Guide for the Preparation of Annual Reports

NATIONAL TREASURY

Guide for the preparation of Annual Reports

Public Entities (excl schedule 2),

Constitutional Institutions and

Trading Entities

for the year ended 31 March 2005

This report contains 54 Pages

National Treasury

Guide for the preparation of annual reports

Year ended 31 March 2005

National Treasury

Guide for the preparation of annual reports

Year ended 31 March 2005

CONTENTS

SECTION A: OVERVIEW / 5
SECTION B: ANNUAL REPORT / 15
SECTION C: ACCOUNTING ISSUES / 40
SECTION D: OTHER MATTERS / 49
SECTION E: WEB-LINKS / 53
SECTION F: CONTACTS / 54

CONTENTS: DETAILED

SECTION A: OVERVIEW / 5
1. / Introduction to the Guide for the preparation of Annual Reports / 6
1.1 / Objective / 6
1.2 / How to use this guide / 6
1.3 / Why an Annual Report? / 7
1.4 / Statutory requirements / 8
1.5 / Key submission dates / 11
1.6 / The way forward / 14
SECTION B: ANNUAL REPORT / 15
2. / General information / 17
2.1 / Submission of the annual report to the Executive Authority / 17
2.2 / Applicable Acts and other information / 17
2.3 / Introduction by the head of the institution / 17
2.4 / Statement of Responsibility / 17
3. / Report of the Audit Committee / 18
3.1 / Guidelines on statutory requirements / 18
3.2 / Process and timelines / 19
3.3 / Evaluation of the Annual Financial Statements (Minimum Guideline) / 19
3.4 / Example of Report of the Audit Committee / 21
4. / Annual Financial Statements / 23
4.1 / Overview / 23
4.1.1 / How to get assistance in preparing Annual Financial Statements / 23
4.1.2 / By when should it be submitted and to whom / 23
4.1.3 / General rules to keep in mind when preparing the Annual Financial Statements / 24
4.2 / Director’s / Accounting Authority or Officer’s Report / 26
4.2.1 / Purpose / 26
4.2.2 / Preparing the Director’s / Accounting Authority or Officer’s Report / 26
4.2.3 / The Director’s / Accounting Authority or Officer’s Report / 27
4.2.4 / Approval / 30
4.3 / Corporate Governance / 30
4.4 / Report of the Auditor-General / External Auditor / 31
4.5 / Accounting Policies / 32
4.6 / STATEMENT OF FINANCIAL PERFORMANCE / 34
4.6.1 / Purpose / 34
4.7 / STATEMENT OF FINANCIAL POSITION / 34
4.7.1 / Purpose / 34
4.8 / Statement of Changes in Equity / 34
4.9 / Cash Flow Statement / 34
4.9.1 / Purpose / 35
4.10 / Notes to the Annual Financial Statements / 35
4.10.1 / Purpose / 35
5. / Human Resource Management / 36
5.1 / Introduction / 36
5.2 / Information to be included / 36
SECTION C: ACCOUNTING ISSUES / 40
6. / Guidance on Public Sector Accounting Issues / 41
6.1 / Fruitless and wasteful expenditure / 41
6.2 / Irregular expenditure / 41
6.3 / Inter-Entity Transactions / 42
6.4 / Surpluses or Deficits / 44
6.5 / Events subsequent to year end in the Public sector / 44
6.5.1 / Events after the Reporting Date / 44
6.5.2 / Accounting perspective – Events after the Reporting Date / 45
6.5.3 / Scope / 45
6.5.4 / Definitions / 45
6.5.5 / Authorising the Annual Financial Statements for issue / 46
6.6.6 / Submission for consideration / 46
6.6.7 / Recognition and measurement (Events after the Reporting Date) / 47
6.6.8 / Adjusting events after the Reporting Date / 47
6.6.9 / Disclosure (Events after the Reporting Date) / 48
SECTION D: WEB-LINKS / 49
8. / Glossary and web-links to document / 49
SECTION E: CONTACTS / 50
9. / Contact details / 50

SECTION A: OVERVIEW

1. / Introduction to the guide for the preparation of Annual Reports / 6
1.1 / Objective and legal status / 6
1.2 / How to use this guide / 6
1.3 / Why an Annual Report? / 7
1.4 / Statutory requirements / 8
1.5 / Key submission dates / 11
1.6 / The way forward / 14

1INTRODUCTION TO THE GUIDE FOR THE PREPARATION OF ANNUAL REPORTS

1.1Objective

The objective of this document is to provide guidance to Public entities, Constitutional Institutions and Trading Entities for the preparation of the annual report, in order to improve on the quality of annual reporting.

