Accounting Manual for Departments - National …. Annual...Financial Statement Presentation Issued October 2017 Page 6 The principles explained in the Chapters to the Accounting Manual,

Issued October 2017

Accounting Manual for Departments

Financial Statement Presentation


Issued October 2017 Page 2

Chapter Content

1 Overview ....................................................................................................................................... 3

2 Key Learning Objectives ............................................................................................................... 3

3 Financial Statement Presentation ................................................................................................. 4

3.1 Components of financial statements .................................................................................. 4

3.2 Primary and secondary financial information ..................................................................... 5

3.2.1 Primary financial information .......................................................................... 5

3.2.2 Secondary financial information ..................................................................... 5

3.3 Other presentation requirements ............................................................................. 6

3.3.1 Fair presentation .......................................................................................... 6

3.3.2 Going concern ............................................................................................. 7

3.3.3 Materiality and aggregation............................................................................ 8

3.3.4 Consistency of presentation ........................................................................... 9

3.3.5 Offsetting .................................................................................................... 9

3.3.6 Comparative information ............................................................................. 10

3.3.7 Current vs. non-current distinction ................................................................ 10

4 Private Public Partnerships ......................................................................................................... 12

5 Summary of Key Principles ......................................................................................................... 14

5.1 Components of the financial statements ................................................................. 14

5.2 Primary and secondary financial information ........................................................... 14

5.3 Other presentation requirements ........................................................................... 14

5.4 Private Public Partnership .................................................................................... 14



1 Overview

The purpose of this Chapter is to provide guidance on the presentation and disclosure of information in the financial statements.

The Office of the Accountant-General has compiled a Modified Cash Standard (MCS) and this manual serves as an application guide to the MCS which should be used by departments in the preparation of their financial statements.

Any reference to a “Chapter” in this document refers to the relevant chapter in the MCS and / or the corresponding chapter of the Accounting Manual.

Explanation of images used in the manual:

2 Key Learning Objectives

Understanding the components of a complete set of financial statements

Distinguish between primary and secondary financial information

Understanding the presentation requirements that should be taken into account in preparing financial statements

Definition

Take note

Management process and decision making

Example



3 Financial Statement Presentation

3.1 Components of financial statements

The financial results of a department consist of economic and service potential activities which are measured in two ways:

the financial performance for a particular period, i.e. 1 April to 31 March

the financial position at a particular point in time, i.e. 31 March

both of which is supplemented with information disclosed in the notes

The above information is presented in different components of the financial statements, which are:

Appropriation statement

The appropriation statement provides a summary of the financial performance of a department against its approved budget at a programme and sub-programme level. The preparation of the appropriation statement is discussed in detail in the Chapter on Appropriation Statement.

Statement of financial performance

The statement of financial performance provides information of the inflow and outflow of funds over a given period of time and whether the department has made a surplus (revenue exceeds expenditure) or a deficit (expenditure exceeds revenue). Information presented in the statement of financial performance is the revenue earned and the expenditure incurred.

Statement of financial position

The statement of financial position provides a snapshot of the department’s recognised assets and liabilities at a point in time. Information presented in the statement of financial position is the nature of assets, liabilities and net assets.

Statement of changes in net assets

The statement of changes in net assets provides a link between the statement of financial performance and the statement of financial position and explains movements in opening and closing balances.

Cash flow statement

The cash flow statement as the name suggests shows a summary of cash receipts and cash payments during the year. The preparation of a cash flow statement is discussed in detail in the Chapter on Cash Flow Statements.

Notes to the primary financial statements, including accounting policies

The notes provide more detailed disclosure than is possible on the face of the financial statements (as referred to above). The notes to the financial statements include accounting policies which are fundamental to the understanding and interpretation of financial statements.

Notes on secondary financial information

The notes are provided on secondary financial information, for example contingent liabilities, commitments, accruals, movement in capital assets and provisions.

There is a close relationship between the abovementioned components of financial statements. Each component reflects different aspects of the same transaction and/or event.



