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GRAP FOR DEPARTMENTS

Modified Cash Standard , Accounting Manual and Template

Presenter: OAG | March 2015

The Framework

2

Modified Cash Standard (MCS)

Overview

Developing the MCS

Considered pronouncements issued by :

• ASB

• IPSASB

• IASB (mainly IFRS for SMEs)

• Other organisations that develop financial reporting, accounting and

auditing requirements for the public sector.

• Best practices, both locally and internationally.

• The capacity of departments to comply with the reporting requirements.

• The systems used by departments in preparing and collating the

information required to comply with the reporting requirements.

4

Due Process

• Published updated MCS, AMD and Specimen for comment

• Comment period closed on 1 December 2014

• Comments received from various stakeholders (provincial and national

depts, PAGs, OAG, AGSA etc)

• Comments register maintained (by TSS)

• Updated the MCS, AMD, Specimen and Template

• MCS, AMD and Specimen published on OAG website on 31 January

2015

5

General Updates

General

• Updated the MCS with principle-related FAQs and updated the AMD with

application guidance FAQ’s

• Relocated paragraphs which required the departments to maintain “registers”

from the MCS to the AMD as these are not principle-related

• No comments or updates for the following MCS and AMD chapters: Appropriation

Statement, Treasury Financial Instruments, Events After reporting date

Preface to the MCS

• Departures and exemptions will be considered in instances where MCS was

“incorrect”. OAG set up an Exemption and Deviation Committee which consults

with AGSA when considering the exemptions and departures.

6

Chapters in the MCS

• Preface to the Modified

Cash Standard

• Concepts and Principles

• Financial Statement

Presentation

• Accounting Policies,

Estimates and Errors

• Appropriation Statement

• Cash Flow Statement

• Revenue

• Expenditure

7

• General Departmental Assets

and Liabilities

• Treasury Financial Instruments

• Capital Assets

• Inventory

• Leases

• Provisions and Contingents

• Related Party Disclosures

• Agent-Principal Disclosures

• Events after the Reporting Date

• Consolidated Financial

Statements

Accounting Manual

• The SCOA and Systems

• Concepts and Principles

• Financial Statement

Presentation

• Accounting Policies,

Estimates and Errors

• Appropriation Statement

• Cash Flow Statement

• Revenue

• Expenditure

8

• General Departmental Assets

and Liabilities

• Capital Assets

• Inventory

• Leases

• Provisions and Contingents

• Related Party Disclosures

• Agent-Principal Disclosures

• Unauthorised, Irregular and

Fruitless and wasteful

expenditure.

Concepts and Principles

Chapter Content

• Basic Accounting Equation and the Double Entry System

– Accounting rules for recording of transactions

– Accounting classification

• Basis of Accounting

– Cash basis of accounting

– Accrual basis of accounting .

– Modified cash basis of accounting

– Modified accrual basis of accounting

• The Departmental Financial Statements

– Composition of financial statements

– Qualitative characteristics and fair presentation

– Elements of financial statements

– Recognition and recording of the elements of financial statements

– Measurement of the elements of financial statements

10

Chapter updates

• Added paragraphs on misstatements and material omissions in the MCS

(most of the wording taken from GRAP1 as wording from GRAP is also

relevant to the MCS environment).

11

Financial Statements Presentation

Components of Financial Statements

• Appropriation statement

• Notes to the appropriation statement

• Statement of financial performance

• Statement of financial position

• Statement of changes in net assets

• Cash flow statement

• Notes (for both primary and secondary information and

the accounting policies) – there are no longer “disclosure

notes”

13

Primary and Secondary Information

14

Annual Financial Statements

Primary Financial Information Secondary Financial Information

STATEMENTS

Notes supporting information

recognised in the statements

PER POS APP CFS CNA

Previously called

Disclosure Notes

Other Presentation Requirements

• Going concern – assumption that department is a going concern but

management to still make assessment.

• Materiality and aggregation – each material class of similar items to

be presented separately.

• Consistency of presentation – from one period to the next

• Offsetting – if permitted by the MCS or Legislation

• Comparative information

• Current vs non-current distinction - <12 months vs > 12months

15

An item is material when it can individually or collectively influence

the decisions or assessments of users of the financial statements

Accounting policies, estimates and errors

Key Principles

• Accounting Policies

Understand what an accounting policy is, selecting an accounting policy

and applying change in an existing accounting policy.

• Accounting Estimate

Understand what is an estimate and how to apply a change in an existing

estimate

• Error

Understand what is an error and how to correct an error.

17

Key Principles

18

Change in Accounting Policy

• Accounting Treatment :

Relevant chapter in the MCS, will clarify how the current and historical

information should be amended to effect the change.

Disclosure :

• Department shall disclose:

a) the nature of the change in accounting policy;

b) the amount of the adjustment for each financial statement line item

affected, including secondary financial information, for the applicable

reporting periods;

19

Accounting estimates

• an adjustment of the carrying amount of an asset or a liability

• ≠ Error

• involves judgements based on the latest available, reliable

information.

