GRAP FOR DEPARTMENTS Modified Cash Standard , Accounting Manual and - - PowerPoint PPT Presentation

GRAP FOR DEPARTMENTS

Modified Cash Standard , Accounting Manual and Template

Presenter: OAG | March 2015

The Framework

2

Modified Cash Standard (MCS) Overview

Developing the MCS

Considered pronouncements issued by :

• ASB
• IPSASB
• IASB (mainly IFRS for SMEs)
• Other organisations that develop financial reporting, accounting and

auditing requirements for the public sector.

• Best practices, both locally and internationally.
• The capacity of departments to comply with the reporting requirements.
• The systems used by departments in preparing and collating the

information required to comply with the reporting requirements.

4

Due Process

• Published updated MCS, AMD and Specimen for comment
• Comment period closed on 1 December 2014
• Comments received from various stakeholders (provincial and national

depts, PAGs, OAG, AGSA etc)

• Comments register maintained (by TSS)
• Updated the MCS, AMD, Specimen and Template
• MCS, AMD and Specimen published on OAG website on 31 January

2015

5

General Updates

General

• Updated the MCS with principle-related FAQs and updated the AMD with

application guidance FAQ’s

• Relocated paragraphs which required the departments to maintain “registers”

from the MCS to the AMD as these are not principle-related

• No comments or updates for the following MCS and AMD chapters: Appropriation

Statement, Treasury Financial Instruments, Events After reporting date Preface to the MCS

• Departures and exemptions will be considered in instances where MCS was

“incorrect”. OAG set up an Exemption and Deviation Committee which consults with AGSA when considering the exemptions and departures.

6

Chapters in the MCS

• Preface to the Modified

Cash Standard

• Concepts and Principles
• Financial Statement

Presentation

• Accounting Policies,

Estimates and Errors

• Appropriation Statement
• Cash Flow Statement
• Revenue
• Expenditure

7

• General Departmental Assets

and Liabilities

• Treasury Financial Instruments
• Capital Assets
• Inventory
• Leases
• Provisions and Contingents
• Related Party Disclosures
• Agent-Principal Disclosures
• Events after the Reporting Date
• Consolidated Financial

Statements

Accounting Manual

• The SCOA and Systems
• Concepts and Principles
• Financial Statement

Presentation

• Accounting Policies,

Estimates and Errors

• Appropriation Statement
• Cash Flow Statement
• Revenue
• Expenditure

8

• General Departmental Assets

and Liabilities

• Capital Assets
• Inventory
• Leases
• Provisions and Contingents
• Related Party Disclosures
• Agent-Principal Disclosures
• Unauthorised, Irregular and

Fruitless and wasteful expenditure.

Concepts and Principles

Chapter Content

• Basic Accounting Equation and the Double Entry System

– Accounting rules for recording of transactions – Accounting classification

• Basis of Accounting

– Cash basis of accounting – Accrual basis of accounting . – Modified cash basis of accounting – Modified accrual basis of accounting

• The Departmental Financial Statements

– Composition of financial statements – Qualitative characteristics and fair presentation – Elements of financial statements – Recognition and recording of the elements of financial statements – Measurement of the elements of financial statements

10 10

Chapter updates

• Added paragraphs on misstatements and material omissions in the MCS

(most of the wording taken from GRAP1 as wording from GRAP is also relevant to the MCS environment).

11 11

Financial Statements Presentation

Components of Financial Statements

• Appropriation statement
• Notes to the appropriation statement
• Statement of financial performance
• Statement of financial position
• Statement of changes in net assets
• Cash flow statement
• Notes (for both primary and secondary information and

the accounting policies) – there are no longer “disclosure notes”

13 13

Primary and Secondary Information

14 14

Annual Financial Statements Primary Financial Information Secondary Financial Information STATEMENTS Notes supporting information recognised in the statements

PER POS APP

CFS

CNA

Previously called Disclosure Notes

Other Presentation Requirements

• Going concern – assumption that department is a going concern but

management to still make assessment.

• Materiality and aggregation – each material class of similar items to

be presented separately.

• Consistency of presentation – from one period to the next
• Offsetting – if permitted by the MCS or Legislation
• Comparative information
• Current vs non-current distinction - <12 months vs > 12months

15 15

An item is material when it can individually or collectively influence the decisions or assessments of users of the financial statements

Accounting policies, estimates and errors

Key Principles

• Accounting Policies

Understand what an accounting policy is, selecting an accounting policy and applying change in an existing accounting policy.

• Accounting Estimate

Understand what is an estimate and how to apply a change in an existing estimate

• Error

Understand what is an error and how to correct an error.

17 17

Key Principles

18 18

Change in Accounting Policy

• Accounting Treatment :

Relevant chapter in the MCS, will clarify how the current and historical information should be amended to effect the change. Disclosure :

• Department shall disclose:

a) the nature of the change in accounting policy; b) the amount of the adjustment for each financial statement line item affected, including secondary financial information, for the applicable reporting periods;

19 19

Accounting estimates

• an adjustment of the carrying amount of an asset or a liability
• ≠ Error
• involves judgements based on the latest available, reliable

information.

