Financial Reporting Systems - PowerPoint Presentation

Slide1

Financial Reporting SystemsIncluding a Unified Chart of Accounts

John Zohrab

Fiscal Affairs Department

Presentation at the Regional Workshop

on Financial Reporting and Management of Fiscal Risks

in Astana, Republic of Kazakhstan, May 21-23, 2014Slide2

Contents

Definitions of a UCOA

Purposes of UCOA

Issues in Designing UCOAAutomationImplications for ReportingConclusions

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Japan IMF Sub AccSlide3

Narrow Definition of UCOA

Uzbekistan & Tajikistan good examples of narrowly-defined UCOA (ND-UCOA)

Unified for the general government sector

Integrates three structures:COA required for financial accounting GFSM 2001 economic classification (revenue classification, economic classification of expense, transactions in assets and liabilities by instrument)

Economic segment of budget classification

3Slide4

Broad Definition of UCOA

Kyrgyz Republic good example of broadly-defined UCOA (BD-UCOA)

Also unified for the general government sector

Comprises all classifications relevant for financial reporting, including:Economic segment, which is the ND-UCOA Functional segment of budget classification

Administrative segmentFund (source of financing) segmentProgram segment

4Slide5

UCOA Purposes (1)

Improves accounting & reporting quality by:

Removing the need for manual reconciliations between budgetary and financial accounting and ensuring their consistency

Bringing the greater legal compliance discipline of budgetary accounting to financial accountingBringing the discipline of double-entry accounting of financial accounting to (one segment of) budgetary accounting

Standardizing the categorization by economic type in the COA and budget classification

5Slide6

UCOA Purposes (2)

Improves accounting & reporting quality by:

Increasing transparency of accounting structure & how reports are generated from accounts

Increasing transparency of accounting and reporting basis across different parts of the general government sectorIncreasing understanding of international public sector accounting standards and related reports

Increasing understanding of GFSM 2001 framework basis and related reports

6Slide7

UCOA Purposes (3)BD-UCOA also improves accounting & reporting quality by improving:

Transparency: by making explicit other segments with which the economic segment (narrowly defined UCOA) interacts

Efficiency: by helping to remove redundancy and improve homogeneity and independence of segments

Coverage: by identifying any missing classification dimensions that are needed

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FOR DISCUSSION

Can you think of any other purposes of a UCOA?

If you can, please write them down and we will discuss them following this presentation

Also, please write down any questions you might have about:The experience of countries that have designed UCOAs; and

The purposes of a UCOA that I have just outlined

8Slide9

A PROBLEM?

If UCOA has so many advantages, why do some countries with good PFM systems (e.g. British heritage systems) not have UCOAs? Perhaps:

Unification at reporting level & similar IT systems & effective accounting ethics, auditing, legal framework = similar result; or

Those countries will some day adopt UCOAs as they discover needed improvements in their accounting and reporting systems

If you can think of more possible explanations, please write them down and we can discuss them after the presentation

9Slide10

UCOA Design Stages

Possible stages of ND-UCOA design:

Stage 1: Transformation of legacy COA to support international-standard financial accounting and reporting i.e. IPSAS

Stage 2: Incorporation of GFSM 2001 structure into transformed, IPSAS-supporting COAStage 3: Integration of economic segment of budget classification into COA

The design of the Uzbekistan, Tajikistan and Kazakhstan ND-UCOAs followed this sequence

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ND-UCOA Design 1

Stage 1:

Driven by reporting requirements, which is what international accounting standards (IPSAS) are

Uses legacy double-entry accrual accounting in Central Asia & Caucasus as foundation for this transformation – major advantage compared with countries moving from a cash basis of accountingUses structure of private sector COA designed for IFRS-based reporting compliance, as IPSAS is closely related to IFRS

Keeps legacy COA’s individual accounts and their names as much as possible

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ND-UCOA Design (2)

Legacy methodological documents used as a model for new methodological documents (e.g. bridge table from old COA to new ND-COA; table showing accounting entries, and therefore correspondences between accounts, for all types of transactions and events recognized in the accounts)

Often, incorrectly, excludes stocks and flows that do not “belong to” budget institutions but to the government e.g. Treasury Single Account, taxes, debt, pensions and social allowances

Not consolidated to whole-of-government – typically only to line ministry level, with public

corpoations

treated as investments

12Slide13

FOR DISCUSSIONCan participants from countries that have designed IPSAS-compliant COAs please write down the key differences they have found between them and the legacy COAs (derived ultimately from the USSR Instruction #61 of 1987)?

