Guidance on Government Annual Financial Reporting
Guidance on Government Annual Financial Reporting
for ESAAG Member Countries
Introduction
Accounting Standards for the Public Sector
The East and Southern African Association of Accountants General (ESAAG) recognizes the significant benefits of achieving consistent and comparable financial information across jurisdictions and it believes that this Guidance will play a key role in enabling these benefits to be realized. The adoption of this Guidance by governments of ESAAG member countries will improve both the quality and comparability of financial information reported by their central government entities.
ESAAG recognizes the right of governments and national standard setters to establish guidelines and accounting standards for financial reporting. ESAAG considers that this Guidance is an important step forward in improving the consistency and comparability of financial reporting and encourages the adoption of this Guidance.
This Guidance is based on the Cash Basis IPSAS[1]amended to reflect existing good practice in a number of ESAAG countries which was identified in a recent study by the African Capacity Building Foundation[2]. As such, the Guidance is based on a bottom-up study of annual financial statements as an aid to developing international accounting standards for governments across sub-Saharan Africa. It is hoped that this Guidance will be used to influence accepted good practice across the globe and lead to a review of the Cash Basis IPSAS.
Public sector Accountability and the Role of Financial Statements
Along with the auditor’s report, a government’s annual financial statements provide the essential financial data necessary for accountability purposes. In a parliamentary democracy, parliament sets the annual budget and so authorises the government to raise taxes and to spend money as indicated. For governments, a budget takes on a special legal significance. Governmental budgets are expressions of public policy priorities and legally authorize the purposes for which public resources may be raised and spent. Government budgets are the primary method by which citizens and their elected representatives hold the government’s management financially accountable. The annual financial statements are the key way in which the government accounts to parliament and its citizens for the taxes raised and the money spent on the provision of public services.
A government’s financial statements (and associated report of the Auditor General) indicate how its management of financial resources complied with the annual budget, authorised by Parliament, relevant laws and financial regulations. Citizens and their elected representatives have the right to know whether the government actually used funds and resources in accordance with the approved budget and Financial Regulations. Demonstrating accountability for compliance with budgetary authority is a distinguishing objective of governmental financial reporting. The aim is to facilitate control by parliament to ensure that all public expenditure is within the limits set by parliament.
For governments which are dependent on donors for a significant proportion of their revenue, their annual financial statements are also a key document to enable the donor community to monitor adherence to agreed policies. These may include, for example, poverty reduction strategies, the proportion of government expenditure to be allocated and actually spent on defined pro-poor expenditure (for example, primary health and education spending).
Because revenues raised through governments’ power to tax are expected to be used to advance the public interest, the public is entitled to hold governments to a standard of accountability that is broader than for private sector companies. Accountability to parliament is the cornerstone of all financial reporting in a representative democracy. Government accountability is based on the belief that citizens and their Parliament have a “right to know,” a right to openly receive financial information that may lead to public debate by the citizens and their elected representatives.
Many of the key users of government financial statements (citizens and their political representatives) are not financially literate and so extra effort is needed to make sure the financial statements are accessible, clear and understandable.
Current Good Practice
A variety of approaches are currently used by ESAAG governments and this practice has yet to be comprehensively documented and good practice identified. In 2006, the East and Southern African Association of Accountants General (ESAAG) supported a study resulting in a Financial Reporting Survey and Database. This was based on broad assessments against the following indicative criteria:
- stakeholder support
- legislative framework underpinning financial reporting
- financial reporting
- credibility of financial statements.
This Guidance complements the above previous ESAAG study. It also builds on a research report by the African Capacity Building Foundation2. This research included a review of the annual financial statements of a dozen sub-Saharan African governments and collated existing good practice. These countries included eight ESAAG member countries (Botswana, Kenya, Mauritius, Namibia, Rwanda, South Africa, Tanzania and Uganda) and four other sub-Saharan African countries (Burkina Faso, Ghana, Nigeria and Sierra Leone).
Broad Indicative Criteria
The following Broad Indicative Criteriaare identified as the key qualitative characteristics of public sector financial reporting:
- timeliness – are the audited financial statements made public promptly after the end of the financial year to which they refer?
- understandability – are the financial statements clear and are the key aspects and terms explained?
- openness – is the key financial information of interest to politicians and citizens made available?
- consistency – is the information consistent from one year to the next, between accounts within the same financial statements and related financial statements and is it reliable and free from material error?
