INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module 4.2: Accounting and Reporting

• Role of accounting and of reporting• Differences between private sector and public

sector financial reporting.• Issues of cash versus accrual based accounting• IPSAS & the status of accounting standards

Module outline

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• Role of accounting and of reporting• Differences between private sector and public

sector financial reporting.• Issues of cash versus accrual based accounting• IPSAS & the status of accounting standards

Module outline

3

“Taxpayers and ratepayers, members of the

legislature, creditors, suppliers, the media and employees”

Who uses the accounts? - 1

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Cash Basis IPSAS – 1.1.2

• Parliament• Media• Civil society and trade unions • Citizens and voters

• Others• World Bank, IMF and aid agencies

Who uses the accounts? - 2

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Traditional Structure of government accounts

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DevelopmentFund

Budget out-turn reportMinistry of Health Budget Actual Variancewages & salaries 225 220 5books 75 70 5stationary 13 12 1telephone 5 3 2travel 12 8 4rent 12 10 2other goods & services

8 10 (2)

financing costs 10 15 (5)

TOTAL 360 348 127

• Nigeria

• Kenya

Examples of public accounts

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• Three main statements:• Statement 1: Statement of Assets and

Liabilities• Statement 2: Statement of Consolidated

Revenue Fund• Statement 3: Statement of Capital Development

Fund• Appropriation Accounts for each ministry etc

Nigeria

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• Exchequer Account- recurrent- development

• Statement of Public Debt• Summary of Investments, Outstanding

Loans & Obligations Guaranteed• Summary of Appropriation Accounts

– Recurrent– Development- Statement of assets & liabilities

Kenya – 2,387 pages

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• Role of accounting and of reporting• Differences between private sector and public

sector financial reporting• Issues of cash versus accrual based accounting• IPSAS & the status of accounting standards

Module outline

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• Boards accountable to shareholders – financial accountability

• Financial statements measure profit

• Audit opinion on whether the accounts show a true and fair view

Private sector accountability

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• Accountability to the electorate – political accountability

• Accounts traditionally show budgetary compliance – appropriation accounts

• Audit of regularity and probity of public sector financial management

Public sector accountability

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• Assets – receivables (debtors) • Liabilities – payables (creditors)• Payments/expenditure (cash/accruals)• Receipts/revenue (cash/accruals)• Contingent liabilities• Suspense accounts• Appropriation accounts

Some accounting terms

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• Role of accounting and of reporting• Differences between private sector and public

sector financial reporting• Issues of cash versus accrual based accounting• IPSAS & the status of accounting standards

Module outline

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• Cash basis - traditional approach in public sector

• Accounts = budget out-turn reports

• Modified cash records:• debtors & creditors• financial balance sheet – debt & bank balances etc

• Francophone Africa – basis of accounting is the payment order (may also have additional month[s])

• Account for all money spent or received in-year

Cash accounting

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• Accrual accounting = private sector style accounts

• Show the ‘profit’ (surplus or deficit) for year

• Main differences with cash accounting:• physical assets valued in balance sheet• depreciation included in Income Statement (P&L

account)

Accrual accounting - 1

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• Cash accounting – assets charged in year paid for

• Accrual accounting – cost of assets spread over their ‘useful lives’

• So managers ‘charged’ for use of assets – will they manage them better?

• But with cash accounting:• often financed by loans – so costs each year• capital programme each year – so cost not lumpy

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Accrual accounting - 2

Profit & Loss Account

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Financial reports prepared on an accrual basis allow users to:• Assess the accountability for all resources the entity controls and the deployment of those resources• Assess the performance, financial position and cash flows of the entity• Make decisions about providing resources to, or doing business with the entityInternational Public Sector Accounting Standards Board (2002)

Advantages of accrual accounting?

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• Over the past 30 years move in many countries to adopt “Accruals” accounting similar to commercial accounting and a move away from cash accounting as part of PFM reforms.

• Many implications and often controversial

Moving to accrual accounting ?

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• Part of the Budget Support Criteria?

• Significant costs involved

Moving to accrual accounting ?

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“There was no evidence that the perceived benefits from the introduction of... accruals accounting... were being realised”

Mellett, Macniven & Marriott, 2008 (funded by ICAS)

Accrual accounting – the evidence?