• Prospective application

20 20

Accounting estimates (in Template)

21 21

43 Change in accounting estimate Value derived using the original estimate Value derived using the amended estimate R-value impact of change in estimate Line item 4 affected by the change Line item 5 affected by the change Provide a description of the estimated impact on future periods During the year the following changes were made to the estimations employed in the accounting for transactions, assets, liabilities, events and circumstances Accounting estimate change 1: Provide a description

• f the change in estmate

Line item 1 affected by the change Line item 2 affected by the change Line item 3 affected by the change

Prospective – therefore the above note only relates to current year changes.

Errors

22 22

Errors cont. (In Template)

• Correcting Primary financial information:
• The error is corrected in the Prior Yr TB (using the journal column) for

the line item affected (i.e. the primary financial statement line and the related note line). This will automatically adjust the primary financial statement prior year amounts as well as the related note.

• For the following notes the error will be corrected in the actual notes:

Unauthorised expenditure, Voted funds to be surrendered or Departmental revenue to be surrendered.

• An explanation of the error is required in their sub-notes.

23 23

Errors cont. (In Template)

24 24

• Secondary financial information:
• The error is corrected in the Prior Yr TB for the line item

affected (this will automatically adjust the relevant secondary information note)

• The error is explained in the Note 44: Prior period errors.

Updates:

• No updates on principles only template
• Illustrative Guide

25 25

Cash Flow Statement

Presentation of the Cash Flow Statement

Cash flows to be classified as:

• Operating activities

Activities of the department that are not investing or financing activities.

• Investing activities

Acquisition and disposal of capital assets and other investments not included in cash equivalents.

• Financing activities

Activities that result in changes in the size and composition of the contributed capital and borrowings of the department.

27 27

Operating activities examples

28 28

• Receipts from taxes, levies and fines;
• Receipts from charges for goods and services

provided by the department;

• Receipts from local and foreign donors;
• Receipts from royalties, fees, commissions and
• ther revenue;
• Transfers to other entities to finance their
• perations (not including loans);
• Payments to suppliers for goods and services;
• Payments to and on behalf of employees;
• Payments of rates and taxes;
• Receipts or payments from transfers of functions /

discontinuance of functions;

• Receipts or payments in relation to litigation

settlements.

Operating activities reconciliation

• Reconciliation between surplus / deficit and cash flow

from operating activities by adjusting surplus / deficit for:

• all non-cash items
• movement in “working capital”, i.e. current assets and

current liabilities

• surrenders
• Include the reconciliation in the notes to the financial

statements.

29 29

Investing activities examples

30 30

• payments to acquire tangible and / or

intangible capital assets.

• receipts from sales of tangible and / or

intangible capital assets;

• payments to acquire equity or debt

instruments of other entities;

• receipts from sales of equity of other

entities;

• advances and loans made to other

parties;

• receipts from the repayment of

advances and loans made to other parties;

R

Financing activities examples

31 31

• proceeds from issuing loans, notes,

bonds and other short- or long-term borrowings;

• repayments of amounts borrowed;
• payments by a lessee for the reduction of

the outstanding liabilities to a finance lease

Cash and cash equivalents

• bank account balances (both

domestic and foreign);

• cash awaiting banking;
• petty cash / imprest floats;
• short-term deposits; deposits at call;

and

• ther highly liquid investments that

are readily convertible to cash on hand at the entity’s option

32 32

Cash and cash equivalents

33 33

Non cash transactions examples

Exclude these from the Cash Flow Statement

• Unrealised gains and losses arising from

changes in foreign currency exchange rates

• the acquisition of assets through the exchange of

assets;

• the conversion of debt to equity; and
• write-off of debt.

34 34

Updates to Cash Flow

• Specified that the exchange rate to be used is the “spot

exchange rate”

• The last sentence on paragraph 26 deleted as it is not

deemed necessary to separately disclose unrealised gains and losses in the cash flow statement and the PER disclosure suffices.

35 35

Revenue

Definition of revenue

• Revenue is the gross inflow of

economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to capital contributions to net assets.

• Where the department and the

counterparty to the revenue transaction agree to settle on a net basis, the department will recognise the net amount received.

37 37

Example

Exchange vs. non-exchange transactions

• Exchange transactions

– Entity receives assets / services (or has liabilities extinguished), and – Directly gives approximately equal value in exchange.

• Non-exchange transactions

– Entity receives assets or services (or has liabilities extinguished), and – Does not give approximately equal value in exchange. Substance of transaction should be considered. E.g Discount as part of the sale policy of the department = Exchange transaction A par. in the MCS added to clarify that departments are not required to present non-exchange and exchange transactions separately.

