IPSASs: The Cash Basis in Theory and Practice

Presented by Wayne Bartlett, CPA, FCCA , MBA, PhD

Contents of the Course

• Session 1 – An Introduction to the Cash-Basis IPSAS

• Session 2 – The Cash-Basis Standard: Some Crucial Definitions and the Concept of Control - Administrative and third party transactions

• Session 3 – Presentation and Disclosure Requirements: model format for financial statements

• Session 4 – Some General Considerations

• Session 5 – Consolidation Issues and Foreign Exchange

• Session 6 – Presentation of Budget Information in Financial Statements

• Session 7 – Accounting for External Assistance in the Cash-Basis Framework

• Session 8 – Encouraged Additional Disclosures within the Cash-Basis Framework

• Session 9 – Practical Challenges to the Implementation of the Cash-Basis IPSAS

• Session 10 – A High-Level Introduction to the IPSAS Accruals Framework: preparations for transition and the importance (and limitations) of IPSAS 33

Objectives

• The primary aim of this course is to deliver training on the Cash-Basis

IPSAS to delegates in a way that presents the key elements covered by

the Standard and their impact on the preparation of financial statements

in both theory and practice.

• A secondary aim is to briefly present the accruals-basis IPSASs at the

high level to ensure that delegates are aware of the key differences from

cash-basis accounting under the framework and its potential

repercussions on accounting and reporting in Bangladesh in the future.

• At the end of the course participants will have a detailed understanding

of the principles and practices of the Cash-Basis IPSAS and a high-level

familiarity with the IPSAS accruals-basis Standards.

Session 1 – An Introduction to the Cash-Basis IPSAS (“CBI”)

• “Financial Reporting under the Cash Basis of Accounting

• In two parts: part one is mandatory, part two is not mandatory.

Part one of CBI

• Sets out the requirements for all entities preparing general purpose financial statements under the cash basis of accounting.

• Defines „cash basis‟

• Establishes disclosure requirements

• Deals with a number of specific reporting issues

• “Must be complied with” by all entities claiming to be using

the CBI.

Objectives and Scope

• OBJECTIVE

- “To prescribe the manner in which General Purpose Financial Statements shall be presented under the cash basis of accounting”

- Principally about cash receipts, cash payments and cash balances of an entity

- Enhances comparability with previous periods and with other entities

• SCOPE (1.1)

- Meant for all entities presenting their financial statements under the cash basis of accounting

- An entity that complies with the Standard shall state the fact. It shall not claim to do so if it does not actually do so.

- Applies to all public sector entities other than Government Business Enterprises (GBE)

Part two of CBI

• Non-mandatory. A useful preparation for the move to accruals accounting. But requires clarity from those responsible for overseeing the reporting framework nationally about what to include and what not to include and how items should be defined.

• Identifies additional accounting disclosures and requirements that an entity is “encouraged” to adopt to enhance accountability and transparency.

GBEs

• What is a GBE? Something that has ALL the following characteristics:

1 An entity with the power to contract in its own name

2 Assigned financial and operational authority to carry on a business

3 Not reliant on continuing government funding to survive as a going concern except for in arms length purchases

4 Is controlled by a public sector entity

GBEs and financial reporting

• Because of the quasi-commercial nature of GBEs, IPSASs do not apply

• IASB states that for „all profit-oriented entities‟ IFRSs should be the financial reporting framework used

Session 2 – The Cash-Basis Standard: Some Crucial Definitions and the Concept of Control - Administrative and third party transactions

• Some key definitions need to be examined

• These relate to:

- Accounting

- Cash

- Control

Cash Basis of Accounting

• Para 1.2.2

• “Recognises transactions and events only when cash is received or paid by the entity”.

• Provides users with information about sources of cash paid during the period, the purposes for which cash was used and cash balances at the reporting date

• Measurement focus is balances of cash and changes therein

• Notes to the financial statements may provide additional information e.g. on liabilities and non-cash assets

Cash definitions

• Cash: Cash in hand, demand deposits, cash equivalents

• Cash equivalents: short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value

• Cash flows: inflows and outflows of cash

• Cash payments: cash inflows

• Cash receipts: cash outflows

Cash controlled by the reporting entity

• An absolutely vital concept and the source of much potential confusion

• Cash collected by an entity may not be controlled by that entity

• What do we mean by control of an entity? It is when “the entity can use the cash for the achievement of its own objectives or otherwise benefit from the cash or regulate the access to others of that benefit.”

