Government accounting and financial reporting in Latin America: The state of public finance -...

Government Accounting and Financial Reporting in Latin America: The State of Public Finance

Victoria Renée Narváez Alonso, General Secretary, CGR, Chile Svetlana Klimenko, Lead Financial Management Specialist, The World Bank Group

Paris, OECD, February 26-27, 2015

Evolution of Reforms in Latin America: Fiscal Discipline and Management of Government Finances

Fiscal Position

Fiscal Stability

Fiscal Sustainability

• Macroeconomic reforms of the mid-80s to early 2000s • Tackled structural and macro-fiscal issues and

helped to: • Reduce inflation • Control budget deficits • Attract foreign direct investments

• Higher growth rates since 2003 (with some interruptions) contributed to: • Lower poverty rates • Expanding middle class • Greater demands for improvements in the

quality of public services • Increased calls for transparency and

accountability

Initial reforms focused on macro-fiscal stabilization.

Subsequent reforms shifted towards management of public resources and

delivery of services.

This evolution of reforms in Latin America reflects the interdisciplinary approach needed for a well-functioning state and underscores the importance of government credibility. 2

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Centrality of the Budget

The budget: • Is a strategic link between

POLICIES and IMPLEMENTATION.

• Allocates resources among competing priorities.

“The budget is the single most important policy document of governments, where policy objectives are reconciled and implemented in concrete terms.” Source: OECD Best Practices for Budget Transparency. • 9 countries

currently have fiscal rules or FRLs.

• All countries have made changes but reform in this area remains incomplete.

• 6 countries have MTBFs but others have practices that are consistent with MTBFs in place.

• 10 countries use PB at the central govt. level; 4 countries use it in line ministries.

Performance Budgeting (PB)

and Management

Initiatives

Medium-Term Budget

Frameworks (MTBF)

Fiscal Rules and Fiscal

Responsibility Laws (FRLs)

Integrated Financial

Management Information

Systems (IFMIS)

Evolution of Reforms in Latin America: Fiscal Discipline and Management of Government Finances

Historically, reforms focused on the budgeting process given its importance. However, the 2008 global financial crisis highlighted a missing (neglected) piece in PFM reforms.

Focus of PFM Reforms in Latin America

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Accounting and

Financial Reporting

Financial Statistics

Budget

Accounting and financial reporting are the foundations of proper budgeting

and fiscal projections.

• Adherence to fiscal rules is largely nugatory without accurate information.

• Unsustainable increases in expenditure likely in absence of proper understanding of available revenue.

• Unbudgeted liabilities could lead to fiscal crisis unless contingent liabilities are accounted for properly.

• Unrealistic economic projections arise with incomplete information.

Evolution of Reforms in Latin America: Missing (neglected) Piece: Accounting and Financial Reporting

GFS Manual 2014 “recognizes the close relationship between guidelines for reporting GFS and accruals based public sector accounting standards.”

“Information contained in financial statements helps in compliance with fiscal rules.” Source: Cangiano et al. 2013.

Key Pieces of Fiscal Information

As was illustrated by the recent global financial crisis, often the importance of an item is highlighted by the consequence of its omission.

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Global Trends: Harmonization of Standards AND Processes Relevance to Latin American Reforms

FROM… Lack of harmonization in preparing

government information

RISKS to Policy – and Decision Making (e.g., debt, cost of capital, revenue)

Accounting (IPSAS)

Budgeting (OECD*)

Statistics (GFS/SNA)

TO…. Convergence attempts at international

and regional (EU) level

• Ongoing convergence of standards to improve fiscal transparency and minimize risks (e.g., GFS/IPSAS).

• In the EU, the focus is on harmonization of standards (EPSAS) AND processes (EU Directive 2011/85 EU – Budgetary Framework, “Sixpack” regulation).

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Different Standards, Practices, and Staff

* No international standards; OECD Best Practices.

GFSM 2014 & Current Reforms in Latin America

Statistics & Accounting Standards ACCRUAL BASIS

Budgeting CASH BASIS

Practices Diverse and Inconsistent

The Survey

Current State of Accounting and Financial Reporting Reforms Th

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Method

• Accountants General of 18 selected countries (83% response rate). • Argentina did not respond; Bolivia and Venezuela responded

only to Part 2. • Self-assessment. • Open and Close-ended questions. • International Public Sector Accounting Standards (IPSAS) as

reference.

