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Towards Introducing Uniform Energy Accounting: The Rationale and Way Forward Jamaluddin Ahmed PhD FCA Member Council The Institute of Chartered Accountants.

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Presentation on theme: "Towards Introducing Uniform Energy Accounting: The Rationale and Way Forward Jamaluddin Ahmed PhD FCA Member Council The Institute of Chartered Accountants."— Presentation transcript:

1 Towards Introducing Uniform Energy Accounting: The Rationale and Way Forward Jamaluddin Ahmed PhD FCA Member Council The Institute of Chartered Accountants of Bangladesh

2 Objectives of the Paper 1. Economics of Regulation 2. Specific need of Uniform Energy Accounting 3. Core issues in Uniform Energy Accounting 4. Scope of uniform Energy Accounting 5. Development of Uniform Energy Accounting in Bangladesh 6. Summary and conclusion

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4 Milestones in Infrastructure Reforms 1984:British Telecom 1986:British Gas 1987:British Airways 1987:British Airport Authority 1989:Water and Sewerage Companies 1990:Electricity Companies 1995:British Rail 1996:British Energy-Nuclear 1990:Telecomm unications 1991:Railway 1996:Electricity 1996:Gas United Kingdom United States of America EU Liberalization

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9 Point of difference Focus Accounting Activities considered Yardstick competition Degree of homogeneity Basis of cost Allocation of common cost Financial Accounting Firm Within a firm Both regulated and un-regulated Can not provide Difficult Temporal cost imputation rule Inadequate allocation Between regulated and Un-regulated activities Regulatory Accounting Regulated activities Regulated activities of more firms Separation of regulated and un-regulated activities Can provide Easier Not included in asset base until in Service A regulated firm would have strong Incentive to allocate common cost to its regulatory activities rather to any Of its competitive activities

10 Objectives Collect information for Sustainability, Allocative Efficiency, Productive Efficiency, Equity or Distributive Efficiency

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27 Single Buyer Model for Electricity GeneratorsTransmission and Dispatch DistributionCustomers Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and Competition. A Compilation of World Bank and Oxford University Press

28 The Wholesale Competition Model for Electricity Generators Transmission and Dispatch DistributorsCustomers Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and Competition. A Compilation of World Bank and Oxford University Press

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35 Purpose of Uniform System of Accounts (USoAC)  USoAC are important for systematic and efficient functioning of the regulated utilities financial system  It allow regulators, creditors, auditors, and others to rely on creditable, transparent, and comparable financial accounting & Reporting information

36 Current BERC Regulated Utilities subject to Uniform System of Accounts BERC DPDCDESCOWZDCNZDCPDBREBPGCBEGCB.

37 Current Accounting System  Each regulated utility under BERC jurisdiction records their accounting books in a non-consistent forms  Utilities have different aggregated Chart of Accounts  The adaptation of Accounting Practices varies from utility to utility Revenue recognition Asset recognition Expense recognition  Submission of Reports to BERC on the basis of aggregated accounting practice

38  All Utilities will provide their financial statements to BERC in the same format  All the records will follow a uniform system of accounts  Guidelines for proper booking and accounting of utility operation  Establishment of Guidelines for all accounts & sub-accounts  Establishment of reliable financial and accounts information for regulators, creditors and other interveners.  Allow transparency in the Sector’s financial system Uniform System of Accounts

39 Advantages of Uniform Accounting System  Necessary: for BERC to carry out its regulatory functions under the Act.  Uniform Reporting System: to BERC for rate setting by auditing utilities’ books and records and establishing fair and reasonable rate of return  Cost Allocation: provides needed accounting information for cost of service study  Transparency: Provides the regulators and the public transparency in the regulated utilities accounting recording system  Completeness: Provide consistent financial and accounting information to the Regulators and the public  Flexibility: Provide a platform that can be modified and enhanced as needed  Continuity: In accordance with the existing practice in the companies

40 Limitations of Existing Accounting System  Lack of proper financial and accounting recording system for the regulators and the public to investigate rate case applications.  Non-Compliance for auditing by the regulators and the independent auditors  Non-Compliance of International Accounting Standards (IAS)  Non-Comparability between utilities within the Sector

41 Current practices as observed by Statutory Auditors performing recent independent audit of the following firms: Examples of Current Accounting System

42 Bangladesh Power Development Board Qualifications  Only maintains Cash Book & Bank Book  Gratuity & Pension Expenses not correctly shown in Financial Statements  Accrued Fixed Deposit Receipts (FDR) income not recognised  Customer Security Deposit could not be identified correctly  Clearing A/Cs not reconciled with Regional Accounting Office (RAO) A/Cs  Foreign & Govt. grants not properly recognized

43 Bangladesh Power Development Board Qualifications (cont.)  Deposit work fund created but no adjustment made after the construction/installation of Assets  Correct status of slow moving/obsolete inventory could not be verified (applies to all utilities)