38 38

Revenue types

• Annual appropriation
• Voted Funds
• Conditional grants
• Statutory appropriations
• Departmental revenue, which has the following sub-categories:
• Taxation revenue
• Sale of goods and services
• Transfers received
• Fines, penalties and forfeits
• Interest, dividends and rent on land
• Sale of capital assets
• Transactions in financial assets and liabilities
• Aid assistance

39 39

Recognition principles

• In PER on the date that the cash is received.
• Appropriated funds are recognised in the financial

statements on the date the appropriation becomes

• effective. Same applies for adjustments.
• Transactions in foreign currency are recognised in ZAR

by applying the spot exchange rate on date of receipt

40 40

Exchequer grant account

41 41

Departmental revenue definition

42 42

The inflow of cash arising in the course of the ordinary activities of the department, normally from the sale of goods, the rendering of services, and the earning of interest, taxes and dividends. It includes transactions in financial assets and liabilities and also transfers received. Departmental revenue is collected by national / provincial departments, and is subsequently paid over to the National / Provincial Revenue Fund.

Departmental revenue classification

43 43

Aid assistance

44 44

• Aid assistance comprises amounts received from local or

international donors via the RDP Fund.

• “CARA Fund Assistance” comprises of amounts

specifically appropriated from the Criminal Asset Recovery Account (CARA).

• If a local or international donor donates funds and there is

no technical assistance agreement, it must be dealt with as a normal donation or a gift to the state in accordance with Section 76(1) of the PFMA and Treasury Regulations.

• At the end of a project, the department is required to

surrender all funds to the RDP Fund.

• Aid assistance note has been updated and there is an

illustrative guide on the changes.

Expenditure

Expenditure definition

Expenditure is a decrease in economic benefits or service potential during the reporting period in the form of outflows or incurrences of liabilities that results in a decrease in net assets, other than those relating to capital distributions from net assets.

46 46

In the modified cash environment, payments are accounted for in the period in which the monies were paid and not in the period in which the underlying transaction or event occurred that gave rise to the expenditure.

Expenditure classification

47 47

Covered in Chapter

• n Capital Assets

NOTE: Details of classification can be

• btained from the SCOA website

Recognition principle

• A department recognises expenditure in the statement of

financial performance on the date of payment.

• Date of payment is the date on which the expenditure is

authorised for payment on the system (but no later than the last day of the reporting period). NOTE: there is a time lag between the authorisation for payment and the interface on the bank statement. At year- end the amount recognised as expenditure in the FINANCIAL STATEMENTS includes all purchases approved for payment by 31 March (even if the payment still needs to clear the bank account).

48 48

Types of Expenditure - Compensation of

employees

• Comprise of most forms of consideration given by a department in

exchange for services rendered by employees.

• Excludes payments made to employees as a re-imbursement of costs incurred
• n behalf of the employer (e.g. travel and subsistence expenditures).
• Made up of two categories:
• salaries and wages

Salary and wages comprise of amounts paid to the employees of a department including all payments made on their behalf such as PAYE / SITE and the employee’s contributions to pension and / or medical schemes.

• social contributions

The social contributions category includes the employer’s contribution to the social insurance schemes to which the employee belongs.

• Employee benefits that have accrued to employees – covered in

Provisions and Contingents

49 49

Types of Expenditure - Goods and Services

Payments for all goods and services to be used by a department, excluding purchases of capital assets. Payments for goods and services, to be used as input into a capital project are also excluded from G&S

• classified as capitalised payments

The following are covered in this presentation:

• Capital assets less than R5,000
• Consumables

50 50

Capital assets less than R5,000

• R5,000 is per unit; not per payment

51 51

NOTE: For Detailed guidance refer to Chapter on Capital Assets

Consumables

• Goods that normally meet the definition of inventory, but are not

essential for satisfying the service delivery obligation of a department.

• With effect from 2013/14 inventory items are be limited to “Inventory

Departments”

• “Inventory Departments” - have inventory in order to deliver on their

mandate

• “Non-Inventory Departments” - the inventory items not needed for a

department to deliver on their service delivery mandate

52 52

NOTE: Details of classification of Consumables can be obtained from the SCOA Website

Interest and rent on land

• Rent on land - Includes the total value of payments due to the use
• f land owned by another party, including other government units.

53 53

• Interest includes the total value of interest
• payments. These are payments associated

with debt, for example interest on borrowing and overdraft facilities.

Payments for financial assets

• Consist mainly of transactions

that result in losses to the department such as the write-

• ff of debt.
• These expenditure is dealt with

in more detail in the Chapter on General Departmental Assets and Liabilities.

54 54

Transfers and Subsidies

Transfers and subsidies include all “non-exchange” payments made by a department. A payment is “non-exchange” provided that the department does not receive anything directly in return for the transfer to the other party.

55 55

current transfers:

• Social security benefits

paid to households

• Fines
• Penalties
• Compulsory fees
• Compensation for

injuries or damages paid to another unit capital transfers:

• Payments that are conditional on the

recipient unit using the funds to acquire capital assets

• Transfer to enterprises (publicly or

privately owned) to cover large operating deficits accumulated over at least two years or to finance their cost of purchasing capital assets

• Debt forgiveness extended to others
• Capital taxes payable to other depts.

