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

Accounting estimates (in Template) 43 Change in accounting estimate During the year the following changes were made to the estimations employed in the accounting for transactions, assets, liabilities, events and circumstances Value Value R-value derived using derived using impact of the original the amended change in estimate estimate estimate Accounting estimate change 1: Provide a description of 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 Line item 4 affected by the change Line item 5 affected by the change Provide a description of the estimated impact on future periods Prospective – therefore the above note only relates to current year changes . 37 37

Errors • Omissions from, and misstatements in, the department’s financial statements for one or more prior periods • Retrospective correction 38 38

Errors cont Error Current period Prior period Correct financial statements prior to authorisation for issue Material Immaterial Do not adjust financial Respective restatement statements Impracticable Practicable Correct financial statements prior to authorisation for issue Impracticable to determine Impracticable to determine period-specific effect cumulative effect of changes Restate opening balances of Restate comparative assets, liabilities and net assets for information to correct the the earliest period for which error prospectively from retrospective restatement is the earliest date possible practicable (this may be the 39 39 current period)

Errors cont. (In Template) • Primary financial information: o 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. o The error must also be corrected in the relevant notes where surplus/deficit is affected: i.e. either Unauthorised expenditure, Voted funds to be surrendered or Departmental revenue to be surrendered. o An explanation of the error is required in their sub-notes. 40 40

Errors - Example Department ABC incurred expenditure of R100,000 on specialised computer services in 20x1. At the end of the financial year, the department erroneously identified this expenditure as unauthorised expenditure (incurred not in accordance with the purpose of the vote or main division). Debit Credit Original accounting R R entries Computer services 100 000 Bank Account 100 000 In 20X3 (the current financial year) it was determined that the expenditure was in fact irregular and not unauthorised expenditure. 41 41

Errors – Example (Cont.) The accounting entry to recognise the unauthorised expenditure in the statement of financial position was as follows: Debit Credit The R100 000 would have increased the voted funds R R to be surrendered to the Unauthorised expenditure 100 000 Revenue Fund Exchequer Grant Account 100 000 (Voted funds to be surrendered to the Revenue Fund) The accounting entry (in the 20x3 financial year) to correct the error is as follows: The R100 000 would Debit Credit decrease the voted funds R R to be surrendered to the Revenue Fund in 20x3 Exchequer Grant Account 100 000 (Voted funds to be surrendered to the Revenue Fund) Unauthorised expenditure 100 000 42 42

Errors – Example (Cont.) Unauthorised expenditure note: Note 20X3 20X2 20x2 (as restated) R’000 R’000 R’000 Opening balance 10 400 7 200 7 200 Prior year error (100) - As restated 10 400 7 100 Unauthorised expenditure – discovered in current year (as restated) - 3 300 3 300 Less: Amounts approved by Parliament/Legislature with funding - - - Less: Amounts approved by Parliament/Legislature without funding - - - and written off in the Statement of Financial Performance Capital - - - Current - - - Transfers and subsidies - - - Less: Amounts transferred to receivables for recovery 15 - - Unauthorised expenditure awaiting authorisation / written off 10 400 10 400 10 500 Adjusting the opening balance for the error that Remains the same, occurred in 20x1 unless another error also identified in 20x2 (Credit leg of entry) 43 43

Errors – Example (Cont.) Voted funds to be surrendered to the Revenue Fund note: Note 20X3 20X2 20x2 (as restated) R’000 R’000 R’000 Opening balance 750 140 140 Prior period error ( 20x1 ) 18.2 (100) - As restated 750 40 140 Transfer from statement of financial performance (as restated) 500 (2 450) (2 450) Add: Unauthorised expenditure for current year 11 - 3 300 3 300 Voted funds not requested/not received 1.1 - - - Transferred to retained revenue to defray excess expenditure 18.1 - - - (PARLIAMENT/LEGISLATURES ONLY) Paid during the year (850) (140) (140) Closing balance 400 750 850 The R100k owed by the revenue fund reduces the Adjusting the opening liability for 20x3 balance for the error that occurred in 20x1 (Debit leg of entry) 44 44