We can then discuss these after the presentation.

13Slide14

ND-UCOA Design (3)

Stage 2:

Incorporates GFSM 2001 ‘economic’ classification (= revenue classification & economic classification of expense & classification of assets and liabilities by instrument)

Driven by accrual GFSM 2001 reporting needs Expands the number of accounts, e.g.

IPSAS current/non-current distinction for each GFSM 2001 financial asset and liability distinction by instrumentIPSAS net asset/revenue & expense distinctions for revaluation gains & losses also for the GFSM 2001 distinctions between holding gains and other volume changes and for each GFSM 2001 asset and liability distinction by instrument

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FOR DISCUSSION

The draft GFSM 2014 (see

www.imf.org

) integrates IPSAS and GFSM 2001. Please consider the following questions and be ready to discuss them following the presentation:When GFSM 2014 is finalized, will it affect UCOAs? If so, how?

From the perspective of an optimal UCOA, do you think that the GFS framework and IPSAS should be further rationalized?If so, how?

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ND-UCOA Design (4)

Stage 3:

Two main options for integrating economic segment of cash budget classification into COA:

A. Additional parts of the COA for economic segment (e.g. in Kyrgyz Republic: 3 parts respectively for cash revenues, cash expenditures and cash transactions in assets and liabilities); or

B. Separate budget accounting record linked to the main parts of the COA, as a subsidiary ledger (manual) or budget module (software solution) via a bridge table (Tajikistan) or common coding

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ND-UCOA Design (5)

Option A is illustrated by the Kyrgyz UCOA. It:

Is transparent

Applies double-entry accounting fully to budgetary accountingInvolves two sets of double entries for each transaction, e.g. when a liability is incurred: DR Cash expenditure CR Payables; when payment is made: DR Cash expenditure CR TSA

Has implementation problems: Likely to require customization in a computerized environmentMore bookkeeping entries in a manual environment

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ND-UCOA Design (6)

Option B is illustrated by the Tajikistan UCOA. It :

Does not require additional UCOA parts

Involves one double-entry per transactionInvolves single-entry budget accountingFits with the design of leading accounting IT systems

Might not be transparent as a result of how the IT system functionality identifies when payments have been made in order to make the budget accounting entries If the IT system uses a bridge table to link the budget accounts with the financial accounts, could involve problems in maintaining the table and less transparency (when payment is made, transaction serial number triggers the appropriate budget accounting entry)

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BD-UCOA Design (1)

Economic segments

based on the GFSM 2001 economic classification are transparent and stable – for accrual financial accounts as well as cash budgetary accounts

Sufficient countries have designed and implemented account structures on this basis to be confident that it is a durable solutionInevitably some loss of information compared with previous classifications, but experience has suggests this is not lasting or major

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BD-UCOA Design (2)

Fund segments

are becoming more common – Uzbekistan, Tajikistan and the Kyrgyz Republic have recently adopted them

They enable expenditures to be linked with the revenues earmarked to fund them e.g. donor funding, a budget, a separate fundThey enable other segments to be more homogeneous

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FOR DISCUSSIONDo you agree with statements in Slide 19 on the economic segment? If not, please write down your views for discussion after the presentation

What are your views on the principle of the fund segment and its design? Please write them down and discuss them after the presentation

21Slide22

BD-UCOA Design (3)

Problems of

functional

and administrative segments seem limited if impacts of Medium Term Expenditure Framework (MTEF) and program segment are ignored Administrative segment reflects the administrative structure that exists