3.2 Primary and secondary financial information

3.2.1 Primary financial information

Primary financial information relates to items of revenue, expenses, assets, and liabilities that have been recognised in accordance with the recognition criteria established by the MCS and supplemented by guidance in the Accounting Manual.

Financial statements presents primary financial information in the statement of financial position, statement of financial performance, statement of changes in net assets and other primary financial statements such as the appropriation statement, cash flow statement, and notes thereto.

Examples of primary financial information include:

Cash and cash equivalents

Prepayments and advances

Receivables

Loans

Compensation of employees

Goods and services

Interest and rent on land

3.2.2 Secondary financial information

The criteria for recording and disclosing secondary financial information in the notes to the financial statements are established in the relevant Chapters of the MCS and supplemented by guidance in the Accounting Manual.

Examples of secondary financial information include:

Accruals

Contingent liabilities

Provisions

Leases (both finance and operating)

Employee benefits such as leave entitlement, service bonus

Receivables for departmental revenue

Capital assets

Primary financial information consists of recognised revenue, expenses, assets and liabilities presented in the financial statements.

Secondary financial information provides additional information about items of revenue, expenditure, assets and liabilities that have been recorded, but did not qualify for recognition in the primary financial statements.



The principles explained in the Chapters to the Accounting Manual, apply equally to the primary and secondary financial information included in the financial statements.

The diagram below depicts the link between primary and secondary financial information

Annual Financial Statements

Primary Financial Information Secondary Financial Information

PERPOS APP CFS

Statements

CNA

Notes supporting information

recognised in the statements

Notes supporting information

recognised in the statements

Where:- POS: Statement of Position PER: Statement of Financial Performance APP: Appropriation Statement CFS: Cash Flow Statement CNA: Statement of Changes in Net Assets

3.3 Other presentation requirements

3.3.1 Fair presentation

For financial statements to be fairly presented, the effects of transactions, other events and conditions should be truthfully and accurately represented in accordance with the and recognition, measurement, presentation and disclosure criteria for assets, liabilities, revenue and expenses as contained in the MCS. A department whose financial statements comply with the MCS must make an explicit and unreserved statement of such compliance in the notes to the financial statements.

The application of the modified cash basis of accounting, combined with sufficient disclosure of secondary financial information prescribed by the MCS, is presumed to achieve fair presentation for the purposes of the users of departmental financial statements; however the extent of any departures or exemptions therefrom may impact this assessment. Refer to the Chapter on Concepts and Principles for a discussion on exemptions and departures from the MCS.

Financial statements should not be described as complying with the MCS, unless they comply with all the requirements of each applicable Chapter of the MCS.

Inappropriate accounting policies are not rectified by disclosure of the accounting policies used, nor by the notes or explanatory material presented.

Departments are encouraged, or may be required by legislation or regulations to disclose information about compliance with legislation and regulations in the annual financial statements.

Where information regarding compliance is not disclosed, it may be useful to refer in a note to any document that includes such information.



3.3.2 Going concern

Financial statements are normally prepared on the assumption that the department is a going concern and will continue in operation and meet its statutory and financial obligations for the foreseeable future.

When preparing financial statements an assessment of a department’s ability to continue as a going concern must be made. This assessment is made by management.

When management is aware, in making this assessment, of material uncertainties related to events or conditions which may cause significant doubt upon the department’s ability to continue as a going concern or to meet its obligations as they fall due, those uncertainties must be disclosed.

When preparing financial statements an assessment of a department‘s ability to continue as a going concern shall be made. This assessment shall be made by management. When management is aware, in making this assessment, of material uncertainties related to events or conditions which may cause significant doubt upon the department‘s ability to continue as a going concern or to meet its obligations as they fall due, those uncertainties shall be disclosed.

In assessing whether the going concern basis is appropriate, management may need to consider a wide range of factors surrounding current and expected performance, expected short and medium term economic environment in which the department operates, potential and announced restructurings of functions, estimates of revenue or the likelihood of continued government funding, before it is appropriate to conclude that the going concern assumption is appropriate.

