Contents
Introduction
1.Terminology alignment
2.PPP arrangement that meets the definition of a Principal-Agent Arrangement
3.Inclusion of third party in the definition of principal-agent arrangement
4.Typical items accounted for by the principal and agent
5.Retention of documents substantiating payments made
6.Supply chain management processes to be used
7.Money collected by a department and surrendered to the revenue fund
8.Money collected by a department’s entity
9.Transitional provisions
10.Comments on the checklist and decision tree
11.Comments on principal-agent arrangements note
12.Two principals in the same inter-government arrangement
13.Effective date of the revised MCS chapter on Accounting by Principals and Agents
Annexure A: Checklist to determine whether or not the arrangement is a principal- agent arrangement.
Annexure B: Note on Principal-agent arrangement
Annexure C: Practical examples
Introduction
The following is a summary of principal-agent arrangementsissues discussed at a MCS Workshop held on 09 September 2015. When departments were preparing annual financial statements for the year ended 31 March 2015 issues pertaining to principal-agent arrangements were raised as areas requiring clarity. Therefore NT saw it appropriate to obtain input on these from the departments. Departments were required to provide responses on specific items listed below during the session based on the Invitation to comment document and were given an opportunity to comment on other principal-agent arrangements matters. Departments were also given an opportunity to send their comments by no later than 25 September 2015. Timeous submission of comments allows NT to adhere to planned timeframes with activities such as collating the comments, analysing them, conducting research, liaisingwith other stakeholders and subject matter experts, then publishing updated MCS, AMD, AFS Template and Specimen AFS for further comment on changes only.
The planned publication of the final MCS, AMD, AFS Template and Specimen AFS is 30 November 2015.
NT wishes to express appreciation tothe departments during the MCS update processthroughparticipating at the workshop, sending written commentsand continued involvement in addressing the MCS matters.
- Terminology alignment
1.1Background
The Accounting Standards Board recently approved the Standard of GRAP on Accounting by Principals and Agents. The terminology used in the MCS chapter on Agent-Principal Disclosuresfor the year ended 31 March 2015 is not in line with the GRAP terminology.
Although the Standard of GRAP on Accounting by Principals and Agentsis not yet effective, the question was posed if the MCS terminology on Agent-Principal disclosures should be aligned to the terminology in the Standard of GRAP on Accounting by Principals and Agents.
1.2Discussion
Comments from Respondents:
All the respondents agreed that the terminology MCS terminology on Agent-Principal disclosures should be aligned to the terminology in the Standard of GRAP on Accounting by Principals and Agents.
Analysis of comments:
MCS terminology on Agent-Principal disclosures should be aligned to the terminology in the Standard of GRAP on Accounting by Principals and Agents.
1.3Resolution
MCS, AMD, AFS Template and Specimen should be updated with the GRAP 109 terminology:
MCS Terminology / GRAP 109 Terminologya) / Agent-principal disclosures / Accounting by Principals and Agents
b) / Agent-principal relationship / Principal-agent arrangement
- PPP arrangement that meets the definition of a Principal-Agent Arrangement
2.1Background
A PPP arrangement may meet the definition of a principal-agent arrangement. Should a department disclose the arrangement on both the PPP Note and the principal-agent arrangements Note OR, disclosure in the PPP arrangement note will suffice?
2.2Discussion
Comments from Respondents:
a)The purpose and type of information that is required for each note should be considered. If these are different, then both notes should be completed. However, if the purpose and type of information required are the same, only the PPP note should be completed and a narrative should be provided on the principal-agent arrangement in the PPP note.
b)Using the checklist as a guideline, the PPP for the department does not meet the definition of a principal agent arrangement. Therefore disclosure in the PPP note only will suffice.
c)It is highly unlikely that PPP arrangement will meet the definition of a principal-agent arrangement.
Analysis of comments:
A principal-agent arrangement that is also a related party relationship should be disclosed in both notes to the financial statements as the purpose and type of information required for each note are different.However, if the purpose and type of information required for a PPP arrangement that also meets the definition of a principal-agent arrangement are different, then both notes should be completed.
For a PPP arrangement that contains a lease, only the PPP note needs to be completed as the PPP note and lease purpose and requirements are similar. This supports the requirement that if the purpose and type of information required are the same, only the PPP note should be completed. The principal-agent arrangement should be mentioned in the PPP note narrative.
2.3Resolution
AMD: Add guidance stated below 2.2 Analysis of comments above.
- Inclusion of third party in the definition of principal-agent arrangement
3.1Background
In the MCS applicable for the year ended 31 March 2015, the definition of an agent-principal arrangement (principal-agent arrangement) did not have a requirement for a third party to be part of the transactions specified in the arrangement.
According to the Standard of GRAP on Accounting by Principals and Agentsthe definition of principal-agent arrangement is as follows:
“A principal-agent arrangement results from a binding arrangement in which one entity (an agent), undertakes transactions with third parties on behalf, and for the benefit of, another entity (the principal).”