As GFSM 2001 states, the functional segment enables consistent reporting by functions of government irrespective of changes in the administrative structure

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BD-UCOA Design (4)

In practice the functional and administrative segments are unlikely to be independent:

Functional codes are mapped from administrative codes in computerized accounting systems

Impractical to generate accounting data except by administrative unit (cf. lack of correspondence between education functions and schools)

As a result, the functional segment in practice appears as a grouping of administrative units, not as an independent dimensionThis is probably in part why some countries use the functional segment for budget appropriations despite the problems this causes (e.g. Kazakhstan, Armenia, Azerbaijan)

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BD-UCOA Design (5)

MTEF affects administrative segment, requiring first-level budget agencies to:

Be aligned with strategic plans and expenditure ceilings, for accountability reasons

Be a manageable numberBe homogeneousHave critical mass

First-level budget agencies that correspond to the first level of the functional segment functions would meet the criteria of manageability, homogeneity and critical mass

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FOR DISCUSSIONDo you agree with the implications of an MTEF on the administrative segment in Slide 24?

Do you think that the functional segment could be the basis for a standardized administrative segment?

Please write your views down for discussion after the presentation

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BD-UCOA Design (6)

Performance budgeting affects administrative segment fundamentally

For accountability reasons, the program or output classification should be aligned with the administrative segment

For accountability and homogeneity reasons, the program or output classification should be aligned with the performance indicators

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Performance IndicatorsPerformance indicators

Do not constitute a classification, as they are not homogeneous

Are like co-ordinates for defining each program/output classification item

Costs and other problems of defining performance indicators could affect definition and stability of program segment

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FOR DISCUSSIONWhat is your experience with a program/output classification?

Do you agree that a program/output classification should be aligned with both the administrative segment and performance indicators?

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Automation (1)

Legacy software typically does not support a UCOA

Previous approach in the region to need for major public financial management (PFM) IT solutions was often to acquire a Commercial Off-The-Shelf (COTS) system via international procurement

This view was driven by, inter alia:Software reliability concerns:

Lack of local expertise in software programming for government financial management solutionsExtensive international testing of COTS system software Support needs, as a COTS supplier would have:

Adequate programming resources;A defined implementation team driving the implementation and accountable for its success;

And follow an established project management methodology; andAdequate international expert support

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Automation (2)More recently, countries in the region have increasingly been pursuing PFM IT solutions based on local software development

Driving factors appear to be:

Cost

Superior local firm awareness of user needsImprovement in local software programming capacity for PFM IT solutions

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Automation (3)

Current thinking in the region on IT solutions for UCOA reflects recent general trend

However, need to have:

Adequate programming resources;A defined implementation team driving the implementation and accountable for its success;

And follow an established project management methodology; andAdequate international expert supportBecause of linkages between accounting, commitment and payment control, budgeting and reporting, typical to implement IT solutions for UCOA that also automate other treasury operations and budget preparation

Thus, the implementation of a UCOA is often one of the first – and crucial - steps in the implementation of treasury modernization and the reform of accounting and reporting

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Automation (4)

Consolidated reporting major challenge, because of intra-entity eliminations

Single integrated IT solution technically best (Tajikistan, Uzbekistan) but interfacing different systems could

work (Kazakhstan) Experience during the next few years likely to show how much interfacing different systems affects data quality

In any event, best to pursue a single integrated IT solution

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FOR DISCUSSIONWhat is the experience in your countries with automating a new accounting and reporting system via:

COTS

Local software development

Stand-alone softwareIntegrated softwareInterfacing different software products?