Updates

• Similar to Chapter on Cash Flow Statement and Revenue , specified

that the exchange rate to be used is the “spot exchange rate”

• Illustrative guide on accounting for EPWP project drafted, out for

comment and to be issued to clarify additional disclosures.

• More guidance added with regard to salaries to members of Legislature.
• Added paragraph stating that even if budget incorrect reporting should be

correct.

• MCS updated to clarify that only disclosure of unspent funds of transfers

and subsidies paid to Provinces and Municipalities, Departmental agencies and accounts is required. This is in line with the PFMA.

56 56

General Departmental Assets and Liabilities

Chapter Content

• This chapter deals specifically with the accounting for:
• Bank overdraft, cash, investments, loans, receivables

and payables;

• Funds to be surrendered to the revenue fund;
• Prepayments and advances;
• Unauthorised, irregular and fruitless and wasteful

expenditure

• These are either classified as financial instruments, non-

financial assets / liabilities or statutory receivables / payables – categories explained in the AMD;

• The MCS provides accounting principles for each type of

asset / liability rather than for the different categories – accounting principles for most categories are the same.

58 58

Accounting for financial assets / liabilities and prepayments / advances

59 59

A financial asset is: (a) cash; (b) a residual interest of another entity [i.e. investments]; or (c) a contractual right to: (i) receive cash or another financial asset from another entity; or (ii) exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. Examples of financial assets included in primary financial information are as follows:

• cash, or cash equivalents under

the control of the department;

• receivables (such staff debt,

supplier overpayments, claims recoverable);

• loans; and
• investments in public entities.

Examples of financial assets included in the secondary financial information are as follows:

• accrued departmental revenue

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

60 60

A financial asset is: (a) cash; (b) a residual interest of another entity [i.e. investments]; or (c) a contractual right to: (i) receive cash or another financial asset from another entity; or (ii) exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. Recognised (primary info) when:  Become a party to the arrangement (e.g. open bank account, sign loan agreement, make investment etc.); and  If cash – recognised when department controls it;  If financial asset (other than cash) – recognised when the cash flows;  If investment – recognised when it is a capital investment;

For investments, the expense is recognised on date of payment (i.a.w. Chapter on Expenditure), the investment is captialised thereafter (i.a.w this Chapter).

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

61 61

A financial asset is: (a) cash; (b) a residual interest of another entity [i.e. investments]; or (c) a contractual right to: (i) receive cash or another financial asset from another entity; or (ii) exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. Recorded (secondary info – as accrued revenue) when:  Become a party to the arrangement (e.g. open bank account, sign loan agreement, make investment etc.); and  Could not be recognised (did not meet criteria for recognition); and  Meets additional criteria for sale

• f goods / rendering of services /

taxation revenue;

Departments need not estimate total tax receivable but must record and disclose cash collected by agents due to the department.

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

62 62

A financial liability is any liability that is a contractual obligation to: (a) deliver cash or another financial asset to another entity; or (b) exchange financial assets or financial liabilities under conditions that are potentially unfavourable to the entity. Examples of financial liabilities included in primary financial information:

• payables (such as deposits,

salary deduction payments); Examples of financial liabilities included in secondary financial information :

• accrued expenditure payable;

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

63 63

A financial liability is any liability that is a contractual obligation to: (a) deliver cash or another financial asset to another entity; or (b) exchange financial assets or financial liabilities under conditions that are potentially unfavourable to the entity. Recognised (primary info) when:  Become a party to the arrangement (e.g. owe an employee, received a deposit); and  It is a cash transaction;

e.g. cash deducted from gross salary of employee and is due to

• ther institutions – UIF, pension etc
• r cash is deposited with the

department (security or key deposits)

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

64 64

A financial liability is any liability that is a contractual obligation to: (a) deliver cash or another financial asset to another entity; or (b) exchange financial assets or financial liabilities under conditions that are potentially unfavourable to the entity. Recorded (secondary info – accrued expenditure) when:  Goods are received, or services delivered;

Services includes those delivered by employees – leave entitlements and bonus accruals.

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

65 65

Advances comprise funds received in advance of goods/services that are yet to be delivered by the department in accordance with the agreement under which the advance is received; A prepayment is a payment made in advance of goods or services being received. Recognised (primary info) when:  Become a party to the arrangement; and  Cash is received (advance) or paid (prepayment);

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

66 66

Measured in primary information –

• On recognition: cost plus transaction costs (where applicable);
• Subsequent measurement: cost less amounts settled or written- off

and/or any accrued interest (where interest is charged);

Measured in secondary information –

• fair value (accrued revenue), cost (accrued expenditure);

Impairment (primary and secondary information) – recorded where there is an indication of impairment showing estimated reduction in carrying value

• f the asset/liability;

Departments are required to specify the methodology applied to calculate the impairment loss. Example of estimating PV of the expected future inflow of cash that is expected in settlement of the recorded financial asset is added in the AMD.

