Public Sector Financial Reports
Preparation of Financial Statements Public Sector Seminar February 2019 Compiled by: Prof. Jade Jansen,Y aeesh Y asseen & Rashied Small Public Sector Financial Reports 2
Financial Reporting – Public Interest Accountability: Report transparently to the public Stewardship: Responsibility: Responsibility for Fulfilling the use of funds & mandates and safekeeping of compliance by resources government Objectives of financial statements Public Sector Financial Reports 3
Public Accountability Accountability is increasingly being used in the political area, political discourse and policy documents because it conveys an imageoftransparencyandtrustworthiness Accountability is defined as a relationship between the public institution or government entity and the public, in which the institution / agency has an obligation to explain and justify its conduct and actions while public can pose questions and pass judgement, and the institution / agency can be sanctioned Public Sector Financial Reports 4
Public Accountability Public accountability pertains to the obligations of those entrusted with public resources to be answerable for the fiscal, management and programme responsibilities with which they have been mandated, and to report to those that have conferred the mandate and to the public. Public Sector Financial Reports 5
Objectives of Financial Statements The objective of financial statements is to provide useful information about the manner in which the public resources have been utilised to fulfil the mandate of thegovernmentinstitution/agency Financial statements should provide information that can be used: • to judge the effectiveness of management • to determine the effective the institution/agency had on communities and societies • for making informed economic decisions Public Sector Financial Reports 6
Objectives of Financial Statements The objective of financial statements is to provide useful information about the manner in which the public resources have been utilised to fulfil the mandate of thegovernmentinstitution/agency Financial statements should provide information that can be used: • to judge the effectiveness of management • to determine the effective the institution / agency had on communities and societies • for making informed economic decisions Public Sector Financial Reports 7
Accounting Bases Accrual basis: When the transactions occur Modified cash Cash basis: basis: When cash inflows Hybrid of the cash / out flows occur & accrual basis Basis of accounting Public Sector Financial Reports 8
Accounting Bases – Cash Basis Cash basis means a basis of accounting that recognises transactions and other events only when cash is received or paid Therisksofapplyingthecashbasisare: • focus is on reporting on the cash management • does not fairly represent the activities of the institution • financial statements may be considered to be incomplete Public Sector Financial Reports 9
Accounting Bases – Cash Basis Statement of Receipts & payments • Revenue & capital expenditure • No separation between statement of financial position & performance items Notes to the financial statements: • Trade receivables & payable • Borrowings • Commitments & contingent liabilities • Performance indicators • Achievement of service delivery objectives Public Sector Financial Reports 10
Accounting Bases – Cash Basis Budget & V ariance Report: • Original and final budget amounts; • Actual amounts on a comparable basis; • Note disclosure, an explanation of material differences between the budget and actual amounts Public Sector Financial Reports 11
Accounting bases – Accrual Basis Accrual basis means a basis of accounting that recognises transactions and other events as an when they occurred even though the cashwill bereceivedorpaidatalaterdate Thebenefitsofapplyingtheaccrualbasisare: • Assess the accountability for all resources and the deployment of the resources to achieve mandate • Assess the performance, position and cash flow • Make decisions about resource allocation • Increases transparency and accountability to public Public Sector Financial Reports 12
Accounting bases – Accrual Basis Therisksofapplyingtheaccrualbasisare: • Increase the complexity of recording transactions • Increase the complexity of measuring “year - end adjustments” • Required professional judgements and measurement for estimates • Application of recognition criteria and the need for maintaining supporting documents • Preparation of financial statements increase in complexity Public Sector Financial Reports 13
Accounting bases – Modified Cash Basis The modified cash basis is a hybrid of the cash and accrual basis where the primary financial statements are prepared on the cash basis but the secondary financial statements contain the information determinein termoftheaccrualbasis. This increases the complexity of consolidating financial statements which uses different bases of accounting when preparingfinancialstatements. Public Sector Financial Reports 14
Accounting bases – Comparison Public Sector Financial Reports 15
Qualitative Characteristics Public Sector Financial Reports 16
Considerations 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 enhances except when it reflects the the reliability & relevance substance of the transaction Materiality & aggregation Material items shall be presented separately only immaterial items can be aggregated Public Sector Financial Reports 17
Considerations for Preparation Initial recognition When transactions are recorded in the accounting records for first time Removal Subsequent measurements Information that is no longer Changing of the amounts required to be disclosed in which were initial recorded the financial statements De-recognition Removing transactions which were previously recognised in financial statements Public Sector Financial Reports 18
Recognition Criteria Cash flow Liquidity Immediate Readily cash inflow converted or outflow into cash Measurement Cost can be measured reliably Public Sector Financial Reports 19
Materiality – Consideration Impact on Nature and decision- size of making transactions Assessed at Misstatement individual & collective of information levels Public Sector Financial Reports 20
Initial Measurement Exchange transaction Non-exchange transaction • • Measured at its cost Measured at fair value of asset • Aggregate costs to: received as at the date of - acquire control/ownership acquisition • - bring to its present location Estimated fair value: - make asset ready for its - active market: market value intended purpose of similar asset - demolition & rehabilitation - no active market: estimate costs (estimated provision) value if there is insignificant • Cost is measure at cash value variations • No market value – based on (exclude interest element for deferred payments) carrying amount of assets given up Public Sector Financial Reports 21
Changes in Accounting Policies Compliance to the requirements of accounting standards (GRAP) Changes to the nature of the entity’s operations Change must enhances the fair presentation of the financial statement Public Sector Financial Reports 22
Changes in Accounting Policies Implemented retrospectively unless exempted by GRAP Retrospective – adjust prior period results If impracticable – implemented prospectively Public Sector Financial Reports 23
Changes in Accounting Policies Practical issues Practical considerations Impact on fair Cost benefit presentation analysis Public Sector Financial Reports 24
Changes in Accounting Policies When the change is caused by amendments to accounting standards which has effects on prior and future periods, the following should be disclosed: ▪ nature of the change in accounting policy; ▪ amount of the adjustment for each line item affected for the current and prior periods; ▪ amount of the adjustment relating to periods before those presented where practicable; and ▪ an explanation if it is impracticable to determine the amounts of the change. Public Sector Financial Reports 25
Changes in Accounting Policies When the change is voluntary implemented by the entity which has effects on prior and future periods, the following should be disclosed: ▪ nature of the change in accounting policy; ▪ reason why applying the new policy will provide more relevant and reliable information; ▪ amount of the adjustment for each line item affected showing: ▪ for the current period ▪ each of the prior periods presented ▪ aggregate for the periods before those presented; and ▪ an explanation if it is impracticable to determine the amounts of the change. Public Sector Financial Reports 26
Changes in Accounting Policies Practical Illustration Change from cash to accrual basis of accounting – financial statements Public Sector Financial Reports 27
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