This Guidance identifies good practice in terms of achievement of each of these four qualitative characteristics of public sector financial reporting.
Benefits
This Guidance should improve the capacity of ESAAG member governments to provide their parliaments, citizens,media and other stakeholders with timely, understandable, open and consistent financial statements. This will improve the quality of financial accountability and governance in the countries which adopt this Guidance. As a result, public spending should be more effective and focussed on key areas of poverty reduction, democracy and development.
This Guidance outlines the form and content of comprehensive and clear financial statements. As this is based on existing good practice, it is more likely to be practical and attainable than existing international standards. In addition, this approach should encourage peer review, learning and co-operation as the relevant professionals mutually learn, share and build on each others’ good practice. This should be more economic and effective than undue reliance on international consultants.
This Guidance, if adopted, will increase the level of accountability of governments to their citizens. It will also increase the level of comparability of financial statements between governments and so facilitate international comparisons.
CONTENTS
Introduction......
Accounting Standards for the Public Sector......
Public sector Accountability and the Role of Financial Statements......
Current Good Practice......
Broad Indicative Criteria......
Benefits......
1 Overview......
Objective of the Guidance......
Scope of the Guidance......
2 The Modified Cash Basis......
Definitions......
Cash Equivalents......
Cash Controlled by the Reporting Entity......
3 Presentation and Disclosure Requirements......
Definitions......
Presentation of Financial statements......
Commentary on the financial statements......
Financial Statements......
4 Information to be Presented in the Statement of Cash Receipts and......
Payments......
Classification......
Line items, headings and sub-totals......
Reporting on a net basis......
5 Information to be Presented in the Financial Balance Sheet......
6 Information Presented as Accounting Policies and Explanatory Notes......
Structure of the Notes......
Selection and Disclosure of Accounting Policies......
Cash and bank balances......
Investments, outstanding loans, advances, imprest etc......
Details of Public Debt......
Arrears......
Losses......
Proceeds from privatisation......
Accounting for Capital Projects......
Salaries and Benefits of Senior Politicians and Public Officials......
7 General Considerations......
Reporting Period......
Timeliness......
Authorization Date......
Information about the Entity......
Opinion of the Auditor General......
Restrictions on Cash Balances and Access to Borrowings......
Consistency of Presentation......
Comparative Information......
Identification of Financial Statements......
Secret expenditure......
Details on the payments and receipts of primary service delivery units......
Correction of Errors......
Consolidated Financial Statements......
Treatment of Foreign Currency Cash Receipts, Payments and Balances......
8 Presentation of Budget Information in Financial Statements......
Definitions......
Approved Budgets......
Original and Final Budget......
Actual Amounts......
Presentation of a Comparison of Budget and Actual Amounts......
Scope......
Comparison of Budget and Actual Amounts......
Level of Aggregation......
Comparable Basis......
Note Disclosures of Budgetary Basis, Period and Scope......
Key budget documents......
9 Recipients of External Assistance......
Definitions......
External Assistance......
Official Resources......
External Assistance Agreements......
External Assistance Received......
1
Guidance on Annual Government Financial Reporting
for ESAAG Member Countries
The key aspects of this Guidance, which have been written in bold italic font, should be read in the context of the commentary paragraphs in this Guidance, which are in plain font.An entity whose financial statements comply with the key aspects of this Guidance should disclose that fact. The financial statements should indicate any key aspects which have not been complied with and explain the reasons for any such non-compliance.
1 Overview
Objective of the Guidance
1.1 The purpose of this Guidance is to describe the manner in which the annual general purpose financial statements of public sector entities should be presented to their parliaments and citizens.
1.2 Governments usually have a common fund (sometimes called the Consolidated Revenue Fund) into which all government income is paid. Transfers are made from this fund, with the authority of the annual budget agreed by parliament, to ministries, departments and agencies to enable them to provide the agreed public services. Accountability to parliament for the funds raised and the expenditure incurred is necessary for the Consolidated Revenue Fund and the accounts of individual ministries, departments and agencies that are funded from the government’s annual budget. Accounting Officers are responsible for the financial affairs and management of their entities. They are personally responsible to Parliament and may be called to account for the financial management of their entity to the Public Accounts Committee. Accounting Officers present annual financial statements of their entities to Parliament. The Auditor General provides independent assurance to Parliament that the monies utilised by each entity have been raised and spent in line with the annual budget and the relevant laws and financial regulations.
