Public Sector Financial Reports Preparation of Financial Statements - - PowerPoint PPT Presentation

Public Sector Financial Reports

Preparation of Financial Statements

Public Sector Seminar February 2019

Compiled by:

• Prof. Jade Jansen,Y

aeesh Y asseen & Rashied Small

Public Sector Financial Reports 2

Financial Reporting – Public Interest

3

Objectives of financial statements

Stewardship: Responsibility for the use of funds & safekeeping of resources Accountability: Report transparently to the public Responsibility: Fulfilling mandates and compliance by government

Public Sector Financial Reports

Public Accountability

Accountability is increasingly being used in the political area, political discourse and policy documents because it conveys an imageoftransparencyandtrustworthiness Accountability is defined as a relationship between the public institution or government entity and the public, in which the institution / agency has an obligation to explain and justify its conduct and actions while public can pose questions and pass judgement, and the institution / agency can be sanctioned

4 Public Sector Financial Reports

Public Accountability

Public accountability pertains to the

• bligations of those entrusted with public

resources to be answerable for the fiscal, management and programme responsibilities with which they have been mandated, and to report to those that have conferred the mandate and to the public.

5 Public Sector Financial Reports

Objectives of Financial Statements

The objective of financial statements is to provide useful information about the manner in which the public resources have been utilised to fulfil the mandate of thegovernmentinstitution/agency Financial statements should provide information that can be used:

• to judge the effectiveness of

management

• to determine the effective the

institution/agency had on communities and societies

• for making informed economic

decisions

6 Public Sector Financial Reports

Objectives of Financial Statements

The objective of financial statements is to provide useful information about the manner in which the public resources have been utilised to fulfil the mandate of thegovernmentinstitution/agency Financial statements should provide information that can be used:

• to judge the effectiveness of

management

• to determine the effective the

institution / agency had on communities and societies

• for making informed economic

decisions

7 Public Sector Financial Reports

Accounting Bases

8

Basis of accounting

Cash basis: When cash inflows / out flows occur Accrual basis: When the transactions occur Modified cash basis: Hybrid of the cash & accrual basis

Public Sector Financial Reports

Accounting Bases – Cash Basis

Cash basis means a basis of accounting that recognises transactions and other events

• nly when cash is received or paid

9

Therisksofapplyingthecashbasisare:

• focus is on reporting on the cash

management

• does not fairly represent the

activities of the institution

• financial statements may be

considered to be incomplete

Public Sector Financial Reports

Statement of Receipts & payments

• Revenue & capital expenditure
• No separation between statement of

financial position & performance items

10

Notes to the financial statements:

• Trade receivables & payable
• Borrowings
• Commitments & contingent liabilities
• Performance indicators
• Achievement of service delivery
• bjectives

Accounting Bases – Cash Basis

Public Sector Financial Reports

11

Budget & V ariance Report:

• Original and final budget amounts;
• Actual amounts on a comparable

basis;

• Note disclosure, an explanation of

material differences between the budget and actual amounts

Accounting Bases – Cash Basis

Public Sector Financial Reports

Accounting bases – Accrual Basis

Accrual basis means a basis of accounting that recognises transactions and other events as an when they occurred even though the cashwill bereceivedorpaidatalaterdate

12

Thebenefitsofapplyingtheaccrualbasisare:

• Assess the accountability for all

resources and the deployment of the resources to achieve mandate

• Assess the performance, position

and cash flow

• Make decisions about resource

allocation

• Increases transparency and

accountability to public

Public Sector Financial Reports

Accounting bases – Accrual Basis

13

Therisksofapplyingtheaccrualbasisare:

• Increase the complexity of

recording transactions

• Increase the complexity of

measuring “year-end adjustments”

• Required professional judgements

and measurement for estimates

• Application of recognition criteria

and the need for maintaining supporting documents

• Preparation of financial statements

increase in complexity

Public Sector Financial Reports

Accounting bases – Modified Cash Basis

14

The modified cash basis is a hybrid of the cash and accrual basis where the primary financial statements are prepared on the cash basis but the secondary financial statements contain the information determinein termoftheaccrualbasis. This increases the complexity

• f

consolidating financial statements which uses different bases of accounting when preparingfinancialstatements.