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Part 1 Implementation

Progress of Reforms

Part 2 Current Reporting and Accounting Practices

Survey Results Part 1

Implementation Progress of Reforms

Accounting and Reporting Reform

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Basis of Accounting

All have plans to modernize their government accounting and financial reporting systems, including:

• Adoption of IPSAS • FMIS Updates

Nicaragua

Mexico Panama Uruguay

Brazil Chile

Costa Rica Dom. Rep. Honduras Paraguay

Peru

Colombia Ecuador

El Salvador

Cash to modified accrual basis Cash to accrual basis IPSAS Modified accrual basis to IPSAS Different accrual bases to IPSAS

Perceived Benefits and Advantages of IPSAS Adoption

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0

2

4

6

8

10

12

Improve transparency andaccountability of governments

Harmonize accounting standards

Improve the quality of decision-making

Strengthen fiscal sustainability

Provide complete information onassets and liabilities

Standardize the informationReflect the economic reality ofpublic bodies more reliably and

consistently

Facilitate comparison at theinternational level

Provide reliable basis for audits andfinancial control

Effective and efficient use ofresource

Improve perceptions in the market

Legal Framework and Adoption of IPSAS

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Strong preference for “indirect adoption” of IPSAS

Need to modify legal framework, but relatively simple

Implications for:

• Harmonization of accounting standards in the public sector

• Comparability of financial statements • Delays

Based on national law, which complies with the requirements of IPSAS



• Approximately equal divide between phased and “Big Bang” implementation approach


Implementation Progress of Reforms: Are the Dates Realistic? Country Progress Expected Year of First IPSAS

Financial Statements

Costa Rica 54% - 59% 2016

Dominican Republic Analysis Stage 2016

Peru 75% 2016

Honduras 35% 2017

Colombia 70% 2017

El Salvador 30% 2018

Uruguay Moderate 2018

Chile To begin in 2016 2019

Ecuador 10% 2019

Brazil Fair 2020

Mexico 10% 2020

Panama 20% 2021

Paraguay Analysis Stage Not stated

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Perceived Obstacles and Disadvantages of IPSAS Adoption

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Survey Results Part 1 Implementation Progress of Reforms

0 1 2 3 4 5 6 7 8 9 10

Lack of trained personnel as agents of change

Need for change in the regulations (laws)

Ignorance of the importance of government accounting

Resistance to change

Prevalence of budget information

Shortage of local experts

Time and investment requirement

Associated costs

Priority Technical Areas for Implementation of IPSAS

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0 1 2 3 4 5 6 7 8 9

Employee benefits

Update or acquisition of computing platform

Tax revenue recognition

Contingencies and provisions

Transition to accrual accounting

Fixed asset management

Fixed and intangible assets

Modalities and Critical Areas of Support

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0

2

4

6

8

10

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Peer review Training Opportunities tointeract with

peers or experts

Exchange ofexpertise

TechnicalAssistance

Preferred Support Modalities

In addition to technical areas, support is needed in: budget and accounting integration, organizational restructuring, IFMIS, electronic consolidation tools…

Main Messages Part 1 Implementation Progress of Reforms

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There are incentives and strong pressure to adopt accrual accounting standards.

Countries are motivated by the benefits of adopting IPSAS but aware of the obstacles to successful implementation.

Further integration of fiscal statistics, budgeting information, and financial accounting is important.

Accrual accounting standards minimize tendencies to work in silos to reduce time and costs.

Scope of Financial Statements

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Survey Results Part 2 Current Reporting and Accounting Practices

Compares the scope of currently prepared financial reports with the requirements included in IPSAS 1 “Presentation of Financial Statements”

Coverage of the Financial Statements

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(i) Whole ofGovernment

(ii) GeneralGovernment

(central,state and

local)

(iii) CentralGovernment

(iv) limitedentities

within theCentral

Government

8

1

6

1

Statement of Financial Position


(ii) GeneralGovernment(central, state

and local)


(iv) limitedentities

within theCentral

Government

7

1

6

1

Government entities included in the prepared financial statements (Classification aligned with the GFSM 2001)

Statement of Financial Performance

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(ii) GeneralGovernment

(central, state andlocal)


(iv) limited entitieswithin the Central

Government

4

1

6

1

Coverage of the Financial Statements (continued)

Statement of Cash Flow

• Costa Rica reports at the level of general government; Mexico reports at the level of limited entities.

• No consistency of what should comprise government-controlled entities.

Government entities included in the prepared financial statements (Classification aligned with the GFSM 2001)

Comprehensiveness and Classification of Information Presented on the Face of Financial Statements

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Respondents overall follow the recommendations of IPSAS 1. Areas requiring attention:

i) Fixed and intangible assets, deferred and other assets and liabilities, financial instruments, pensions, and other post-employment liabilities (Statement of Financial Position). “Other” categories are used as a “parking space.”

ii) Transfers, own revenues, non-budgetary transactions, and grants paid (Statement of Financial Performance).

iii) Payments made by third parties on behalf of the government and classification of cash flows by operating, investing, and financing activities (Cash Flow Statement).

iv) Segregation of amounts related to property revaluation, foreign exchange differences, and investment revaluations (Statement of Changes in Net Assets).

