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 2014

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

• Due process involved accountants, auditors, preparers and users of the

departmental financial statements.

• The draft MCS was exposed for comment in April 2012, republished in

April 2013 and introduced through the interim AFS for 2013/2014.

• Final standard published January 2014.
• The MCS will be reviewed by the OAG periodically.
• Appendices may be added periodically to provide clarity on the

application of the Standard. FAQ’s to deal with implementation issues..

5

The Updated Framework

6

 Translated accounting policies into principles;  Clarified measurement principles;  Added and / or enhanced disclosures;

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

General Chapter Layout

Introduction Scope Definitions Accounting Principles

• Recognition / recording
• Measurement
• Presentation
• Derecognition / removal

Disclosures

8

Different for every chapter

Accounting Manual for Departments (AMD) Overview

Accounting Manual

• Preface to the MCS
• The SCOA and Systems
• Concepts and Principles
• Financial Statement

Presentation

• Accounting Policies,

Estimates and Errors

• Appropriation Statement
• Cash Flow Statement
• Revenue
• Expenditure

10 10

• 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

Separate guides

Chapter Layout

1 Overview 2 Key learning objectives 3 …….. 4 …….. 5 ……... 6 Summary of key principles 7 Annexure (includes comprehensive examples)

11 11

Different for every chapter

Images

12 12

Preface to the Modified Cash Standard

Principles in the MCS

14 14

Principles in the MCS (Cont.)

15 15

Principles

Measurement Presentation Disclosure

Notes to  AS  PER  POS  CFS  Appropriation Statement (AS)  Statement of Financial Performance (PER)  Statement of Financial Position (POS)  Statement of Changes in Net Assets  Notes (other) Previously called Disclosure Notes

PRIMARY FINANCIAL INFORMATION SECONDARY FINANCIAL INFORMATION

Recognition and derecognition Recording and removal “NEW”

The SCOA and Systems

Chapter Content

• Recording basic accounting

transactions

• Understanding the various systems of

accounting – BAS – LOGIS – PERSAL

• Reconciliations

(Extracts of recons added as annexures)

• Understanding the SCOA

17 17

BAS LOGIS PERSAL System

18 18

Standard Chart of Accounts

SEGMENT DESCRIPTION Infrastructure Does the transaction relate to an infrastructure or non-infrastructure asset? Item What is the nature of the payment and what is the nature of the receipt? Asset Does the transaction relate to an asset or the use of an asset and if so, which class of asset? Project Does the transaction relate to a specific project and if so, what type of project? Objective Against which programme / activity should the transaction be recorded? Fund Against which source of funding should the payment be allocated and against which source should the receipt be allocated? Responsibility To which cost centre should the transaction be allocated? Regional In which region does the service get delivered and in which region is the beneficiary that benefits from the transaction?

19 19

Economic Classification

Economic Classification Item Segment Infrastructure Segment Asset Segment

Concepts and Principles

Chapter Content

• Objective of the Departmental Annual

Financial Statements

• Users of the Departmental Financial

Statements

• Definition of Modified Cash Basis of

Accounting

• Qualitative Characteristics
• Fair Presentation
• Elements of Financial Statements
• Recognition and Reporting of the

Elements & Measurement

21 21

Previously Chapter 1 of DFRFG Achieved through compliance with the MCS Broad definitions and principles

Accounting Equation

• Assets

– What the department has or owns e.g. cash in bank, receivables

• Liabilities

– What the department owes others e.g. payables

• Net Assets

– The residual that remains after deducting all of a department’s recognised liabilities from its recognised assets

Assets (A) Liabilities (L) Net Assets (NA)

22 22

Double-entry system

23 23

Assets Liabilities

Increase

Increase in revenue Increase in expenditure Increase in liabilities Increase in assets

Decrease

Increase in expenditure Increase in revenue Decrease in liabilities Decrease in assets

Cash To Accrual

24 24

Qualitative Characteristics

25 25

Elements of financial statements

26 26

• Assets
• Liabilities
• Net Assets
• Revenue
• Expense
• Definition
• Comment

(clarifying the definition)

• Examples:

– Primary Information – Secondary Information Detail

Measurement of Elements

27 27

Measurement base Assets Historical cost Fair value Liabilities Historical cost

Refer to relevant chapters, eg Capital Assets, for approved measurement base

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”

