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

Investing activities examples • 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 R parties; • receipts from the repayment of advances and loans made to other parties; 30 30

Financing activities examples • 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 31 31

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 • other 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 Example • 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

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 o Voted Funds o Conditional grants • Statutory appropriations • Departmental revenue, which has the following sub-categories: o Taxation revenue o Sale of goods and services o Transfers received o Fines, penalties and forfeits o Interest, dividends and rent on land o Sale of capital assets o 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 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. 42 42

Departmental revenue classification 43 43

Aid assistance • 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. 44 44

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. 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. 46 46

Expenditure classification Covered in Chapter on Capital Assets NOTE: Details of classification can be obtained from the SCOA website 47 47

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 on behalf of the employer (e.g. travel and subsistence expenditures). • Made up of two categories: o 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. o 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 NOTE: For Detailed guidance refer to Chapter on Capital Assets 51 51

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 NOTE: Details of classification of Consumables can be obtained from the SCOA Website 52 52

Interest and rent on land • Interest includes the total value of interest payments. These are payments associated with debt, for example interest on borrowing and overdraft facilities. • Rent on land - Includes the total value of payments due to the use of land owned by another party, including other government units. 53 53

Payments for financial assets • Consist mainly of transactions that result in losses to the department such as the write- off 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. current transfers : capital transfers : • • Social security benefits Payments that are conditional on the paid to households recipient unit using the funds to acquire capital assets • Fines • Transfer to enterprises (publicly or • Penalties privately owned) to cover large operating • Compulsory fees deficits accumulated over at least two years or to finance their cost of • Compensation for purchasing capital assets injuries or damages • paid to another unit Debt forgiveness extended to others • Capital taxes payable to other depts. 55 55

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: o Bank overdraft, cash, investments, loans, receivables and payables; o Funds to be surrendered to the revenue fund; o Prepayments and advances; o 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 A financial asset is: Examples of financial assets included in primary financial (a) cash; information are as follows: (b) a residual interest of another • cash, or cash equivalents under entity [i.e. investments]; or the control of the department; (c) a contractual right to: • receivables (such staff debt, (i) receive cash or another supplier overpayments, claims financial asset from recoverable); another entity; or • loans; and (ii) exchange financial • investments in public entities. assets or financial liabilities with another Examples of financial assets entity under conditions included in the secondary that are potentially financial information are as favourable to the entity. follows: • accrued departmental revenue 59 59

Accounting for financial assets / liabilities and prepayments / advances (Cont.) A financial asset is: Recognised (primary info) when :  Become a party to the (a) cash; arrangement (e.g. open bank (b) a residual interest of another account, sign loan agreement, entity [i.e. investments]; or make investment etc.); and (c) a contractual right to:  If cash – recognised when (i) receive cash or another department controls it; financial asset from  If financial asset (other than another entity; or cash) – recognised when the (ii) exchange financial cash flows; assets or financial  If investment – recognised liabilities with another when it is a capital investment; entity under conditions that are potentially favourable to the entity. For investments, the expense is recognised on date of payment (i.a.w. Chapter on Expenditure), the investment is captialised thereafter 60 60 (i.a.w this Chapter).

Accounting for financial assets / liabilities and prepayments / advances (Cont.) Recorded (secondary info – as A financial asset is: accrued revenue) when : (a) cash;  Become a party to the (b) a residual interest of another arrangement (e.g. open bank entity [i.e. investments]; or account, sign loan agreement, (c) a contractual right to: make investment etc.); and (i) receive cash or another  Could not be recognised (did not financial asset from meet criteria for recognition); another entity; or and (ii) exchange financial  Meets additional criteria for sale assets or financial of goods / rendering of services / liabilities with another taxation revenue; entity under conditions that are potentially favourable to the entity. Departments need not estimate total tax receivable but must record and disclose cash collected by agents due to the department. 61 61

Accounting for financial assets / liabilities and prepayments / advances (Cont.) A financial liability is any liability Examples of financial liabilities that is a contractual obligation to: included in primary financial information : (a) deliver cash or another • financial asset to another payables (such as deposits, entity; or salary deduction payments); (b) exchange financial assets or Examples of financial liabilities financial liabilities under included in secondary financial conditions that are potentially information : unfavourable to the entity. • accrued expenditure payable; 62 62

Accounting for financial assets / liabilities and prepayments / advances (Cont.) A financial liability is any liability Recognised (primary info) when : that is a contractual obligation to:  Become a party to the arrangement (e.g. owe an (a) deliver cash or another employee, received a deposit); financial asset to another and entity; or  It is a cash transaction; (b) exchange financial assets or financial liabilities under conditions that are potentially e.g. cash deducted from gross unfavourable to the entity. salary of employee and is due to other institutions – UIF, pension etc or cash is deposited with the department (security or key deposits) 63 63