Accounting for financial assets / liabilities and prepayments / advances (Cont.)

• Bank overdraft should form part of current liabilities; not be deducted

from the current assets bank balance, new principle added.

• Prepayments: Materiality was factored in and the updated paragraph

reads as follows: “A department may recognise a prepayment in the statement of financial performance in accordance with the Chapter on Expenditure if the prepayment is material and was budgeted for as an expense in the year in which the actual prepayment was made.”

67 67

Other assets and liabilities

68 68

This chapter provides principles for the recognition / recording and measurement of:

• Unauthorised expenditure;
• Irregular expenditure; and
• Fruitless & wasteful expenditure.

A chapter has been added in the AMD giving guidance on Unauthorised, irregular and fruitless and wasteful expenditure;

Capital Assets

Scope

70 70

Includes

(a) investment properties; (b) biological assets; (c) specialised military equipment; (d) heritage assets; (e) infrastructure assets (f) intangible assets; and (g) other immovable and movable items of capital assets

Excludes

(a) intangible assets arising from powers and rights conferred to a department by legislation, a constitution, or by equivalent means; and (b) agricultural produce after the point of harvest. (c) Inventories (d) Consumables (e) Capital asset subject to a finance lease

Definitions of Capital Assets

Capital assets are non-current tangible or intangible assets of a department that are expected to be used or held by that department for longer than one year. MCS PAR 09 – Capital Assets Tangible assets are non-monetary assets having physical substance that:

• are held for use in the production or supply of goods or services, for rental to others,
• r for administrative purposes or for the development, construction, maintenance or

repair of other capital assets; and

• are expected to be used during more than one reportingMCS PAR 09 – Capital

Assets

71 71

Assets are resources controlled by a dept as a result of past events and from which future economic benefits or service potential are expected to flow to the dept. MCS PAR 11 – Capital Assets An intangible asset is an identifiable non-monetary asset without physical substance. MCS PAR 09 – Capital Assets .

Definitions of Capital Assets

72 72

Control exists where a department has the power to obtain the future economic benefits or service potential from the underlying resource and to restrict the access of

• thers to those benefits.

(The key principle is that of control of the economic benefits or service potential of the asset rather than 'physical' control.) MCS PAR 10 & 11 – Capital Assets

Intangible Assets

Identifiability Criterion in the definition of an intangible asset:

• is separable, i.e. is capable of being separated or divided

from the department and sold, transferred, licenced, rented

• r exchanged, either individually or together with a related

contract, identifiable asset or liability, regardless of whether the department intends to do so; or

• arises from binding arrangements (including rights from

contracts) regardless of whether those rights are transferable or separable from the department or from other rights and obligations.

73 73

Intangible Assets

Types Acquired Intangible Asset Internally Generated

74 74

Internally generated intangible Assets

75 75

Research Development

Current expenditure Intangible Asset

Loose tools, spare parts and servicing equipment

76 76

Heritage Assets

77 77

There are instances where heritage assets can have a dual

• purpose. These capital assets that are used for more than
• ne purpose should be classified as a heritage asset when a

significant portion of the asset meets the definition of a heritage asset.

Measurement of movable assets

78 78

Subsequent Measurement: COST

Measurement of immovable assets

79 79

Fair value

80 80

Subsequent costs immovable assets

81 81

Additions notes

82 82

Disposals notes

83 83

Capital assets update

Capital assets

• PAR 13 Added the following paragraph regarding control of immovable assets:

“With regards to immovable assets, consideration should also be given to the legislative requirements relating to specific mandates. Reporting in line with the legislative framework is contained in the guidance on immovable assets.”

• PAR 62 :

“Where a movable asset is acquired through a non-exchange transaction from non-government entities, its cost shall be measured at its fair value as at the date

• f acquisition”

84 84

Capital assets update (cont)

Capital Assets (continued)

• PAR 78 :

Capital Assets transferred between departments: All capital assets shall be transferred at cost or fair value. The transferor has the responsibility to fair value the capital asset prior to transfer if the capital asset was recorded at R1. (1 April 2002 exception still applicable).

• PAR 95;97 & 98 :

Specific disclosure requirement of prior period error pertaining to capital asset added and covered in Illustrative guide on prior period errors. Disclose the number and value of assets to be transferred to another department in terms of section 42 of the PFMA, but where the transfer has not been completed at year end

85 85

Inventory

Definition of inventories

Inventories are assets:

• in the form of materials or

supplies to be consumed in the production process;

• in the form of materials or

supplies to be consumed or distributed in the rendering

• f services;
• held for sale or distribution

in the ordinary course of

• perations; or
• in the process of production

for sale or distribution.