• Prospective application

20

Accounting estimates (in Template)

21

43 Change in accounting estimate

Value

derived using

the original

estimate

Value

derived using

the amended

estimate

R-value

impact of

change in

estimate

Line item 4 affected by the change


Provide a description of the estimated impact on future periods

During the year the following changes were made to the estimations employed in the accounting for transactions,

assets, liabilities, events and circumstances

Accounting estimate change 1: Provide a description

of the change in estmate




Prospective – therefore the above note only relates

to current year changes.

Errors

22

Errors cont. (In Template)

• Correcting Primary financial information:

o The error is corrected in the Prior Yr TB (using the journal column) for

the line item affected (i.e. the primary financial statement line and the

related note line). This will automatically adjust the primary financial

statement prior year amounts as well as the related note.

o For the following notes the error will be corrected in the actual notes:

Unauthorised expenditure, Voted funds to be surrendered or

Departmental revenue to be surrendered.

o An explanation of the error is required in their sub-notes.

23

Errors cont. (In Template)

24

• Secondary financial information:

o The error is corrected in the Prior Yr TB for the line item

affected (this will automatically adjust the relevant

secondary information note)

o The error is explained in the Note 44: Prior period errors.

Updates:

• No updates on principles only template

• Illustrative Guide

25

Cash Flow Statement

Presentation of the Cash Flow Statement

Cash flows to be classified as:

• Operating activities

Activities of the department that are not

investing or financing activities.

• Investing activities

Acquisition and disposal of capital assets

and other investments not included in

cash equivalents.

• Financing activities

Activities that result in changes in the

size and composition of the contributed

capital and borrowings of the department.

27

Operating activities examples

28

• Receipts from taxes, levies and fines;

• Receipts from charges for goods and services

provided by the department;

• Receipts from local and foreign donors;

• Receipts from royalties, fees, commissions and

other revenue;

• Transfers to other entities to finance their

operations (not including loans);

• Payments to suppliers for goods and services;

• Payments to and on behalf of employees;

• Payments of rates and taxes;

• Receipts or payments from transfers of functions /

discontinuance of functions;

• Receipts or payments in relation to litigation

settlements.

Operating activities reconciliation

• Reconciliation between surplus / deficit and cash flow

from operating activities by adjusting surplus / deficit for:

o all non-cash items

o movement in “working capital”, i.e. current assets and

current liabilities

o surrenders

• Include the reconciliation in the notes to the financial

statements.

29

Investing activities examples

30

• payments to acquire tangible and / or

intangible capital assets.

• receipts from sales of tangible and / or

intangible capital assets;

• payments to acquire equity or debt

instruments of other entities;

• receipts from sales of equity of other

entities;

• advances and loans made to other

parties;

• receipts from the repayment of

advances and loans made to other

parties;

R

Financing activities examples

31

• proceeds from issuing loans, notes,

bonds and other short- or long-term

borrowings;

• repayments of amounts borrowed;

• payments by a lessee for the reduction of

the outstanding liabilities to a finance

lease

Cash and cash equivalents

• bank account balances (both

domestic and foreign);

• cash awaiting banking;

• petty cash / imprest floats;

• short-term deposits; deposits at call;

and

• other highly liquid investments that

are readily convertible to cash on

hand at the entity’s option

32

Cash and cash equivalents

33

Non cash transactions examples

Exclude these from the Cash Flow Statement

• Unrealised gains and losses arising from

changes in foreign currency exchange rates

• the acquisition of assets through the exchange of

assets;

• the conversion of debt to equity; and

• write-off of debt.

34

Updates to Cash Flow

• Specified that the exchange rate to be used is the “spot

exchange rate”

• The last sentence on paragraph 26 deleted as it is not

deemed necessary to separately disclose unrealised gains

and losses in the cash flow statement and the PER

disclosure suffices.

35

Revenue

Definition of revenue

• Revenue is the gross inflow of

economic benefits or service

potential during the reporting

period when those inflows result

in an increase in net assets, other

than increases relating to capital

contributions to net assets.

• Where the department and the

counterparty to the revenue

transaction agree to settle on a

net basis, the department will

recognise the net amount

received.

37

Example

Exchange vs. non-exchange transactions

• Exchange transactions

– Entity receives assets / services (or has liabilities extinguished), and

– Directly gives approximately equal value in exchange.

• Non-exchange transactions

– Entity receives assets or services (or has liabilities

extinguished), and

– Does not give approximately equal value in exchange.

Substance of transaction should be considered.

E.g Discount as part of the sale policy of the department =

Exchange transaction

A par. in the MCS added to clarify that departments are not

required to present non-exchange and exchange transactions

separately.

38

Revenue types

• Annual appropriation

o Voted Funds

o Conditional grants

• Statutory appropriations

• Departmental revenue, which has the following sub-categories:

o Taxation revenue

o Sale of goods and services

o Transfers received

o Fines, penalties and forfeits

o Interest, dividends and rent on land

o Sale of capital assets

o Transactions in financial assets and liabilities

• Aid assistance

39

Recognition principles

• In PER on the date that the cash is received.

