1. Budget classification and Chart of accounts Ilonda Stepanova, Director of Budget Department Ministry of Finance, Latvia Kiev January 23-24, 2012 1

2. Expert’s mission’s agenda 3 sessions: Theoretical aspects of subject, best practices Examples, case studies The emphasis is put on the process and implementation of measures! Discussions Introduction of the Ukraine’s experience and planned reforms and measures in the fields where TAIEX assistance was asked.

3. 1 st session’s agenda Overview of internationally recognized methodologies of government finance statistics (GFS); The principles of budget classification system and principles of revenue classification; Chart of accounts

4. OVERVIEW OF INTERNATIONALLY RECOGNIZED METHODOLOGIES OF GOVERNMENT FINANCE STATISTICS (GFS) 4

5. Statistical reporting systems and accounting standards (1) Statistical reporting systems - methodologies developed by international institutions, the use of which provides comparability of national public finance data; Accounting standards - internationally recognized standards for financial reporting used in the public and private sector.

6. Statistical reporting systems and accounting standards (2) Purpose and output of two systems: Public sector Statistical report system is used to assess overall fiscal performance; Public sector Accounting standards are used to assess public sector overall performance... but both systems share some common definitions, information etc.

7. Statistical reporting systems and accounting standards (3) Statistical reporting systems Accounting standards UN SNA IMF GFS 2001 EU ESA95 IFRS IPSAS Commercial entities Public sector entities

8. IMF GFS 2001- classification of revenue (1) Revenue is an increase in net worth resulting from transactions; Tax revenue is composed of compulsory transfers to the general government sector. Tax revenue are classified according to the base on which the tax is levied. Fines, penalties and most social security contributions are excluded from tax revenue. 8 Source: Government Statistics Manual 2001

9. IMF GFS 2001- classification of revenue (2) All other revenue - combined into category of non- tax revenue divided in categories: Social contributions; Grants Property income Sales of goods and services Other revenue 9

10. IMF GFS 2001- classification of revenue (2) 1Revenue 11Taxes 111Taxes on income, profits, and capital gains 112Taxes on payroll and workforce 113Taxes on property 114Taxes on gods and services 115Taxes on international trade and transactions 116Other taxes 12Social contributions 121Social security contributions 122Other social contributions 13Grants 131From foreign governments 132From international organizations 133From other general government units 14Other revenue(property income, interest e.t.c.) 10

11. ESA 95 – classification, revenue part (1) D2Taxes on production and imports D21Taxes on products D29Taxes on other products D4Interest D5Current taxes on income and wealth, etc. D51Taxes on income D59Other current taxes D6Social contributions and benefits D61Social contributions D7Other current transfers D9Capital transfers D91Capital taxes 11

12. ESA 95 – classification, revenue part (2) Time of recording: ESA95 records flows on an accrual basis; that is, when economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled. … but for tax revenue Regulation (EC) No 2516/2000 of the European Parliament and of the Council of 7 November 2000 modifying the common principles of the European system of national and regional accounts in the Community (ESA) 95 as concerns taxes and social contributions and amending Council Regulation (EC) No 2223/96 determines the order on the reflection of tax revenue from taxes and social security contributions to ensure comparability and transparency among Member States. 12

13. ESA 95 – classification, revenue part (3) Article 3 of Regulation stipulates that treatment of taxes and social contributions is carried out using one of two methods: operate with cash revenues by adjusting the date when the action, which proceeds tax commitments, was accomplished; coefficient method, there should be used calculations of tax revenues and declarations, and sums has to be corrected by the coefficient, which represents outstanding calculated and declared sums.....but in a middle run cash and accrual data should be equal to avoid overestimation of tax revenue 13

14. BUDGET CLASSIFICATION

15. Budget classification (1) Definition: The budget classification is a tool which allows planning, collecting, processing and reporting the budget information (financial flows) in a unified form. The classification forms a legal structure of the budget. 15

16. Budget classification (2) The main features of a sound budget classification system: Comprehensiveness Unity Internal consistency Stability Source: IMF Technical note “Budget Classification”

17. Budget classification (3) The budget classification is a precondition for the other Public Finance Management reforms: Integrated Financial Information System; Medium Term Expenditure Framework; Performance Budgeting. 17 Source: IMF Technical Note “Budget Classification”

18. Budget classification (4) Users of information - International organizations Government agencies The audit institutions Ministry of Finance, Treasury ParliamentThe public Source: A.Gustafsson “A note on budget and accounts classifications ”

19. Budget classification (5) Excise tax Excise tax on oil products Excise tax on petrolExcise tax on unleaded petrol 19

20. Budget classification (6) Non- financial part should be clearly distinguished from financial part: Non-financial part - direct impact on budget balance Financial part - no direct impact on budget balance Budget classification shall be mutually coherent (e.g. Revenue classification and expenditure classification - transfers!) The structure of classification shall ensure necessary level of aggregation according to the user’s needs.

21. CASE STUDY Latvia

22. System of budget classifications (1) In 2005 the Cabinet of Ministers approved a set of new classifications; The new budget classifications have been in force since 2007; Additional budget resources were allocated to budget institutions and local governments to adapt their IT systems. To ensure comparability of data and correct use of the new classifications, bridge tables were prepared for the transition from old classification to the new one.

