4 Framework for preparing F/S Why have a framework? PurposeWhat does it cover? ScopeDoes it have constraints? LimitationsPurpose:basis for the review of current and development of future IPSAS / E.C. accounting rulesAssist preparers, auditors and users in applying and/or interpreting IPSAS / E.C. accounting rulesScope:Defines qualitative characteristics that determine the usefulness of information in financial statementsDeals with the definition, recognition and measurement of the elements from which financial statements are constructed
5 Framework for preparing F/S Objectives of financial statementsThis sectionjQualitative characteristics of financial statementsNet assets andnet assets maintenancekmlComponents and elements offinancial statementsSection 2
6 Purpose of F/SF/S are a structured representation of the financial position and of the transactions undertaken by an entity that is useful to a wide range of users in making and evaluating decisions about the allocation of resources.Specifically, the objectives of F/S in the public sector are to provide information useful for decision-making, and to demonstrate the accountability of the entity for the resources entrusted to it.F/S can also have a predictive/prospective role, providing information useful in predicting the level of resources required for continued operations and the resources that may be generated by them.
7 Scope of the E.C. F/S The E.C. financial statements will: Consolidate those of entities controlled (e.g. Agencies and institutions)Proportionately consolidate those of jointly controlled entities (e.g. Galileo)Report its share in the result and net assets of entities in which it has a significant influence using the equity method of accounting (e.g. European Investment Fund)All entities concerned will have to report to the E.C. using the E.C. accounting rules
8 Qualitative characteristics of F/S Main objective of FS: Provide reliable information on financial position, performance and changes in financial positionMain characteristic: Decision usefulnessMajor qualitative Understandability Comparabilitycharacteristics:Relevance Reliability(Materiality)Substance over form PrudenceTrue and fair viewUnderstandable = understandable to the « average user » - suggests a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligenceRelevant = relevant to the user when making economic decisions – the relevance of information is affected by its nature and materiality – information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the F/SReliable = free from material error and bias - information can be depended upon by users to represent faithfully what it can reasonably be expected to representSubstance over form – refer to introductionPrudence – but this is not a reason to include excessive provisions
9 ConstraintsMain objective of FS: Provide reliable information on financial position, performance and changes in financial positionMain characteristic: Decision usefulnessMajor qualitative Understandability Comparabilitycharacteristics:Relevance Reliability(Materiality)Substance over form PrudenceConstraints: Timeliness Cost-benefit balanceTrue and fair view
10 2. Components and elements of financial statements
11 Components of F/S IPSAS European Communities (FR) Statement of financial positionBalance sheetStatement of financial performanceEconomic outturn account (including segment reporting)Statement of changes in net assetsStatement of changes in net assetsCash flow statementCash flow tableAccounting policies and notes to the financial statementsNotes to the financial statements
12 Balance sheet elements AssetsNet assets and LiabilitiesNet assetsLiabilitiesTotal AssetsTotal Net Assets and LiabilitiesResourcesControlled as a result from past eventsEmbodying future economic benefits or service potentialThe residual interestPresent obligationsResulting from past eventsThe settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential
13 Aggregated – Detailed in the notes Balance sheetAssetsNet assets and LiabilitiesNon-current assetsNet assetsNon-current liabilitiesCurrent assetsCurrent liabilitiesTotal assetsTotal net assets and liabilitiesIncreasing liquidityThis year + prior yearAggregated – Detailed in the notesTo be realised in the normal course of the E.C.s’ operating cycle or within 12 months + cash and cash equivalents
15 Economic outturn account elements resultof the year-=IncomeExpensesIncreases in economicbenefitsDecreases in economicbenefitsThe net assets maintenance concept:The excess of income over expense translates into an increase in the residual interest (the excess of assets over liabilities) – and vice-versaWhere assets and liabilities are not equal, a residual figure for net assets/equity will be reported;If > 0, can be interpreted as the net resources that may be applied for the provision of goods or services in the future (= the community’s investment in the entity);If < 0, may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities.
17 Extraordinary items Net Surplus or Deficit = Surplus or Deficit from ordinary activities and extraordinary itemsExtraordinary =RareUnusualOutside control of entityMaterialExample:Costs associated with the provision of services following a natural or man-made disaster, for example, the provision of shelter to homeless people following an earthquake.In order for a such an event to qualify as an extraordinary event it would need to be of a magnitude that would not normally be expected in either the geographic area in which it occurred or the geographic area associated with the entity, and the provision of emergency services or the restoration of essential services would need to be outside the scope of ordinary activities of the entity concerned.Where an entity has responsibility for providing assistance to those affected by natural disasters then costs associated with this activity would not generally meet the definition of an extraordinary itemIndicate that non-recurring items that do not meet the definition of an extraordinary item form part of surplus/(deficit) from ordinary activities but should be disclosed to facilitate understanding of the financial statements, comparability with prior years and prospective analysis.
18 Statement of changes in net assets Detailed structureSee financial report 2005 page 33
20 Notes to the financial statements Accounting policiesImpact of the transition to accrual accountingNotes to the Balance SheetNotes to the Economic Outturn AccountNotes to the Cashflow tableOff-Balance Sheet and notesFinancial risk managementRelated party disclosuresEvents after the balance sheet dateConsolidated entitiesNon-consolidated entities
21 Accounting policies IPSAS-compliant when ruled out by IPSAS Options retained when an IPSAS allows one or more alternative accounting policiesInternally-developed when no specific requirement exists
22 Changes in accounting policies Changes in accounting policies = change from one allowed basis of accounting to another allowed basis of accountingExample: the initial adoption of a policy to carry assets at revalued amountsNormally applied retrospectively (restate comparative information)Fundamental errorsChanges in accounting estimatesGive examples of each. The examples should help preparing the exercises.
23 Fundamental errorsSignificant errors in a prior year’s financial statements as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, fraud or oversightsExample: omission of a major class of expenses in the financial statementsNormally correct retrospectively: restate comparative informationGive examples of each. The examples should help preparing the exercises.
24 Changes in accounting estimates Many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available.Estimates may be required, for example, of GNI-based revenue revenue due by Member States, bad debts arising from uncollected receivables, or the useful lives of depreciable assetsAccounting estimates by their nature are approximations that may need revision as additional information becomes knownRecognise the effect in the period of the changeGive examples of each. The examples should help preparing the exercises.
25 Segment informationA distinguishable activity or group of activities of an entity for which it is appropriate to separately report financial information for the purpose of evaluating past performance and for making decisions about the future allocation of resources« Service segments » are naturally aligned with activities identified in budget documentationE.g. At a national « whole-government » level financial information is generally aggregated and reported in a manner which reflects major economic classifications of activities undertaken and/or portfolio responsibilities of individual ministers: health, defence, education, …
26 The E.C.s’ segment information CurrentPriorE.C. policy areas e. g.ExpensesOperating assetsOperating liabilitiesReconciliation to total amounts reportedAccounting policiesAgricultureRegional policyHumanitarian AidInternal MarketExternal RelationsOthers