• Appropriated funds are recognised in the financial

statements on the date the appropriation becomes

effective. Same applies for adjustments.

• Transactions in foreign currency are recognised in ZAR

by applying the spot exchange rate on date of receipt

40

Exchequer grant account

41

Departmental revenue definition

42

The inflow of cash arising in the course of the ordinary

activities of the department, normally from the sale of goods,

the rendering of services, and the earning of interest, taxes

and dividends. It includes transactions in financial assets

and liabilities and also transfers received.

Departmental revenue is collected by national / provincial

departments, and is subsequently paid over to the National /

Provincial Revenue Fund.

Departmental revenue classification

43

Aid assistance

44

• Aid assistance comprises amounts received from local or

international donors via the RDP Fund.

• “CARA Fund Assistance” comprises of amounts

specifically appropriated from the Criminal Asset Recovery

Account (CARA).

• If a local or international donor donates funds and there is

no technical assistance agreement, it must be dealt with

as a normal donation or a gift to the state in accordance

with Section 76(1) of the PFMA and Treasury Regulations.

• At the end of a project, the department is required to

surrender all funds to the RDP Fund.

• Aid assistance note has been updated and there is an

illustrative guide on the changes.

Expenditure

Expenditure definition

Expenditure is a decrease in economic benefits or service potential during

the reporting period in the form of outflows or incurrences of liabilities that

results in a decrease in net assets, other than those relating to capital

distributions from net assets.

46

In the modified cash environment, payments are accounted for in the

period in which the monies were paid and not in the period in which the

underlying transaction or event occurred that gave rise to the

expenditure.

Expenditure classification

47

Covered in Chapter

on Capital Assets

NOTE: Details of classification can be

obtained from the SCOA website

Recognition principle

• A department recognises expenditure in the statement of

financial performance on the date of payment.

• Date of payment is the date on which the expenditure is

authorised for payment on the system (but no later

than the last day of the reporting period).

NOTE: there is a time lag between the authorisation for

payment and the interface on the bank statement. At year-

end the amount recognised as expenditure in the

FINANCIAL STATEMENTS includes all purchases

approved for payment by 31 March (even if the payment

still needs to clear the bank account).

48

Types of Expenditure - Compensation of employees

• Comprise of most forms of consideration given by a department in

exchange for services rendered by employees.

• Excludes payments made to employees as a re-imbursement of costs incurred

on behalf of the employer (e.g. travel and subsistence expenditures).

• Made up of two categories:

o salaries and wages

Salary and wages comprise of amounts paid to the employees of a department

including all payments made on their behalf such as PAYE / SITE and the employee’s

contributions to pension and / or medical schemes.

o social contributions

The social contributions category includes the employer’s contribution to the

social insurance schemes to which the employee belongs.

• Employee benefits that have accrued to employees – covered in

Provisions and Contingents

49

Types of Expenditure - Goods and Services

Payments for all goods and services

to be used by a department,

excluding purchases of capital

assets.

Payments for goods and services, to

be used as input into a capital

project are also excluded from G&S

- classified as capitalised payments

The following are covered in this presentation:

• Capital assets less than R5,000

• Consumables

50

Capital assets less than R5,000

• R5,000 is per unit; not per payment

51

NOTE: For Detailed guidance refer to Chapter on Capital Assets

Consumables

• Goods that normally meet the definition of inventory, but are not

essential for satisfying the service delivery obligation of a department.

• With effect from 2013/14 inventory items are be limited to “Inventory

Departments”

• “Inventory Departments” - have inventory in order to deliver on their

mandate

• “Non-Inventory Departments” - the inventory items not needed for a

department to deliver on their service delivery mandate

52

NOTE: Details of classification of Consumables

can be obtained from the SCOA Website

Interest and rent on land

• Rent on land - Includes the total value of payments due to the use of land owned by another party, including other government units.

53

• Interest includes the total value of interest payments. These are payments associated with debt, for example interest on borrowing and overdraft facilities.

Payments for financial assets

• Consist mainly of transactions

that result in losses to the

department such as the write-

off of debt.

• These expenditure is dealt with

in more detail in the Chapter on

General Departmental Assets

and Liabilities.

54

Transfers and Subsidies

Transfers and subsidies include all “non-exchange” payments made

by a department. A payment is “non-exchange” provided that the

department does not receive anything directly in return for the transfer to

the other party.

55

current transfers:

• Social security benefits

paid to households

• Fines

• Penalties

• Compulsory fees

• Compensation for

injuries or damages

paid to another unit

capital transfers:

• Payments that are conditional on the

recipient unit using the funds to acquire

capital assets

• Transfer to enterprises (publicly or

privately owned) to cover large operating

deficits accumulated over at least two

years or to finance their cost of

purchasing capital assets

• Debt forgiveness extended to others

• Capital taxes payable to other depts.

