East AFRITAC Regional Workshop Financial Reporting Towards Accrual Accounting

(1)

East AFRITAC

Regional Workshop

Financial Reporting – Towards

Accrual Accounting

Arusha, Tanzania

(2)

•

Introductions

•

Welcome & background

•

Key note address

•

Agenda for workshop

•

Workshop organization

•

Housekeeping matters

•

Introducing the score card

2

Welcoming session

(3)

Background to workshop

•

Most developed countries have adopted (or

are adopting) accrual accounting.

•

GFS and SNA returns are based on accrual.

•

AFE countries account for income and

expenditure on cash (or modified cash) basis.

•

Increasing focus on budgeting for outputs &

outcomes (rather than inputs).

(4)

•

To improve the quality of public financial

management.

•

To provide better quality fiscal information.

•

To increase performance & value for money.

•

To reduce the risk of data manipulation

•

Because other countries are accounting on

the accrual basis or converting to it.

4

Accrual accounting - why convert?

Some possible justifications

(5)

Key questions for workshop

•

Why

should we convert to accrual?

•

Where

are we now?

•

What

are the difficulties that are likely to be

encountered?

•

How

can we protect against risk of abuse and

weakening of internal controls?

•

When

and how can changes be implemented (i.e.

prioritization & sequencing)?

(6)

East AFRITAC

Regional Workshop

Financial Reporting – Towards

Accrual Accounting

Arusha, Tanzania

11

th

to 14

th

April, 2011

Session 1 – Accrual versus cash

accounting, the basics

(7)

Financial Reporting

Setting the context

1

Good Quality

Financial

Reporting

Attracts

investment &

private sector

growth

Accountability

transparency

Improved

public service

delivery

Strong

Country

Capacity

Inter-national

standards

(8)

•

Session Topics:

–

Definitions of cash & accrual bases

–

Differences between the two bases

–

Comparative benefits & costs

3

Key workshop questions:

1. Does accrual accounting lead to:

a) Improved transparency and accountability?

b) Increased investor confidence?

c) Enhanced delivery of public services?

2. If so, how can AFE member countries best move

towards implementing accrual accounting?

Financial reporting

(9)

The Cash Basis of accounting recognizes transactions, and

other events, when cash is received or paid.

The cash basis measures the financial results for a period

as the difference between cash received and paid

.

Inflows

Outflows

Cash basis of accounting

(10)

The Performance Statement (receipts and payments) is

no more than a summary of the cashbooks.

The only assets and liabilities shown

in the Position Statement will be

cash, bank balances (or overdrafts)

and cash equivalents.

5

Financial Reports

(11)

•

Unrealised gains or losses

•

Purchase of goods and services on credit or

where the method of payment includes a

non-cash exchange;

•

Consumption of goods or services which have

been paid for in previous accounting periods;

•

Consumption of the service potential of

long-term assets; and

•

Incurrence of liabilities (e.g. pension obligations).

Cash basis of accounting

(12)

The final accounts consist of an:

Operating Statement

(performance

statement); a

Financial Position

Statement

showing assets & liabilities

and is supported by a

Cash Flow

Statement

.

The effects of transactions and other events are

recognised when they occur (not when the cash is

received or paid) and they are reported in the financial

statements of the period to which they relate.

7

Accrual basis of accounting

(13)

Accrual basis of accounting

Accounting adjustments

Accruals accounting requires adjustments for:

•

Accrued Expenses –

an expense that has been

incurred but has not been paid.

•

Pre-Paid Expenses –

an expense that has been paid

the benefit of which will be received in the future.

•

Non-Cash Expenses:

–

Depreciation

(recognizes the expense in the year)

–

Bad Debts Provisions

(provides for a loss)

(14)

Cash versus accrual basis

Payment transactions Points

Goods/

Services

Ordered

Goods and

Invoice

Received

Invoice Paid

POINT AT WHICH THE TRANSACTION IS

RECORDED

ACCRUALS

CASH

(15)

FY+1

FY Expenses

FY -1

FY-1

FY Payments

FY+1

Financial Year

Next Financial

Year

CASH BASIS

ACCRUAL BASIS

Payment cut off points

Some AFE member countries allow a “grace” period for processing

(16)

From cash to accrual

11

Cash Basis

Accounting

Full Accrual

Accounting

Modified Cash Accounting

Modified Accrual Accounting

Most AFE countries will consider themselves to be somewhere between

the cash basis and full accrual accounting model.

