Public Sector Finance [In Introduction to GRAP] Prepared by: Prof. Ebrahim Arnold, Rashied Small & Jade Jansen
Overview & Objective Legislation [PFMA & MFMA] Objective: Financial Statements & Service delivery rather Reports than profit motive Objective: Reliably account for service potential as Accounting Framework opposed to future [GRAP] economic bebefits Introduction to GRAP 2
Compliance with Accounting Frameworks Type of entities Framework National and provincial departments Accrual basis and/or modified cash basis Parliament and provincial legislature GRAP Constitutional institutions GRAP Schedule 2 public entities IFRS Schedule 3A & 3C public entities GRAP/IFRS High capacity municipalities GRAP Medium capacity municipalities GRAP Low capacity municipalities GRAP Municipal entities GRAP Introduction to GRAP 3
Objectives of f Financial Statements • Fulfilling an entity’s duty to be accountable – utilisation of the resources under it control to meet its service delivery goals • Enable users to assess the accountability of the entity – evaluate the performance of the entity in satisfying its service delivery goals • Enable users to evaluate the operating results of the entity for the financial period – evaluate the management of the resources under the control of the entity • Assessing the level of services that can be provided by the entity and its ability to meet its obligations as the become due – evaluate the potential to provide services and its liquidity to meet financial obligations Introduction to GRAP 4
Qualitative Characteristics Introduction to GRAP 5
Measurement Methods Historical cost Current Fair value replacement cost Measurement Realisable / Market value settlement value Present value Introduction to GRAP 6
Additional Reports Statements of Details about the service performance entity’s outputs and and programme outcomes reviews Information about compliance with Other reports by legislative, management about regulatory or other the entity’s external imposed achievements regulations Introduction to GRAP 7
Consideration for Preparation Faithful representation Stringent compliance with the definition & recognition criteria of elements Consistency Offsetting Alternative is only No offsetting is permissible permissible if it enhance the except when it reflects the reliability & relevance substance of the transaction Materiality & aggregation Material items shall be presented separately only immaterial items can be aggregated Introduction to GRAP 8
Basis of f Preparation Accrual basis: When the transactions occur Cash basis: Modified cash basis: When cash inflows / out Hybrid of the cash flows occur & accrual basis Basis of measurement Introduction to GRAP 9
Classification Current assets Current Liabilities • It is expected to be realised, or is held • It is expected to be settled in the entity’s for sale or consumption, in the entity’s normal operating cycle normal operating cycle • It is held primarily for the purposes of • It is held primarily for the purpose of being traded being traded • It is due to be settled within 12 months • It is expected to be realised within 12 after the reporting date months after the reporting date • The entity does not have an • It is cash or cash equivalent – unless its unconditional right to defer settlement use is restricted for a period of 12 of the liability for at least 12 months months after the reporting date after the reporting date Introduction to GRAP 10
Revenue Recognition – Principal & Agent Criteria for identification Principal Agent Risk & No Primary rewards of Credit risk Price setting significant Set price responsibility ownership risk
Revenue Recognition – Principal & Agent Criteria for identifying the principal in the relationship: • It is exposed to the significant risk and rewards of ownership. • It has the primary responsibility for providing the goods or services • It carries the risk of inventory throughout the transaction • It carries the customer’s credit risk • It has latitude in establishing prices, either directly or indirectly Criteria for identifying the agent in the relationship: • It does not have exposure to significant risk and rewards associated with the transaction • The amount the entity earns is predetermined, fixed fee or percentage of the transaction amount
Revenue Recognition – Principal & Agent Example: Legislation mandates Entity A to undertake a specific task and has approved a budget of R 150 million. Entity A can select the following options to execute the mandate: 1. Appoints a contractor and agrees to pay R 120 million. Entity B is appointed as project manager including paying the contractor. Total budget is transferred to Entity B – difference is retained as fee for services rendered. 2. Appoints Entity B to execute the task. Contract provide full details of the task. Agreed cost is the budgeted amount and Entity B carries any additional costs. 3. Assigns the responsibility to Entity B to execute the mandate. Responsibilities include (i) oversight and compliance function, (ii) discretion over how the task is executed, (iii) costs is included in its budget, (iv) cost is limited to budget, and (v) excess costs are borne by Entity B
Revenue Recognition – Principal & Agent Example: 1. Entity B acts as the agent – no legislative responsibility in terms of mandate, not responsible to performance of contractor (project manager) and does not bear credit risk. Entity B recognise the R30 million as revenue when the service is performed (stage of completion). 2. Entity B is the principal – limited responsibility i.t.o contract, has performance obligation, carries the financial risk. Entity B recognise the R 150 million as revenue (stage of completion) and the related expenses as incurred. 3. Entity B acts as the principal – responsibility is has been transferred, and carries the financial risk. Entity B recognise R 150 million as revenue - non- exchange transaction(stage of completion) and the related expenses as incurred.
Revenue Recognition – Exchange Transactions Revenue – Exchange transactions Sale of Rendering of Interest Royalties Dividends goods services Fair value of Effective Right to Stage of Substance of consideration interest receive completion agreement on receivable method payment Introduction to GRAP 15
Revenue categories Rendering of services Sale of goods Interest, royalties and dividends General revenue criteria pplicable It must be probable that It must be probable that It must be probable that economic to all Revenue economic benefits or service economic benefits or service benefits or service potential recognition potential associated with the potential associated with the associated with the transaction will categories transaction will flow to the transaction will flow to the flow to the entity; and entity; and entity; and The revenue can be measured The revenue can be measured The revenue can be measured reliably reliably reliably Stage of completion of the Significant risk and rewards of Interest is recognised using the transaction at the reporting ownership of the goods have effective interest rate method as date can be measured reliably; been transferred to the set out in GRAP 104 on Financial Specific recognition criteria per and purchaser; Instruments. Cost incurred and the cost to Cost incurred and the cost to Royalties are recognised as they complete the transaction can be complete the transaction can are earned in accordance with the measured reliably. be measured reliably; and substance of the relevant revenue category agreement. The seller retains neither Dividends or similar distributions continuing managerial are recognised when the owner’s involvement to the degree or the entity’s right to receive usually associated with payment is established. ownership nor effective control over the goods sold. Introduction to GRAP 16
Revenue Recognition – Key Is Issues Recognition Initial recognition Subsequent recognition Not recoverable Probable recovery & Recognised as reliably measureable impairment/expense Certainty Uncertainty Recognise gross Revenue is not amount recognised
Revenue Recognition – Key Is Issues 1. Non-refundable transactions: • Initial recognition – deferred revenue • Subsequent recognition – recognise revenue based on stage of completion • Cancellation – recognise revenue (based on original classification) 2. Multiple revenue transaction: • Separately identifiable components – recognition criteria is applied independently • Recognition of revenue – sale of goods = transfer of risks & rewards - services = stage of completion • Not separately identifiable – inter-dependent transactions • Recognition – based on substance of transaction
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