Notes to the Financial Statements

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Current Reporting and Accounting Practices

Notes to Financial Statements

16 15

11 11 12 13

6

12 16

12 9

11

3

Accountability and Transparency

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0

3

6

9

12

15

Published FinancialStatements

SAI Issued Opinion FS Include SAIOpionion

13 10

6

Existing disclosure practices with respect to financial information and external audits

Of nine issued opinions, two are unqualified; five are qualified; one is a disclaimer; and one is a negative opinion.

Recognition and Measurement of PPE

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Current Reporting and Accounting Practices

• Simultaneous use of the fair value and cost as measurement method poses a question about the underlying policy.

• Only 9 countries systemically recognize depreciation.

Cost at Acq. Fair Value atAcq.

Both Meas.At Acq

Cost at Post-Acq

Fair Value atPost-Acq

Both Meas.At Post-Acq

Neither atPost-Acq

16

9 8 8 6

4

7

Recognition and Measurement of Tax Revenue

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Definition of a taxable event for three key taxes: • Income Tax: 14 countries - “earning of assessable income during the taxation

period by the taxpayer” • Value Added Tax: 15 countries - “the undertaking of taxable activity during the

taxation period by the taxpayer” • Property Tax: 12 countries - “passing of the date on which the tax is levied, or

the period for which the tax is levied” However, at the moment, tax revenue is measured and recognized in: • 8 countries at the time of actual cash collection (Dominican Republic, Ecuador,

El Salvador, Guatemala, Honduras, Mexico, Paraguay, and Venezuela). • 4 countries in the tax returns presented by the taxpayers (Chile, Colombia,

Nicaragua, and Peru). • 8 countries disclose their policies for the recognition and measurement of tax

revenue in the Notes, and 6 countries recognize the advance payment of taxes as an asset with the respective liability.

Types of Employee Benefits Included in Financial Statements and Approach Used to Measure the Value of the Defined Benefit Pension Plans

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• 4 countries use both Defined Contribution and Defined Benefit Plan. • 3 countries (Colombia, Costa Rica, and Peru) determine the present value of

Defined Benefit obligations and fair value of assets, using actuarial assumptions.

Wages, Salaries,Annual andSick Leave

Social Security DefinedContribution

Plan

Defined BenefitPlan

Post-employm.Ins. & Med.

Care

TerminationBenefits

16 16

7 4

6 5

Conclusions

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Analysis of the survey results shows:

• Similarities in the challenges faced, from application and compliance with technical standards to adapting and integrating systems and processes.

• Universal need to better-understand, document, and optimize links connecting financial reporting, budgeting, and fiscal reporting processes.

Solutions will require engagements at both the country and regional levels:

• Country level: To harmonize laws, regulations, policies, and procedures to enable implementation across different levels of government.

• Regional level: To facilitate knowledge sharing and dissemination, and deepen collaborations to identify common, cost-effective solutions.

Conclusions

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In tandem with the reforms taking place in countries, a few areas merit further attention: • How does the introduction of accrual accounting impact the budgeting

process and the preparation of GFS? • What role can government internal and external auditors play in the reform

process? • While anecdotal evidence points to linkages between greater transparency

and accountability and improved service delivery, how can this correlation be better understood and documented?

A starting point would be systematic documentation and dissemination of: • Individual country approaches to adoption and implementation of accrual

accounting or IPSAS • Analysis and use of applicable international experiences and practices • Coordination of the on-going and planned accounting and financial reporting

reforms at the regional level.

División de Análisis Contable Área o Unidad

IPSAS ADOPTION IN CHILE

Local context today

The General Comptroller Office (Contraloría General de la República or “CGR”) is in charge of setting the national accounting standards.

Public sector entities register their accounting information according to a national standard, but they do not present financial statements.

CGR adds the information in a report where it is presented in four separate sectors: Central Government; Municipal Sector, State Higher Education Institutions; and Government Business Enterprises.

Benefits

There will be more complete information about assets and liabilities of public entities.

The adoption of IPSAS will increases the transparency and the accountability of the financial administration.

IPSAS delivers new and more accurate information for the decision making process.

Strategic decisions for IPSAS adoption

8. Partnership with the Ministry of Finance

4. Codesign of the new standard with public sector entities between the years 2011 an 2014

1. Gradual implementation by sectors

3. Indirect adoption of IPSAS through the issue of a new national standard

5. Collaboration from universities and audit firms as revision groups

9. Use of a transitional period for the first-time adoption of IPSAS in accordance with IPSAS 33

6. Dissemination and training programs lead by CGR, universities and audit firms

7. Modify the existing information systems

2. Adopt all IPSAS simultaneously

CGR issued resolution with

the national standard for the indirect adoption of

IPSAS

Begins the

application of the new standard

Presentation of non

comparative transitional

financial statements.

Presentation of

comparative transitional

financial statements

Presentation of the first

IPSAS financial statements

Implementation chronogram in the Central Government

Presenter

Presentation Notes

Government accounting and financial reporting in Latin America: The state of public finance -...

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