(17)

From cash to accrual

Variations

Cash Basis

Modified Cash

Modified Accrual

Full Accrual

Assets

Cash Balances

Accounts Receivable

(within x days)

Cash Balances

Financial Assets:

- Investments

- Loans

Outstanding

- Revenues Receivable

- Other Receivables

Cash Balances

Financial Assets:

- Investments

- Loans

Outstanding

- Revenues Receivable

- Other Receivables

Tangible Assets:

- Property, plant and

equipment

- Inventories

Intangible Assets

Liabilities

None

Accounts Payable

(within x days)

Transfer Payments

(within x days)

Borrowings

Accounts Payable

Transfer Payments

Borrowings

Accrued Liabilities

(e.g. accrued interest)

Accounts Payable

Transfer Payments

Borrowings

Accrued Liabilities

(e.g. employee pension

obligations and accrued

interest)

(18)

Cash versus accrual – example (1)

Sample transactions

•

Revenues –

fees and charges of EA$70m due in period, only

EA$60m received.

•

Sale of asset –

an investment asset valued at EA$150m sold for

EA$150m in period. All sale proceeds received.

•

Government salaries in period –

EA$50m paid. Future pension

liability relating to period estimated at 20% of payroll cost.

•

Operating expenses –

payments made of EA$60m. Goods &

services received and invoiced at period end but not paid of

EA$10m.

•

Acquisition of asset –

asset acquired for EA$100m. Accounting

policy commences depreciation in period following acquisition. All

other fixed assets fully depreciated.

•

Revaluation of debt –

Opening external debt balance of EA$500m.

No repayments or new debt in period. EA$ currency devalues by

5%.

•

Bank guarantee –

Notice received that state enterprise has

defaulted on loan repayments and that guarantee of EA$30m will

(19)

Cash versus accrual – example (2)

Comparable statements

Cash Flow Statement

Operating Statement

Position Statement

Revenues

Assets

B/F +/-

C/F

Fees & charges

60 Fees & charges

70 Bank

75

0

75

Sale of investment

150

70 Receivables

15

10

25

Expenses

Investments 300 -150 150

Payroll

50 Personnel costs

60 Fixed Assets 400 100 500

Operating

60 Operating

70

790 -40 750

Capital asset

100 Forex loss

25

Liabilities

Cash Deficit

- Claim

30 Payables

40

30

Balances:

185 Pension

200

10 210

Opening cash

75

Accrual deficit

115 Loans

500

25 525

Closing cash

75

700

75 765

(20)

•

Ease of Understanding:

Accrual more complex but familiar to more

people.

•

Ease of manipulation:

Both scenarios dependent on policies &

standards. Cash is riskier as more off-budget/off balance sheet transactions.

Accrual risky unless budget prepared on same basis.

•

Comprehensiveness:

Accrual has greater coverage, includes all cash

plus other information.

•

Facilitates liquidity management:

Accrual includes cash

information plus payment and revenue arrears.

•

Property, plant & equipment management

: Accrual provides

information on asset use.

•

Comparability:

Dependent on accounting standards adopted. Accrual

consistent with GFS and SNA.

•

Assessing sustainability of fiscal policy & inter

generational equity:

Accrual more useful than cash but requires

supplementing with demographic data etc.

Cash versus accrual basis

Comparative usefulness (1)

15

(21)

•

Credibility:

External lenders & credit agencies more familiar with accrual

– could lead to lower borrowing costs.

•

Basis for determining fiscal strategy:

Accrual better, when

combined with good cash information.

•

Accountability:

Accrual provides accountability information for

resources (e.g. fixed assets)

•

Basis for product/service pricing:

Fuller costing information

from accrual.

•

Discourages fraud & corruption

: Accrual better than cash but

dependent on strong internal controls.

•

Implementation:

Commercial accounting systems geared to accrual.

However extra training and effort required, especially to account for fixed assets.

•

Ongoing operations:

Accrual requires more skilled staff to operate and

audit.

(22)

14-04-2011

(23)

14-04-2011

International Public Sector Accounting Standards (IPSAS)

Government reporting: accounting basis

cash flows

budget cash flows actuals

assets,liabilities

estimate assets,liabilities actuals

revenues,expenses

budget revenues,expenses actuals

Cash accounting

Accrual accounting IPSAS

(24)

14-04-2011

(25)

(26)

14-04-2011

5

International Public Sector Accounting Standards (IPSAS) ₁₀

What are the advantages of IPSAS over other

accrual accounting standards?