The question posed to the departments was should transactions relating to principal-agent arrangements involve an agent undertaking transactions with third parties?
3.2Discussion
Comments from Respondents:
a)Respondents agreed that it is necessary to make it a requirement for a third party to be part of the arrangement in a principal-agent arrangement with a respondent further specifying that, although substance over legal form will prevail in terms of international accounting principles, in terms of the law of agency, a third party is always involved and aligning legal and accounting principles where possible, will ensure better understandability in its application. However the rest of the requirements (summarised in a checklist) should still be considered before concluding if the arrangement is a principal-agent arrangement. A comment from a respondent was as follows:
“The nature of an agent is such that it will act on behalf of a principal. To act on behalf of a principal, there needs to be a third party involved. Without a third party involved, one party is simply delivering goods / services to another party.”
b)A respondent was of the view thatalso agreed to a) above and added that the arrangement between the agent and third party must be independent from the arrangement between the principal and agent.
c)A respondent suggested that principal-agent arrangements should exclude arrangements between departments (national and provincial) and public entities. It should be limited to arrangements between departments and public entities that have arrangements with service providers, implementing agents, local government, contractors etc.
Analysis of comments:
Despite the rest of the criteria to be considered in determining of an arrangement is a principal-agent arrangement, introduction of transactions with third parties as a requirement is supported. This means that most ordinary department-supplier arrangements will not end up being principal-agent arrangements is the intention of the chapter.
Most inter-governmental principal-agent arrangements are material and if these are excluded from the scope, the full picture of arrangements used to fulfil the mandates of government entities. Therefore excluding any inter-governmental principal-agent arrangements is not recommended.
3.3Resolution
MCS: Update the definition ofprincipal-agent arrangement to include third party in alignment with the GRAP definition.
AMD: Update the definition ofprincipal-agent arrangement to include third party in alignment with the GRAP definition. Provide guidance on what constitutes a “third party”.
- Typical items accounted for by the principal and agent
4.1Background
Once the department has established that they are a principal or an agent in a principal-agent arrangement, they should disclose the necessary amounts in the financial statements and related notes. Typical items disclosed by a principal or an agent in a principal-agent arrangement can be identified.
4.2Discussion
Comments from Respondents:
- The principal should account for revenue and expenses arising from the transactions with third parties in its statement of financial performance as the benefits accrue to the principal as part of its service delivery mandate.
- The department responsible for the function will report the following items in the financial statements irrespective of whether or not there is a principal-agent arrangement:
- Revenue - Amount received from the agent for the fees collected from third parties on behalf of the principal (the department).
- Conditional grant – To address the issue around budget processes this transactions should be treated as a conditional grant however this relinquish all the rights of the department over the assets and also some control. It shouldn’t be a transfer payment because this meets the definition of a principal agent arrangement.
- Expenditure – Amount transferred to agent, for example, for construction of houses. This should be reported ascapital expenditure in the PER and the relevant WIP disclosure note/annexure.
- Administration fee paid to agent for a function that the principal is responsible for. This should be reported as goods and services in the PER
- Advance – If raised in the POS it may have a severe impact on the budget process as the disbursement may only happen at a later stage e.g. new financial year
Analysis of comments:
Revenue, Expenditure, Assets and Liabilities Disclosure in Primary, Secondary Financial Information and Annexures
Disclosure / ExamplesPrincipal
Revenue and Expenses / Principal accounts for revenue and expenses arising from the transactions with third parties in its statement of financial performance. / Revenue - Amount received from the agent for the fees collected from third parties on behalf of the principal.
Expense: Amount transferred to agent to construct property on the principal’s behalf such as fee paid as compensation to the agent
Principal
Assets and Liabilities / Refer to other MCS chapters in determining whether assets and liabilities arising from principal-agent arrangement. / Asset: Capital asset constructed by the agent
Liability: Fee owing to the agent
Agent
Revenue and Expenses / Agent accounts for the revenue and expenses associated with undertaking the transactions on behalf of the principal. / Revenue: Fee received as compensation from the principal
Expenditure: Costs incurred in providing administration service such as employee costs
Agent
Assets and Liabilities / Refer to other MCS chapters in determining whether assets and liabilities arising from principal-agent arrangement.
Assets and Liabilities relating to resources held on behalf of the principal in order to undertake transactions with the relevant third parties.
Assets and liabilities as a result of rights and obligations arising from principal-agent arrangements. / Asset: Cash held in agent’s bank account for amounts to be remitted to the principal.
Liability: Cash held in agent’s bank account for amounts to be remitted to the principal. This amount is owed to the principal
4.3Resolution
AMD: Add guidance specified below 4.2 Analysis of comments above.
- Retention of documents substantiating payments made
5.1Background
Substantiating documents should be retained. There is uncertainty pertaining to which entity in a principal-agent arrangement should retain the substantiating documents.