The guideline provides minimum guidance on the structure and content of the annual report for the abovementioned entities, and consolidates reporting requirements as set out in the various statutory documents namely, The Constitution, 1996, the Public Finance Management Act (PFMA), 1999, the Treasury Regulations 2001, the Companies Act 1973(where applicable) and the Public Service Regulations, 2001.

The annual report is the most important tool to measure the performance of an Entity, and is critical for holding Government accountable to the Legislature and Public. Cabinet agreed that all Accounting Officers and Authorities must improve on the quality of non-financial performance information in their annual reports, including reporting against the measurable objectives outlined in strategic and performance plans tabled with the 2004 Budget.

This preparation guide (with the specimen Annual Financial Statements) constitutes Generally Accepted Accounting Practice (GAAP). Public entities, Constitutional Institutions and Trading Entities are all required to comply with GAAP in the preparation of their annual report.

This guide is applicable to any Entity that falls under the definition of a Public Entity in terms of schedule 3 of the PFMA. It also includes any institution falling under the definition of schedule 1, being a Constitutional Institution and all Trading Entities as per the definitions in the PFMA.

1.2How to use this guide

Although this guide should be seen as a whole (with guidelines corresponding to a complete annual reporting format), it was not intended that this guide should be read from start to finish in order to prepare the National or Provincial Entity’s Annual Reports. The guide can be used as a “quick reference tool” to specific topics on which guidance is required.

Section B in this document is set out in the structure of an Annual Report. Public entities should therefore complete their annual reports in four (4) sections mentioned below:

Sub-section 2:General Information
Sub-section 3:Report of the Audit Committee
Sub-section 4:Annual Financial Statements
Sub-section 5:Human Resource Management

The guideline elaborates on each individual section, provides guidelines on how to complete these sections, what information to disclose or include in the sections as well as other additional information to keep in mind when preparing this.

The sections can be used as a direct reference, instead of being used as a whole.

Sections C - F do not formally form part of the annual reports to be completed. They are merely guidelines on specific or more complicated topics, (such as irregular and fruitless and wasteful expenditure), web-links of documents needed, or other contact details of where one can get help on the preparation of the annual report.

Section C:Accounting issues

Section D:Other matters

Section E:Web-links

Section F:Contacts

The guideline should be used in conjunction with the Specimen Annual Financial Statement as an additional tool. The Specimen Annual Financial Statements can be viewed on the following link of theOffice of the Accountant General:

Note: The guide includes quoted sections from specific Acts, where these Acts were referred. The purpose is to make an easy reference to the actual Acts applicable. These sections are written in Italics.

1.3Why an Annual Report?

When a Government is voted into office, an inevitable contract of accountability is entered into between Government and the citizens it serves. It is therefore incumbent on Government to inform the citizens and Legislatures on what they intend to achieve by way of pre-determined objectives. These pre-determined objectives are reflected in:

Performance agreements between a Minister / MEC and the head of the Entity;
Service delivery improvement programmes;
Strategic plans; and
Estimates of expenditure.

The accountability process culminates with the publishing of the annual report, which serves to inform the citizens of the country and its Legislatures as to what progress Government has made in the achievement of its objectives. Accounting Authorities or officers are therefore required to compile annual reports for the institutions that they are responsible for and these annual reports must fairly represent their institution’s performance and financial position for a particular fiscal year. The information contained in the annual report should reflect the institution’s achievements in relation to the objectives as set out in year 1 of the institution’s strategic plan and annual budget for the financial year in question.

The Executive Authority must critically assess this annual report, which must be presented to Parliament or the relevant provincial Legislature. It is therefore proposed that all Public entities submit their Annual Reports to its executive, accompanied by a Cabinet memorandum summarising the performance and outputs of that Entity, and the corrective steps it intends to take to deal with any adverse audit or poor performance outcomes.