•Standardisation: enables comparability (international and between governments within a country) and consolidation

•True and fair view: generally accepted accounting principles

•Due process: exposure drafts of standards are made public and comments are requested

•Easy to understand for users who comprehend company accounts (IFRS similarity) and cash accounting (balance sheet, statement of financial performance and cashflow statement are obligatory)

•Fair values enable convergence with government finance statistics (GFS)

•Better exchange of knowledge and more mobility of financial controllers and auditors between the public and private sectors

(27)

(28)

14-04-2011

7

Rwanda

13

International Public Sector Accounting Standards (IPSAS) ₁₄

Uganda

(29)

The Austrian experience –

drivers for change

Johann Seiwald

(30)

2

•

dissatisfaction with the traditional system

•

budget department started research on possible budget

reform

•

strongly influenced by international experience

•

budget department received political support for reform

•

amendment of constitution (2007): reform made

irreversible („bridges burned“)

How the reform spirit

emerged

(31)

Why a reform?

•

Primary motivation: Improved budgetary decision-making

•

Addresses the following weaknesses of the traditional

system:

- No binding medium-term perspective

- Prevailing focus on inputs

- Monopoly of cash-perspective

•

The budget as a comprehensive control instrument for

resources, outputs & outcomes

•

Implementation in two stages: 2009 and 2013

(32)

4

Accounting system: 1986 – 2012

•

Cash budget (with some accrual modifications) as

dominant management lever

•

Accrual accounting (with reports on federal level):

- No appropriate valuation rules

- No management impact

- IT-infrastructure in place

- Some practical experience of staff with accruals

•

Cost accounting:

- Implementation in central units of the ministries from 2000 –

2005

(33)

Integration of accruals in a general

framework of financial management

Amendment in

the constitution:

New Principles: impact orientation, efficiency, transparency, true

and fair view

Improved Management of finances and performance by

integrated approach

New Balance of Managerial Flexibility and Accountability

MTEF, fiscal rules

and sustainability

reports

Accrual

budgeting and

accounting

Fiscal Institutions:

Performance Control Office Budget Office in Parliament

Court of Audit

Performance

Budgeting,

Result-oriented

(34)

6

Strategic approach in reform

development and implementation

•

Extensive study of other countries‘ reform experience:

Learning

about do‘s and dont‘s, intercultural aspect to be considered

•

Making the reform process irreversible:

Key elements in

constitutional amendments, detailed legislation at a later stage

•

Reform design and implementation through own staff:

Keeping

external consultancies to a minimum, building and strengthening

internal know-how

•

Pragmatic reform design:

Reducing complexity, less is more, no

100% perfectionist approach

(35)

•

informal parliamentary committee consisting of all parties

(make reform a national modernization project)

•

reform design remained intact, minor changes according to

demands of parliament

•

advantages for parliament: performance budgeting as an

additional lever; budget office for parliament; additional

reports

•

unanimous decision in parliament guaranties acceptance

of reform under different political constellations

Getting stakeholders on board:

Parliament

(36)

8

•

close cooperation between MoF and CoA: „friends of

the taxpayers“

•

CoA strongly endorsed reform

•

advantages for CoA: broader portfolio for CoA

(evaluation of performance goals and measures);

additional reports of line ministries to CoA

Court of Auditors

(37)

•

different roles of MoF and line ministries cause „natural“

conflict

•

line ministries failed to weaken position of MoF

•

unanimous decision in council of ministers necessary

•

agreement MoF – chancellery (the latter will be

responsible for performance controlling) freed the way for

reform

•

bridges burned in 2007 very helpful

•

advantages for line ministries: more flexibility (global

budgets); performance budgeting as a shop window

Line Ministries

(38)

10

Goals:

•

creating a positive attitude towards the reform in the

public mind

•

getting feedback on important aspects of reform

•

target groups:

- media (special briefings)

- scientific community (bilateral contacts; conferences)

- foreign multipliers (in particular OECD SBO)

The Public

(39)

The Austrian Federal Budget Reform

•

is a comprehensive reform addressing the whole system

and not only specific elements

•

is more than an accounting reform and a change in

managerial, budgetary and accounting rules

•

involves

cultural change

within the administration as well

as on the political level (setting priorities, defining

(40)

12

Thank you for your attention!