5.2Discussion
Comments from Respondents:
a)The agent transacts on behalf of the principal. Therefore the principal should retain the original supporting documentation for the transactions pertaining to revenue and expenditure recognised by the principal. There may be an agreement that the agent should retain original supporting documents but at least copies should be availed to the principal for monitoring and oversight.
b)The ASB guideline on Accounting for Housing Schemes (currently in draft) should be consulted and aligned to the MCS principles.
c)The agreement may specify the extent of documents to be submitted to the principal.
d)If supply chain management processes of the agent are utilised then there is no need for the agent to submit the substantiating documents pertaining to the payment made by the agent.
e)Originals should be given to the principal.
f)For audit purposes, the AGSA can liaise with their colleagues to verify existence of original documents kept by the agent.
Analysis of comments:
The binding arrangement may specify document management requirements pertaining to the arrangement and such requirements should be adhered to. Where the binding arrangement is silentabout document management requirements, it is advised that the agent avails copies of the supporting documents after considering the practicality of sending documents to the principal and cost implications. Where the agent has not sent source documents to the principal, the agent should ensure that the source documents can be availed for inspection.
5.3Resolution
AMD: Add guidance specified below 5.2 Analysis of comments above.
- Supply chain management processes to be used
6.1Background
Uncertainty exists regarding which entity’s supply chain management processes should be usedin a principal-agent arrangement.
6.2Discussion
Comments from Respondents:
a)If the agent is also a public sector entity that needs to comply with SCM legislation, the agent can procure according to its own policy.If the department used a private sector entity instead of a public sector entity, the agreement would have needed to include a requirement for the private sector entity to use the department’s SCM policy as it would not otherwise be subject to “government” SCM legislation.
b)Ordinarily when the agent enters into contracts with suppliers they will use their own supply chain processes and not the principal’s unless so stated in the principal-agent arrangement.
c)The challenges that the department encounter is when they appoint an implementing agent, usually 3C public entities, who are not required to follow the SCM processes of departments in terms of section 16A of the Treasury Regulations (TR).This results in irregular expenditure as the payment is incurred by departments.
Analysis of comments:
Various types of arrangements will require various types of SCM processes. The requirements stipulated by legislation with regards to the relevant SCM processes to be applied by the parties in an arrangement should be adhered to. SCM processes to be applied by the agent should be stated in the terms of the binding arrangement.These should not contradict legislation. If the binding arrangement is silent, the NT can be consulted to obtain clarity on the most appropriate SCM processes to be followed.
6.3Resolution
AMD: Add guidance specified below 6.2 Analysis of comments above.
- Money collected by a department and surrendered to the revenue fund
7.1Background
PFMA states:
s11 (a) “all money received by the national government must be paid into the Fund, except money reasonably excluded by this Act or another act of Parliament”.
s 21(a) “all money received by the provincial government must promptly be paid into the Fund, except money reasonably excluded by this Act or another Parliament”.
PFMA requires that all money received by the national and provincial departments be surrendered to the relevant revenue fund. A question raised is whether money collected by a department and surrendered to the revenue fund meets the definition of a principal-agent arrangement.
7.2Discussion
Comments from Respondents:
a)Departments are not all acting on behalf of the revenue fund when they perform their “normal” duties, each has its own mandate that it is fulfilling in its own capacity. The fact that it is funded via the revenue fund is just the nature of government finances. This is also in line with GRAP 109 on Accounting by Principals and Agents.
b)In terms section (b) of the checklist, “benefit” should be interpreted as activities performed in line with a departments mandate as any money received cannot be used for any other benefit. This is further emphasised in the cost containment measures where activities such as team building exercises etc are not allowed. Therefore monies received from the revenue fund (equitable and conditional) will not benefit the department in any way other than the use thereof to perform its mandate.Considering section c) of the checklist, a department can never transfer its mandatory functions in totality to a third party. The department will forever be in control of a project.
Analysis of comments:
If the department collects money as part of its mandate, it should treat it as its own revenue even though ultimately the department must surrender money collected to the revenue fund as required by the PFMA.
7.3Resolution
AMD: Add guidance stated below 7.2 Analysis of comments above.
- Money collected by a department’s entity
8.1Background
A question posed states “How should money collected by the department’s entity then required to be transferred to the department that will in turn transfer the money to the Revenue Fund be accounted for? Would this constitute a principal-agent arrangement?”
8.2Discussion
Comments from Respondents:
a)We propose that department continue with the disclosure as per NT’s FAQ issued in 2014-15. It is not the department’s revenue and it should simply be an “in-and-out” in the department’s general ledger. If the money was paid by year-end, there would be no balances in the department’s financial statements and only a narrative disclosure on the amount received and paid over during the year will be made. Otherwise the amount not yet paid over will be included as a payable.
b)If a department is simply a conduit for its entity and the flow of money to the revenue fund from the entities reporting to its Ministerit does not constitute a principle-agent relationship.
c)No principal-agent arrangement as there is no binding arrangement and the surrender of funds are governed by the PFMA
d)Monies to be surrendered to the revenue fund must be treated as a payable