Accounting for financial assets / liabilities and prepayments / advances (Cont.) Recorded (secondary info – A financial liability is any liability that is a contractual obligation to: accrued expenditure) when :  Goods are received, or services (a) deliver cash or another delivered; financial asset to another entity; or Services includes those delivered by (b) exchange financial assets or employees – leave entitlements and financial liabilities under bonus accruals. conditions that are potentially unfavourable to the entity. 64 64

Accounting for financial assets / liabilities and prepayments / advances (Cont.) Advances comprise funds Recognised (primary info) when : received in advance of  Become a party to the goods/services that are yet to be arrangement; and delivered by the department in  Cash is received (advance) or accordance with the agreement paid (prepayment); under which the advance is received; A prepayment is a payment made in advance of goods or services being received. 65 65

Accounting for financial assets / liabilities and prepayments / advances (Cont.) 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 of 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. 66 66

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 This chapter provides principles for the recognition / recording and measurement of: o Unauthorised expenditure; o Irregular expenditure; and o Fruitless & wasteful expenditure. A chapter has been added in the AMD giving guidance on Unauthorised, irregular and fruitless and wasteful expenditure; 68 68

Capital Assets

Scope Includes Excludes (a) investment properties; (a) intangible assets arising from (b) biological assets; powers and rights conferred to a (c) specialised military equipment; department by legislation, (d) heritage assets; a constitution, or by equivalent (e) infrastructure assets means; and (f) intangible assets; and (b) agricultural produce after the (g) other immovable and movable point of harvest. items of capital assets (c) Inventories (d) Consumables (e) Capital asset subject to a finance lease 70 70

Definitions of Capital Assets 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 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, or 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 reporting MCS PAR 09 – Capital Assets An intangible asset is an identifiable non-monetary asset without physical substance. MCS PAR 09 – Capital Assets . 71 71

Definitions of Capital Assets 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 others 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 72 72

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 or 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 Internally Generated Asset 74 74

Internally generated intangible Assets Research Development Current Intangible expenditure Asset 75 75

Loose tools, spare parts and servicing equipment 76 76

Heritage Assets There are instances where heritage assets can have a dual purpose. These capital assets that are used for more than one purpose should be classified as a heritage asset when a significant portion of the asset meets the definition of a heritage asset. 77 77

Measurement of movable assets Subsequent Measurement: COST 78 78

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 of 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 NOTE: Those goods supplies to be consumed in purchased / produced and held the production process; or distributed specifically for • in the form of materials or executing the service supplies to be consumed or distributed in the rendering delivery mandate of the of services; department • held for sale or distribution in the ordinary course of Inventory Still Annexure for operations; or 2014/15 and 2015/16 FYs. Will • in the process of production be a note w.e.f. 1 April 2016 for sale or distribution. 87 87

Examples of inventories • 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 88 88

Recording of Inventory 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. 89 89

Inventory note 1 Prior period error adjustments of Inventory Example 2 · Surpluses and shortages · Reclassification as capital or Cash additions: minor assets Amount should equal Inventory · Reclassification as inventory purchases in the PER · Reclassification as consumables 3 · Fair value of donated or in-kind Opening balance items · Add/(Less): Adjustments to prior Inventory transferred from another department (Value year balances 1 recorded by recipient) 2 Add: Additions/Purchases – Cash 4 Add: Additions – Non-cash 3 Sales (Less): Disposals 4 Obsolete, Lost, Damaged (Less): Issues (Follow loss control process) 5 Add/(Less): Adjustments 6 5 Closing balance Issued to cost centres or external stores 6 Errors relating to the current year 90 90

Initial measurement 91 91

Subsequent measurement 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. 92 92

Leases

Leases definitions 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. Budget: A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Capital Title may or may not eventually be transferred. Budget: An operating lease is a lease other than a finance lease repair of other capital assets. Current Rental and hiring – according to SCOA, a Example: hiring a transaction that involves a once-off payment for the marquee for an event temporary use of a capital asset which is owned by an external party. Commencement date is the date from which the When lessee takes lessee is entitled to exercise its right to use the asset. possession of a leased asset Inception date is the earlier of the date of the lease When lease agreement is agreement and the date of commitment by the parties signed by both parties to the principle provisions of the lease 94 94

Classification • 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 agreemen t for each of its leases not merely their legal form. 95 95

Classification - Risks and rewards Rewards Risks • • Deriving revenue or Loss due to idle service potential from capacity use of asset over its • Loss due to technical economic life obsolescence • Expectation of profits • Changes in asset over its economic life value due to changing • Gain from increase in economic conditions value upon disposal • Carry the risk of • Realisation of repairs and residual value upon maintenance disposal • Carry the risk of insurance cost / losses 96 96

Finance vs Operating Lease Lessor Lessee Treat as a Treat as a Finance Asset Sale Purchase lease Operating Right to use the Lessor Lessee lease Asset 97 97

Classification indicators 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. 98 98

Other Classification Indicators • 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 . 99 99

Specific issues – Land and Buildings • 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 100 100