Updates

• Similar to Chapter on Cash Flow Statement and Revenue , specified

that the exchange rate to be used is the “spot exchange rate”

• Illustrative guide on accounting for EPWP project drafted, out for

comment and to be issued to clarify additional disclosures.

• More guidance added with regard to salaries to members of Legislature.

• Added paragraph stating that even if budget incorrect reporting should be

correct.

• MCS updated to clarify that only disclosure of unspent funds of transfers

and subsidies paid to Provinces and Municipalities, Departmental

agencies and accounts is required. This is in line with the PFMA.

56

General Departmental Assets and Liabilities

Chapter Content

• This chapter deals specifically with the accounting for:

o Bank overdraft, cash, investments, loans, receivables

and payables;

o Funds to be surrendered to the revenue fund;

o Prepayments and advances;

o Unauthorised, irregular and fruitless and wasteful

expenditure

• These are either classified as financial instruments, non-

financial assets / liabilities or statutory receivables /

payables – categories explained in the AMD;

• The MCS provides accounting principles for each type of

asset / liability rather than for the different categories –

accounting principles for most categories are the same.

58

Accounting for financial assets / liabilities and prepayments / advances

59

A financial asset is:

(a) cash;

(b) a residual interest of another

entity [i.e. investments]; or

(c) a contractual right to:

(i) receive cash or another

financial asset from

another entity; or

(ii) exchange financial

assets or financial

liabilities with another

entity under conditions

that are potentially

favourable to the entity.

Examples of financial assets

included in primary financial

information are as follows:

• cash, or cash equivalents under

the control of the department;

• receivables (such staff debt,

supplier overpayments, claims

recoverable);

• loans; and

• investments in public entities.

Examples of financial assets

included in the secondary

financial information are as

follows:

• accrued departmental revenue

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

60


(a) cash;






another entity; or


assets or financial





Recognised (primary info) when:

Become a party to the

arrangement (e.g. open bank

account, sign loan agreement,

make investment etc.); and

If cash – recognised when

department controls it;

If financial asset (other than

cash) – recognised when the

cash flows;

If investment – recognised

when it is a capital investment;

For investments, the expense is

recognised on date of payment

(i.a.w. Chapter on Expenditure), the

investment is captialised thereafter

(i.a.w this Chapter).


61


(a) cash;






another entity; or


assets or financial





Recorded (secondary info – as

accrued revenue) when:


arrangement (e.g. open bank

account, sign loan agreement,

make investment etc.); and

Could not be recognised (did not

meet criteria for recognition);

and

Meets additional criteria for sale

of goods / rendering of services /

taxation revenue;

Departments need not estimate total

tax receivable but must record and

disclose cash collected by agents

due to the department.


62

A financial liability is any liability

that is a contractual obligation to:

(a) deliver cash or another

financial asset to another

entity; or

(b) exchange financial assets or

financial liabilities under

conditions that are potentially

unfavourable to the entity.

Examples of financial liabilities

included in primary financial

information:

• payables (such as deposits,

salary deduction payments);

Examples of financial liabilities

included in secondary financial

information :

• accrued expenditure payable;


63





entity; or







arrangement (e.g. owe an

employee, received a deposit);

and

It is a cash transaction;

e.g. cash deducted from gross

salary of employee and is due to

other institutions – UIF, pension etc

or cash is deposited with the

department (security or key

deposits)


64





entity; or





Recorded (secondary info –

accrued expenditure) when:

Goods are received, or services

delivered;

Services includes those delivered by

employees – leave entitlements and

bonus accruals.


65

Advances comprise funds

received in advance of

goods/services that are yet to be

delivered by the department in

accordance with the agreement

under which the advance is

received;

A prepayment is a payment

made in advance of goods or

services being received.



arrangement; and

Cash is received (advance) or

paid (prepayment);


66

Measured in primary information –

• On recognition: cost plus transaction costs (where applicable);

• Subsequent measurement: cost less amounts settled or written- off

and/or any accrued interest (where interest is charged);

Measured in secondary information –

• fair value (accrued revenue), cost (accrued expenditure);

Impairment (primary and secondary information) – recorded where there is

an indication of impairment showing estimated reduction in carrying value

of the asset/liability;

Departments are required to specify the methodology applied to calculate

the impairment loss. Example of estimating PV of the expected future

inflow of cash that is expected in settlement of the recorded financial asset

is added in the AMD.

Accounting for financial assets / liabilities and

prepayments / advances (Cont.)

• Bank overdraft should form part of current liabilities; not be deducted

from the current assets bank balance, new principle added.

• Prepayments: Materiality was factored in and the updated paragraph

reads as follows:

“A department may recognise a prepayment in the statement of financial

performance in accordance with the Chapter on Expenditure if the

prepayment is material and was budgeted for as an expense in the year

in which the actual prepayment was made.”

67

Other assets and liabilities

68

This chapter provides principles for the recognition / recording

and measurement of:

o Unauthorised expenditure;

o Irregular expenditure; and

o Fruitless & wasteful expenditure.