• It includes cash collected by or appropriated or granted to an entity which the entity can use to fund its operating objectives, acquire capital assets or repay its debt.

• If the entity cannot use money it collects for these purposes, IT DOES NOT CONTROL THE MONEY AND IT SHOULD NOT THEREFORE REPORT IT AS ITS RECEIPTS

Bank Deposits • There may be cases where cash is collected on behalf of govt. but it

deposits it in its own bank account before transfer to consolidated revenue account or similar.

• Similarly there may be cases where money to be transferred to a 3rd party but it goes through its own bank account before transfer.

• In such cases the cash is only controlled whilst it lies in its own bank account.

• Paragraph 1.4.9 requires disclosure of amounts held in bank accounts that are not available for use by the entity or are subject to external restrictions.

Single Treasury Accounts

• Paragraph 1.2.8: managed through a centralised treasury function.

• Individual entities do not control their own bank accounts.

• Central entity makes payments on behalf of individual entities.

• Individual entities should report expenditures that someone else pays on their behalf in a separate column headed „treasury account‟ (or something similar and/or more appropriate) in the statement of cash receipts and payments.

Session 3 – Presentation and Disclosure Requirements: model format for financial

statements

• Some more definitions:

- Accounting policies: specific principles, bases, conventions, rules, practices applied by the entity in preparing and presenting financial statements.

- Materiality: an item is material if its omission or misstatement could influence the decisions or assessments of users made on the basis of the financial statements. Can be material by e.g. nature or size.

- Reporting date: the date of the last day of the reporting period to which financial statements are made.

Financial statements

• A Statement of Cash Receipts and Payments which: - Recognises all cash receipts, payments and balances controlled

by the entity. - Separately identifies payments made by 3rd parties on behalf of

the entity.

• Accounting policies and explanatory notes.

• If the entity makes its budget publicly available, a comparison of budget and actual amounts either as a separate financial statement or as a budget column in the statement of cash receipts and payments. Note however that if budget and actual are not on a consistent basis, then a separate financial statement is required.

Additional non-cash information: an important point

• If the entity discloses information on a non-cash basis as defined by this Standard should be disclosed in the notes to the financial statements.

• This is an important point – mixing up more than one basis of accounting can be very confusing to the user.

• Additional statements are allowed (1.3.9). Examples are given e.g. cash movements and balances for major fund categories such as a consolidated revenue fund, additional information on sources and deployment of borrowings. However these may only included cash controlled by the entity.

Additional disclosures

• 1.3.10: often entities collect information of a non-cash nature. These could include details of:

- Receivables, payables, borrowings and other liabilities

- Commitments and contingent liabilities

- Performance indicators and service delivery objectives

• Such information may be disclosed in the notes to the financial statements where that information is likely to be useful to users

• Part 2 of the Standard discusses these areas in more detail

Information to be included in the Statement of Cash Receipts and Payments (SCRP)

1 Total cash receipts of the entity showing an appropriate sub-classification for the entity.

2 Total cash payments of the entity showing an appropriate sub-classification for the entity.

3 Beginning and closing cash balances of the entity.

Normally these should be on a gross basis. However a net basis may be used where there are transactions which the entity administers on behalf of another entity and which are recognised in the SCRP or when turnover is quick and maturities are short.

Approach to classification

RECEIPTS

• e.g. Taxation or appropriations, grants and donations

• Borrowings

• Proceeds from property disposals

• Ongoing service delivery and trading activities

PAYMENTS

• Ongoing service delivery including transfers

• Debt reduction programmes

• Acquisitions of property, plant and equipment

• Trading activities

Payments by third parties on behalf of the entity

• Covered by paragraph 1.3.24.

• As already referred to, if another entity settles payments on behalf of the entity then separate columns are required.

• These should be split between those which are part of the economic entity (“the group”) to which the entity belongs and those which are not.

