1. Government Finance Statistic and New Budgeting and Accounting Classification Structure CAUCASUS REGIONAL MEETING March 2006

2. 2 Presentation Focus Overview of Accounting Reform Project in Armenia New Economic Codes New Functional Codes New Account Code Structure Problems Encountered Moving Forward

3. 3 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

4. 4 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

5. 5 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

6. 6 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

7. 7 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

8. 8 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

9. 9 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

10. 10 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

11. 11 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

12. 12 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

13. 13 New Economic Codes Breakdown of the Fields: –Class –Category –Group –Synthetic –Analytic –Sub-Analytic

14. 14 New Economic Codes Ten Classes –Balance Sheet 000000 – Non-Financial Assets 100000 – Financial Assets 200000 – Liabilities 300000 – Net Assets / Equity

15. 15 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

16. 16 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

17. 17 New Function Codes Breakdown of Function Code –Section – 2 Digit –Group – 1 Digit –Class – 1 Digit

18. 18 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

19. 19 New Function Codes

20. 20 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

21. 21 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

22. 22 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

23. 23 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

24. 24 Account Code Structure A classification system does NOT dictate the basis of budgeting or accounting or financial reporting

25. 25 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

26. 26 Account Code Structure Current Structure in Armenia –Administrative / Organization –Geographic –Functional –Economic Assets Liabilities & Equity Revenues Expenditures –Program

27. 27 Account Code Structure

28. 28 Account Code Structure Budget Control Versus Accounting –Budget control can be at a different level than the accounting

29. 29 Account Code Structure

30. 30 Account Code Structure

31. 31 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.

32. 32 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

33. 33 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

34. 34 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