry per transaction
Involves single-entry budget accounting
Fits with the design of leading accounting IT systems
Might not be transparent as a result of how the IT
system functionality identifies when payments have
been made in order to make the budget accounting
entries
• If the IT system uses a bridge table to link the budget
accounts with the financial accounts, could involve
problems in maintaining the table and less
transparency (when payment is made, transaction
serial number triggers the appropriate budget
accounting entry)
18
BD-UCOA Design (1)
• Economic segments based on the GFSM 2001
economic classification are transparent and
stable – for accrual financial accounts as well
as cash budgetary accounts
• Sufficient countries have designed and
implemented account structures on this basis
to be confident that it is a durable solution
• Inevitably some loss of information compared
with previous classifications, but experience
has suggests this is not lasting or major
19
BD-UCOA Design (2)
• Fund segments are becoming more
common – Uzbekistan, Tajikistan and
the Kyrgyz Republic have recently
adopted them
• They enable expenditures to be linked
with the revenues earmarked to fund
them e.g. donor funding, a budget, a
separate fund
• They enable other segments to be more
homogeneous
20
FOR DISCUSSION
• Do you agree with statements in Slide
19 on the economic segment? If not,
please write down your views for
discussion after the presentation
• What are your views on the principle of
the fund segment and its design?
Please write them down and discuss
them after the presentation
21
BD-UCOA Design (3)
• Problems of functional and administrative
segments seem limited if impacts of
Medium Term Expenditure Framework
(MTEF) and program segment are ignored
• Administrative segment reflects the
administrative structure that exists
• As GFSM 2001 states, the functional
segment enables consistent reporting by
functions of government irrespective of
changes in the administrative structure
22
BD-UCOA Design (4)
• In practice the functional and administrative
segments are unlikely to be independent:
– Functional codes are mapped from administrative
codes in computerized accounting systems
– Impractical to generate accounting data except by
administrative unit (cf. lack of correspondence
between education functions and schools)
– As a result, the functional segment in practice
appears as a grouping of administrative units, not as
an independent dimension
– This is probably in part why some countries use the
functional segment for budget appropriations despite
the problems this causes (e.g. Kazakhstan, Armenia,
Azerbaijan)
23
BD-UCOA Design (5)
• MTEF affects administrative segment,
requiring first-level budget agencies to:
– Be aligned with strategic plans and expenditure
ceilings, for accountability reasons
– Be a manageable number
– Be homogeneous
– Have critical mass
• First-level budget agencies that
correspond to the first level of the
functional segment functions would meet
the criteria of manageability, homogeneity
and critical mass
24
FOR DISCUSSION
• Do you agree with the implications of
an MTEF on the administrative segment
in Slide 24?
• Do you think that the functional
segment could be the basis for a
standardized administrative segment?
• Please write your views down for
discussion after the presentation
25
BD-UCOA Design (6)
• Performance budgeting affects
administrative segment fundamentally
• For accountability reasons, the
program or output classification should
be aligned with the administrative
segment
• For accountability and homogeneity
reasons, the program or output
classification should be aligned with
the performance indicators
26
Performance Indicators
• Performance indicators
– Do not constitute a classification, as they are
not homogeneous
– Are like co-ordinates for defining each
program/output classification item
• Costs and other problems of defining
performance indicators could affect
definition and stability of program
segment
27
FOR DISCUSSION
• What is your experience with a
program/output classification?
• Do you agree that a program/output
classification should be aligned with
both the administrative segment and
performance indicators?
28
Automation (1)
• Legacy software typically does not support a UCOA
• Previous approach in the region to need for major public
financial management (PFM) IT solutions was often to
acquire a Commercial Off-The-Shelf (COTS) system via
international procurement
• This view was driven by, inter alia:
– Software reliability concerns:
• Lack of local expertise in software programming for government
financial management solutions
• Extensive international testing of COTS system software
– Support needs, as a COTS supplier would have:
• Adequate programming resources;
• A defined implementation team driving the implementation and
accountable for its success;
• And follow an established project management methodology; and
• Adequate international expert support
29
Automation (2)
• More recently, countries in the region
have increasingly been pursuing PFM
IT solutions based on local software
development
• Driving factors appear to be:
– Cost
– Superior local firm awareness of user needs
– Improvement in local software programming
capacity for PFM IT solutions
30
Automation (3)
• Current thinking in the region on IT solutions for UCOA
reflects recent general trend
• However, need to have:
• Adequate programming resources;
• A defined implementation team driving the implementation and
accountable for its success;
• And follow an established project management methodology; and
• Adequate international expert support
• Because of linkages between accounting, commitment
and payment control, budgeting and reporting, typical to
implement IT solutions for UCOA that also automate
other treasury operations and budget preparation
• Thus, the implementation of a UCOA is often one of the
first – and crucial - steps in the implementation of
treasury modernization and the reform of accounting and
reporting
31
Automation (4)
• Consolidated reporting major challenge,
because of intra-entity eliminations
• Single integrated IT solution technically
best (Tajikistan, Uzbekistan) but
interfacing different systems could work
(Kazakhstan)
• Experience during the next few years
likely to show how much interfacing
different systems affects data quality
• In any event, best to pursue a single
integrated IT solution
32
FOR DISCUSSION
• What is the experience in your
countries with automating a new
accounting and reporting system via:
– COTS
– Local software development
– Stand-alone software
– Integrated software
– Interfacing different software products?