Some liabilities that are ordinarily reported in the statement of financial position in the accrual environment are not reported as such in the modified cash environment. Although this is in line with the MCS, the going concern appropriateness is not as apparent as in an accrual environment. The following is an example of one of the indicators that management can use to assess going concern appropriateness using information disclosed in the financial statements:

Management should take all information regarding the future (from the reporting date) into consideration when going concern is assessed (e.g. current and expected performance, expected short and medium term economic environment for the department, estimated revenue, etc.).

Example: Assessing going concern

Current Assets xx

Unauthorised expenditure x Cash and cash equivalents x Other financial assets x Prepayments and advances x Receivables x Loans x Aid assistance prepayments x Aid assistance receivable x

Add: Current Assets in Notes xx

……… x ……… x



3.3.3 Materiality and aggregation

Each material class of similar items should be presented separately in the financial statements.

Consideration should also be given to items that might not be sufficiently material to warrant separate disclosure on the face of the statements, but that may nevertheless be sufficiently material to be presented separately in the notes.

Items of a dissimilar nature or function should be presented separately, except when they are immaterial.

Current Liabilities xx

Voted funds to be surrendered to the Revenue Fund x Departmental revenue and NRF Receipts to be surrendered to the Revenue Fund x Bank overdraft x Payables x Aid assistance repayable x Aid assistance unutilised x

Add: Current Liabilities in Notes xx

Provisions x Employee Benefits x Accruals and payables not recognised x ……… x

Net Current Assets / (Liabilities) xxx

An item is material when it can individually or collectively influence the decisions or assessments of users of the financial statements.

If an item is material by nature it should be disclosed separately and not aggregated with other expenses, regardless of its monetary value. For example, if an expense of R5 000 for the write off of irrecoverable stolen cash was included in the immaterial line item “other expenses”, then the R5 000 has to be disclosed separately, because the nature of the write-off is material.



3.3.4 Consistency of presentation

Consistency requires departments to handle affairs a certain way to avoid possible misinterpretations of financial reporting and to enhance comparability from one period to the next.

The financial statements of departments should thus be presented consistently to the previous financial years in order to ensure comparability of financial information, unless a change is required in terms of the MCS.

Comparative information should be reclassified when the presentation or reclassification of current period items are amended. Departments should disclose the nature, amount and reason for the reclassification.

3.3.5 Offsetting

Assets and liabilities, revenue and expenses should not be offset; these items should be reported separately. Offsetting is permitted only if it is required or permitted by the MCS or Legislation or where offsetting reflects the substance of the transaction or the event.

Example: Items of dissimilar nature should be presented separately unless they are immaterial

Departments often group dissimilar items together in the notes to the financial statements and no detail is disclosed, e.g. shown as “other”. Often the total of these items exceeds materiality. Dissimilar items should be presented separately, unless they are immaterial.

Presentation of Conditional grants and other transfers paid to municipalities.

Should departments complete both Note 49 of the financial statements and Annexure 1A to the financial statements?

Yes.

The requirements of Note 49 and Annexure 1A are similar but not identical. Note 49 is auditable and does not include the amounts spent by municipalities. Annexure 1A requires the amounts spent by municipalities and this is information required by other National Treasury divisions.

Note 49 is in line with the DoRA requirement which states that “the National Treasury may determine how transferring officers and receiving officers must report on conditional allocations to municipalities within 30 days after the end of each quarter to facilitate the audit of the allocations,”. Therefore, the DoRA requirement had to be included in the auditable part of the financial statements.

Municipalities are required to report on the actual spending of DoRA allocations on a monthly basis and details provided by Municipalities should be included in Annexure 1A. The audit on the spending is conducted in the Municipalities’ books.