NOTE: Those goods purchased / produced and held

• r distributed specifically for

executing the service delivery mandate of the department

87 87

Inventory Still Annexure for 2014/15 and 2015/16 FYs. Will be a note w.e.f. 1 April 2016

Examples of inventories

88 88

• LTSM (DoE)
• certain items bought for distribution, e.g. school

furniture bought by a DoE to be distributed to schools;

• certain library materials that meet definition of

inventories;

• medicine, e.g. medicine purchased by a DoH to be

distributed/sold to a patient ;

• uniforms and protective clothing bought for the use of

department staff, e.g. police uniforms; and

• work-in-progress related to inventories

Recording of Inventory

89 89

Recorded as part of the secondary financial information if, and only if:

• it is probable that future economic benefits or service

potential associated with the item will flow to the department; and

• the cost or fair value of the item can be measured

reliably.

Inventory note

90 90

Errors relating to the current year Issued to cost centres or external stores Sales Obsolete, Lost, Damaged (Follow loss control process) · Fair value of donated or in-kind items · Inventory transferred from another department (Value recorded by recipient)

Opening balance Add/(Less): Adjustments to prior year balances Add: Additions/Purchases – Cash Add: Additions – Non-cash (Less): Disposals (Less): Issues Add/(Less): Adjustments Closing balance

1 2 3 4 5 6

Prior period error adjustments of Inventory Example · Surpluses and shortages · Reclassification as capital or minor assets · Reclassification as inventory · Reclassification as consumables

1

Cash additions: Amount should equal Inventory purchases in the PER

2 3 4 5 6

Initial measurement

91 91

Subsequent measurement

92 92

Lower of cost and net realisable value, Exception Inventories are measured at the lower of cost and current replacement cost where they are held for:

• distribution through a non-exchange transaction; or
• consumption in the production process of goods to be distributed at no

charge or for a nominal charge.

Leases

Leases definitions

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. Commencement date is the date from which the lessee is entitled to exercise its right to use the asset. An operating lease is a lease other than a finance lease repair of other capital assets.

94 94

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. Rental and hiring – according to SCOA, a transaction that involves a once-off payment for the temporary use of a capital asset which is owned by an external party. Inception date is the earlier of the date of the lease agreement and the date of commitment by the parties to the principle provisions of the lease Budget: Capital Example: hiring a marquee for an event Budget: Current When lessee takes possession of a leased asset When lease agreement is signed by both parties

Classification

95 95

• Made at inception date and is not changed, even when

the existing lease is renewed

• If substantially all of the risks and rewards have been

transferred to the lessee, it is a finance lease; otherwise it is an operating lease.

• Considers the overall substance of the lease agreement for

each of its leases not merely their legal form.

Classification - Risks and rewards

96 96

Risks

• Loss due to idle

capacity

• Loss due to technical
• bsolescence
• Changes in asset

value due to changing economic conditions

• Carry the risk of

repairs and maintenance

• Carry the risk of

insurance cost / losses Rewards

• Deriving revenue or

service potential from use of asset over its economic life

• Expectation of profits
• ver its economic life
• Gain from increase in

value upon disposal

• Realisation of

residual value upon disposal

Finance vs Operating Lease

97 97

Lessor Treat as a Sale Lessee Treat as a Purchase Asset Lessor Lessee Right to use the Asset Finance lease Operating lease

Classification indicators

98 98

For a lease to be classified as a finance lease it is not necessary to have all the indicators present, it could be one or a combination of the indicators.

• Ownership of the asset is transferred to the lessee when the lease term

ends;

• The lessee has an option to purchase the asset at a price that is

expected to be much lower than the fair value of the asset at the date the option becomes exercisable and at the time of entering the lease, it is expected that the lessee will exercise the option;

• The lease term is for a major part of the economic life of the asset even

though title is not transferred; (approx. 75%)

• At the inception of the lease the present value of the minimum lease

payments amounts to at least substantially all of the fair value of the leased asset; (approx. 90%)

• The leased asset is of such a specialised nature that only the lessee

can use it without major modifications; or

• The leased asset is not easily replaceable by another asset.

Other Classification Indicators

99 99

• If the lessee can cancel the lease, the lessee will carry any loss that

will be incurred by the lessor as a result of the cancellation;

• Gains or losses due to changes in the fair value of the residual

value are credited to the lessee

• At the end of the initial lease, the lessee has an option to extend the

lease at a rent that is substantially lower than the market rent.

Specific issues – Land and Buildings

100 100

• Where lease contains both a land and a building element, two components

are assessed individually

• Where land is operating lease and building is finance lease, payments

should be allocated between the land and the building based on the fair values of each

• Where payments cannot be allocated, the entire lease is classified as

finance lease

• Where lease contract is clearly an operating lease, e.g. where the building

is leased for a significant shorter period than its economic life, then classify as operating lease

• Where payment amount that would be

allocated to land is immaterial, both the land and building can be treated as a single asset for classification purposes and the economic life of the asset would be based on the economic life of the building

Specific issues – Cell phones & 3G modems

101 101

Most relevant indicators of the transfer of risks and rewards for cell phone contracts:

• the lease transfers ownership of the asset to the lessee by the end of

the lease term;

• the lease term is for the major part of the economic life of the asset;
• at the inception of the lease, the pv of the minimum lease payments

amounts to at least substantially all of the fv of the leased asset; and

• if the lessee can cancel the lease, the lessor’s losses associated with

the cancellation are borne by the lessee.