A chapter has been added in the AMD giving guidance on

Unauthorised, irregular and fruitless and wasteful expenditure;

Capital Assets

Scope

70

Includes (a) investment properties;

(b) biological assets;

(c) specialised military equipment;

(d) heritage assets;

(e) infrastructure assets

(f) intangible assets; and

(g) other immovable and movable

items of capital assets

Excludes (a) intangible assets arising from

powers and rights conferred to a

department by legislation,

a constitution, or by equivalent

means; and

(b) agricultural produce after the

point of harvest.

(c) Inventories

(d) Consumables

(e) Capital asset subject to a

finance lease

Definitions of Capital Assets

Capital assets are non-current tangible or intangible assets of a department that are

expected to be used or held by that department for longer than one year. MCS PAR 09

– Capital Assets

Tangible assets are non-monetary assets having physical substance that:

• are held for use in the production or supply of goods or services, for rental to others,

or for administrative purposes or for the development, construction, maintenance or

repair of other capital assets; and

• are expected to be used during more than one reportingMCS PAR 09 – Capital

Assets

71

Assets are resources controlled by a dept as a result of past events and from which

future economic benefits or service potential are expected to flow to the dept. MCS PAR

11 – Capital Assets

An intangible asset is an identifiable non-monetary asset without physical substance.

MCS PAR 09 – Capital Assets .

Definitions of Capital Assets

72

Control exists where a department has the power to obtain the future economic

benefits or service potential from the underlying resource and to restrict the access of

others to those benefits.

(The key principle is that of control of the economic benefits or service potential of the

asset rather than 'physical' control.) MCS PAR 10 & 11 – Capital Assets

Intangible Assets

Identifiability Criterion in the definition of an intangible asset:

• is separable, i.e. is capable of being separated or divided

from the department and sold, transferred, licenced, rented

or exchanged, either individually or together with a related

contract, identifiable asset or liability, regardless of whether

the department intends to do so; or

• arises from binding arrangements (including rights from

contracts) regardless of whether those rights are

transferable or separable from the department or from other

rights and obligations.

73

Intangible Assets

Types

Acquired Intangible Asset

Internally Generated

74

Internally generated intangible Assets

75

Research

Development

Current

expenditure Intangible

Asset

Loose tools, spare parts and servicing

equipment

76

Heritage Assets

77

There are instances where heritage assets can have a dual

purpose. These capital assets that are used for more than

one purpose should be classified as a heritage asset when a

significant portion of the asset meets the definition of a

heritage asset.

Measurement of movable assets

78

Subsequent Measurement: COST

Measurement of immovable assets

79

Fair value

80

Subsequent costs immovable assets

81

Additions notes

82

Disposals notes

83

Capital assets update

Capital assets

• PAR 13 Added the following paragraph regarding control of immovable assets:

“With regards to immovable assets, consideration should also be given to the

legislative requirements relating to specific mandates. Reporting in line with the

legislative framework is contained in the guidance on immovable assets.”

• PAR 62 :

“Where a movable asset is acquired through a non-exchange transaction from

non-government entities, its cost shall be measured at its fair value as at the date

of acquisition”

84

Capital assets update (cont)

Capital Assets (continued)

• PAR 78 :

Capital Assets transferred between departments: All capital assets shall be

transferred at cost or fair value. The transferor has the responsibility to fair value the

capital asset prior to transfer if the capital asset was recorded at R1. (1 April 2002

exception still applicable).

• PAR 95;97 & 98 :

Specific disclosure requirement of prior period error pertaining to capital asset added

and covered in Illustrative guide on prior period errors.

Disclose the number and value of assets to be transferred to another department

in terms of section 42 of the PFMA, but where the transfer has not been

completed at year end

85

Inventory

Definition of inventories

Inventories are assets:

• in the form of materials or

supplies to be consumed in

the production process;

• in the form of materials or

supplies to be consumed or

distributed in the rendering

of services;

• held for sale or distribution

in the ordinary course of

operations; or

• in the process of production

for sale or distribution.

NOTE: Those goods

purchased / produced and held

or distributed specifically for

executing the service

delivery mandate of the

department

87

Inventory Still Annexure for

2014/15 and 2015/16 FYs. Will

be a note w.e.f. 1 April 2016

Examples of inventories

88

• LTSM (DoE)

• certain items bought for distribution, e.g. school

furniture bought by a DoE to be distributed to schools;

• certain library materials that meet definition of

inventories;

• medicine, e.g. medicine purchased by a DoH to be

distributed/sold to a patient ;

• uniforms and protective clothing bought for the use of

department staff, e.g. police uniforms; and

• work-in-progress related to inventories

Recording of Inventory

89

Recorded as part of the secondary financial information

if, and only if:

• it is probable that future economic benefits or service

potential associated with the item will flow to the

department; and

• the cost or fair value of the item can be measured

reliably.

