East AFRITAC Regional Workshop Financial Reporting Towards Accrual Accounting

Transcription

1 East AFRITAC Regional Workshop Financial Reporting Towards Accrual Accounting Welcome and Introductions Arusha, Tanzania 11 th to 14 th April,

2 Welcoming session Topics Introductions Welcome & background Key note address Agenda for workshop Workshop organization Housekeeping matters Introducing the score card 2

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). Pressure on AFE countries to convert. 3

4 Accrual accounting - why convert? Some possible justifications 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. But, can benefits be proven and measured? 4

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)? Who needs to manage and support the change? 5

6 East AFRITAC Regional Workshop Financial Reporting Towards Accrual Accounting Session 1 Accrual versus cash accounting, the basics Arusha, Tanzania 11 th to 14 th April,

7 Financial Reporting Setting the context 1 Strong Country Capacity Attracts investment & private sector growth Good Quality Financial Reporting Accountability transparency International standards Improved public service delivery Economic Growth & poverty alleviation 2

8 Financial reporting Workshop considerations 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? Session Topics: Definitions of cash & accrual bases Differences between the two bases Comparative benefits & costs 3

9 Cash basis of accounting Key features The Cash Basis of accounting recognizes transactions, and other events, when cash is received or paid. Inflows Outflows The cash basis measures the financial results for a period as the difference between cash received and paid. 4

10 Financial Reports Under the cash basis of accounting 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

11 Cash basis of accounting Transactions not recognized Unrealised gains or losses Purchase of goods and services on credit or where the method of payment includes a noncash exchange; Consumption of goods or services which have been paid for in previous accounting periods; Consumption of the service potential of longterm assets; and Incurrence of liabilities (e.g. pension obligations). 6

12 Accrual basis of accounting Key Features 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. 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. 7

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) Pension entitlements (provides for a known expense) 8

14 Cash versus accrual basis Payment transactions Points Goods/ Services Ordered Goods and Invoice Received Invoice Paid ACCRUALS CASH POINT AT WHICH THE TRANSACTION IS RECORDED 9

15 Cash versus accrual basis Payment cut off points Previous Financial Year Financial Year Next Financial Year FY-1 FY Payments FY+1 CASH BASIS FY -1 FY Expenses FY+1 ACCRUAL BASIS Some AFE member countries allow a grace period for processing payments after the year end, but expensing ln the previous financial year 10

16 From cash to accrual Cash Basis Accounting Modified Cash Accounting Full Accrual Accounting Modified Accrual Accounting Most AFE countries will consider themselves to be somewhere between the cash basis and full accrual accounting model. 11

17 From cash to accrual Variations Cash Basis Modified Cash Modified Accrual Full Accrual Assets Cash Balances Cash Balances Accounts Receivable (within x days) Liabilities None Accounts Payable (within x days) Transfer Payments (within x days) Borrowings Cash Balances Financial Assets: - Investments - Loans Outstanding - Revenues Receivable - Other Receivables Accounts Payable Transfer Payments Borrowings Accrued Liabilities (e.g. accrued interest) Cash Balances Financial Assets: - Investments - Loans Outstanding - Revenues Receivable - Other Receivables Tangible Assets: - Property, plant and equipment - Inventories Intangible Assets Accounts Payable Transfer Payments Borrowings Accrued Liabilities (e.g. employee pension obligations and accrued interest) 12

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 be called upon. 13

19 Cash versus accrual example (2) Comparable statements Cash Flow Statement Operating Statement Position Statement Revenues Revenues Assets B/F +/- C/F Fees & charges 60 Fees & charges 70 Bank Sale of investment Receivables Expenses Expenses Investments Payroll 50 Personnel costs 60 Fixed Assets Operating 60 Operating Capital asset 100 Forex loss 25 Liabilities Cash Deficit - Claim 30 Payables Balances: 185 Pension Opening cash 75 Accrual deficit 115 Loans Closing cash Net Assets Reserves

20 Cash versus accrual basis Comparative usefulness (1) 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. Source: Athukorala & Reid, AsDB,

21 Cash versus accrual basis Comparative usefulness (2) 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. Source: Athukorala & Reid, AsDB,

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23 Government reporting: accounting basis IPSAS cash flows budget cash flows actuals Cash accounting assets,liabilities estimate revenues,expenses budget assets,liabilities actuals revenues,expenses actuals Accrual accounting International Public Sector Accounting Standards (IPSAS) 2

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26 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 International Public Sector Accounting Standards (IPSAS) 10 5

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28 Rwanda International Public Sector Accounting Standards (IPSAS) 13 Uganda International Public Sector Accounting Standards (IPSAS) 14 7

29 The Austrian experience drivers for change Johann Seiwald Federal Ministry of Finance Austria April 2011, Arusha

30 How the reform spirit emerged 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 ) 2

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 unanimous decisions in Parliament 3