• These separate columns should distinguish between sources and uses of funds.

• For those paying bodies which are outside the economic entity e.g. External Assistance agencies amounts may only be included when the entity is formally advised that such amounts have been paid on their behalf.

Further control issues

• Paragraphs 1.3.19 to 1.3.23 gives further clarification on situations where an entity e.g. a tax collection body collects monies on behalf of someone else.

• Especially if the money is not paid into their account and e.g. into a Single Treasury Account it will not control the cash “and these cash flows will not form part of the cash receipts, cash payments or cash balances of the entity”.

Structure of the notes

• The notes to the F/S should:

- Present information about the basis of preparation of the F/S and the specific accounting policies selected and applied for significant transactions and other events

- Provide additional information which is not presented on the face of the F/S but it necessary for a fair presentation of the entity‟s cash receipts, payments and balances

• Notes should be presented in a systematic manner. Each item in the F/S should be cross-referenced to the notes.

Accounting policies

• General purpose financial statements should present info that is understandable, relevant and reliable.

• Reliable has three elements: (i) presents faithfully cash receipts, payments, balances and other info; (ii) is neutral, i.e. free from bias; (iii) is complete in all material respects.

• The accounting policies section shall describe each specific accounting policy that is necessary for an understanding of the F/S.

• Inappropriate accounting treatment is not rectified by disclosure, no matter how comprehensive it is.

• Any additional disclosures – see Part 2 of the Standard – shall follow the same rules.

Authorisation date and information about the entity

• The entity shall disclose the date that the F/S are authorised for use. If another body has the power to amend the F/S, this shall be disclosed.

• Information about the entity is also required. If not disclosed elsewhere in the info published with the F/S, this includes:

- The domicile and legal form of the entity and the jurisdiction within which it operates

- A description of the entity‟s operations and principal activities

- A reference to any relevant legislation covering the entity‟s activities

- The name of the controlling entity and the ultimate

controlling entity of the economic entity

Session 4 – Some General Considerations

• Reporting Period: GPFS shall be presented at least annually

(paragraph 1.4.1). There may be occasions when a period of less or more than one year is used, if so it must be stated why this is the case and also explained that comparative amounts may not be comparable.

• Timeliness: the usefulness of F/S is impaired if they are not made available within a reasonable period. 6 months is the maximum suggested, though 3 months is „strongly encouraged‟ (para. 1.4.4)

Restrictions on cash balances and access to borrowings

• The issue of control is, as we have seen, a very important one. A number of disclosures are required, as below. These disclosures should include commentary and the nature and amount of the items involved.

• Significant cash balances not available for use by the entity (e.g. because of foreign exchange restrictions).

• Significant cash balances that are subject to external restrictions; this might be the case with a grant or donation that must be used for a specific purpose.

• Undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments.

Consistency of Presentation • The underlying rule is that in normal circumstances the presentation

and classification of items in the F/S shall be retained from one period to the next (para. 1.4.13).

• One exception is when there is a significant change to the nature of entity operations or if a review of the way that F/S are prepared suggests that an alternative approach may be more appropriate. This could happen for example when there is a major restructuring of the business.

• Another exception is when a future change is required by an amendment to the Standard.

• Changes in structure require a change to comparative information to make it truly comparable.

Identification of Financial Statements

• It is important to be very clear about what is meant by „Financial Statements‟ and where they begin as they are often published with other information and there is therefore scope for confusion.

• The Standard only applies to information in the Financial Statements.

• Each component of the Financial Statements must be clearly labelled.

• The following must be prominently displayed: - The name of the reporting entity - Whether the F/S are for the individual entity or for the economic entity - The reporting date or the period covered by the F/S - The reporting currency - The level of precision used in the F/S

Comparative information

• The general rule is that comparative information must be included in the F/S (1.4.16). An obvious exception is if this is the first time that the F/S have been prepared using the Standard.

• Comparative information should not only be included on the face of the F/S but also in narrative and descriptive information.

• This is not just numerical info. It might include descriptive details such as that relating to an ongoing court case.

• You should note that a restatement of comparative info is not required if it is impracticable. Should this be the case then a disclosure note is needed to explain in principle what changes would have been made if the data had been available.