The following is a diagrammatic representation of the planning, budgeting and reporting cycle

Planning, budgeting and reporting cycle

1.4Statutory requirements

Public entities, Constitutional Institutions and Trading Entities annual reports need to comply with the set statutory requirements that refer to the Annual Financial Statements.

Set out below are certain specific statutory requirements as set out in the:

Public Finance Management Act (PFMA), 1999 (Act No.1 of 1999)
Treasury Regulations (TR) October 2004
Companies Act 1973 (Act No. 61 of 1973)

It is an explanatory guide of why much of the information called for in the Annual Financial Statements has been included.

Public Finance Management Act

Requirement / Compliance/comment
S1
(PFMA) / Definition: “financial statements” means statements consisting of at least –

a STATEMENT OF FINANCIAL POSITION;
an STATEMENT OF FINANCIAL PERFORMANCE;
a cash-flow statement;
any other statements as may be prescribed; and
any notes to these statements;”

/ See TR 18.2
S55(1)(b)
(PFMA) / “The accounting authority….must prepare financial statements for each financial year in accordance with generally accepted accounting practice unless the Accounting Standards Board approves the application of Generally Recognised Accounting Practice for that Public Entity. / See TR 18.2 re Trading Entities and Constitutional Institutional i.r.o. Y/E 2005
TR 28.1.6 Public entities
S55(2)(a)
(PFMA) / “The annual report and annual financial statements referred to in subsection (1)(d) must –
(a) fairly present

the state of affairs of the Public Entity,
its business,
its financial results,
its performance against predetermined objectives, and
its financial position as at the end of the financial year concerned;”

/ See STATEMENT OF FINANCIAL POSITION
S55(2)(b)(i)
(PFMA) / “Include particulars of –

any material losses through criminal conduct,
any irregular expenditure; and
fruitless and wasteful expenditure,

that occurred during the financial year.” / See Notes to the Annual Financial Statements
See TR 9.1.5
See TR 28.2 Public entities
S55(2)(b)(ii)
(PFMA) / “Include particulars of –
Any criminal or disciplinary steps taken as a consequence of such losses or irregular expenditure or fruitless and wasteful expenditure” / See Notes to the Annual Financial Statements
S55(2)(b)(iii)
(PFMA) / “Include particulars of –
Any losses recovered or written off” / See Notes to the Annual Financial Statements
S55(2)(b)(iv)
(PFMA) / “Include particulars of –
Any financial assistance received from the State and commitments made by the State on its behalf, and” / See Notes to the Annual Financial Statements
S55(2)(b)(v)
(PFMA) / “Include particulars of –
Any other matters that may be prescribed” / Prescribed by Treasury Regulations below
S55(2)(c)
(PFMA) / Include the Annual Financial Statements of any Subsidiaries

Treasury regulations

Requirement / Compliance/comment
TR3.1.13 (a) / “..an audit committee must, in the annual report of the institution, comment on - the effectiveness of internal control;” / See Report of the Audit Committee.
TR3.1.13 (c) / “..an audit committee must, in the annual report of the institution, comment on - its evaluation of the annual financial statements.” / See Report of the Audit Committee.
TR4.3.4 / “The accounting officer of an institution must, on an annual basis, submit to the provincial treasury (if applicable), the National Treasury and the Auditor-General a schedule of –

the outcome of any disciplinary proceedings and/or criminal charges;
the names and ranks of officials involved; and
the sanctions and any further Action taken against these officials.

The schedule ….must be accompanied by a report which refers to any changes made in the institution’s system of financial and risk management as a result of any investigation.” / For various reasons this cannot be a published report (as part of the Annual Financial Statements) and is obviously intended to be a separate report for the treasuries and A-G only.
TR7.3.2 / “Information on the tariff structure must be disclosed in the annual report, including information on exemptions, discounts, free services and any other aspect of material influence on the revenue yield.” / Although not specifically required to be included in the Annual Financial Statements, the requirement is so closely financially related that its inclusion is appropriate. See the Management Report.
TR9.1.5 / “The amount of the unauthorised, irregular, fruitless and wasteful expenditure must be disclosed as a note to the annual financial statements of the institution.” / See Notes to the Annual Financial Statements.
TR11.4.3 / “All debts written off must be disclosed in the annual financial statements, indicating the policy in terms of which the debt was written off.” / See Accounting Policies and Notes to the AFS.
TR13.1.4 / “The accounting officer must report on all known contingent liabilities of the department or Constitutional Institution in its annual report.” / See Notes to the Annual Financial Statements.
TR14.3.1 (d) / “The accounting officer must, for each separate portion of trust money - annually prepare separate annual financial statements that comply with generally accepted accounting practice.” / Such financial statements do not form part of the Entity’s Annual Financial Statements.