44 Power Grid Company of Bangladesh Ltd. Qualifications  No physical count of fixed assets conducted and no fixed asset register maintained  No physical inventory count  No recognition obtained from NBR for “Unfunded Gratuity Scheme”

45 Power Grid Company of Bangladesh Ltd. Concerns  Inadequate Insurance Coverage of FA  Absence of FA Addition & Disposal Policy  Item-wise Inventory List not Available  GMD reported Inventory differs from Physical Counting of Inventory  No Financial & Accounting Policy Developed  Inadequate Internal Audit Coverage and Consolidation of Financial Statements

46 Power Grid Company of Bangladesh Ltd. Concerns (cont.)  Transmission charge not Independently Verified  Cash Transaction amount Notable  Opportunity Lost in FDR Interest  Bank Reconciliation Statements incorrectly prepared  Long Outstanding cheques in Reconcilation  Tax at Source deducted inadequately

47 Power Grid Company of Bangladesh Ltd. Concerns (cont.)  Overtime Register for employees not found  Log-book of Sub-Station not Updated  Long Pending of Unadjusted Advance

48 REB: 70 PBSs Qualifications  Theft, burn or damage to Electricity/ Equipment in Service was not recognized correctly in the Financial Statements  Interest on Long Term Loan recognized in the wrong period.  Cash flow Statement had not been prepared  Compensation received Electrical Equipment Damaged/Destroyed was not included in the P & L A/C.

49 Concerns  Company is operating below BEP  PBS could not utilise a line bought from PBS causing loss  System loss percentage prescribed by REB has been fluctuating over last 5 years  Obsolete items in PBS store  Significant amount of Consumer bills lie outstanding REB: 70 PBSs

50 Concerns (cont.)  PBS required to invest in Asset Replacement Fund but there is a shortfall  PBS required to invest in Donation Reserve Fund but there is a shortfall  Significant amount of money lies with the Cashier which is not covered by insurance  No inventors of materials in shops REB: 70 PBSs

51 Concerns  Detailed break down of FA valuation as not available for which ascertaining FA value for future insurance claim might be difficult  2 Generation Plants inactive, and there is a risk of penalty by BPDB if the 3 rd plant closes  Depreciation treatment are not provided properly in accounting system  Correct status of slow moving/obsolete inventory could not be verified  Tax on dividend to shareholders not correctly done  Tax on ‘off-shore’ technical service also not correctly adjusted Non-regulated Independent Power Producers (IPP) (Current problems which may benefit from USoAC)

52 Observed Issues to be Addressed  No asset valuation in any Utility  No current fixed asset register  No current Depreciation Study after the transfer of assets  No Uniformity in depreciation application across the Utility

53 Implementation of the Uniform System of Accounts allows BERC to carry out the provisions of the Act and provide transparency & reduce the information asymmetry and to improve the quality of regulation For Bangladesh USoAC is one of the key regulatory elements for effective regulations of utilities and is important for systematic functioning of the regulated utilities financial system recording within the sector. In a Nutshell

54 What is the USoAC??  USoAC or the Uniform System of Accounts is a Prescribed System of Accounts  Designed to segregate each account type of the Utilities according to Assets, Liabilities, Income and Expense  The USoAC has been successfully implemented and practiced in the United States for more than 100 years  It is operated by the Federal Energy Regulatory Commission (FERC) in USA

55 Purpose of the USoAC  USoAC is important for systematic and efficient functioning of the regulated utilities financial system  It allow regulators, creditors, auditors, and others to rely on creditable, transparent, and comparable financial accounting & Reporting information

56 How the USoAC will Function?

57 Advantages of the USoAC

58 Current Accounting Practice

59 Limitations of Current Accounting Practice

60 Collaborative Workshops

61 1 st Collaborative Workshops

62 2 nd Collaborative Workshops

63 3 rd Collaborative Workshops

64 4 th Collaborative Workshops

65 4 th Collaborative Workshops (contd.) No. of Participants OrganizationDesignation 2DPDCDGM (Finance), Deputy Manager (F) 1WZPDCLManager (F) 1United Power Gen. & Dist. Co. Ltd. Deputy Manager (A & F) 1RPCLDeputy Manager (A & F) 1DESCODeputy Manager (F) 1BPDBAdditional Director (Finance) 2EGCB Ltd.Manager (F & A), Manager (F) 1RELChief Accountant, Manager (A/cs & Tax) 2REBController (F & A), Director (Finance) 2PGCBDeputy Manager (A), Manager (A) 1APSCLAsst. Manager (F), 1Summit PowerManager (Internal Audit) 2NWZPDCLDeputy Director (F), Director (F Power CellDeputy Director (F)

66 Features of the Workshops

67 Following the Workshops

68 Thank You


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