• cell phone contracts usually transfer
• wnership at the end of the contract and

the phone usually only has a short economic life, these contracts will generally result in finance leases.

• Also consider materiality when classifying

the agreements

Recognition, Measurement and Recording

102 102

Finance lease: Lessee

A disclosure requirement has been added in the MCS and AMD that where a department has numerous lease agreements the department can group the lease disclosure narrative according to the sub-categories of capital assets leased and specify the range of terms applicable to such lease agreements.

Recognition, Measurement and Recording

103 103

Finance lease: Lessor

Recognition, Measurement and Recording

104 104

Operating lease: Lessee

Recognition, Measurement and Recording

105 105

Operating lease: Lessor

Provisions and Contingents

Scope

107 107

Provisions - Definitions

Provision

• Liability of uncertain timing or amount

Liability

• Present obligations of the entity arising from past events, settlement of

which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential. Types

• Capped leave - leave due to an employee as at and including 30 June

2000

• Performance bonus – constructive obligation, (not legal obligation),

based on practice.

108 108

Provisions - Recording

All of the following criteria must be met:  A department has a present obligation (legal or constructive) as a result

• f a past event;

 It is probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; and  A reliable estimate can be made of the amount of the obligation. Difference between provisions and other liabilities - uncertainty about the timing or amount needed to settle the obligation;

109 109

Provisions - Measurement

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the reporting date

• Time value of money is ignored;
• Best estimates is based on management’s judgement (previous

experience, reports of independent experts etc);

• Reimbursement – when certain that reimbursement will be received;
• Review at each reporting date;
• Unused provision should be reversed;

– Changes in Provisions

– Reviewed at each reporting date and be adjusted to reflect the current best estimate. Reversed if no longer probable.

110 110

Contingent Liabilities

111 111

CONTINGENT LIABILITY Possible

• bligation,

confirmed in future Present

• bligation

not meeting recognition criteria Record only - NO recognition

Contingent liabilities- Measurement

• Measured using the best estimate
• Assessed continuously to determine if the outflow of resources has

become probable

• Recorded in a contingencies register
• Types of contingent liabilities
• Guarantees
• Claims against the department

112 112

Contingent assets

Record a contingent asset where an inflow of economic benefits or service is probable.

113 113

CONTINGENT ASSET

Possible asset, confirmed in future Record only

• NO

recognition

Provisions and other liabilities (Cont.)

114 114

Provisions (In template)

115 115

37.1 Reconciliation of movement in provisions - 2013/14 Provision 1 Provision 2 Provision 3 Provision 4 Total provisions R'000 R'000 R'000 R'000 R'000 Opening balance

• Increase in provision
• Settlement of provision
• Unused amount reversed
• Closing balance
• - - -
• Reimbursement expected from third party

Change in provision due to change in estimation of inputs

Added this subnote to provisions

Commitments

116 116

• The department commits itself to future transactions that

will normally result in the outflow of resources

• With tenders, a commitment exists when the award has

been formally communicated to the service provider that won the tender since a legitimate expectation of appointment has been created at year end

• The total outstanding contract value is disclosed in the

notes to the annual financial statements.

• The note excludes amounts provided for in the budget of

the department unless these amounts are contractually committed at the reporting date.

Commitments disclosure criteria

117 117

Both the following criteria should be met:

• Contracts should be non-cancellable or only cancellable at

significant cost (for example, contracts for computer or building maintenance services); and

• Contracts should relate to something other than the

routine, steady, state business of the department – therefore salary commitments relating to employment contracts or social security benefit commitments are excluded.

Updates

• Long service awards: AMD specified that PERSAL reports on employees

due for long service awards in the ensuing financial year can be

• extracted. Screenshots also included. These can be used to estimate the

long service award amount to be disclosed. Should the department be unable to extract such reports, a past trend can be used to estimate the ensuing financial year’s long service awards amount. The process should be summarised in the narrative.

• Stated in the AMD that variation order amount should form part of

Commitment amount.

118 118

Related Party Disclosures

Related party definition

A related party is a person or an entity with the ability to control or jointly control the other party or exercise significant influence over the other party,

• r vice versa, or an entity that is subject to common control, or joint control.

