Government Finance Statistic and New Budgeting and Accounting Classification

Structure

CAUCASUS REGIONAL MEETINGMarch 2006

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Presentation Focus

• Overview of Accounting Reform Project in Armenia

• New Economic Codes

• New Functional Codes

• New Account Code Structure

• Problems Encountered

• Moving Forward

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Second Generation Accounting and Reform Project

• Government financial management information system (GFMIS)

• International Public Sector Accounting Standards (IPSAS)

• Chart of accounts in compliance with Government Finance Statistics (GFS) 2001

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Second Generation Accounting and Reform Project

• All of these initiatives result from IMF / World Bank conditionalities without a real understanding of the implications or the work necessary to implement

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IPSAS

• IPSAS Standards are international financial reporting standards for the public sector

• IPSAS Standards are issued by the IPSAS Board of the International Federation of Accountants (IFAC)www.ifac.org

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IPSAS

• Status– Cash Based Standards Approved by

Steering Committee with Transition to Accrual

– Steering Committee Approved Work Plan– Cash Based Standards Have Been

“Unofficially” Translated into Armenian– MoFE staff is preparing statements based

on 2005 financial information

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IPSAS

• Key Dates– Identification of problems to implement cash

based standards – 3/31/2006

– Strategy to implement the standards and transition plan for accrual based standards – 6/30/2006

– It is expected that a new reporting format to comply with the new standards will be developed for use by January 1, 2007

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IPSAS• Problems and Issues

– Currently using the Soviet Manual from 1980 which is a coding structure and describes entries

– There are no financial policies– Lack of understanding about:

• Accrual based IPSAS and unwillingness to “go backwards”

• What financial reporting standards mean– There is no certification process or training for

governmental accountants and external auditors

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New Economic and Functional Codes

• The primary focus was on meeting a conditionality that required compliance with GFS 2001.

• As GFS only addresses economic and function codes, this was the original focus.

• We spent two years developing the codes and the annotated manual

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New Economic and Functional Codes• Objectives of the new economic and

functional coding structure were expanded to:– Comply with both GFS and IPSAS– Allow for cash basis with transition to accrual basis– Allow for cash based budgeting and accrual based

accounting– Ensure consistency for a GFMIS– Provide enough detail for financial management

purposes

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New Economic and Functional Codes

• GFS 2001– Published by International Monetary Fund

– The primary purpose is to “provide a framework suitable for analyzing and evaluating fiscal policy”

– GFS is a statistical reporting system NOT an accounting system

– The GFS manual focuses on the accrual basis, but cash reporting will be implemented first

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New Economic and Functional Codes

• New Economic and Functional Codes– Used for Budgeting and Accounting

– Replace Functional Codes

– Replace the Balance Sheet, Revenue and Expense Codes Used for Budgeting and Reporting

– Impact All State Budget Institutions, Local Self-Governing Units and NCE’s and JSC’s

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New Economic Codes

• Breakdown of the Fields:– Class– Category– Group– Synthetic– Analytic– Sub-Analytic

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New Economic Codes

• Ten Classes– Balance Sheet

• 000000 – Non-Financial Assets• 100000 – Financial Assets• 200000 – Liabilities• 300000 – Net Assets / Equity

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New Economic Codes

• Ten Classes– Expenses

• 400000 – Current Expenses• 500000 – Outflows For Non-Financial Assets• 600000 – Outflows For Principal Repayment

and Acquisition of Financial Assets

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New Economic Codes

• Ten Classes– Revenues

• 700000 – Current Revenues• 800000 – Proceeds From the Sale of Non-

Financial Assets• 900000 – Proceeds From Borrowing and The

Sale of Financial Assets

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New Function Codes

• Breakdown of Function Code– Section – 2 Digit– Group – 1 Digit– Class – 1 Digit

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New Function Codes

• New Codes By Section:– 1100 GENERAL PUBLIC SERVICES– 1200 DEFENSE– 1300 PUBLIC ORDER AND SAFETY– 1400 ECONOMIC AFFAIRS– 1500 ENVIRONMENTAL PROTECTION– 1600 HOUSING AND COMMUNITY AFFAIRS– 1700 HEALTH– 1800 RECREATION, CULTURE AND RELIGION– 1900 EDUCATION– 2000 SOCIAL PROTECTION

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New Function Codes0100 STATE AND COMMUNITY SERVICES OF A