Contact address:

Johann Seiwald

Advisor Budget Reform

Budget Directorate

Austrian Federal Ministry of Finance

Hintere Zollamtsstraße 2b, A-1030 Vienna

Tel: +43 1 514 33 502006

(41)

Scope of consolidation in public sector

accounting according to IPSAS.

I

nternational

P

ublic

S

ector

A

ccounting

S

tandards

Frans van Schaik

Member IPSASB

Partner Deloitte

Professor University of Amsterdam

Purpose of consolidated financial statements

2

Separate financial statements:

provide only a partial view of the activities of the government

separate legal or organizational entities make up a single economic entity

Consolidated financial statements:

show the full extent of the financial affairs of the government, including those of its controlled entities.

(42)

2

IPSAS 6-definition of control

for financial

reporting purposes

•The power to govern..

• …the financial and operating policies of another entity…

• …so as to benefit from its activities

3

International Public Sector Accounting Standards (IPSAS) ₄

Power and benefits conditions and indicators:

examples

• Power condition: Power to appoint or remove majority of members of the board of directors

• Power indicator: Ability to approve hiring and removal of key personnel

• Benefits condition: Power to dissolve the other entity and obtain residual economic benefits or bear significant obligations

• Benefits indicator: Reporting entity is able to direct the other entity to co-operate with it in achieving its

(43)

International Public Sector Accounting Standards (IPSAS) ₅

separate

financial statements

(under IPSAS)

consolidated

(under IPSAS 6)

controlled entities

with non-market

activities

(under IPSAS)

government

business

enterprises

(under IFRS)

International Public Sector Accounting Standards (IPSAS) ₆

separate

(under IPSAS)

general government

sector-disclosures in

(under IPSAS 22)

consolidated

(under IPSAS)

controlled entities

with non-market

activities

(under IPSAS)

government

business

enterprises

(under IFRS)

obligatory for any IPSAS financial statements optional disclosures in IPSAS financial statements

(44)

4

International Public Sector Accounting Standards (IPSAS) ₇

separate

(under IPSAS)

general government

sector-disclosures in

(under IPSAS)

general

government

sector (under

statistical bases)

consolidated

(under IPSAS)

controlled entities

with non-market

activities

(under IPSAS)

government

business

enterprises

(under IFRS)

Coverage of Cash Basis IPSAS and GFS

(45)

Rwanda

9

Uganda

(46)

6

Uganda

11

Uganda

(47)

Two universities: one within, one outside

scope of consolidation

•University of Amsterdam:

–Governed by a supervisory board whose members are appointed by the Minister of Education.

–Supervisory board is responsible for approving the

university‟s budget, the institution‟s plans, the financial

statements.

•University of Tilburg:

–An „extraordinary university‟ (not a state university). –Dutch Conference of Bishops appoints the management

board of the foundation.

–The foundation committee appoints, suspends, and discharges the members of the management

committee.

13

IPSAS-definition of control

for financial

reporting purposes

14

Definition of control

the power to govern.. •_•must be presently exercisable _{existence of power, not the exercise of power}

…the financial and

operating policies of

another entity…

includes:

•adopting the budget

•control expenditure

•setting staff rules and regulations does not include:

•the judge‟s decision (is independent of

financial and operating policies

…so as to benefit from its

(48)

8

Power must be presently exercisable

•The entity must already have had its power conferred upon it by legislation or agreement

•Whether the entity is likely or unlikely to actually exercise control is not relevant to the determination of whether the power to govern exists

•Power to govern is not presently exercisable if it requires changing legislation or renegotiating agreements in order to be effective

15

International Public Sector Accounting Standards (IPSAS) ₁₆

Existence of power, not the exercise of power

• “Control exists because the power to control is sufficient

even though the controlling entity may choose not to

exercise that power.”

•Decisive is whether reporting entity has power to control the other entity. Whether reporting entity actually uses this power is not relevant

Example:

•ILO Governing Body appoints 24 out of 35 members of board of the International Training Center (ITC) of ILO

•ILO controls ITC even though it does not give clear

instructions to these 24 board members on how to vote in ITC's Board

(49)

Indirect control through one controlled entity

17

Indirect control through more than one

controlled entity

(50)

10

Why consolidation is necessary: Government

business enterprise borrows to pay dividend

19

Government

business

enterprise

(accrual accounting)

Government

(cash accounting) owns 77% surplus + € 500 mln. borrowings unaffected borrowings + € 500 mln. dividend € 500 mln.