Inventory note

90

Errors relating to the current year

Issued to cost centres or external stores

SalesObsolete, Lost, Damaged (Follow loss control process)

· Fair value of donated or in-kind items

· Inventory transferred from another department (Value recorded by recipient)

Opening balance

Add/(Less): Adjustments to prior year balances

Add: Additions/Purchases – Cash

Add: Additions – Non-cash

(Less): Disposals

(Less): Issues

Add/(Less): Adjustments

Closing balance

1

2

3

4

5

6

Prior period error adjustments of InventoryExample· Surpluses and shortages· Reclassification as capital or

minor assets· Reclassification as inventory· Reclassification as consumables

1

Cash additions:Amount should equal Inventory purchases in the PER

2

3

4

5

6

Initial measurement

91

Subsequent measurement

92

Lower of cost and net realisable value,

Exception

Inventories are measured at the lower of cost and current replacement

cost where they are held for:

• distribution through a non-exchange transaction; or

• consumption in the production process of goods to be distributed at no

charge or for a nominal charge.

Leases

Leases definitions

A finance lease is a lease that transfers substantially all

the risks and rewards incidental to ownership of an asset.

Title may or may not eventually be transferred.

Commencement date is the date from which the

lessee is entitled to exercise its right to use the asset.

An operating lease is a lease other than a finance lease

repair of other capital assets.

94

A lease is an agreement whereby the lessor conveys to the lessee in return for a

payment or series of payments the right to use an asset for an agreed period of time.

Rental and hiring – according to SCOA, a

transaction that involves a once-off payment for the

temporary use of a capital asset which is owned by an

external party.

Inception date is the earlier of the date of the lease

agreement and the date of commitment by the parties

to the principle provisions of the lease

Budget:

Capital

Example: hiring a

marquee for an event

Budget:

Current

When lessee takes

possession of a leased

asset

When lease agreement is

signed by both parties

Classification

95

• Made at inception date and is not changed, even when

the existing lease is renewed

• If substantially all of the risks and rewards have been

transferred to the lessee, it is a finance lease; otherwise it is

an operating lease.

• Considers the overall substance of the lease agreement for

each of its leases not merely their legal form.

Classification - Risks and rewards

96

Risks

• Loss due to idle

capacity

• Loss due to technical

obsolescence

• Changes in asset

value due to changing

economic conditions

• Carry the risk of

repairs and

maintenance

• Carry the risk of

insurance cost /

losses

Rewards

• Deriving revenue or

service potential from

use of asset over its

economic life

• Expectation of profits

over its economic life

• Gain from increase in

value upon disposal

• Realisation of

residual value upon

disposal

Finance vs Operating Lease

97

Lessor Treat as a

Sale

Lessee Treat as a

Purchase Asset

Lessor

Lessee Right to use the

Asset

Finance

lease

Operating

lease

Classification indicators

98

For a lease to be classified as a finance lease it is not necessary to have

all the indicators present, it could be one or a combination of the indicators.

• Ownership of the asset is transferred to the lessee when the lease term

ends;

• The lessee has an option to purchase the asset at a price that is

expected to be much lower than the fair value of the asset at the date

the option becomes exercisable and at the time of entering the lease, it

is expected that the lessee will exercise the option;

• The lease term is for a major part of the economic life of the asset even

though title is not transferred; (approx. 75%)

• At the inception of the lease the present value of the minimum lease

payments amounts to at least substantially all of the fair value of the

leased asset; (approx. 90%)

• The leased asset is of such a specialised nature that only the lessee

can use it without major modifications; or

• The leased asset is not easily replaceable by another asset.

Other Classification Indicators

99

• If the lessee can cancel the lease, the lessee will carry any loss that

will be incurred by the lessor as a result of the cancellation;

• Gains or losses due to changes in the fair value of the residual

value are credited to the lessee

• At the end of the initial lease, the lessee has an option to extend the

lease at a rent that is substantially lower than the market rent.

Specific issues – Land and Buildings

100

• Where lease contains both a land and a building element, two components

are assessed individually

• Where land is operating lease and building is finance lease, payments

should be allocated between the land and the building based on the fair

values of each

• Where payments cannot be allocated, the entire lease is classified as

finance lease

• Where lease contract is clearly an operating lease, e.g. where the building

is leased for a significant shorter period than its economic life, then classify

as operating lease

• Where payment amount that would be

allocated to land is immaterial, both the land

and building can be treated as a single asset

for classification purposes and the economic

life of the asset would be based on the

economic life of the building

Specific issues – Cell phones & 3G modems

101

Most relevant indicators of the transfer of risks and rewards for cell phone

contracts:

o the lease transfers ownership of the asset to the lessee by the end of

the lease term;

o the lease term is for the major part of the economic life of the asset;

o at the inception of the lease, the pv of the minimum lease payments

amounts to at least substantially all of the fv of the leased asset; and

o if the lessee can cancel the lease, the lessor’s losses associated with

the cancellation are borne by the lessee.