29 29

Primary and Secondary Information

30 30

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

PER POS APP

CFS

CNA

Notes supporting information recognised in the statements

Previously called Disclosure Notes

Fair presentation

Fair presentation presenting information, including accounting policies, in a manner which provides relevant, reliable, comparable and understandable information. Departure / Deviation In rare circumstances where management concludes that compliance with a specific requirement in the MCS will result in misleading financials > May still result in fair presentation Exemption NT exempts an entity from full compliance with the MCS > Will impact on fair presentation

31 31

If I do it, it will meet the objectives of financial reporting I can’t do it; please allow me not to –

• bjectives not met

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

32 32

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

Accounting policies, estimates and errors

34 34

Accounting policies

• No option for alternative treatment (e.g. cost vs. revaluation)
• Where accounting policy not catered for in the MCS – mgt

judgement required in determining relevant accounting policy in consultation with OAG

• Must apply accounting policy consistently -
• From year to year
• On similar transactions
• Change in accounting policy – no changes permitted unless

specified in MCS

• Retrospective or Prospective application of change –

depends on MCS requirements

35 35

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

36 36

Accounting estimates (in Template)

37 37

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

• Omissions from, and

misstatements in, the department’s financial statements for one or more prior periods

• Retrospective correction

38 38

Error

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

Errors cont

39 39

Errors cont. (In Template)

40 40

• 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.

• 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.

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

Errors - Example

41 41

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). In 20X3 (the current financial year) it was determined that the expenditure was in fact irregular and not unauthorised expenditure.

Debit Credit R R Computer services 100 000 Bank Account 100 000

Original accounting entries

Errors – Example (Cont.)

42 42

The accounting entry to recognise the unauthorised expenditure in the statement of financial position was as follows:

Debit Credit R R Unauthorised expenditure 100 000 Exchequer Grant Account (Voted funds to be surrendered to the Revenue Fund) 100 000

The R100 000 would have increased the voted funds to be surrendered to the Revenue Fund

The accounting entry (in the 20x3 financial year) to correct the error is as follows:

Debit Credit R R Exchequer Grant Account (Voted funds to be surrendered to the Revenue Fund) 100 000 Unauthorised expenditure 100 000

The R100 000 would decrease the voted funds to be surrendered to the Revenue Fund in 20x3

Errors – Example (Cont.)

43 43

Note 20X3 20X2 (as restated) 20x2 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

Unauthorised expenditure note:

Adjusting the opening balance for the error that

• ccurred in 20x1

(Credit leg of entry) Remains the same, unless another error also identified in 20x2

Errors – Example (Cont.)

44 44

Voted funds to be surrendered to the Revenue Fund note:

The R100k owed by the revenue fund reduces the liability for 20x3

Note 20X3 20X2 (as restated) 20x2 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 (PARLIAMENT/LEGISLATURES ONLY) 18.1

• Paid during the year

(850) (140) (140) Closing balance 400 750 850

Adjusting the opening balance for the error that

• ccurred in 20x1

(Debit leg of entry)

Errors – Example (Cont.)

45 45

Prior period error sub-note:

Note 20X2 11 R’000 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.

Errors cont. (In Template)

46 46

• 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.

Errors cont. (In Template – Secondary information note)

47 47

44 Prior period errors 44.1 Correction of prior period error for secondary information 2012/13 Note R'000 Net effect on the note

• Net effect on the note
• Provide a description of the nature of the prior period error as well as why the correction was required

Line item 2 affected by the change Line item 3 affected by the change 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 The comparative amounts in Note xx were restated as follows: Line item 1 affected by the change

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

52 52

FEBRUARY OCTOBER

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:
• Sector education and training authorities (SETA)
• National Skills Fund
• 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:
• current payments
• transfers and subsidies
• 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:

• departmental revenue received (e.g. sales of goods and

services)

• prior year unauthorised expenditure approved without

funding

• 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

• f the department.
• Examples of the above activities can be found in the

AMD

57 57

CFS: operating activities (In Template)

59 59

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

• Cash Flow Statement

for the year ended 31 March 2014

Split as per the MCS

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.