Correction of errors

• Errors are an unfortunate fact of life, even in audited F/S!

• Errors relating to brought-forward cash balances should be amended in the brought-forward amounts.

• Disclosures are also required to explain what has happened. This includes the nature of the error, the amount of any correction and the fact that comparative information is restated or that it is impracticable to do so.

Session 5 – Consolidation Issues and Foreign Exchange

• Covered in sections 1.6 and 1.7 of the Standard.

• Consolidation is a crucial issue which once more links very closely to the concept of control.

• Revolves around the treatment of the entities within the economic entity or group.

• One entity has control of another when it can control its financial and operational activities for its own benefit.

• The financial statements of an economic entity presented as those of a single entity are called consolidated financial statements.

Scope of consolidated financial statements • A controlling entity should normally issue consolidated financial statements which

consolidates all controlled entities, foreign and domestic.

• However a controlled entity should be excluded from consolidation if it operates under severe long-term restrictions.

• A controlling entity that is a wholly owned controlled entity need not present consolidated financial statements provided users of such financial statements are unlikely to exist or their information needs are met by the overall consolidated financial statements.

• Note that entities are encouraged to prepare „intermediate level‟ consolidated financial statements if users of them are likely to exist.

• A controlling entity that is virtually wholly owned (assumed to be 90%+) need not present consolidated financial statements provided that it obtains the approval of minority interests not to do so.

• Note that 1.9.30 offers specific guidance on what to do with state/provincial/local government for consolidation purposes. In some cases (related to control) separate financial statements will be required for each level of government.

The economic entity….

Controlling entity

Controlled entity A

Controlled entity A1

Controlled entity B

Controlled entity C

Controlled entity C1

Consolidation procedures as follows…

1 Cash balances and transactions between the entities must be eliminated in full.

2 If F/S consolidated are made up to different dates, then adjustments should be made for the different periods: the consolidated entity must as far as possible be brought back to the same date as the controlling entity‟s financial statements. There must not be a difference of more than three months between the end-date of the two periods.

3 Uniform policies shall be used for like transactions. If this is not practicable then this must be disclosed along with proportion in the consolidated financial statements to which the different accounting policies have been applied.

Two consolidation disclosures (1.6.20)

1 A listing of significant controlled entities including the name and the jurisdiction within which it operates if different from that of the controlling entity.

2 The reasons for not consolidating a controlled entity.

Foreign currency (section 1.7)

• Briefly dealt with. There is a much more comprehensive accruals-basis IPSAS on the subject.

• Some definitions:

- Reporting currency: that in which the financial statements are presented

- Foreign currency: a currency other than the reporting currency

- Exchange rate: the ratio of exchange for two currencies

- Exchange difference: the difference resulting from reporting the same number of units in the reporting currency at different exchange rates

- Closing rate: the spot exchange rate at the closing date

Treatment of foreign currency cash receipts, payments and balances

• Cash receipts and payments should be translated by applying the exchange rate at the date of the transaction.

• Cash balances held in a foreign currency at the reporting date should be translated at the closing rate.

• An entity shall disclose the amount of exchange differences included as reconciling differences between opening and closing cash balances for the period.

• When the reporting currency is different from the currency of the country in which the entity is domiciled, the reason for using a different currency shall be disclosed.

Session 6 – Presentation of Budget Information in Financial Statements

• The overall rule: an entity that makes approved budgets publicly available shall present a comparison of the budget amounts for which it is publicly accountable and actual amounts (1.9.8)

• This can be either as an additional financial statement or a separate column in the statement of cash receipts and payments.

• The following should be included:

- The original and final budget amounts

- The actual amounts on a comparable basis

- An explanation of material differences between the budget for which the entity is held publicly accountable and actual amounts (by note disclosure unless already included in other public documents)

Scope

• The Standard does not require that entities make budgets publicly available.

• The Standard takes into account that in some cases budgets will be approved which relate to both an overall entity and also ones with separate components such as agencies which prepare their own budgets. The Standard applies to all entities included in these general areas.