Primarily DoRA allocations should be reported as part of Note 49 and Annexure 1A and not transfers that do not form part of DoRA. Should there be other transfers that legislation specifically requires that they be audited as it does with DoRA allocations, departments should include line items of such transfers in both Note 49 and Annexure 1A. They should be clearly distinguishable from the DoRA allocations.



3.3.6 Comparative information

Comparative information must be disclosed in respect of the previous period for all amounts reported in the financial statements, unless the MCS requires or permits otherwise.

Comparative information should also be included for narrative and descriptive information when it is relevant to understand the current period’s financial statements.

3.3.7 Current vs. non-current distinction

An asset is classified as current when it satisfies any of the following criteria:

the asset is expected to be realised in, or is held for sale or consumption in the department’s normal operating cycle, which may be shorter or longer than 12 months (when the normal operating cycle is not clearly identifiable, it is assumed to be 12 months);

Example: Offsetting permitted

Department ABC has a policy whereby all personal telephone calls made by members of staff are deducted from their salaries in the month following the receipt of the telephone bill. In this instance, when the salary deduction is offset against the related expense, this reflects the substance of the transaction - the department’s actual telephone expense is the amount net of the expenses incurred by and recoverable from the staff members.

Note that the Chapter on General Departmental Assets and Liabilities in the MCS specifically prohibits offsetting of financial assets and financial liabilities. Offsetting is only allowed if the department has the intention to settle on a net basis or a legal enforceable right to set off the amounts exists. Refer to the specific chapter of the Accounting Manual for more detail.

Example: Offsetting not permitted

One of the department’s major suppliers leases a property from the department. At the end of 20x1 the supplier has not yet paid the last month’s rental of R15 500 and the department had an outstanding balance with the supplier of R35 600 for consumables purchased.

The department would record in the notes to the financial statements the following:

R

Receivables for departmental revenue 15 500

Accruals 35 600

As illustrated above, offsetting is not allowed unless permitted by the MCS or if it reflects the substance of the transaction or event, i.e. the department and supplier have the intention of settling both transactions simultaneously. In this example, there are two different transactions and the intention is not to settle them simultaneously, i.e. the department will not set off the amount due from the supplier against the amount payable to the supplier.



the asset is primarily held for trading purposes;

the asset is expected to be realised within 12 months after reporting date; or

it is a cash or cash equivalent asset, unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting date.

All other assets which do not satisfy any of the above listed criteria should be classified as non-current assets.

A liability is classified as current when it satisfies any of the following criteria:

the liability is expected to be settled in the department’s normal operating cycle (when the normal operating cycle is not clearly identifiable, it is assumed to be 12 months);

the liability is primarily held for trading purposes; or

the liability is expected to be settled within 12 months after the reporting date.

All other liabilities which do not satisfy any of the above listed criteria’s should be classified as non-current liabilities.

Example: Current vs. non-current distinction - assets

Department ABC has an outstanding debtor that was supposed to repay within 30 days, however the debtor’s account is now long outstanding since they dispute the amount owed by them. At year end the debtor’s account is outstanding for 120 days. Should the department classify the debtor as current or non-current.

Is the debtor’s account expected to be realised within 12 months after the reporting date?

If yes, then classify as current.

If no, then classify as non-current.

Example: Current vs. non-current distinction - assets

If a debtor owes R 40 000 at year end and agreed with the department to pay instalments of R 1000 as from 1 April of the ensuing financial, then R12 000 will be classified as current asset and R 28 000 will be classified as non-current assets as the latter will only be settled after 12 months.

Example: Current vs. non-current distinction - liabilities

Department ABC entered into a loan agreement with DPSA on 31 March 20x2. According to the agreement R1 million is repayable within one year and R6 million is repayable after one year.

For the 20x2 financial year the department will classify the R1 million as current and the R6 million as non-current.



4 Private Public Partnerships

Unitary fees are the charges payable to the Private Party in connection with the performance of its obligations included in the project deliverables. The components of a unitary fee includes an amount for retiring the debt incurred by the private party and an amount for the operations and maintenance of the facility being operated by the private party. Often the amount for retiring debt is fixed, whereas the amount paid to cover the operations and maintenance of the facility is increased annually according to Consumer Price Index (CPI).