60 60

Cash and cash equivalents

64 64

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.

67 67

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

68 68

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

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

72 72

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

73 73

Aid assistance

74 74

• 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).

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.

76 76

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.

Expenditure classification

77 77

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).

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:
• salaries and wages
• 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

82 82

NOTE: For detailed guidance refer to the 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.

• “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”

83 83

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

Consumables (In Template)

84 84 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
• Total

Basic flow purchase of goods/services

85 85

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.

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

• 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

• ther government units are also included
• here. Interest paid on overdue accounts

should also be included under this item.

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.

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.

88 88

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.

Basic flow of transfers and subsidies

89 89

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;
• 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

• f one entity and a financial liability or a residual interest of another entity.

92 92

Accounting for financial assets

93 93

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 (Cont.)

94 94

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 capitalised thereafter (i.a.w this Chapter).

Accounting for financial assets (Cont.)

95 95

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 liabilities

96 96

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 liabilities (Cont.)

97 97

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 liabilities (Cont.)

98 98

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.

Non-financial assets

99 99

Non-financial assets for example, create an opportunity to generate an inflow of cash or another financial asset, but does not give rise to a present right to receive cash or another financial assets.

• Typical examples include

inventories and capital assets.

• Non-financial assets and

liabilities included in the scope of this Chapter are prepayments and advances because the future economic benefit is the receipt of goods

• r services rather than the

right to receive cash or another financial asset.

Accounting for prepayments / advances

100 100

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);

Measurement

101 101

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;

Other assets and liabilities

102 102

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

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

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

Capital Assets

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. 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.) 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 reporting

104 104

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

Scope

105 105

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

Intangible Assets

Asset meets the identifiability criterion in the definition of an intangible asset when it:

• 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.

106 106

Minor Assets (Capital assets less than R5 000)

• R5 000 is per unit; not per payment

107 107

NOTE: For detailed guidance refer to the Chapter on Capital Assets

Loose tools, spare parts and servicing equipment

108 108

Biological Assets

109 109

Heritage Assets

110 110

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.

Infrastructure Assets

111 111

Internally generated intangible Assets

112 112

Research:

the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding

Development:

the application of research findings or other knowledge to a plan or design for the production

• f new or substantially improved

materials, devices, products, processes, systems or services before the start of production or use

Current expenditure Intangible Asset

Components

113 113

Measurement of movable assets

114 114

Subsequent Measurement: COST

Measurement of immovable assets

115 115

Fair value

116 116

Subsequent costs immovable assets

117 117

Additions notes

118 118

Disposals notes

119 119

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

121 121

Inventory Still Annexure for 2013/14 and 2014/15 and 2015/16. Will be note w.e.f. 1 April 2016

Examples of inventories

122 122

• 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

123 123

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

124 124

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

125 125

Subsequent measurement

126 126

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.

128 128

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

129 129

• 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

130 130

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

131 131

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

Classification indicators are included in the chapter

• n leases

Specific issues – Land and Buildings

134 134

• 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 – Leased vehicles

135 135

Government garage leases can be either operating or finance leases

Finance Lease Allocation Operating Lease Allocation Daily Tariff = Lease instalment Finance lease Operating lease Kilometre Tariff Fleet services Fleet services

Specific issues – Cell phones & 3G modems

136 136

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

137 137

Finance lease: Lessee

Recognition, Measurement and Recording

138 138

Finance lease: Lessor

Recognition, Measurement and Recording

139 139

Operating lease: Lessee

Recognition, Measurement and Recording

140 140

Operating lease: Lessor

Sale and leaseback

141 141

Lessee Lessor

Provisions and Contingents

Provisions and other liabilities

144 144

Notes Example Payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier (and include payments in respect of social benefits where formal agreements for specified amounts exist). Primary deposits such as for access cards, housing keys, rentals etc Secondary amounts due to suppliers for the delivery of goods and / or capital assets, and invoice received Accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to leave entitlements). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. Secondary utility bills (e.g. water & electricity); inventory delivered without an invoice

Provisions and other liabilities (Cont.)