Presentation issues

• An entity shall only present a columnar analysis in the statement of cash receipts and payments if the budget and actual are compared on a consistent basis.

• In other cases a separate statement of budget and actual amounts is required. In such instances it would be useful for the financial statements to fully explain the different approaches that are in use.

• If the budget and actual are on a different basis, then the actual should be brought back to the budget basis for the purposes of comparison (1.9.19). An example would be when the budget is on a cash basis, actual amounts are on a partial/full accruals basis. If so, then the actual amounts must be restated on a cash basis.

Comparison of budget and actual amounts • Presenting original and final budget amounts compared to actuals (on a

comparable basis) completes the accountability cycle. It enables users to assess whether resources were obtained and used in the manner anticipated.

• Use of variance analysis assists readers in understanding variations from the budget.

• Sometimes the legal requirement is not to make both original and final budgets publicly available. If both are required, then the local legislation may make clear which one variances should be made against. If this is not the case, then it is permissible either to match actual to original budget (to see differences in performance) or against final to assess compliance (1.9.13)

Levels of aggregation

• Many public sector budgets have a great deal of detail. These will often be aggregated into broad classes under common budget heads/classifications etc. The presentation of budget and actual information on a consistent summarised format helps for comparative purposes.

• That said, it may be necessary to aggregate further for the purposes of preparing financial statements. This might be necessary to avoid information overload. Determining what level of aggregation is required involves professional judgement. See general qualities of information: 1.3.32 of this Standard.

• Additional information on e.g. performance is encouraged by Part 2 of the Standard. Good cross-referencing is important in such cases. Developments in reporting are moving towards more than just financial reporting being included in financial statements and supporting reports.

Changes from original to final budget

• Entities are required to provide explanations of changes between the two (1.9.23). These may be because of e.g. reallocations or other reasons. Such explanations can either be included in disclosure notes to the financial statements or by separate reports issued before or at the same time. If the latter, proper cross-referencing must be in place.

• It is important to clearly identify reasons for changes e.g. changes in government policies. Such information is often included in budget outturn reports.

Multiyear budgets

• In some cases budgets are multiyear but with annualised budgets identified within this overall framework. There is sometimes the capacity to roll forward unused appropriations in any given year.

• The multiyear basis may affect the original and final budget figures. E.g. second year „original budget‟ may be increased by any carry-overs from the first year.

• If unusually multiyear budgets are not split into individual years then some judgement may be needed to do so.

Important budget disclosures

• An explanation in the notes of the budgetary basis and classification basis (e.g. cash/accrual or somewhere in between basis) or budgets split into e.g. programs or the existence of separate capital budgets: see 1.9.33.

• The period of the approved budget (1.9.37): e.g. budget may be part of multiyear budget.

• The entities included in the approved budget (1.9.39).

Reconciliation of actual amounts used for budget comparison on a comparable basis and actual amounts in the financial statements

• 1.9.41: if actual amounts are adjusted for budget adjustment purposes then a reconciliation is required from the figure included for actuals in the comparison to total cash receipts and payments.

• The reconciliation should include timing and entity differences.

• Budgetary basis differences: e.g. cash v accruals.

• Timing differences: e.g. budget period is different to that for financial statements.

• Entity differences: differences between those included in the budget „universe‟ and that of the financial statements.

• The reconciliation can be included in the notes or on the face of the financial statements.

• The disclosure of comparative information for prior periods is not required by this Standard for this particular element.

Session 7 – Accounting for External Assistance in the Cash-Basis Framework

• External assistance can be an important contributor to the finances of many countries.

• It is important therefore that it is properly accounted for and disclosed.

• This session looks at these issues in more depth.

• Some useful definitions are given in 1.10.1. Note that sometimes terms are used interchangeably in practice. Normally the meaning is obvious but sometimes it is not. You must be careful when looking at this area that you examine the practical reality and not just the words: „substance over form‟

External assistance generally

• External assistance: „all official resources which the recipient can use for the achievement of its objectives‟. Does not include NGOs.

• An NGO is a foreign or national entity established independent of the control of any government. However in some cases the distinction between an NGO and a donor can become blurred: here judgement must be used.