Available on the IPSASB Web Site

•All IPSASs (including Spanish and French translations)

•All current Exposure Drafts

•IPSASB Update on most recent IPSASB meeting

•IPSASB meeting papers (before each meeting)

•Free of charge at: www.ipsasb.org

Visit

www.deloitte.nl/ipsas

or mail

fvanschaik@deloitte.nl

(51)

Reporting entities –

the Austrian approach

Johann Seiwald

(52)

2

•

3 levels of government:

- Federal level

- 14 ministries

- „minister autonomy“

- strong position of Minister of Finance

- Federal Chancellor has no directive power

- Regional level („Länder“)

- 9 Länder

- Independence

- Municipalities

- About 2.300

•

Considerable hive-offs during last years

(53)

2nd Stage as of 2013:

New Budget Structure

Total Budget

Headings

Budget Chapters

Global Budgets

Detail Budgets

Cost Accounting

Transparent budget structure as a prerequisite for other reform elements

MTEF: 5 Headings

~ 30

~70 global resource frameworks

instead of more than 1000

appropriation line items

flexible steering tool,

easily adaptable to

specific requirements

shown in the budget

enacted by Parliament

binding within public

administration

(54)

4

Reporting Entities

•

Accruals obligatory for Federal Level:

- MOF

-

All line ministries

-

All federal agencies

-

NOT: off-budget corporatisations

-

Standard setting by MOF and Court of Audit

•

Efforts to develop an aligned framework for local

(55)

Reporting structure

Total Budget

Headings

Budget Chapters

Global Budgets

Detail Budgets

Cost Accounting

Consolidated report of

federal level; no full

consolidation IPSAS 6

Financial report comprising all

agencies and resources

Reasons for variancesby

line ministries

Flexible control lever,

easily adaptable to

specific requirements

Reports in the IT-system, not

published

Enacted by Parliament

Preparation by agencies and

basis for consolidated

reports

Ministry of Finance

prepares, Court of

Audit checks

accounts

Coordination by

line ministry

(56)

6

Outsourcing in Austria: legal and

institutional framework

Decentralisation

:

transfer of tasks from public administration to public and

private entities operating at arm’s length with the government

Institutional and legal framework:

- 100% owned

by competent ministry

- set up

by law

either as private limited company or

specific public entity

-

autonomous financial management:

financial flows

in/out of the state budget based on different activities

and parameters

-

autonomous personnel management

(57)

Outsourcing in Austria: legal and

institutional framework

Corporate governance:

- Management or chief executive

accountable to

supervisory board

-

Supervisory board:

chaired by civil servant from

parent ministry, at least one member from MoF

Grand

scale:

-

130 bodies,

-

Shift of 55% of government employees

- incl. Austrian Post and Austrian Railways: 100.000;

Universities: 20.000

Important for Public Finances: Consideration in

whole-of-government deficit and debt ratios

(58)

8

List of examples

Cultural and educational institutions:

Universities, Zoo of

Schönbrunn, Schönbrunn Castle, federal theatres, federal

museums, Spanish Horse Riding School

Support services and others:

Federal computer centre

(BRZ), federal debt management (ÖBFA), unemployment service

(AMS), Statistics Austria



Accounting according to Austrian corporate act

Services of general economic interest, infrastructure:

Austrian railways (ÖBB), post and telecommunications, state

press, federal real estate management (BIG), ASFINAG (highway

construction and operation)

(59)

Objectives and expectations on

political level

•

More efficiency and cost-effectiveness in the

provision of public services

- more autonomy of the management

greater accountability and responsibility

- output oriented steering and control

- accrual accounting

•

Substantial relief of the federal budgets

•

Reduction in the number of state employees

•

Facilitation in meeting the Maastricht criteria

(public deficit and total public debt

)

(60)

10

Thank you for your attention!

Contact address:

Johann Seiwald

Advisor Budget Reform

Budget Directorate

Austrian Federal Ministry of Finance

Hintere Zollamtsstraße 2b, A-1030 Vienna

Tel: +43 1 514 33 502006

t: www.ipsasb.org

www.deloitte.nl/ipsas