32 Accounting system: 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 No steering function 4

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 5 Result-oriented management of state bodies Performance Budgeting, Controlling and Reporting

34 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 Ensuring a pilot phase for sufficient testing 6 6

35 Getting stakeholders on board: Parliament 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 7 7

36 Getting stakeholders on board: Court of Auditors 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 8 8

37 Getting stakeholders on board: Line Ministries 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 9 9

38 Getting stakeholders on board: The Public 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) 10 10

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 measurable objectives, transparent decision-making, etc.) 11

40 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: johann.seiwald@bmf.gv.at 12

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 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. key element of financial reporting for government International Public Sector Accounting Standards (IPSAS) 2 1

42 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 International Public Sector Accounting Standards (IPSAS) 3 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 objectives International Public Sector Accounting Standards (IPSAS) 4 2

43 consolidated financial statements (under IPSAS 6) government business enterprises (under IFRS) controlled entities with non-market activities (under IPSAS) separate financial statements (under IPSAS) International Public Sector Accounting Standards (IPSAS) 5 consolidated financial statements (under IPSAS) obligatory for any IPSAS financial statements government business enterprises (under IFRS) general government sector-disclosures in financial statements (under IPSAS 22) optional disclosures in IPSAS financial statements controlled entities with non-market activities (under IPSAS) separate financial statements (under IPSAS) International Public Sector Accounting Standards (IPSAS) 6 3

44 consolidated financial statements (under IPSAS) government business enterprises (under IFRS) general government sector-disclosures in financial statements (under IPSAS) general government sector (under statistical bases) controlled entities with non-market activities (under IPSAS) separate financial statements (under IPSAS) International Public Sector Accounting Standards (IPSAS) 7 Coverage of Cash Basis IPSAS and GFS International Public Sector Accounting Standards (IPSAS) 8 4

45 Rwanda International Public Sector Accounting Standards (IPSAS) 9 Uganda International Public Sector Accounting Standards (IPSAS) 10 5

46 Uganda International Public Sector Accounting Standards (IPSAS) 11 Uganda International Public Sector Accounting Standards (IPSAS) 12 6

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. International Public Sector Accounting Standards (IPSAS) 13 IPSAS-definition of control for financial reporting purposes Definition of control the power to govern.. the financial and operating policies of another entity so as to benefit from its activities must be presently exercisable existence of power, not the exercise of power 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 e.g. direct other entity to cooperate with it to achieve its objectives International Public Sector Accounting Standards (IPSAS) 14 7

48 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 International Public Sector Accounting Standards (IPSAS) 15 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 International Public Sector Accounting Standards (IPSAS) 16 8

49 Indirect control through one controlled entity International Public Sector Accounting Standards (IPSAS) 17 Indirect control through more than one controlled entity International Public Sector Accounting Standards (IPSAS) 18 9

50 Why consolidation is necessary: Government business enterprise borrows to pay dividend Government (cash accounting) surplus mln. borrowings unaffected dividend 500 mln. owns 77% Government business enterprise (accrual accounting) borrowings mln. International Public Sector Accounting Standards (IPSAS) 19 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: Visit or mail fvanschaik@deloitte.nl fvanschaik@uva.nl International Public Sector Accounting Standards (IPSAS) 10

51 Reporting entities the Austrian approach Johann Seiwald Federal Ministry of Finance Austria April 2011, Arusha

52 Structure of government in Austria 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 Considerable hive-offs during last years 2

53 2nd Stage as of 2013: New Budget Structure Total Budget Headings MTEF: 5 Headings enacted by Parliament binding within public administration Budget Chapters Global Budgets Detail Budgets ~ 30 ~70 global resource frameworks instead of more than 1000 appropriation line items shown in the budget Cost Accounting flexible steering tool, easily adaptable to specific requirements Transparent budget structure as a prerequisite for other reform elements 3 3

54 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 level and municipalities 4

55 Reporting structure Ministry of Finance prepares, Court of Audit checks accounts Total Budget Headings Consolidated report of federal level; no full consolidation IPSAS 6 Coordination by line ministry Enacted by Parliament Preparation by agencies and basis for consolidated reports Budget Chapters Global Budgets Detail Budgets Cost Accounting Financial report comprising all agencies and resources Reasons for variancesby line ministries Reports in the IT-system, not published Flexible control lever, easily adaptable to specific requirements 5

56 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 exceptions for inherited staff from parent ministry 6

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: bodies, - Shift of 55% of government employees - incl. Austrian Post and Austrian Railways: ; Universities: Important for Public Finances: Consideration in whole-ofgovernment deficit and debt ratios

58 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) Accounting according to IFRS/IAS 8

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) Control and governance insufficiencies 9

60 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: johann.seiwald@bmf.gv.at 10