• In practice, the rules of 1.1 to 1.9 apply to NGOs, those of 1.10 to donors and other external assistance.

• „Official resources‟ in the context of external assistance applies to a binding agreement under a bilateral or multilateral agreement from one country to another, regardless of the levels of government involved. Transactions between one level of government and another within the same country are not „external assistance‟ in the context of this Standard.

External assistance received

• May provide for the entity to:

- Draw down loans or grants

- Seek reimbursement for qualifying payments

- Request the third party to make payments to others for goods and services delivered for the benefit of the beneficiary

- Provide goods or services in kind directly to the recipient

Disclosures of external assistance received

• 1.10.8: entity shall disclose separately on the face of the financial statements total external assistance received in cash during the period.

• Shall also disclose separately („on the face‟ or in the notes) total external assistance paid by 3rd parties to directly settle obligations during the period. This only applies where formal advice has been received or alternative verification is available.

• If from more than one significant provider, shall be classified by significant classes of provider (1.10.10).

• Total amount of external assistance loans received during the period and total amounts of grants shown separately („on the face‟ or in the notes).

Undrawn external assistance

• 1.10.18 – entity shall disclose in its financial statements the balance of its undrawn loans and grants from EA as at the reporting date.

• This only applies if these are specified in a binding agreement.

• Should be split between loans and grants. Note that normal foreign currency exchange rules (1.7.3) will be applied.

• Any significant terms and conditions impacting on access should be shown

Other Disclosures

• Where an entity elects to disclose goods and services supplied basis of determining value should be disclosed (1.10.21 – see also 2.1.90)

• Disclosure of any debt rescheduled/cancelled during the period along with any related terms and conditions (1.10.23)

• Any terms and conditions where significant non-compliance which has led to EA being withdrawn or repaid. Amount cancelled or returned should also be disclosed (1.10.25).

Session 8 – Encouraged Additional Disclosures within the Cash-Basis Framework

• Part 2 of the CBI is very important. It gives guidance on non-

mandatory areas of additional disclosures that are encouraged in addition to the mandatory elements of Part 1.

• That said, they have to be handled properly. There are examples of them creating some confusion in practice e.g. on what basis of valuation to use, whether additional information amounts to „financial statements‟ per CBI for example.

• That said they can be very useful e.g.: - To governments requiring additional information on debts - To external international bodies for the same reason - For countries transitioning to accrual-basis IPSAS

Some important definitions • Accrual basis: a basis of accounting under which transactions and other

events are recognised when they occur rather than when they are received or paid.

• Asset: resources controlled by an entity as a result of past events and from which future economic benefits (or service potential) are expected to flow to the entity.

• Liability: present obligations of the entity arising from past events which are expected to lead to result in an outflow from the entity of resources embodying economic benefits or service potential.

• Revenue: gross inflow of economic benefits or service potential during the period that results in an increase in assets/equity (other than contributions from owners).

Going Concern

• 2.1.3 Those responsible for preparing the F/S are encouraged to make an assessment of the entity‟s ability to continue as a going concern.

• If they are aware of any uncertainties affecting the future, they are encouraged to disclose the nature of those uncertainties.

• Affects individual entities rather than the government as a whole.

• Will need to take into account all information relevant to the „foreseeable future‟ – loosely defined as 12 months from date of approval of the F/S.

• Includes assessment of expected performance, potential restructurings, estimates of receipts or likely continuation of government funding, potential sources of replacement funding.

Administered Transactions

• A key area of interest (and potential confusion!). Differs from questions on control.

• 2.1.15: An entity is encouraged to disclose in the notes to the financial statements the amount and nature of cash flows resulting from transactions administered by the entity as an agent on behalf of others.

• A good example would be a „Department of Taxation‟ (or similar) which collects taxes on behalf of government. Such Departments only „control‟ monies that go into their own bank account (or are paid on their behalf by others) and is used for the purpose of meeting their own operating objectives. All other cash is „administered‟ rather than „controlled‟ by them.

• However there may be occasions when transfer payments to a third party „pass through‟ the entity‟s bank account before being transferred. In such cases, cash receipts and cash payments processed during the period should be included in their statement of receipts and payments along with any cash balances remaining at the end of the period.