GENERAL NATURE1100 GENERAL PUBLIC SERVICES

0200 DEFENSE 1200 DEFENSE 0300 MAINTENANCE OF PUBLIC ORDER,

NATIONAL SECURITY AND JUDICIARY ACTIVITY

1300 PUBLIC ORDER AND SAFETY

0400 EDUCATION AND SCIENCE 1900 EDUCATION 0500 HEALTH 1700 HEALTH 0600 SOCIAL INSURANCE AND SOCIAL

SECURITY2000 SOCIAL PROTECTION

0700 CULTURE, INFORMATION, SPORT AND RELIGION

1800 RECREATION, CULTURE AND RELIGION

0800 DWELLINGS AND UTILITIES 1600 HOUSING AND COMMUNITY AFFAIRS

0900 FUEL AND ENERGY FACILITIES 1400 ECONOMIC AFFAIRS 1000 AGRICULTURE, FORESTRY AND WATER

MANAGEMENT AND AQUACULTURE1400 ECONOMIC AFFAIRS

1100 INDISTRY, MINERALS, CONSTTUCTION AND NATURE PROTECTION

1400 ECONOMIC AFFAIRS

1200 TRANSPORT, ROAD MANAGEMENT AND COMMUNICATION

1400 ECONOMIC AFFAIRS

1300 OTHER ECONOMIC SERVICES 1400 ECONOMIC AFFAIRS 1400 EXPENDITURES NOT BELONGING TO THE

MAIN GROUP1500 ENVIRONMENTAL PROTECTION

GFS 1986 GFS 2001

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Account Code Structure

• The primary focus was to meet the conditionality that the current structure comply with GFS 2001.

• The new codes were integrated into the current framework

• Further work is being done to expand and modernize the structure before a GFMIS is implemented

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Account Code Structure

• Further Work Is Needed To:– Accommodate program budgeting needs– Meet reporting needs of individual budget

Institutions– Provide for a richer administrative

hierarchy

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Account Code Structure

• Further Work Is Needed To:– Include all future information needs even if

they will not be used in the short-term– Ensure that each segment is uniquely

numbered to facilitate reporting– Ensure all field segments are uniquely

defined so there is no overlap in definition

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Account Code Structure

A uniform classification system is a system for classifying economic events and transactions. It represents the basis for:– Budgeting and Accounting– Financial Reporting– Statistical Reporting– Internal Management Reports

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Account Code Structure

A classification system does NOT dictate the basis of budgeting or accounting or financial reporting

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Account Code Structure

• Flexible– Must meet all of the financial information

and needs of all levels of government: Parliament and Government Ministers Managers, budget staff, accountants and other

internal staff International organizations / donors

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Account Code Structure

• Current Structure in Armenia– Administrative / Organization

– Geographic

– Functional

– Economic• Assets• Liabilities & Equity• Revenues• Expenditures

– Program

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Account Code Structure

Armenia Serbia BosniaFund XAdministration / Organization X X XSub-Organization X XGeographic XEconomic X X XSub-Economic X XFunction X X XSource of Funds XProgram / Project X X X

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Account Code Structure

• Budget Control Versus Accounting– Budget control can be at a different level than the

accounting

Budget Accounting Variance

Budget, Budget Control, Budget Execution422000 Travel Costs 10,000 7,000 3,000

Accounting422211 Per diem allowance for business travels abroad 5,000422221 Hotel allowance for business travels abroad 2,000

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Account Code Structure

Name of Segment Definition Number of

Digits Values

Defined By

Level of Budget Control

Required Fields On Accounting Transactions

Administrative Identifies organizational reporting relationships so reports can be developed at any level of the organizational hierarchy.

Type of Public Body State, communities, joint stock company 1 MoFE X X Public Body Unique identifier for each public body 4 MoFE X X Branch Legislative, Judiciary and Executive 1 MoFE X X Ministry / Agency 2 MoFE X X Cost Center / Department Hierarchy of Ministry / Agency 3 Ministry X

Regional Identifies revenues and expenditures by region 2 MoFE X X

Function Designates the activities or functions related to revenues and expenditures.

4 MoFE X X

Program Designates the program to which applicable revenue and expenditure codes apply

4 MoFE X X

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Account Code Structure

Name of Segment Definition Number of

Digits Values

Defined By

Level of Budget Control

Required Fields On Accounting Transactions

Economic Classification of assets, liabilities, equity, revenues and receipts and expenditures and other inflows and outflows by type of economic activity (GFS 2001 and MFE Order 873)

Class 1 MoFE X X Category 1 MoFE X X Group 1 MoFE X X Synthetic 1 MoFE X X Analytic 1 MoFE X Sub-Analytic 1 MoFE X Sub-Economic 3 Ministry X

Sector Designates GFS sector from which revenue was received or to which expenditures were made

1 MoFE X X

Transaction Designates the type of transaction as defined by GFS. 1 MoFE X X

Source of Funds Identifies the source of funding 2 MoFE X X

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Problems Encountered

• IMF provided technical oversight, but the oversight was provided by an economist and an IT individual neither of whom understood GFS or accounting needs and concerns.

• Current focus on function and the program link to function will necessitate reformulating many programs.

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Problems Encountered

• Lack of cooperation by the MoFE Budget Department over the past two years

• The philosophy that MoFE knows best and no input by State ministries and agencies and communities is needed

• Training must be conducted for 70 State ministries and agencies and 900 communities

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Moving Forward

• Implementation Dates:– Development of the 2008 budget– Reporting as of January 1, 2008

• Now have the attention of MoFE Budget Department

• Working cooperatively with the EC, UNDP and USAID local government projects

• Agreement from World Bank to focus on the cash basis and not to use the transaction codes for now

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Moving Forward

• Workshop has been conducted with State ministries and budget analysts

• Workshops planned in April for communities and oversight agencies

• Training plan is being developed

• Identifying changes needed to current Treasury and Budget systems