Presented by Felicitas T IrunguDirector Ernst & Young and Council Member

April 2011

CASH BASIS IPSAS

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Cash Basis IPSAS

Objective of Cash Basis IPSAS

The purpose of this Standard is to prescribe the manner in which general purpose financial statements should be presented under the cash basis of accounting.

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Cash Basis IPSAS

Why is information about the cash position of an entity necessary?

Information about the cash receipts, cash payments and cash balances of an entity is necessary for accountability purposes and provides input useful for assessments of the ability of the entity to generate adequate cash in the future and the likely sources and uses of cash. In making and evaluating decisions about the allocation of cash resources and the sustainability of the entity’s activities, users require an understanding of the timing and certainty of cash receipts and cash payments.

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Cash Basis IPSAS

Compliance with the Standard

Compliance with the requirements and encouragements of this Standard will enhance comprehensive and transparent financial reporting of the cash receipts, cash payments and cash balances of the entity. It will alsoenhance comparability with the entity’s own financial statements of previous periods and with the financial statements of other entities which adopt the cash basis of accounting.

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Cash Basis IPSAS

This Standard comprises two parts ( I & II ):

Part 1 is Mandatory.

► It sets out the requirements which are applicable to all entities preparing general purpose financial statements under the cash basis of accounting.

► It defines the cash basis of accounting, establishes requirements for the disclosure of information in the financial statements and supporting notes, and deals with other specific reporting issues.

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Part 2 is not Mandatory.

► It identifies additional accounting policies and disclosures that an entity is encouraged to adopt to enhance its financial accountability and the transparency of its financial statements.

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► Mandatory► Consolidated Statement of Cash Receipts and

Payments► Statement of Comparison of Budget and actual

amounts► Notes to Financial Statements

► Voluntary► Statement of Cash Assets and Fund Balances ► Notes ► Statement of Outstanding Invoices (Liabilities)► Statement of Unjustified Advances and Loans► Non-financial assets disclosure notes ► Statement of Contingent Liabilities

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► An entity which prepares and presents financial statements under the cash basis of accounting, as defined in this Standard, should apply the requirements of Part 1 of this Standard in the presentation of its general purpose annual financial statements.

► An entity whose financial statements comply with therequirements of Part 1 of this Standard should disclose that fact. Financial statements should not be described as complying with this Standard unless they comply with all the requirements in Part 1 of the Standard.

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► General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their specific information needs. Users of general purpose financial statements include taxpayers and ratepayers, members of the legislature, creditors, suppliers, the media and employees. General purpose financial statements include those financial statements that are presented separately or within another public document such as an annual report.

► This Standard applies to all public sector entities other than Government Business Enterprises which are profit oriented and use IFRS.

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DefinitionsGovernment Business Enterprises (GBE)Means an entity that has all the following characteristics:

► Is an entity with the power to contract in its own name;► Has been assigned the financial and operational authority

to carry on a business;► Sells goods and services, in the normal course of its

business, to other entities at a profit or full cost recovery;► Is not reliant on continuing government funding to be a

going concern (other than purchases of outputs at arm’s length); and

► is controlled by a public sector entity

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► Cash comprises cash on hand, demand deposits and cash equivalents

► Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

► Cash basis - a basis of accounting that recognizes transactions and other events only when cash is received or paid.

► Cash flows are inflows and outflows of cash.► Control of cash arises when the entity can use or

otherwise benefit from the cash in pursuit of its objectives and can exclude or regulate the access of others to that benefit.

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Cash Basis of AccountingFinancial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date.

► The measurement focus in the financial statements is balances of cash and changes therein.

► Notes to the financial statements may provide additional information about liabilities, such as payables and borrowings, and some non-cash assets, such as receivables, investments and property, plant and equipment.

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Cash Basis IPSAS

Cash Controlled by the Reporting Entity

► Cash collected by, or appropriated or granted to, an entity which the entity can use to fund its operating objectives, acquire capital assets or repay its debt is controlled by the entity.

► Paragraph 1.4.9 requires the disclosure of cash balances held by an entity at reporting date that are not available for use by the entity or are subject to external restrictions.

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Financial Statements

An entity should prepare and present general purpose financial statements which include the following components:

► a statement of cash receipts and payments which:(i) recognizes all cash receipts, cash payments and cash balances controlled by the entity; and(ii) separately identifies payments made by third parties on behalf of the entity.

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Financial Statements

► accounting policies and explanatory notes; and► when the entity makes publicly available its approved budget:-► A comparison of budget and actual amounts either as a

separate additional financial statement or as a budget column in the statement of cash receipts and payments in accordance with paragraph 1.9.8 of this Standard.

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Accounting Policies and Explanatory Notes.The notes to the financial statements of an entity should:

► Present information about the basis of preparation of the financial statements and the specific accounting policies selected and applied or significant transactions and other events; and

► Provide additional information which is not presented on the face of the financial statements but is necessary for a fair presentation of the entity’s cash receipts, cash payments and cash balances.

► Cross referencing

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Reporting Period► The general purpose financial statements should be

presented at least annually. ► When, in exceptional circumstances, an entity’s reporting

date changes and the annual financial statements are presented for a period longer or shorter than one year, an entity should disclose in addition to the period covered by the financial statements:(a) the reason(s) for a period other than one year being used; and(b) the fact that comparative amounts may not be comparable.

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Comparative Information

► Comparative information should be disclosed in respect of the previous period for all numerical information required by this Standard.