Public Sector Financial Reports

Accounting bases – Comparison

15 Public Sector Financial Reports

Qualitative Characteristics

16 Public Sector Financial Reports

Considerations for Preparation

17

Faithful representation Stringent compliance with the definition & recognition criteria of elements Consistency Alternative is only permissible if it enhances the reliability & relevance Materiality & aggregation Material items shall be presented separately only immaterial items can be aggregated Offsetting No offsetting is permissible except when it reflects the substance of the transaction

Public Sector Financial Reports

Considerations for Preparation

18

Initial recognition When transactions are recorded in the accounting records for first time Subsequent measurements Changing of the amounts which were initial recorded De-recognition Removing transactions which were previously recognised in financial statements Removal Information that is no longer required to be disclosed in the financial statements

Public Sector Financial Reports

Recognition Criteria

19

Liquidity Readily converted into cash Measurement Cost can be measured reliably Cash flow Immediate cash inflow

• r outflow

Public Sector Financial Reports

Materiality – Consideration

Nature and size of transactions Assessed at individual & collective levels Misstatement

• f information

Impact on decision- making

20 Public Sector Financial Reports

Initial Measurement

Exchange transaction Non-exchange transaction

• Measured at its cost
• Aggregate costs to:
• acquire control/ownership
• bring to its present location
• make asset ready for its

intended purpose

• demolition & rehabilitation

costs (estimated provision)

• Cost is measure at cash value

(exclude interest element for deferred payments)

• Measured at fair value of asset

received as at the date of acquisition

• Estimated fair value:
• active market: market value
• f similar asset
• no active market: estimate

value if there is insignificant variations

• No market value – based on

carrying amount of assets given up

21 Public Sector Financial Reports

Changes in Accounting Policies

22

Compliance to the requirements

• f accounting

standards (GRAP) Changes to the nature of the entity’s operations Change must enhances the fair presentation of the financial statement

Public Sector Financial Reports

Changes in Accounting Policies

23

Implemented retrospectively unless exempted by GRAP Retrospective – adjust prior period results If impracticable – implemented prospectively

Public Sector Financial Reports

Changes in Accounting Policies

24

Practical considerations Practical issues Cost benefit analysis Impact on fair presentation

Public Sector Financial Reports

Changes in Accounting Policies

25

When the change is caused by amendments to accounting standards which has effects on prior and future periods, the following should be disclosed: ▪ nature of the change in accounting policy; ▪ amount of the adjustment for each line item affected for the current and prior periods; ▪ amount of the adjustment relating to periods before those presented where practicable; and ▪ an explanation if it is impracticable to determine the amounts of the change.

Public Sector Financial Reports

Changes in Accounting Policies

26

When the change is voluntary implemented by the entity which has effects on prior and future periods, the following should be disclosed: ▪ nature of the change in accounting policy; ▪ reason why applying the new policy will provide more relevant and reliable information; ▪ amount of the adjustment for each line item affected showing: ▪ for the current period ▪ each of the prior periods presented ▪ aggregate for the periods before those presented; and ▪ an explanation if it is impracticable to determine the amounts of the change.

Public Sector Financial Reports

Changes in Accounting Policies

Practical Illustration Change from cash to accrual basis of accounting – financial statements

27 Public Sector Financial Reports

Changes in Accounting Estimates

28

A change in accounting estimate is an adjustment of the carrying amount of an asset or liability; or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information

• r new developments and, accordingly are not corrections of

errors. When it is difficult to distinguish between a change in an accounting policy and change in an accounting estimate, the change is treated as a change in an accounting estimate.

Public Sector Financial Reports

Changes in Accounting Estimates

29

The following should be disclosed in the note to the financial statements: ▪ nature of the change; ▪ effect on income/expenses – profit for the period; ▪ effect on carrying amount of assets/liabilities and equity; ▪ effect of the change on future periods, if practicable.

Public Sector Financial Reports

Changes in Accounting Estimates

30 Public Sector Financial Reports

Changes in Accounting Estimates

31 Public Sector Financial Reports

Changes in Accounting Estimates

Practical Illustration Accounting for fully depreciated assets and changes in the useful lives and residual values of assets

32 Public Sector Financial Reports

Correction of Errors

33

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, information that: ▪ was available when the financial statements for those periods were authorised for issue, and ▪ could reasonably be expected to have been obtained and taken into account in the preparation

• f

the financial statements. Errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversight and misinterpretation of facts. Such errors should be material and results in the misrepresentation of information in the financial statements.