Errors – Example (Cont.) Prior period error sub-note: Note 20X2 R’000 11 Nature of prior period error Relating to 20X1 100 100 Relating to 20X2 - - Total 100 In 20X1 Department ABC incurred specialised computer services costs without obtaining the appropriate approval. The department erroneously allocated these specialised computer services costs to Unauthorised Expenditure due to the department’s misinterpretation of definitions of Unauthorised Expenditure and Irregular Expenditure. In 20x3 it was clarified that the expenditure incurred is in fact Irregular Expenditure and not Unauthorised Expenditure. Necessary adjustments have been made to the primary and secondary information. 45 45

Errors cont. (In Template) • Secondary financial information: o The error is corrected in the Prior Yr TB for the line item affected (this will automatically adjust the relevant secondary information note) o The error is explained in the Note 44: Prior period errors. 46 46

Errors cont. (In Template – Secondary information note) 44 Prior period errors 44.1 Correction of prior period error for secondary information 2012/13 Note R'000 The comparative amounts in Note xx were restated as follows: Line item 1 affected by the change Line item 2 affected by the change Line item 3 affected by the change Net effect on the note - The comparative amounts in Note xx were restated as follows: Line item 1 affected by the change Line item 2 affected by the change Line item 3 affected by the change Net effect on the note - Provide a description of the nature of the prior period error as well as why the correction was required 47 47

Accounting Policy, Estimates and Errors 48 48

Appropriation Statement

Appropriation Statement The appropriation statement provides a comparison between budget amounts and the actual amounts arising from the execution of the budget with an explanation of the reasons for material differences . 50 50

Changes to the appropriation 51 51

The Department’s Budget Types FEBRUARY OCTOBER 52 52

Statutory appropriation • Amounts charged to national / provincial departments in terms of specific legislation applicable to the department or the PFMA. • The department is still accountable for the administration of the charge vested in them. • Examples are: o Sector education and training authorities (SETA) o National Skills Fund o Salaries paid to judges and magistrates 53 53

Expenditure presentation in Approp. Statement • The amounts to be included in economic classification of expenditure are the actual expenditure during the year. • Payments are divided into three broad categories: o current payments o transfers and subsidies o payment for capital assets • The appropriation statement should also reflect the final and actual expenditure for the comparative period . 54 54

Reconciliation of appropriation statement (budget) to PER • The objective of the reconciliation is to ensure that items compared in the appropriation statement are in fact items that should be compared. • Included in the statement of financial performance is a range of items not included in the adjustment estimate, including: o departmental revenue received (e.g. sales of goods and services) o prior year unauthorised expenditure approved without funding o aid assistance received • Explain material variances 55 55

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. • Examples of the above activities can be found in the AMD 57 57

CFS: operating activities (In Template) Cash Flow Statement Split as for the year ended 31 March 2014 per the MCS 2013/14 2012/13 Note R'000 R'000 CASH FLOWS FROM OPERATING ACTIVITIES Receipts - - Annual appropriated funds received 1.1 - - Statutory appropriated funds received 2 - - Departmental revenue received 3 - - Interest received 3.3 - - NRF Receipts - - Aid assistance received 4 - - Net (increase)/ decrease in working capital - - Surrendered to Revenue Fund - - Surrendered to RDP Fund/Donor - - Current payments - - Interest paid 7 - - Payments for financial assets - - Transfers and subsidies paid - - Net cash flow available from operating activities 23 - - 59 59

Operating activities reconciliation • Reconciliation between surplus / deficit and cash flow from operating activities by adjusting surplus / deficit for: o all non-cash items o movement in “working capital”, i.e. current assets and current liabilities o surrenders • Include the reconciliation in the notes to the financial statements. 60 60