1.3 Compliance with the requirements and encouragements of this Guidance will enhance comprehensive and transparent financial reporting by public sector entities. It will also enhance comparability with the entity’s own financial statements of previous periods and with the financial statements of other entities which adopt this Guidance.
Scope of the Guidance
1.4 A public sector entity which prepares and presents annual financial statements to account for the monies raised or spent under the authority of the government’s annual budget agreed by parliament, should apply the requirements of this Guidance in the presentation of its general purpose annual financial statements.
1.5 General purpose financial statements and the associated reports of the Auditor General are the way in which budget funded ministries, departments and agencies account to parliament for the money they have raised and spent during the relevant financial year. General purpose financial statements include those financial statements that are presented separately or within another public document such as an annual report.
1.6 This Guidance applies equally to the general purpose financial statements of an individual budget funded entity (ministry, department or agency) and to the general purpose financial statements of the Consolidated Revenue Fund from which transfers are made to the individual ministries, departments and agencies. It requires the preparation of a statement of cash receipts and payments, a financial balance sheet and the disclosure of accounting policies and explanatory notes.
1.7 Personal accountability is achieved by the appointment of an accounting officer who is personally responsible to parliament for the budget (or vote(s)) for their organisation. The Accountant General is the accounting officer for the Consolidated Revenue Fund and so is responsible for providing parliament with the financial statements for this Fund. Accounting officers are similarly responsible for providing parliament with annual financial statements for the ministry, department or agency for which they are responsible.
1.8 Other funds may be established under parliamentary authority, for example, a Capital Fund or a Roads Fund. In each case arrangements should be made to appoint an accounting officer for each of the funds who will be personally responsible to parliament for the financial management of the fund and for presenting annual financial statements for the fund to parliament.
1.9 An entity whose financial statements comply with the key aspects of this Guidance should disclose that fact. The financial statements should indicate any key aspects which have not been complied with and explain the reasons for any such non-compliance.
1.10 The key aspects of this Guidance are set in bold italic font. Entities whose financial statements comply with these key aspects should disclose their compliance with this Guidance. Where an entity is not able to comply with any particular key aspects of this Guidance, this should be disclosed in the notes to their financial statements with a brief explanation of the reasons for this non-compliance and, where appropriate, plans to ensure compliance in the future.
1.11 This Guidance applies to all central government public sector entities other than Government Business Enterprises.
1.12 The Preface to International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) explains that International Financial Reporting Standards (IFRSs) are designed to apply to the general purpose financial statements of all profit-oriented entities, these include Government Business Enterprises.
2 The Modified Cash Basis
Definitions
2.1 The following terms are used in this Guidance with the meaning specified:
Cash comprises cash on hand, demand deposits and cash equivalents.
Modified cash basis means a basis of accounting that recognizes transactions and other events when cash is received or paid. However, the financial statements include additional information on non-cash items, for example, government debt.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash.
Cash payments are cash outflows.
Cash receipts are cash inflows.
Government Business Enterprise means an entity that has all the following characteristics (it may also be termed a parastatal organisation or a state owned enterprise):
(a) is an entity with the power to contract in its own name;
(b) has been assigned the financial and operational authority to carry on a business;
(c) sells goods and services, in the normal course of its business, to other entities at a profit or full cost recovery;
(d) is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm’s length); and
(e) is controlled by a public sector entity.
Modified Cash Basis of Accounting
2.2 The modified cash basis of accounting recognizes transactions and events only when cash (including cash equivalents) is received or paid by the entity. Financial statements prepared under the modified cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date. The measurement focus in the financial statements is balances of cash and changes therein compared with the annual budget approved by Parliament. Notes to the financial statements may provide additional information about liabilities, such as government debt, payables and borrowings, and some non-cash assets, such as receivables and investments.
2.3 Each government has specific rules about which budget year a transaction will fall. This is usually the year in which the payment is received or made and recorded in the appropriate financial records. Cash or cheques received after the end of the financial year will be recorded as income of the following year. Cash payments and cheque issues usually have to made before the end of the final day of the financial year to be accounted for in that year. However, payments may be recorded in the financial year if the goods and services have been officially ordered and received during the financial year, but the payments are made within a specified period (for example one month) of the start of the following financial year.
Cash Equivalents
2.4 Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents.
2.5 Bank borrowings are generally considered to give rise to cash inflows. However, in some jurisdictions, bank overdrafts which are repayable on demand form an integral part of an entity’s cash management. In these circumstances, bank overdrafts are included as a component of cash. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.