33
Implications for Reporting (1)
• UCOA means reports are generated
with common methodology
• Methodology invariant as between
manual and automated, and as between
different IT solutions, especially their
reporting functionality
• This transparency gives additional
confidence in the quality of the
accounting data underlying reports
34
Implications for Reporting (2)
• Budget accounts are automatically reconciled via
UCOA with financial accounts, implying budget
reports and financial statements are inherently
consistent with each other
• However, they still need to be reconciled, because
they report cash flows (or accruals) in different
ways (see IPSAS 24 para 47)
• Consistent data means the reconciliation
statement focuses on identifying the different
perspectives on the data, i.e. for interpretation,
rather than on problems with the data
• This brings budget management to a new and
higher level of understanding and control
35
Implications for Reporting (3)
• GFSM 2001 item accounts are automatically
reconciled via the UCOA with other financial
accounts, implying GFSM 2001 reports and
financial statements are inherently consistent with
each other
• Enables comparison between GFSM 2001 reports
and e.g. IPSAS financial statements to focus on
the different perspectives on the data, i.e. for
interpretation, rather than on problems with the
data
• This brings financial management to a new and
higher level of understanding and control,
allowing the full potential of the GFS system to be
realized
36
Implications for Reporting (4)
• GFS is still a very young system, less than 30
years old - its potential is still being
discovered, so far probably the only GFSM
2001 report being widely used is the statement
of sources and uses of cash
• UCOA enables most GFSM 2001 reports to be
produced readily and of auditable quality,
giving credibility and user confidence
• GFSM 2001 classifications are likely to
increasingly populate the notes to financial
statements where the analytical basis is
optional (i.e. not just a question of IPSAS 22)
and to explain aspects of the statements
37
Implications for Reporting (5)
• UCOA readily enables production of
consolidated whole-of-government
financial statements of auditable quality
on the basis of international standards
• This, and the familiarity of the underlying
accounting and reporting concepts, gives
users confidence in them
• As a result, consolidated whole-ofgovernment financial statements are
having an increasing impact on fiscal
policy
38
Implications for Reporting (6)
• UCOA promotes:
– Uniformity in the preparation of financial
statements used for decision making at lower
levels
– The greater resultant transparency gives
users greater confidence in, and
understanding of, them them
– Will help to maximize the use of the financial
statements in decision-making
39
FOR DISCUSSION
• Do you agree with the statement in
slide 34 that the UCOA enables report
to be generated with a common
methodology?
• What is your view about the future use
of GFSM 2001 reports?
• What is your view about the
significance of consolidated whole-ofgovernment financial statements?
40
Conclusion (1)
• Interpret international experience in light of different
contexts
• Accrual accounting per se is not difficult in this region,
because public sector accountants have been using it since
1987
• Combining accrual accounting with cash budgeting has also
been practised in this region since 1987
• Concept of a UCOA combining support for cash budget and
accrual financial accounting is intuitively obvious in this
region - there has been no resistance to the concept
• Many other countries have only experienced cash
accounting - sometimes single-entry - and have always had
the same recognition basis as between budget and financial
accounting
41
Conclusion (2)
• Conceptual difficulties in this region in
implementing UCOA and related reporting reforms
therefore limited to specific aspects that are novel
• Because private sector accountants in this region
have been implementing IFRS or IFRS-based
standards, aspects of public sector accounting
standards that are close to IFRS are not so novel
• Novelty in conceptual framework limited to:
– Aspects of GFSM 2001 that are not close to GFS 1986
– Unique public sector problems e.g. treatment of stocks and
flows “on behalf of government”, treatment of relationships
between treasury and budget organizations
42
Conclusion (3)
• Challenges are mainly in implementation, in particular:
– Convincing decision-makers and other implementers of the
importance of the more difficult reforms, e.g. consolidated wholeof-government financial reporting
– Institutional changes, including making use of the additional
financial information without overloading the different types of
user
– Automation
– Training
– Preparing key methodological documents, including on report
formats, consolidation rules, the reflection of revenues in
consolidation, the reflection of pension liabilities, the reliable
valuation of assets and the reconciliation of accrual basis
financial reports with cash basis budget reports
43
Conclusion (4)
• Accrual financial reporting does not imply accrual budgeting –
see the chapter on accrual budgeting by Abdul Khan in Public
Financial Management and its Emerging Architecture
• Cash budgeting can coexist indefinitely with accrual financial
reporting
• Perhaps the implication of international experience is that, over
time, there will be an incremental and selective increase in
accrual information used in the budgetary process
• Prerequisite for this will be high quality accrual information,
which will depend on:
– Compliance with robust accounting standards;
– Strong internal and external auditing
– Reliable IT systems
– Trained and ethical public financial management professionals
44
THANK YOU FOR YOUR
ATTENTION!
45