• cell phone contracts usually transfer

ownership at the end of the contract and

the phone usually only has a short

economic life, these contracts will

generally result in finance leases.

• Also consider materiality when classifying

the agreements

Recognition, Measurement and Recording

102

Finance lease: Lessee

A disclosure requirement has been added in the MCS and AMD that where a

department has numerous lease agreements the department can group the

lease disclosure narrative according to the sub-categories of capital assets

leased and specify the range of terms applicable to such lease agreements.


103

Finance lease: Lessor


104

Operating lease: Lessee


105

Operating lease: Lessor

Provisions and Contingents

Scope

107

Provisions - Definitions

Provision

• Liability of uncertain timing or amount

Liability

• Present obligations of the entity arising from past events, settlement of

which is expected to result in an outflow from the entity of resources

embodying economic benefits or service potential.

Types

• Capped leave - leave due to an employee as at and including 30 June

2000

• Performance bonus – constructive obligation, (not legal obligation),

based on practice.

108

Provisions - Recording

All of the following criteria must be met:

A department has a present obligation (legal or constructive) as a result

of a past event;

It is probable that an outflow of resources embodying economic

benefits or service potential will be required to settle the obligation;

and

A reliable estimate can be made of the amount of the obligation.

Difference between provisions and other liabilities - uncertainty about the

timing or amount needed to settle the obligation;

109

Provisions - Measurement

The amount recognised as a provision should be the best estimate of the

expenditure required to settle the present obligation at the reporting date

• Time value of money is ignored;

• Best estimates is based on management’s judgement (previous

experience, reports of independent experts etc);

• Reimbursement – when certain that reimbursement will be received;

• Review at each reporting date;

• Unused provision should be reversed;

– Changes in Provisions

– Reviewed at each reporting date and be adjusted to reflect the current

best estimate. Reversed if no longer probable.

110

Contingent Liabilities

111

CONTINGENT LIABILITY

Possible obligation,

confirmed in

future

Present obligation

not meeting

recognition

criteria

Record only - NO recognition

Contingent liabilities- Measurement

• Measured using the best estimate

• Assessed continuously to determine if the outflow of resources has

become probable

• Recorded in a contingencies register

• Types of contingent liabilities

• Guarantees

• Claims against the department

112

Contingent assets

Record a contingent asset where an inflow of economic benefits or service

is probable.

113

CONTINGENT ASSET

Possible asset,

confirmed in future

Record only - NO

recognition

Provisions and other liabilities (Cont.)

114

Provisions (In template)

115

37.1 Reconciliation of movement in provisions - 2013/14

Provision 1 Provision 2 Provision 3 Provision 4 Total provisions

R'000 R'000 R'000 R'000 R'000

Opening balance -

Increase in provision -

Settlement of provision -

Unused amount reversed -

-

-

Closing balance - - - - -

Reimbursement expected from third party

Change in provision due to change in

estimation of inputs

Added this subnote to provisions

Commitments

116

• The department commits itself to future transactions that

will normally result in the outflow of resources

• With tenders, a commitment exists when the award has

been formally communicated to the service provider

that won the tender since a legitimate expectation of

appointment has been created at year end

• The total outstanding contract value is disclosed in the

notes to the annual financial statements.

• The note excludes amounts provided for in the budget of

the department unless these amounts are contractually

committed at the reporting date.

Commitments disclosure criteria

117

Both the following criteria should be met:

• Contracts should be non-cancellable or only cancellable at

significant cost (for example, contracts for computer or

building maintenance services); and

• Contracts should relate to something other than the

routine, steady, state business of the department –

therefore salary commitments relating to employment

contracts or social security benefit commitments are

excluded.

Updates

• Long service awards: AMD specified that PERSAL reports on employees

due for long service awards in the ensuing financial year can be

extracted. Screenshots also included. These can be used to estimate the

long service award amount to be disclosed. Should the department be

unable to extract such reports, a past trend can be used to estimate the

ensuing financial year’s long service awards amount. The process should

be summarised in the narrative.

• Stated in the AMD that variation order amount should form part of

Commitment amount.

118

Related Party Disclosures

Related party definition

A related party is a person or an entity with the ability to control or jointly

control the other party or exercise significant influence over the other party,

or vice versa, or an entity that is subject to common control, or joint control.

120

Entities:

1. subsidiaries, associates and joint ventures;

2. entities in which a substantial ownership interest is held, directly or

indirectly, by any person described in (3) or (4) of individuals below, or

over which such a person is able to exercise significant influence

Individuals

3. individuals owning, directly or indirectly, an interest in the reporting

department that gives them significant influence over the department,

and close members of the family of any such individual;

4. management personnel, and close members of the family of key

management personnel;

Spheres of government

121

Identification of related parties

122

Related party transactions

Related party transaction is a transfer of resources, services or

obligations between the reporting department and a related party,

regardless of whether a price is charged

123

Transactions that may indicate a related party relationship

o Arrangements where one party incurs expenses on behalf of

another party (these costs may or may not be recovered);

o Lease arrangements at more or less than market value or for no

consideration;

o Sales without substance (funds are transferred to an entity for

goods or services that were never rendered/delivered);

o Services or goods are purchased at nominal or no cost

Related party transactions

124

• A department must disclose transactions and balances with its related

parties falling under its Minister / MEC’s portfolio.