The phrase “indexed component” means that portion of the unitary fee which, by virtue of the PPP agreement, is increased, usually on an annual basis, by a stated index such as the Consumer Price Index (CPI).

Concession fees are fees payable by the private party for use of state land.

To the extent that a department is party to a PPP, it shall disclose, as part of the secondary financial information, the following information to enable the users to determine the impact of the PPP on the department:

a description of the nature and amount of any unitary fees to be paid to the private party pursuant to the PPP agreement, indicating the fixed and indexed components of the payments

a description of the nature and amount of any concession fees received from the private party pursuant to the PPP agreement;

a general description of the significant terms of the PPP agreement, along with a description of the parties to the agreement, and the date of commencement thereof;

an analysis of the indexed component of the contract fees paid;

the value of any rights, including tangible or intangible capital assets to be provided to the private party in terms of the PPP agreement; and

the value of any other obligations the department might have in terms of the PPP agreement, including prepayments and advances.

Departments must take care to provide information about all obligations they might have in terms of PPP agreements. Where the line items provided do not make provision for items specific to a department, details must be provided in the item “Other obligations” with a corresponding explanation. All aspects of the PPP should be considered in determining the disclosure in the financial statements.

A public private partnership (PPP) is a commercial transaction between department and a private party in terms of which the private party:

performs an institutional function on behalf of the institution; and/or

acquires the use of state property for its own commercial purposes; and

assumes substantial financial, technical and operational risks in connection with the performance of the institutional function and/or use of state property; and

receives a benefit for performing the institutional function or from utilising the state property, either by way of: consideration to be paid by the department which derives from a

Revenue Fund; charges fees to be collected by the private party from users or

customers of a service provided to them; or a combination of such consideration and such charges or fees.



All revenue and expenditure specifically relating to PPPs is recognised in the statement of financial performance (PER). The underlying capital asset or liability in terms of a PPP is not shown on the statement of financial position but in the PPP note. The amounts recognised in both the PER and the POS must also be included in the PPP notes. For example, if a department has a PPP involving private sector use of state land, the concession fee details will be included in this note.

If the department has a PPP with a lease agreement, the lease details will be included in the PPP note and not in the lease commitments note. Likewise, if a department has a PPP with an underlying capital asset, the capital asset details will be included in this note and not in the capital asset note/s.



5 Summary of Key Principles

This chapter provides guidance on the presentation and disclosure of information in the financial statements.

5.1 Components of the financial statements

The components of financial statements are:

1. Appropriation statement

2. Notes to the appropriation statement

3. Statement of financial performance

4. Statement of financial position

5. Statement of changes in net assets

6. Cash flow statement

7. Notes to the financial statements, including accounting policies

8. Notes on secondary financial information

5.2 Primary and secondary financial information

Primary financial information consists of recognised revenue, expenses, assets and liabilities presented in the financial statements.

Secondary financial information provides additional information about items of revenue, expenditure, assets and liabilities that have been recorded, but did not qualify for recognition in the primary financial statements.

5.3 Other presentation requirements

When preparing financial statements, consideration should be given to the following presentation requirements:

Fair presentation

Going concern

Materiality and aggregation

Consistency of presentation

Offsetting

Comparative information

Current vs. non-current distinction

5.4 Private Public Partnership

A description of the PPP arrangement, the unitary fees or concession fees and current and capital expenditure relating to the PPP arrangement is included in the PPP note.

Where a PPP also meet the definition of a principal-agent arrangement, the department must provide disclosure requirements in both notes as the disclosure requirements for PPP and principal-agent arrangements are significantly different.

Documents

Accounting Manual for Departments - National …. Annual...Financial Statement Presentation Issued October 2017 Page 6 The principles explained in the Chapters to the Accounting Manual,