Cash and cash equivalents 64 64

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. 67 67

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. Eg Discount as part of the sale policy of the department = Exchange transaction 68 68

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 69 69

Revenue types 70 70

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 . • Transactions in foreign currency are recognised in ZAR by applying the exchange rate on date of receipt 71 71

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. 72 72

Departmental revenue classification 73 73

Aid assistance • Aid assistance comprises amounts received from local or international donors via the RDP Fund. • 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. CARA Fund Assistance • “CARA Fund Assistance” comprises of amounts specifically appropriated from the Criminal Asset Recovery Account (CARA). 74 74

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. This means that expenditure is recognised when goods and/or services are received from parties. 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. 76 76

Expenditure classification Covered in Chapter on Capital Assets NOTE: Details of classification can be obtained from the SCOA website 77 77

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). 78 78

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 o social contributions • Employee benefits that have accrued to employees – covered in Provisions and Contingents 79 79

Basic payroll cycle 80 80

Goods and Services Payments for all goods and services to be used by a department, excluding purchases of capital assets. The following are covered in this presentation: • Minor assets • Consumables 81 81

Minor Assets (Capital assets less than R5 000) • R5 000 is per unit; not per payment NOTE: For detailed guidance refer to the Chapter on Capital Assets 82 82

Consumables • Goods that normally meet the definition of inventory, but are not essential for satisfying the service delivery obligation of a department. • “ 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 • With effect from 2013/14 inventory items will be limited to “Inventory Departments ” NOTE: Details of classification of Consumables can be obtained from the SCOA Website 83 83

Consumables (In Template) 2013/14 2012/13 Note R'000 R'000 6.5 Inventory 6 Clothing material and accessories - Farming supplies - Food and food supplies - Fuel, oil and gas - Learning and teaching support material - Materials and supplies - Medical supplies - Medicine - Medsas inventory interface - Other supplies 6.5.1 - Total - - 6.5.1 Other Supplies Ammunition and security supplies - Assets for distribution - Military stores Other - Total - - 2013/14 2012/13 Note R'000 R'000 6.6 Consumables 6 Consumable supplies - - Uniform and clothing - Household supplies - Building material and supplies - Communication accessories - IT consumables - Other consumables - Stationery, printing and office supplies - 84 84 Total - -

Basic flow purchase of goods/services 85 85

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. Interest payments on bills and bonds issued by other government units are also included here. Interest paid on overdue accounts should also be included under this item. • Rent on land - Includes the total value of payments due to the use of land owned by another party, including other government units. NOTE: All rent on land excludes rental for the use of buildings or other fixed structures. If it is not possible to distinguish between payment for the use of land and the fixed structures on it, the whole amount is recorded under goods and services. 86 86

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. 87 87

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. 88 88

Basic flow of transfers and subsidies 89 89

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 UIF; • 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. 91 91

Financial instrument A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or a residual interest of another entity. 92 92

Accounting for financial assets 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 93 93

Accounting for financial assets (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 capitalised thereafter 94 94 (i.a.w this Chapter).

Accounting for financial assets (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. 95 95

Accounting for financial liabilities 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; 96 96

Accounting for financial liabilities (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) 97 97

Accounting for financial liabilities (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. 98 98

Non-financial assets Non-financial assets for • Typical examples include example, create an opportunity to inventories and capital generate an inflow of cash or assets. another financial asset, but does • Non-financial assets and not give rise to a present right to liabilities included in the receive cash or another financial scope of this Chapter are assets. prepayments and advances because the future economic benefit is the receipt of goods or services rather than the right to receive cash or another financial asset. 99 99

Accounting for prepayments / advances 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. 100 100

Measurement Measured in primary financial 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 financial 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; 101 101

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. Separate guides are issued on the application of the definitions and to illustrate the disclosure requirements 102 102

Capital Assets

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. 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. 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 An intangible asset is an identifiable non-monetary asset without physical substance. 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.) 104 104

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 105 105