Other relevant Treasury Regulations sections:-

Public entities and Trading accounts

TR 16.7.1 (f), TR27.1.7, TR 27.1.10(b)and (c), TR 28.1.1, TR 28.1.2, TR 28.1.3, TR 28.1.4, TR 28.1.7, TR 28.2.1, TR28.2.2, TR 28.2.3

Constitutional institutions

TR 3.1.5, TR 3.1.9, TR 3.1.13(b), TR 16.7.1(F), TR18.3.1, TR 21.2.4, TR 22.1.4

Requirement / Compliance/comment
TR18.2 / “The following reporting standards comprise generally recognised accounting practice and must be adhered to for the preparation of annual financial statements, unless otherwise approved by the National Treasury:
Trading Entities and Constitutional Institutions
Annual financial statements must consist of –
(a) STATEMENT OF FINANCIAL POSITION (statement of financial position);
(b) an STATEMENT OF FINANCIAL PERFORMANCE (statement of financial performance);
(c) a cash flow statement;
(d) notes to the annual financial statements; and
(e) such other statements as may be determined by the National Treasury.
The annual financial statements must be accompanied by the audit opinion of the Auditor-General.
The annual financial statements must conform with generally accepted accounting practice. These statements must fairly represent the financial position at the end of the financial year concerned and cash flows of the institution for the year then ended.
Should these statements materially depart from the Statements of GAAP, the financial statements must provide a disclosure of the departure, the particulars thereof, the reasons therefore and the financial effect of such a departure on the financial statements.
The annual financial statements must, by means of figures and a descriptive report, explain any matters and information material to the affairs of the institution.”
TR19.8.4 / “The annual financial statements in respect of a trading Entity must be compiled in accordance with paragraph 18.2” / Separate guidance to be issued by NT, during March 2004.

1.5Key submission dates

The following are the submission dates for financial statements in terms of the PFMA:

(Where an Entity’s year-end is a date other than 31 March, the deadlines should be linked to the 31 March year-end and adjusted accordingly, e.g. the first submission date where the year-end is 30 June will be 31 August etc).

Action / PFMA / Date / Responsibility
s40(1)(b)
s55(1)(b)
(PFMA) / Reporting date / 40(1)(b)
55(1)(b)
(see below) /
31/03 /
Accounting authority / officer
s40(1)(c)
s55(1)(c)
(PFMA) / Trading Entities / Constitutional Institutions: Submit approved annual financial statements and management report to relevant treasury and Auditor-General / external auditor
Public entities: Submit approved annual financial statements and directors’ / accounting authority’s report to the auditors of the Entity
A business enterprise or other Public Entity under the ownership control of a National / provincial Government: Submit to the relevant treasury / 40(1)(c)
s55(1)(c)
(see below) /
31/05 /
Accounting officer
Accounting authority / officer
s40(2)
(PFMA) / Trading Entities / Constitutional Institutions: Audit report issued to Accounting Officer (Applicable to Public Entities as well) / 40(2)
(see below) / 31/07 / Auditor-General/external auditor
T.R 27.1.13 / Trading Entities / Constitutional Institutions: Audit Committee Meeting for Evaluation of AFS (Applicable to Public Entities as well) / To meet 31 July / Before Auditor-General reporting date / Audit Committee
s40(1)(d) (i)
(PFMA) / Trading Entities / Constitutional Institutions: Submission to A-G of Draft Annual Report (Applicable to Public Entities as well) / To meet 31 July / Final date 16/07 / Accounting officer
s55(1)(d)
(PFMA) / Public entities: Submission of annual report to relevant treasury and the executive authority / S55(1)(d)
(see below) / 31/08 / Accounting authority
s40(1)(d)
(PFMA) / Trading Entities / Constitutional Institutions: Submission of annual report to relevant treasury and the executive authority / 40(1)(d)
(see below) / 31/08 / Accounting officer
40.1(e)
S55(2)(3) / Submission of Annual Report to Parliament / Provincial Legislature / 40.1(e)
S55(2)(3) / 31/08 / Minister / MEC
s65(1)(a)
(PFMA) / Table in National Assembly or provincial Legislature
* / 65(1)(a)
(see below) / 31/08 / Minister / MEC
Announcement, Tabling and Committee report date / No specific deadline / Speaker
Consideration date (Designated committee) / Internally decided / Parliament