145 145

Notes Example Provisions are liabilities of uncertain timing or amount Secondary payments for damages connected with legal cases that are probable Contingent liability a) is a possible obligation that arises from past events, and whose existence will be confirmed

• nly by the occurrence or non-occurrence of
• ne or more uncertain future events not wholly

within the control of the department; or b) is a present obligation that arises from past events but is not recognised because: i) it is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the

• bligation; or

ii) the amount of the obligation iii) cannot be measured with sufficient reliability. Secondary guarantees issued by a government department

Provisions and other liabilities (Cont.)

146 146

Provisions and other liabilities (Cont.)

147 147

Recording of provisions

148 148

All of the following criteria must be met:

• A department has a present obligation (legal or

constructive) as a result of 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
• bligation.

Measurement of provisions

149 149

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

• bligation 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);

• Midpoint of a continuous range
• Expected value – statistical method
• Most likely outcome
• Reimbursement – when certain that reimbursement will be

received;

• Review at each reporting date;
• Unused provision should be reversed;

Specific types of provisions

150 150

Capped leave - leave due to an employee as at and including 30 June 2000 Performance bonus – constructive obligation, (not legal

• bligation), based on practice.

Amount disclosed:

• Approved amount payable;
• Estimate the based on the ratings agreed with employees;
• 1.5% of the compensation of employees budget; or
• past practices or payments made.

Provisions (In template)

151 151

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

Contingent liabilities

152 152

• 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

Contingent assets

153 153

A possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-

• ccurrence of one or more uncertain future events not wholly

within the control of the department.

• record a contingent asset where an inflow of economic

benefits or service is probable.

Commitments

154 154

• 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

• unrecognised contractual commitments
• 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

155 155

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.

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.

157 157

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

158 158

Identification of related parties

159 159

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

160 160

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

161 161

• A department must disclose transactions and balances with its related

parties falling under its Minister / MEC’s portfolio.

• A department must disclose a list of all its related party relationships

irrespective of whether there were any transactions between the related parties 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

Disclosure of related party transactions

162 162

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

163 163

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

164 164

Agent-Principal Disclosures

BINDING ARRANGEMENT

Agent-Principal Arrangements

166 166

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

167 167

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

• Due by Principal (i.e. where

expenditure was spent o.b.o. principal) POS or NOTES Any asset or Liability associated with the activity undertaken by Agent

Agent principal disclosures (In Template)

168 168

42 Agent-principal arrangements 2013/14 42.1 Department acting as the principal 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)

169 169

42.2 Department acting as the agent 42.2.1 Revenue received for agency activities 2013/14 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 42.2.2Reconcilitaion of agency funds and disbursements - 2013/14 Name of principal entity Total agency funds received Amount remitted to the principal Variance betw amounts received and amounts remitted R'000 R'000 R'000 Explanation of the variance

Events after the Reporting Date

Events after the reporting date

171 171

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

172 172

Events after the reporting date

173 173

AFS TEMPLATE

AFS Template: General

175 175

• No major changes
• Updated in line with the MCS and the changes to the SCOA
• Published guidance:
• Guide on the completion of the AFS Template
• Guide on specific AFS Template changes (e.g the move of

Learnerships from Other operating expenditure to Salaries and wages)

• Macro will be issued at the end of March 2014 to take into

account any SCOA changes.

AFS Template: Other Specifics

176 176

• Direct exchequer receipts
• removed. Per: Prior yr amounts added to the Departmental

revenue line.

• Direct exchequer payments
• removed. Per: Prior yr amounts added to the Payments for

financial assets.

• Interest received and paid
• CFS: Split to show separately on face.
• Minor assets
• renamed “Assets less than R5 000” to clarify that these are only

the minor capital assets are under goods and services and not

• ther assets (such as inventory and cash). [NB! Please note that this has
• nly been a name change and will have no other implications]

AFS Template: Other Specifics cont.

177 177

• Learnerships and gifts
• moved to salaries and wages and consumables respectively. The

reallocation of prior year amounts is explained in the Guide on How to effect specific changes on the AFS Template.

• Accrued departmental revenue
• renamed (previously Receivables for departmental revenue). This

is in line with the accounting policies.

• Impairment
• moved the specific impairment (e.g. for investments) to note of the

item being impaired. Note 36 will now only require the detail of “Other impairment”.

AFS Template: Other specifics - impairment

178 178

Thank you