23. System of budget classifications (2) Classification of revenue; Classification of expenditure according to economic categories Classification of expenditure according to the government functions (COFOG) Classification of institutional sectors Classification of budget financing Classification of general government debt 23

24. System of budget classifications (3) Reasons for elaboration of new classifications: Lack of classification in some areas (e.g. institutional classification); Necessity to submit public finance data according to the Eurostat data transmission program; Necessity to reflect transactions related to the new EU fund planning period (2007 – 2013); Necessity to prepare public finance forecasts according to the ESA95 methodology. 24

25. Compliance with ESA95 ESA95 was used as a reference to prepare revenue and expenditure classifications; the new classifications contain both their own codes and the ESA95 codes. Non – tax revenue and self-earned revenue according to ESA95 were classified as tax revenue, transfers or output. If it was not possible to find an exact ESA95 code then this revenue was aligned to the ESA95 classification according to the substance. 25

26. Revenue classification – principles (1) Budget revenue classification codified types of revenue to ensure information systematization, collection and processing; Budget revenue classification consists of groups and subgroups which characterize the type of revenue according to the economic nature; Tax revenue is usually classified in accordance with a taxable object (tax base).

27. Revenue classification – principles (2) Budget classification consists of: Codes: Titles of codes; Explanations of the code usage; In data processing systems: Each budget revenue classification level is not separated by full stop. Budget revenue classification is maintained in five symbols; “0” (zero) is added to the four-symbol codes

28. Revenue classification – principles (3) GroupSubgroupType of revenue 1.0.Tax revenues 1.1.Personal income tax 1.2.Corporate income tax 1.3.Social security contributions 1.4.Property taxes 1.5.Value added taxes 1.6.Excise tax 1.7.Custom tax 1.8.Taxes on specific goods and services 1.9.Taxes on the right to use certain goods 2.0.Non-tax revenues 3.0.Self-earned revenues

29. Revenue classification – principles (4) GroupSubgroupType of revenue 3.0.Self-earned revenues 4.0Foreign financial assistance 4.1.Foreign financial assistance (budget revenue) 4.2.Foreign financial assistance (institutions revenue) 5.0.Transfers 6.0.Donations and gifts 7.0.Subsidy from general revenue Subsidy from the general revenue is used only to show the resources of ministries’ budgets needed to cover expenditures

30. Revenue classification - example

31. Tax and no-tax revenue accounts Revenue classification code is used as an attribute for the state budget revenue account numbers Example: Corporate income tax account LV91TREL106000012100 Revenue classification code

32. Revenue classification – consistency with expenditure classification (1) Transfers: are payments from one budget to another budget at the same government level or between different levels; Should be eliminated when the consolidated general government budget is being calculated. Transfers are both revenue (resource) and expenditure! The level of aggregation can be different!

33. Update of the classification (1) During the period from 2008 to 2011 only minimal, mainly technical changes were performed: New codes because of changes in the legislation (e.g. Micro-enterprise tax ); Additional clarifications on the application of codes.

34. Update of the classification (2) During 2011, revenue classification was reviewed: The codes not used to reflect transactions were deleted from the classification; New codes were added taking into account changes in the government sector delimitation.

35. CHART OF ACCOUNTS

36. Chart of accounts (1) Definition A chart of accounts is a classification of transactions and events (payments, revenues, depreciations, losses) according to their economic, legal, or accounting nature.

37. Chart of accounts (2) COA is a critical element of the Public Finance Management framework for classifying, recording and reporting information on financial plans, transactions and events in a systematic and consistent way. The COA specifies how the financial transactions are recorded in a series of accounts; The COA provides a coding structure for the classification and recording of relevant financial information. 37 Source: IMF «Chart of accounts: A critical Element of the Public Financial Management Framework»

38. Chart of accounts (3) Objectives of COA: Control; Accountability; Budget management; Financial planning and management; Management information; General purpose financial reporting Statistical reporting 38 Source: IMF «Chart of accounts: A critical Element of the Public Financial Management Framework »

39. Chart of accounts (4) Core principles for effective development, implementation and maintenance of COA: Comprehensiveness - COA should capture all the required/relevant information; Adequate granularity – the segments and sub-segments of COA should be designed to facilitate many possible combinations of data elements; Mutual exclusiveness – the COA segments and their attributes should be defined in a way to make them mutually exclusive and avoid confusion in transaction recording and reporting; Avoiding redundancy - there is no need for an independent segment in a COA if the related information could be derived from other segment; Internal consistency Unified framework Scalability 39 Source: IMF Technical note «Chart of accounts: A critical Element of the Public Financial Management Framework»

40. Budget classification and Chart of Accounts Chart of accounts Classifications COA includes budget classifications (revenue, expenditure etc.) and asset, liability and equity accounts

41. Chart of accounts Latvia (1) 41 Budget institutions Chart of accounts and explanation of application is approved by the Cabinet of Ministers regulation; Currently applied Chart of accounts has been in force since 2007; Chart of accounts consists of three levels of the account groups and an account number, which consists of four digits; For analytical purposes budget institutions can use the 5th digit.

42. Chart of accounts Latvia (2) 1st level of account groupTitle of account Assets 1000Long-term investment 2000Current assets Liabilities 3000Equity capital 4000Reserves 5000Acconts payable Revenue and expenditure 6000Revenue 7000Expenditures 8000Miscellaneous revenue and expenditure 42

43. Chart of accounts Latvia (3) 1st level of account group 2nd level of account group Title of account Off-balance 0100Leased assets 9100Off-balance assets 9500Off-balance liabilities 43

44. Chart of accounts Latvia (3) Revenue and expenditure 6000Revenue Aggregation according to the revenue classification 7000Expenditure Aggregation according to the expenditure classification 8000Miscellaneous revenue and expenditure 44

45. Chart of accounts Latvia (4) If the ministry has centralized accounting system then there should be a unified principles of usage of fifth digit of Chart of accounts. 45

46. Implementation of new classification and Chart of accounts Commitment and leadership Legal framework IT systems Transitional period 46