*As a matter of practice recognising the role of the Executive in using annual reports as a tool to assess both financial and non-financial performance, it is recommended that all Ministers/MECs also submit their annual reports to Cabinet or provincial Exco, together with a Cabinet memorandum outlining the key performance issues, and corrective steps to be taken for any adverse audit or poor performance.

PFMA Sections 40(1)(a)(b)(c)(d)(e)(f), 55(1)(a)(b)(c)(d) and 65(1)(a) – as in the above table

S40 (1) / Section 40(1)
(PFMA)
“The accounting officer for a department, trading Entity or Constitutional Institution-
( a) must keep full and proper records of the financial affairs of the department, trading Entity, or Constitutional Institution in accordance with any prescribed norms and standards;
(b) must prepare annual financial statements for each financial year in accordance with generally recognised accounting practise;
(c) must submit those annual financial statements within two months after the end of the financial year to-
(i)the Auditor-General for auditing; and
(ii)the relevant treasury to enable that treasury to prepare consolidated financial statements in terms of section 8 or 19

PFMA Sections 40(1)(a)(b)(c)(d)(e)(f), 55(1)(a)(b)(c)(d) and 65(1)(a) – as in the above table

(d) must submit within five months of the end of a financial year to the relevant treasury and, in the case of a department or trading Entity, also to the executive authority responsible for that department or trading Entity-
(i)an annual report on the Activities of that department, trading Entity or Constitutional Institution during that financial year;
(ii)the financial statements for that financial year after those statements have been audited; and
(iii)the Auditor-General’s report on those statements;”
(e) must, in the case of Constitutional Institution, submit to Parliament that institution’s annual report and financial statements referred to in paragraph (d), and the Auditor General’s Audit Report on those statements, within one month after the accounting officer received the Auditor General’s Audit report; and
(f) is responsible for the submission by the Department or Constitutional Institution of all reports, returns, notices and other information to Parliament, the relevant Provincial Legislature, an Executive Authority, the Relevant Treasury or the Auditor General, as may be required by this Act”
s55(1) / Section 55(1)
(PFMA)
“The accounting authority for a Public Entity-
(a) must keep full and proper records of the financial affairs of the Public Entity;
(b) must prepare financial statements for each financial year in accordance with generally accepted accounting practise;
(c)must submit those financial statements within two months after the end of the financial year-
(i)to the auditors of the Public Entity for auditing; and
(ii)if it is a business enterprise or other Public Entity under the ownership control of the National or a provincial Government, to the relevant treasury;
(d) must submit within five months of the end of a financial year to the relevant treasury, to the executive authority responsible for that Public Entity and if the Auditor-General did not perform the audit of the financial statements, to the Auditor-General-
(i)an annual report on the Activities of that Public Entity during that financial year;
(ii)the financial statements for that financial year after those statements have been audited; and
(iii)the report of the auditors on those statements;”
s65(1) / Section 65(1)
(PFMA)
“The executive authority responsible for a department or Public Entity must submit to Parliament Assembly or a provincial Legislature, as may be appropriate-
(a) the annual report and financial statements referred to in section 40(1)(d) or 55(1)(d) and the audit report on those statements, within one month after the accounting officer for the department or the accounting authority for the Public Entity received the audit report;”

1.6The way forward

Changes will be made to the format of the Annual Financial Statements in the years to come as we gain experience, introduce systems to generate additional information, promulgate new legislation, as the Accounting Standards Board (ASB) issues accounting standards and as we adopt new accounting policies.