Disclosure of major classes of cash flow

• An entity is encouraged to disclose an analysis of total cash receipts and payments by 3rd parties appropriately classified e.g. on nature of payments or the functions they support (2.1.23)

• Also encouraged to disclose proceeds from borrowings. These may be further classified into type and source.

• This can be „on the face‟ or through disclosure notes.

• Examples of „nature of payments‟ and „functional method‟ can be found in 2.1.26 and 2.1.27

• Some additional suggestions of classifications are in 2.1.30 e.g. receipts from tax, from fees/fines/penalties, from sale of goods and services.

Related Party Disclosures

• Although this is only briefly mentioned, this is a very important area in terms of both transparency and accountability.

• It can also be a politically contentious area as it might indicate an increased risk of corruption.

• 2.1.31 – entity is encouraged to disclose in the notes information required by IPSAS 20 which defines related parties – often comes back once more to questions of control.

• Includes requirements about aggregate remuneration of key management personnel.

Disclosure of Assets and Liabilities

• This is one area where often additional information is disclosed in many countries in practice.

• 2.1.33 – encouraged to disclose information about assets and liabilities (see earlier definition) .

• Disclosure of this information will enhance understanding of the F/S and of financial strengths and weaknesses of the situation.

• Appropriate classification is a help e.g. assets as receivables, investments, property, plant & equipment, liabilities as payables, borrowings by type.

• Accruals IPSASs can be useful e.g. IPSAS 13 („Leases‟), IPSAS 17 („PPE‟), IPSAS 19 („Contingent Liabilities and Contingent Assets‟)

Consolidated Financial Statements

• Additional disclosures encouraged (2.1.41): - Proportion of ownership interests in controlled entities and

proportion of voting power - The name of any controlled entity in which the entity has a voting

share of less than 50%, together with an explanation of how control exists

- The name of any entity in which there is an ownership interest of more than 50% but control does not exist and explanations.

• Disclosure of aggregate cash flows from acquisitions and disposals of controlled entities.

• Disclosure of any joint ventures which are necessary for a fair presentation for cash receipts and payments.

NGOs and External Assistance

• 2.1.64 – Entity is encouraged to disclose assistance received from NGOs in the same way as that received via External Assistance (costs v benefits rules apply).

• External Assistance: purposes for which EA was received split between grants and loans.

• Purposes for which EA payments were made (e.g. Economic Development/Emergency Relief/ Defence Objectives/Trading Activities).

• Analysis of each provider of EA.

• Summary of repayment terms and conditions of outstanding EA debt.

• Value of EA received in the form of goods and services (may be questions of how these are valued especially if e.g. second hand: „fair value‟ rules may apply).

Session 9 – Practical Challenges to the Implementation of the Cash-Basis IPSAS

• The CBI is a good piece of guidance and a comprehensive familiarity

with it should help deal with problems.

• However, there are a number of practical problems that may arise which can cause difficulties.

• What follows is a personal selection based on personal experience of working in a number of countries of what to watch out for.

Issue 1: Confusion between control and administration of cash and how to recognise this

• Clearly identifying when cash is controlled and when it is administered can be very problematic.

• Administered transactions should not be included in the statement of receipts and payments of the administering entity if they do not have their own bank account (e.g. in a Single Treasury Account system).

• This does not stop the reporting of total collections within disclosure notes.

• How to report Revenues collected (e.g. standalone statements), include in MoF etc.

• Some agents resist suggestions that monies collected should not be reported as „their‟ revenues.

Issue 2: Difficulties in defining timing of „receipts‟ and „payments

• In practical terms, when are payments deemed to be received and paid?

• It should ideally be when the entity gains/loses control of the monies involved

• This may be significantly different than when postings to the system are made for them

• What steps are taken to make adjustments for differences?

• How long are ledgers left open at the end of the year and how practically does this impact on the assessment of timings?

Issue 3: Finance systems unable to cope with „cash accounting‟

• Some countries have brought a high-end accruals-based finance system for their accounting purposes.

• Ironically these are often „over-specified‟ for what is required.

• This can lead to a lot of time/effort/money being spent on making adjustments to get systems back to a cash basis.