120 120

Entities: 1. subsidiaries, associates and joint ventures; 2. entities in which a substantial ownership interest is held, directly or indirectly, by any person described in (3) or (4) of individuals below, or

• ver which such a person is able to exercise significant influence

Individuals 3. individuals owning, directly or indirectly, an interest in the reporting department that gives them significant influence over the department, and close members of the family of any such individual; 4. management personnel, and close members of the family of key management personnel;

Spheres of government

121 121

Identification of related parties

122 122

Related party transactions

Related party transaction is a transfer of resources, services or

• bligations between the reporting department and a related party,

regardless of whether a price is charged

123 123

Transactions that may indicate a related party relationship

• Arrangements where one party incurs expenses on behalf of

another party (these costs may or may not be recovered);

• Lease arrangements at more or less than market value or for no

consideration;

• Sales without substance (funds are transferred to an entity for

goods or services that were never rendered/delivered);

• Services or goods are purchased at nominal or no cost

Related party transactions

124 124

• A department must disclose transactions and balances with its related

parties falling under its Minister / MEC’s portfolio. A department is exempt from all the disclosures requirements listed above in relation to related party transactions if that transaction occurs within:

• a normal supplier and/or client/recipient relationships on terms and

conditions no more or less favourable than those which it is reasonable to expect the department to have adopted if dealing with that individual entity or person in the same circumstances; and

• terms and conditions within the normal operating parameters

established by that reporting entity’s legal mandate A department must disclose a list of all its related party relationships irrespective of whether there were any transactions between the related parties falling under its Minister/ MEC’s portfolio.

Disclosure of related party transactions

125 125

Departments need only disclose the In kind goods and services provided/received in the AFS related party transactions note that

• ccur within their

portfolio.

NB! In kind goods and services transactions that take place outside the department’s portfolio must be disclosed in the AO Report Portfolio of the department

KMP and Close family members

126 126

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the activities of the department Close members of the family of a person are those family members who may be expected to influence, or be influenced by that person in their dealings with the department. As a minimum, a person is considered to be a close member of the family of another person if they:

• are married or live together in a relationship similar to a

marriage; or

• are separated by no more than two degrees of natural or

legal consanguinity or affinity

Close family members

127 127

Related party updates

• Disclosure requirements reworded to clarify that the department should

disclose a list of its related party relationships with entities falling under its Minister/MEC’s portfolio.

128 128

Agent-Principal Disclosures

BINDING ARRANGEMENT

Agent-Principal Arrangements

130 130

Principal has the power to exercise beneficial control over an activity, where beneficial control is power (eg power established by legislation), to direct the activity, and the ability to benefit from that power. Activity/ies carrying out of a separately identifiable task or process, or group of similar tasks

• r processes

Agent Party that does not have beneficial control

Accounting treatment

131 131

Principal PER Payment to Agent POS or NOTES Any asset or Liability associated with the activity undertaken by Agent Agent PER Departmental revenue

• Fees received

POS Advance

• Funds received from Principal

Receivable

• Where advance was not

received POS or NOTES Any asset or Liability associated with the activity undertaken by Agent

Agent principal disclosures (In Template)

132 132 42 Agent-principal arrangements 2014/15 2013/14 42.1 Department acting as the principal R'000 R'000 Total

• For each of the individual agents of the department, provide a description of the nature, circumstances and terms relating to

the arrangements with the agents

Agent principal disclosures (In Template)

133 133 42.2 Department acting as the agent 42.2.1 Revenue received for agency activities 2014/15 2013/14 R'000 R'000 Total

• For each of the individual agent relationships of the department, provide a description of the nature, circumstances and terms

relating to the arrangements with the principal 42.2.2 Reconciliation of agency funds and disbursements - 2014/15 Name of principal entity Total agency funds received Expenditure incurred against funds Amount remitted to the principal Variance betw amounts received and amounts remitted Explanation of the variance R'000 R'000 R'000 R'000

Events after the Reporting Date

Events after the reporting date

135 135

Events after the reporting date are those events that occur between the reporting date and the date when the financial statements are authorised for issue. The date of authorisation for issue is the date on which the financial statements have received approval from management to be issued to the executive authority. Reporting date is the date of the last day of the financial year. For departments this is 31 March for that specific financial year. Adjusting event – provide information about events that existed at reporting date. Non-adjusting event – provide information about events that arose after reporting date

Events after the reporting date

136 136

Events after the reporting date

137 137

Year End Procedure 2014/15

Due date for submission to: OAG Budget Office ALM Unaudited financials Copies: 29/05/2015 1 29/05/2015 1 29/05/2015 1 Audited financials Copies: 31/07/2015 1 31/07/2015 1 31/07/2015 1 Annual Reports Copies: 31/08/2015 3 31/08/2015 9 31/08/2015 1

Accounting Support during 2014/15 audit process

139 139

Name of OAG representative within NT Province Cluster Star Kafu Telephone: 012 315 5763/5741 Email: star.kafu@treasury.gov.za KZN & NW Justice John Watson Telephone: 012 315-5590/ 406-9091 Email: John.Watson@treasury.gov.za NC & FS Economic Services Keitumetse Malebye Telephone: 012 315 5989/ 395-6542 Email: keitumetse.malebye@treasury.gov.za EC & MP Finance & Admin Thokozile Motsweni Telephone : 012 315 5233 /5281 Thokozile.Motsweni@treasury.gov.za WC & GP Central Government & Social Services Lizette Labuschagne Telephone : 012 315 5781 Lizette.Labuschagne@treasury.gov.za LP NRF

Thank you