PwC Introduction. 2 PwC Overview of session 1. The modernisation project 4. Some IPSAS key concepts...
-
Upload
rickey-kerslake -
Category
Documents
-
view
216 -
download
0
Transcript of PwC Introduction. 2 PwC Overview of session 1. The modernisation project 4. Some IPSAS key concepts...
Introduction
2
Overview of session
1. The modernisation project
4. Some IPSAS key concepts
5. Questions
3. IPSAS and the E.C. accounting rules
2. Accrual V. Cash accounting
Introduction
1. The modernisation project
4
Issues addressed
Integration of financial and accounting IT platforms
Enhancements to data security and consistency
Accrual accounting in compliance with IPSAS
Accounting User requirements IT platforms
Decentralised Implementation
Centralised Information
5
Phase 3
IntegrateChange
Phase 1
FeasibilityStudy
Phase 2
2.1ProjectSet-Up
2.2Component Evaluation& Issues
Resolution
2.3InitialCon-
version
Converting to IPSAS- The big picture
1/1/2005
Phase 4
• Publication of annual
accounts• Stabilization
Introduction
2. Accrual V. Cashaccounting
7
Cash-basis V. Accrual-basis
• A basis of accounting that recognises
transactions and other events when
cash is received or paid.
• Measures financial results for a period
as the difference between cash
received and cash paid.
• A basis of accounting under which
transactions and other events are recognized
when they occur (and not only when cash or
its equivalent is received or paid).
• Therefore, the transactions and events are
recorded in the accounting records and
recognised in the financial statements of the
periods to which they relate.
• The elements recognised under accrual
accounting are assets, liabilities, net
assets, revenue and expenses.
Cash-basis Accrual-basis
8
Cash + Accrual
Budgetary =Cash-basis
IPSAS = Accrual-basis
E.C. Decision
9
The benefits of cash accounting
• Simple / Easy to understand by non-accountants
• Is less subject to estimates
• Cash accounting is adapted to the principle of annual parliamentary authority - Useful for assessing compliance with cash budgets / Easy follow up of budget implementation
• Useful for monitoring and estimating a government’s cahs resources
• Information on cash raised and spent remains the best indicator of the impact of the public sector on the economy
10
Why adopt accrual accounting in addition?
• Both cash and accrual accounting address the question of the « affordability » of a public entity’s programmes and operations:
– Budgets and cash accounting-based financial statements lay out
a public entity’s spending and how it is financed
– Accrual accounting-based financial statements provide additional
information in describing a public entity’s financial position and
actual results
• Accrual accounting distinguishes expenditure which provides economic benefits in the short-term (i.e. for current consumption) from that which will benefit the E.C. (and the E.C. citizens) well into the future (i.e. capital expenditure).
11
Why adopt accrual accounting in addition?
Enhanced information to the
“external world”
Enhanced
management information
Parliament General public
Incr
ea
sed
tra
nsp
aren
cyIncre
ase
d a
ccou
ntability
12
New « Public Management Approaches »
• European impetus towards reforming governmental accounting and budgeting:
- Democratic pressure for increased transparency and
accountability in government
- Consumer pressure for improved delivery of public services
- Cost pressure to provide more and better infrastructure and
services, more efficiently
13
More complete information
• Presentation of a proper combined picture of financial position and performance:
Assets
Net assets
Liabilities
• Complete information on the utilisation of resources (assets)
• Complete information on total borrowing and indebtedness
Revenues
<Expenses>
Net surplus/(deficit)
• Information about the total cost of policies and activities
• Comparison of revenue from « tax-payers » and the cost of policies and activities
14
Worked example: Australia
What does this tell?
Australia: 2002-2003 Budget at a glance
Underlying Budget cash surplus of $2.1 billion, or 0.3 per cent of GDP. Using accrual accounting concepts, however, the fiscal balance is forecast to be $0.2 billion.
15
Worked example: Australia (cont’d)
Revenue Revenue
<Expenses> <Expenses>
Assets
Liabilities
2.1. 0.2
By reporting the full picture, accrualaccounting shows that tax to be leviedin 2002/03 is enough to financethe current policies and activities – but that in addition the Australiangovernment is either disinvesting inassets or increasing liabilities – future taxation or other revenues are already committed to paying off debt ormaintaining assets
16
Worked example: Belgium
A l’occasion de cette rentrée parlementaire, le Gouvernement fédéral fait plus fort encore, avec l’opération Belgacom. En reprenant ses obligations en matière de pension, à concurrence de € 5 milliards […], et en faisant passer cela comme une recette, […] il oublie […] de dire qu’à cet actif correspond une dette transférée de Belgacom à l’Etat et contractée à l’égard de chaque pensionné de l’entreprise; tôt ou tard, l’Etat devra honorer cet engagement. Dès lors, […] en dérogation de toutes règles de comptabilité, il enregistre également cette recette comme un produit qui flatte ses comptes de résultat des années 2003 et 2004 (de respectivement € 3,6 et 1,4 milliards), […].
Sans cette opération effrontée, le budget de Verhofstadt II serait en déficit de 0,9 % du PIB en 2003 et de 0,4 % en 2004. Quant au surplus primaire hors Belgacom, il s’effrite jusqu’à 4,4 % cette année et 4,9 % en 2004, selon nos estimations. […] Et en 2005 ? […] Il n’y aura plus de nouvelle opération Belgacom. Par contre, l’Etat fédéral assumera déjà la charge des pensions de l’entreprise publique […]
17
Worked example: Belgium (cont’d)
Accrual accounting would have provided information on the Belgian State’s overall financial position and current stock of liabilities.