• Sometimes the work undertaken to make the adjustment is not properly tested leading to inaccurate accounting and reporting.

• Make sure that the system chosen is fit for purpose. Ensure high-level involvement of suitably qualified accounting staff during system design, testing and implementation as well as ongoing maintenance.

Issue 4: Differences between budget and actual basis of accounting

• Often, even in fully developed systems, budget remains on cash but accounting is accrual or modified accrual.

• How to deal with variations between budget and actual can require complicated reconciliation adjustments.

• Systems often have trouble dealing with two different dimensions in practice.

Issue 5: Properly defining who/what should be included in consolidated financial statements

• Clear identification of control criteria and when control exists and when it doesn‟t.

• Dealing with inter-entity transactions appropriately and eliminating when necessary.

• Consistent accounting policies on consolidation.

• Dealing with GBEs on consolidation.

• Clear strategy for how to deal with different levels of government e.g. central/state/local.

• Reasonable transition timetable for full consolidation: don‟t be over-ambitious and unrealistic: don‟t over-promise and under-deliver.

• Different knowledge levels amongst different entities who are consolidated.

Issue 6: Proper definition of what to include for „Part 2‟ encouraged additional disclosures

• Clearly articulated statement of what should be included in the additional disclosures.

• Proper guidance on how to value them, define them (e.g. assets).

• What to do with assets that are impaired.

• Having extra statements rather than disclosures and mixing up accruals items with cash items.

Session 10 – A High-Level Introduction to the IPSAS Accruals Framework: preparations for

transition and the importance (and limitations) of IPSAS 33

• Preparing for accruals accounting is a massive task.

• It needs to be properly understood by all stakeholders, both internal and external.

• A switch to accruals accounting without an intention to use better information for better decision-making is not worthwhile.

• There are many dimensions of change management involved; systems, training, recruitment, awareness-raising for example.

IPSAS accruals: key groupings

• At latest count 37 different accruals-based IPSASs (though a few have been superseded)

• Set by IPSASB and updated regularly

• Most (but not all) based on an equivalent IFRS

• Different „topic types‟ e.g.

- Different types of reports

- Non-financial assets

- Financial assets

- Consolidation issues

- Revenue issues

IPSAS 33: Key Elements • Recently released, IPSAS 33 allows for a transitional period to move from cash to accrual-

basis IPSAS

• ONE-STAGE OPTION: Entity moves straightaway to fully IPSAS compliant financial statements

• TWO-STAGE OPTION: - Entity adopts IPSASs, takes advantage of exemptions (STAGE 1) - Entity finally moves to fully IPSAS compliant financial statements (STAGE 2)

• In the two-stage option full compliance cannot be claimed until all material changes have been implemented

• Overall aim is to provide transparent reporting about a first-time adopter‟s transition to accrual basis and provide a suitable starting point for accounting in accordance with accrual basis IPSASs

- In situations where benefits of providing the information are expected to exceed the costs

• Standard exemption period is three years

• Full disclosure of where the entity is in terms of transition is required

• Some areas are linked e.g. certain non-current asset changes for PPE and leasing for example must be made at the same time

IPSAS 33: Limitations

• A point strongly made by IPSAS 33 is that it should be seen as the final stage in a long process.

• In reality the time taken to transition to full accruals will normally be for much longer than three years.

• Organisations moving to full accruals need to make detailed plans long before IPSAS 33 becomes relevant.

Getting ready for accruals accounting

• Will to move: yes or no?

• Clearly defined benefits included?

• Fully designed and consistent project plan with clear milestones in place?

• Full costs identified?

• Data collection systems in place?

• Piloting approach used?

• Previous experience of modified cash?

• Capacity present in implementing bodies?

• Capacity present in decision-making bodies?

• Training programme in place?

• Recruitment programme in place?

• Audit body fully involved?

The CBI – Cash Receipts and Payments

• 2.2.1 – An entity that intends to migrate to the accrual basis of accounting is encouraged to present a statement of receipts and payments in the same format as that required by IPSAS 2 on Cash Flow Statements.

• This requires analysis of cash flows into operating, investing and financing activities