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Implications for Reporting (1)UCOA means reports are generated with common methodology

Methodology invariant as between manual and automated, and as between different IT solutions, especially their reporting functionality

This transparency gives additional confidence in the quality of the accounting data underlying reports

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Implications for Reporting (2)

Budget accounts are automatically reconciled via UCOA with financial accounts, implying budget reports and financial statements are inherently consistent with each other

However, they still need to be reconciled, because they report cash flows (or accruals) in different ways (see IPSAS 24

para 47)

Consistent data means the reconciliation statement focuses on identifying the different perspectives on the data, i.e. for interpretation, rather than on problems with the dataThis brings budget management to a new and higher level of understanding and control

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Implications for Reporting (3)

GFSM 2001 item accounts are automatically reconciled via the UCOA with other financial accounts, implying GFSM 2001 reports and financial statements are inherently consistent with each other

Enables comparison between GFSM 2001 reports and e.g. IPSAS financial statements to focus on the different perspectives on the data, i.e. for interpretation, rather than on problems with the data

This brings financial management to a new and higher level of understanding and control, allowing the full potential of the GFS system to be realized

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Implications for Reporting (4)

GFS is still a very young system, less than 30 years old - its potential is still being discovered, so far probably the only GFSM 2001 report being widely used is the statement of sources and uses of cash

UCOA enables most GFSM 2001 reports to be produced readily and of auditable quality, giving credibility and user confidence

GFSM 2001 classifications are likely to increasingly populate the notes to financial statements where the analytical basis is optional (i.e. not just a question of IPSAS 22) and to explain aspects of the statements

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Implications for Reporting (5)

UCOA readily enables production of consolidated whole-of-government financial statements of auditable quality on the basis of international standards

This, and the familiarity of the underlying accounting and reporting concepts, gives users confidence in them

As a result, consolidated whole-of-government financial statements are having an increasing impact on fiscal policy

38Slide39

Implications for Reporting (6)UCOA promotes:

Uniformity in the preparation of financial statements used for decision making at lower levels

The greater resultant transparency gives users greater confidence in, and understanding of, them

themWill help to maximize the use of the financial statements in decision-making

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FOR DISCUSSIONDo you agree with the statement in slide 34 that the UCOA enables report to be generated with a common methodology?

What is your view about the future use of GFSM 2001 reports?

What is your view about the significance of consolidated whole-of-government financial statements?

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Conclusion (1)

Interpret international experience in light of different contexts

Accrual accounting per se is not difficult in this region, because public sector accountants have been using it since 1987

Combining accrual accounting with cash budgeting has also been practised

in this region since 1987Concept of a UCOA combining support for cash budget and accrual financial accounting is intuitively obvious in this region - there has been no resistance to the concept

Many other countries have only experienced cash accounting - sometimes single-entry - and have always had the same recognition basis as between budget and financial accounting

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Conclusion (2)

Conceptual difficulties in this region in implementing UCOA and related reporting reforms therefore limited to specific aspects that are novel

Because private sector accountants in this region have been implementing IFRS or IFRS-based standards, aspects of public sector accounting standards that are close to IFRS are not so novel

Novelty in conceptual framework limited to:

Aspects of GFSM 2001 that are not close to GFS 1986Unique public sector problems e.g. treatment of stocks and flows “on behalf of government”, treatment of relationships between treasury and budget organizations

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Conclusion (3)

Challenges are mainly in implementation, in particular:

Convincing decision-makers and other implementers of the importance of the more difficult reforms, e.g. consolidated whole-of-government financial reporting

Institutional changes, including making use of the additional financial information without overloading the different types of user

AutomationTrainingPreparing key methodological documents, including on report formats, consolidation rules, the reflection of revenues in consolidation, the reflection of pension liabilities, the reliable valuation of assets and the reconciliation of accrual basis financial reports with cash basis budget reports

43Slide44

Conclusion (4) Accrual financial reporting does not imply accrual budgeting – see the chapter on accrual budgeting by Abdul Khan in

Public Financial Management and its Emerging Architecture

Cash budgeting can coexist indefinitely with accrual financial reporting

Perhaps the implication of international experience is that, over time, there will be an incremental and selective increase in accrual information used in the budgetary process

Prerequisite for this will be high quality accrual information, which will depend on:Compliance with robust accounting standards;

Strong internal and external auditingReliable IT systems

Trained and ethical public financial management professionals44Slide45

THANK YOU FOR YOUR ATTENTION!

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