Public Sector Financial Reports

34

Correction of material prior period errors shall be applied retrospectively in the first set of financial statements issued after the error is discovered by: ▪ restating the comparative amounts of prior periods which the error affects; ▪ restating the carrying amount of the asset/liability in the comparative period if the error occurred in periods prior to the comparative period. Where it is impracticable to determine the effects the error has for each period, the

• pening

carrying amount

• f

the asset/liability shall be restated for the earliest period for which the retrospective restatement is practicable.

Correction of Errors

Public Sector Financial Reports

35

The following shall be disclosed in the financial statements: ▪ nature of the prior period error; the amount of the correction for each line item in the financial statements where practicable; ▪ where practicable, the amount of the correction at the beginning of the prior period; ▪ explanation if it is not practicable to determine the amounts to be disclosed.

Correction of Errors

Public Sector Financial Reports

Changes in Accounting Estimates

Practical Illustration Correcting of errors in prior periods

36 Public Sector Financial Reports

Infrastructure Assets

▪ Assets usually display the following characteristics: ▪ they are part of a system or network; ▪ they are specialised in nature and do not have alternative uses; ▪ they are immovable; and ▪ they may be subject to constraints on disposal.

37 Public Sector Financial Reports

Infrastructure Assets

Practical Illustration Used extracts from financial statements for discussion

38 Public Sector Financial Reports

Enabling Assets

▪ Assets required for safety or environmental reasons ▪ Necessary for an entity to obtain the future economic benefits or service potential from its other assets ▪ For example, fire safety regulations may require a hospital to retro-fit new sprinkler systems. ▪ Recognised as part of specific assets or as a components asset (useful lives) ▪ Impairment test jointly with primary asset in accordance with Standards of GRAP on Impairment of Non-cash-generating Assets (GRAP 21) or Impairment of Cash-generating Assets (GRAP 26)

Public Sector Financial Reports 39

Enabling Assets

Practical Illustration Used extracts from financial statements for discussion

40 Public Sector Financial Reports

Subsequent Recognition

Repairs & Maintenance (Expensed) Improvements (Capitalised) Replacement parts (Capitalised) Major inspections (Capitalised) De-recognition (Replacement & Inspections)

41 Public Sector Financial Reports

Impairment of PPE

42

▪ Classification of assets: ▪ Cash-generating assets: use to generate commercial returns which generally exceeds the cost of the asset ▪ Non-cash generating assets: used to provide service delivery (no charge of generate cash inflow to break- even) ▪ Dual purpose assets: default is based on the objective to generate commercial returns ▪ Impairment test must be conducted at each reporting date (consider internal and external factors) ▪ Impairment loss is recognised when carrying amount of the asset exceeds its recoverable service amount

Public Sector Financial Reports

Recoverable Amount - Methods

43

▪ Fair value less cost to sell ▪ Price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset ▪ Active market price – fair price between willing buyer and seller. ▪ Value in use ▪ Present value of the asset’s remaining service potential ▪ Depreciated replacement cost approach: present value

• f the depreciated replacement cost of the asset using

an optimisation basis

Public Sector Financial Reports

44

▪ Service unit approach: present value is determined by reducing the current cost of the remaining service potential of the asset before impairment, to conform with the reduced number of service units expected from the asset in its impaired state ▪ Restoration cost approach: cost of restoring the service potential of an asset to its pre-impaired level. Present value of the remaining service potential of the asset is determined by subtracting the estimated restoration cost

• f the asset from the current cost of replacing the

remaining service potential

• f

the asset before

• impairment. Depreciated reproduction or replacement

cost of the asset, whichever is lower.

Recoverable Amount - Methods

Public Sector Financial Reports

Impairment of Assets

Practical Illustration Impairment of PPE and trade receivables

45 Public Sector Financial Reports

Questions?

46 Public Sector Financial Reports

@SAIPAcomms South African Institute of Professional Accountants SAIPA-South African Institute of Professional Accountants JOIN THE CONVERSATION AND BE #SAIPAproud

47 Public Sector Financial Reports