Future revenues or additional borrowing will be needed in the longer term to satisfy the non-recognised liability.
Generally said, under cash-based accounting, spending controls can be circumvented by deferring payments or hiding liabilities.
18
The benefits to the E.C. of the modernisation project
Enhanced
management information
New informationEnhanced consistency
(ABAC for budgetary
accounting, general
accounting and management
information)
19
Enhanced management information
New management functionalities - examples:
Master file of allnew contractors and
contracts per legal entity
Follow-up of clearing ofpre-financings
throughintermediary/final
payments
Inventory ofguarantees received
Immediate, straight-forwardassessment of the exposureor liability to any third party(commitments, payments,collections, …) Inventory of
assets
20
Enhanced management information:Asset and liability managementExamples:
Accrual accounting focuses decisions-makers on:
– The broad range of options available in managing assets: under
a cash-based system, there is a tendency to focus on whether or
not to spend on new assets – while under an accrual-based
system, the focus also extends to whether to retain or upgrade
existing assets
– Financial assets and ensuring that they are measured realiably
(the E.C. cannot make appropriate financing decisions without
objectively assessing the recoverability of assets)
21
Enhanced management information: Expenses
Accrual accounting will provide the E.C. with information on the full costs of their activities so that they can:
– consider the cost consequences of particular policy objectives
and the cost of alternative mechanisms for meeting these
objectives;
– better allocate responsibility for managing particular costs; and
– develop performance indicators.
22
Enhanced management information –Example: Loans• Unlike commercial loans, some E.C. loans may provide the
borrower for concessions – e.g. below-market interest rates
• If the E.C. lend from borrowed funds at rates lower than it pays to borrow money, they do so at a cost
• If accounted for on a cash basis, there is little impact in the year the loan is made
• But over time, the costs accumulate
• Future revenues are in fact being committed to meet the growing difference between the interest rate the E.C. pay for money and the rate they earn on funds they have lent
23
Enhanced management information –Example: Loans (cont’d)• Currently:
– In budgetary accounting, the loan
is not even recorded as an asset
– In the 2002 financial report, all
loans are reported at face value –
i.e. no information is given on the
future cost of the concession
granted to the borrower
• Under the new accrual-based E.C.
rules:
– Interest-free loans or loans at a rate
below market rates for similar products
to similar debtors will be recorded at an
amount equal to the present value of all
future cash receipts discounted using
the prevailing market rates
– any additional amount lent = the cost of
the concession to the borrower = a
reduction of income or an expense The same will apply to interest-free
pre-financings: this will measure
the cost of pre-financing
contractors / beneficiaries
Introduction
3. IPSAS and the E.C. accounting rules
25
Why IPSAS?
1. World-wide impetus to enhance corporate financial reporting and its comparability – not only in the public sector:
– In the EU, listed companies are required to publish their
consolidated financial statements under IAS/IFRS for each
financial year starting on or after 1 January 2005 (IAS/IFRS
regulation of 7 June 2002). This applies to c. 7,000 listed
companies
26
Why IPSAS?
2. The only international comprehensive set of accounting standards for the public sector 1:
• Elaborated from International Accounting Standards
• Easier understanding
- Easier future convergence of national standards of Member States
• Adopted by the OECD; being adopted by the NATO
1Public sector refers to: international organisations; national governments; regional governments (state, provincial, territorial); local governments (city, town); and related governmental entities (agencies, boards, commissions and enterprises)
27
The E.C. accounting rules
Basis of preparation Financial statements Net surplus or deficitfor the period,
fundamental errors andchanges in accounting policies
Property, plant andequipment
Group accounting
Intangible assets
Leases
Foreign currencytransactions
Inventories
Pre-financing
Revenues andreceivables
Payables andexpenses
Provisions,Contingent Assets andContingent Liabilities
Related parties andKey management disclosures
Cash andcash equivalents
Financial assets andfinancial liabilities
28
Tools and resources
AccountingStandards
AccountingManual
Consoli-dation
Manual
Procedural guidelines by operation
http://www.cc.cec/budg/
29
Overview of training
Module 1 IntroductionFinancial statementsRevenues and receivablesExpenses and payablesPre-financingProvisions, Contingent Liabilities and Contingent Assets
Module 2 Property, Plant and EquipmentIntangible Assets LeasesInventories
Introduction
4. Some IPSAS key concepts
31
Substance over form
• Accounting policies should reflect the economic substance of events and transactions and not merely their legal form – the definition of accounting policies requires the exercise of judgment
• Examples:
– From a risk and rewards perspective leasing an asset may in
substance be equivalent to owning it
– Control (and the obligation of consolidating another entity) refers
to an entity’s power to govern the financial and operating policies
of another entity and does not necessarily require an entity to
hold a majority shareholding or other equity interest in the other
entity
32
Carrying value
• Carrying value = the amount for which an asset or a liability are recognised in the financial statements
• Implies an initial measurement (e.g. the cost of acquisition of an asset) then subsequent measurements (e.g. the recognition of the value consumption of an asset through depreciation)
33
Depreciation
• Depreciation = the systematic allocation of the depreciable amount of an asset over its useful life
– Depreciable amount = The cost of an asset, or other amount
substituted for cost in the financial statements (e.g. fair value),
less its residual value
– Useful life = Either: (a) the period of time over which an asset is
expected to be used by the entity; or (b) the number of production
or similar units expected to be obtained from the asset by the
entity.
34
Fair value
Fair value = the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction
– Several standards require that assets or liabilities be measured at
their fair value (rather than at historical cost or cost of
acquisition): e.g. items of property, plant and equipment gifted;
financial assets held for trading; …
Introduction
5. Questions