A department is exempt from all the disclosures requirements listed

above in relation to related party transactions if that transaction occurs

within:

• a normal supplier and/or client/recipient relationships on terms and

conditions no more or less favourable than those which it is

reasonable to expect the department to have adopted if dealing with

that individual entity or person in the same circumstances; and

• terms and conditions within the normal operating parameters

established by that reporting entity’s legal mandate

A department must disclose a list of all its related party relationships

irrespective of whether there were any transactions between the related

parties falling under its Minister/ MEC’s portfolio.

Disclosure of related party transactions

125

Departments need only

disclose the In kind

goods and services

provided/received in the

AFS related party

transactions note that

occur within their

portfolio.

NB! In kind goods and

services transactions that take

place outside the

department’s portfolio must be

disclosed in the AO Report Portfolio of the department

KMP and Close family members

126

Key management personnel are those persons having the

authority and responsibility for planning, directing and

controlling the activities of the department

Close members of the family of a person are those family

members who may be expected to influence, or be influenced

by that person in their dealings with the department. As a

minimum, a person is considered to be a close member of

the family of another person if they:

• are married or live together in a relationship similar to a

marriage; or

• are separated by no more than two degrees of natural or

legal consanguinity or affinity

Close family members

127

Related party updates

• Disclosure requirements reworded to clarify that the department should

disclose a list of its related party relationships with entities falling under

its Minister/MEC’s portfolio.

128

Agent-Principal Disclosures

BINDING

ARRANGEMENT

Agent-Principal Arrangements

130

Principal

has the power to

exercise beneficial

control over an

activity, where

beneficial control is

power (eg power

established by

legislation),

to direct the activity,

and the ability to

benefit from that

power.

Activity/ies

carrying out of

a separately

identifiable

task or

process, or

group of

similar tasks

or processes

Agent

Party that

does not

have

beneficial

control

Accounting treatment

131

Principal

PER

Payment to Agent

POS or NOTES

Any asset or Liability

associated with the activity

undertaken by Agent

Agent

PER

Departmental revenue

- Fees received

POS

Advance

- Funds received from Principal

Receivable

-Where advance was not

received

POS or NOTES

Any asset or Liability associated

with the activity undertaken by

Agent

Agent principal disclosures (In Template)

132

42 Agent-principal arrangements

2014/15 2013/14

42.1 Department acting as the principal R'000 R'000

Total - -

For each of the individual agents of the department, provide a description of the nature, circumstances and terms relating to

the arrangements with the agents

Agent principal disclosures (In Template)

133

42.2 Department acting as the agent

42.2.1 Revenue received for agency activities 2014/15 2013/14

R'000 R'000

Total - -

For each of the individual agent relationships of the department, provide a description of the nature, circumstances and terms

relating to the arrangements with the principal

42.2.2 Reconciliation of agency funds and disbursements - 2014/15

Name of principal entity

Total agency funds

received

Expenditure

incurred against

funds

Amount remitted

to the principal

Variance betw

amounts

received and

amounts

remitted

Explanation of the

variance

R'000 R'000 R'000 R'000

Events after the Reporting Date

Events after the reporting date

135

Events after the reporting date are those events that occur between the

reporting date and the date when the financial statements are authorised

for issue.

The date of authorisation for issue is the date on which the financial

statements have received approval from management to be issued to the

executive authority.

Reporting date is the date of the last day of the financial year. For

departments this is 31 March for that specific financial year.

Adjusting event – provide information about events that existed at

reporting date.

Non-adjusting event – provide information about events that arose after

reporting date


136


137

Year End Procedure 2014/15

Due date for submission to:

OAG Budget Office ALM

Unaudited

financials

Copies:

29/05/2015

1

29/05/2015

1

29/05/2015

1

Audited

financials

Copies:

31/07/2015

1

31/07/2015

1

31/07/2015

1

Annual Reports

Copies:

31/08/2015

3

31/08/2015

9

31/08/2015

1

Accounting Support during 2014/15 audit process

139

Name of OAG representative within NT Province Cluster

Star Kafu

Telephone: 012 315 5763/5741

Email: [email protected]

KZN & NW Justice

John Watson

Telephone: 012 315-5590/ 406-9091


NC & FS Economic Services

Keitumetse Malebye

Telephone: 012 315 5989/ 395-6542


EC & MP Finance & Admin

Thokozile Motsweni

Telephone : 012 315 5233 /5281

[email protected]

WC & GP Central Government &

Social Services

Lizette Labuschagne

Telephone : 012 315 5781

[email protected]

LP NRF

mailto:[email protected]





Thank you

grap for departments - national treasury. annual... · 2015-03-12 · statement, treasury financial...

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