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Accrual accounting in NHS from 1991

“Departments have made significant progress in using accruals-based accounting and budgeting systems since our previous study. This has allowed departments to better understand how they are using their financial resources, for example by offering more detailed information to manage their assets and liabilities. Departments have used this information to help identify under-utilised assets and to dispose of those no longer required.”

UK National Audit Office, 2008

Accrual accounting – the evidence?

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Auditor General, Cayman Islands, April 2010: “the state of financial accountability reporting has gotten worse

in the two years since I last reported on this matter” “I believe this situation has become a national crisis that could

lead to tremendous consequences for the Cayman Islands Government if not addressed immediately”

The real risks of moving to accrual accounting

UK Governement Accounts, Published Nov 2011: (20 months late) NAO press release – accounts have 3 pages of qualifications• "The publication of the first audited Whole of Government

Accounts is a landmark event, which has substantially furthered the cause of transparency and accountability in public spending.

• "The accounts need to be significantly improved, though, if they are to play a full part in comprehensive and meaningful analysis of the government’s financial position. I am particularly concerned that large organisations which in my view are clearly owned and controlled by the government, have been excluded

Even problems in developed countries

When are transactions recognised?

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Budget approvedIn gov’t legalauthority for expenditure

Funds warrantedAuthority to spenddelegated to specified official

OrderFor goods or services underdelegated authority

Invoice receivedPoint at which legal liability to pay arises

Cash paymentTo supplier forgoods or services

Gov’t financialmanagement musttrack budgetchanges, e.g.transfers betweenbudget heads

Delegation ofauthority to spendkey budgetmanagement stagefor gov’t financialmanagement

Commitment to spend important in gov’t budget management to monitorexpenditure againstbudget ceilings

Recognition oftransaction underaccrual accounting

Recognition oftransaction undercash accounting

Transaction stages over time

Michael Parry, ‘Accrual Accounting for National Governments’ in Public Fund Digest, Vol 5 Nr 2, 2005 p 63

• Role of accounting and of reporting• Differences between private sector and public

sector financial reporting• Issues of cash versus accrual based accounting• IPSAS & the status of accounting standards

Module outline

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• A consolidated government statement (but only general government – not state owned enterprises)

• Submitted for audit within 6 months• International Public Sector Accounting Standards (IPSAS)

or corresponding national standards used• Budget reported by administrative, economic and sub-

functional classification (PI-5 becomes PI-4 in PEFA Test Version 2015)

PEFA – PI-25 (PI 28 in PEFA Test 2015)

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• The PEFA update strengthens the requirements in terms of financial reports.

PEFA Update 2015

• Comparisons with the government’s budget required• Classification is to be “appropriate to the entity’s

operations”• Accounting policies and additional notes necessary

for a fair presentation

Cash Basis IPSAS - 2

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Key objectives: • Government roles and responsibilities

clear• Information on government activities

provided to the public• Budget preparation, execution &

reporting open; and• Fiscal information follows standards of

data quality & independence on integrity

IMF Code of Fiscal Transparency - 1

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On financial statements:• Publication of fiscal information by law• Budget information helps policy analysis

& accountability• Comprehensive, integrated accounting

system to assess payment arrears• Final accounts presented to parliament

within a year• Programme results compared to major

budget objectives of program33

IMF Code of Fiscal Transparency - 2

The New Fiscal Transparency Code (2014) based on 4pillars

• Should provide:• relevant, comprehensive, timely, and reliable

information on the government’s financial position and performance.

• Differences from the 2007 Code •  focuses on outputs rather than processes • takes account of different levels of country capacity • FTEs to replace fiscal ROSCs

• https://www.imf.org/external/np/exr/facts/fiscal.htm

Pillar I: Fiscal Reporting

• Guidance for statistical reporting to IMF

• Accrual based approach (from 2001)

• Rules for reporting & details provided

• Classification by economic & function

IMF Government Financial Statistics

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• Accounting and reporting systems are crucial for accountability

• Attention should first focus on: • Establishing key link in accountability to parliament & public

(with audit report)• Timeliness, clarity and simplicity of financial reporting.

• Assets registers should be maintained, but moving towards full accrual accounting is not a priority.

Key messages

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