► Comparative information should be included in narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.

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Identification of Financial Statements

► The financial statements should be clearly identified and distinguished from other information in the same published document.

► Prominently displayed and repeated when it is necessary for a proper understanding of the information presented:-

(a) The name of the reporting entity or other means of identification;

(b) Whether the financial statements cover the individual entity or the economic entity;

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c) The reporting date or the period covered by the financial statements. (d) The reporting currency; and(e) The level of precision used in the presentation of figures in the financial statements.

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Presentation of Budget Information in Financial Statements

An entity that makes publicly available its approved budget(s).

► Present a comparison of the budget amounts for which it is held publicly accountable and actual amounts.

► Either as a separate additional financial statement or as additional budget columns in the statement of cash receipts and payments currently presented in accordance with this Standard.

► Complete the accountability cycle by enabling users of the financial statements to identify whether resources were obtained and used in accordance with the approved budget

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Effective Date

► This International Public Sector Accounting Standard became effective for annual financial statements covering periods beginning on or after 1 January 2004.

► Presentation of Budget - on or after 1 January 2009 –Earlier application is encouraged, but should be disclosed.

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Additional Disclosures

► The second part of the IPSAS on Cash Basis Financial Reporting refers to additional disclosures encouraged, as well as to a treatment of public sector entities intending to shift towards the accrual accounting.

► reservations about going concerns► identification of extraordinary items► major classes of cash flows► related parties► assets and liabilities► comparison with budgets► consolidated financial statements► joint ventures► financial reporting in hyperinflationary economies

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Cash Versus Accrual Accounting► The traditional approach to government financial reporting

was to provide a budget out-turn report for each ministry, and the auditor general’s report

► Governments are faced by a flood of financial, organizational and management reforms/globalization challenges.

► Concepts such as ► Efficiency and effectiveness► Management and accountability by performance► comprehensive auditing► Performance contracts

Are we reacting to pressure or proactively adopting best practices?

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Financial Crisis► In recent years, international financial crises have

highlighted the need for better governance through more transparent financial reporting and more effective auditing.

► The IMF - good governance is of central importance to achieving macroeconomic stability

► Financial crises - lack underlying economic can feed market uncertainty and trigger large capital outflows and threaten macroeconomic stability.

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The world financial system has weathered several majorfinancial crises in the past several decades:

► the U.S. Savings and Loan Crisis in the late 1980s and early 1990s and the

► Asian Financial Crisis in 1997, followed in short order by the

► Russian Financial Crisis in 1998, are only a few of the most prominent.

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► The current financial crisis, sparked by a collapse in residential housing prices and rising defaults in the category of high-risk loans known as “subprime,” has yet to find a name - or an end. Financial markets around the world have been in turmoil for over two years:

► investors have taken heavy losses, access to credit is► highly constricted (despite relatively low interest rates)

and financial markets are highly illiquid► Governments have had to step in and support ailing

financial institutions – this calls for better resource allocation and efficiency in the use of Government resources, hence going beyond the cash basis of accounting.How do we contribute to prompt dissemination and use of financial data to avert the next crisis?

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Cash Basis IPSAS

Cash basis: ► Expenses and revenues recorded when they are paid or received► Allows for transparent financial reporting of cash receipts, payments

and balances, under the cash basis of accounting.

Accrual basis: ► Expenses and revenues recorded when they are incurred or earned► Focuses on revenue, cost, assets, liability and equity, instead of cash

flow only.

Does accrual best meet our public sector needs?

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The financial statements include ► Under accrual basis of accounting

► the statement of financial position ► the statement of financial performance► the cash flow statement ► the statement of changes in net assets/equity

► Cash basis of accounting ► the statement of cash receipts and payments

Which approach suits the users of our financial statements?

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► Cash basis► cash received is treated as revenue for the period in which it was

collected

► Accrual basis► requires that relevant systems be in place to allocate collections to

the relevant accounts, i.e. Revenue, Accounts Receivable or Prepayments

Do we have the relevant systems to allocate collections to the relevant accounts i.e. Revenue, or Prepayments?

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Complexities of the Accrual basis of accounting

► The accrual system is much more complex than the traditional cash system.

► revenues and expenses are allocation to the period to which they relate.

► revenues be recorded on an accrual basis and ► estimates made of revenue collectible at year end.

Shall we disclose the basis of our estimates?

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► Pension► Liability not included in financial statements.► Actuarial review to provide the estimate of the pension liability.

► Impairment of assets► Basis of provision for bad debts

► Depreciation/ amortization► Basis of provision for various infrastructure and fixed assets

► Contingent liabilities – not accounted for under cash basis yet substantial for Government sector

Is the basis for each of our estimates appropriate?

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Operational requirements Cash Accounting Accrual Accounting

Relatively simple Relatively complex

Links to traditional budget and revenue systems

Relatively strong Relatively weak

Coverage Records only transactions that result in cash payments or receipts

Records estimated non-cash transactions aswell

Timing Records only transactions that occur within the accounting period

Records the estimated future effects of currenttransactions and policy changes

Audit and control Relatively simple Relatively demanding

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Accrual Accounting► Why► Information available facilitates a better quality of management

and decision making► Facilitates the cost of capital assets being spread over the useful

life of these assets, ► Allows for a more effective and reliable assessment of the health

of Government’s finances

► Why not► Accrual requires sophisticated professional judgments regarding

physical assets, long-term social programs► Accrual generally requires more complex IT systems than cash

systems

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Q & A

Thank you