IPSAS 24

PRESENTATION OF BUDGET INFORMATION IN FINANCIAL STATEMENTS

International Public Sector Accounting Standards (IPSASs)

• The IPSASs are accounting reporting guidelines for the preparation and presentation of general purpose financial reports of public entities.

• The IPSASs prescribe the manner in which general purpose financial statements should be presented to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other public entities.

• To achieve this objective, the IPSASs set out overall considerations for the presentation (structure) and minimum requirements (content) of financial statements, and provide guidance on the recognition, measurement, and disclosure of other specific transactions and events.

Accrual & Cash Accounting IPSAS

There are two sets of IPSAS. Under accrual based IPSAS transactions and events are recorded in the accounting records and recognized as assets, liabilities, net assets/equity, revenue, or expenses in the financial statements of the periods in which they occur.

Under cash based IPSAS, transactions and events are recorded and recognized in the financial statements only when cash or its equivalent is received or paid.

Public entities are encouraged to adopt the accrual IPSAS. It facilitates correctly reports resource allocation between periods and enhances transparency on total resource costs and impact on the economy.

Scope and Authority of IPSASs

• IPSAS are designed to guide the preparation and presentation of general purpose financial statements of public sector entities.

• Public sector entities include national (central), regional and local governments, and their component entities such as departments, agencies, boards, commissions et cetera.

• IPSAS do not apply to Government Business Enterprises (GBE).

General purpose financial statements

General purpose financial statements are those intended to meet the needs of users who are not in a position to demand reports tailored to meet their specific information needs, e.g taxpayers and ratepayers, members of the legislature, creditors, suppliers, the media, and employees.

Such reports provide information about an entity’s assets, liabilities, changes in net assets/equity, revenue, expenses, and cash flows and may be presented separately or within another public document such as an annual report.

Objectives of general purpose financial statements

To provide information that is useful for decision-making and to demonstrate the accountability of the entity for the resources entrusted to it by providing information:

(a) About the sources, allocation and uses of financial resources entrusted to it;

(b) On how the entity financed its activities and met its cash requirements;

(c) That is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments;

(d) About the financial condition of the entity and changes in it

(e) Useful in evaluating the entity’s performance in terms of service costs, efficiency and accomplishments.

Objectives of general purpose financial statements (cont.)

General purpose financial statements also have a predictive or prospective role. They provide information useful in predicting the level of resources required for continued operations, the resources that may be generated by continued operations, and the associated risks and uncertainties.

Financial reporting may also provide users with information indicating whether resources were obtained and used

(a) in line with the legally adopted budget; and (b) in accordance with legal and contractual requirements,

including financial limits established by appropriate legislative authorities.

Responsibility for Financial Statements

The responsibility for the preparation and presentation of financial statements varies within and across jurisdictions with some drawing a distinction between the responsibility for preparing and responsibility for approving or presenting the financial statements.

Consider examples of people / positions responsible for the preparation and for the approval and presentation of financial statements of individual public entities.

These may be the heads or chief executives for the individual entities and the finance minister or the head of the central finance agency (e.g., controller or accountant-general) for the government as a whole.

Components of Financial Statements

A complete set of financial statements comprises: (a) A statement of financial position; (b) A statement of financial performance; (c) A statement of changes in net assets/equity; (d) A cash flow statement; (e) When the entity makes publicly available its

approved budget, a comparison of budget and actual amounts either as a separate additional financial statement or as a budget column in the financial statements; and

(f) Notes, comprising a summary of significant accounting policies and other explanatory notes.

IPSAS 24:Disclosure of budget information

• IPSAS 24, in furtherance of IPSAS 1, provides guidance for public entities which publicize their approved budgets to include budget information and a comparison of budget and actual amounts either in their financial statements

Approved budget

• The approved budget is the expenditure authority derived from laws, appropriation bills, rules, decisions etc, for an entity to apply specified funds from its revenue or from the treasury for agreed and identified purposes.

• The approved budget establishes authority for expenditure on the specified items and the legal limits within which an entity must operate.

• In some entities, the approved budget for which the entity will be held accountable may be the original budget and in others it may be the final budget.

Original and final budget

• The original budget is the budget that was first approved for application in the budget year.

• Budgetary adjustments may be necessary in the course of the year where the original budget did not adequately envisage actual operating circumstances. Actual revenue may fall short of budgeted amount and reductions or transfers on budget heads or line items become necessary to accommodate changed priorities and also to maintain fiscal discipline.

• The final budget is the original budget for the period adjusted for reserves, provisions accruals, transfers, allocations, and other authorized changes.

Budgetary process

• Most, but not all, governments prepare and issue their annual financial budgets as public documents, or otherwise make them publicly available.

• There are three main stages in the budgetary process which may be conducted on a cash or accrual basis at each of the levels of government (local, regional, state, and national):

Budget formulation

• During the formulation stage, initial budgets are developed and submitted to the legislative bodies for consideration and spending authorization based on the political priorities and fiscal policies of government.

• These budgets reflect the financial characteristics of the government’s plans for the forthcoming period and are used to analyze the potential consequences of those plans on the economy

Fiscal Transparency

Fiscal transparency is a major contributor to the cause of good governance. It leads to better informed public debate about the design and results of fiscal policy and makes governments more accountable for the implementation of fiscal policy,

Some countries (i.e., Germany) have special mechanisms for reviewing the realism of underlying economic forecasts, as well as related revenue estimates, to assure that the public is fully informed regarding these projections.

Fiscal transparency requires disclosure of more than just budget (and actual) figures. It also requires disclosure of information on the assumptions behind budget figures that may be subject to audit or review by the external auditors.

Code of Good Practices on Fiscal Transparency

To encourage countries to publicize their budgetary practices, the International Monetary Fund (IMF) issued a Code of Good Practices on Fiscal Transparency. The Code recommends the following four key objectives:

• The roles and responsibilities in government should be clear;• The public should be provided with full information on the past,

current, and projected fiscal activity of government in a timely manner;

• Budget preparation, execution, and reporting should be undertaken in an open manner; and

• Fiscal information should attain widely accepted standards of data quality and be subject to independent assurances of integrity.

Financial Management

Many governments provide guidance documents on the budget process and procedures. These include the areas to be considered when developing proposals and new initiatives, capital budgeting and working capital management, setting user charges, and output costing.

Some professional organizations publish best practices in public budgeting in order to encourage their members to improve their budgeting procedures.

The following four principles are recommended1. Establish broad goals to guide government decision making;2. Develop approaches to achieve goals;3. Develop a budget consistent with approaches to achieve goals; and4. Evaluate performance and make adjustments.

Budget information reporting

• Public sector entities are typically subject to budgetary limits in the form of appropriations or budget authorizations (or equivalent), which may be given effect through authorizing legislation.

• General purpose financial reporting by public sector entities may provide information on whether resources were obtained and used in accordance with the legally adopted budget.

• Where the financial statements and the budget are on the same basis of accounting, IPSAS 24 encourages the inclusion in the financial statements of a comparison with the budgeted amounts for the reporting period.

Budget information reporting formats

• The use of a columnar format for the financial statements, with separate columns for budgeted amounts, actual amounts and for any variances from the budget or appropriation

• A statement by the individual's) responsible for the preparation of the financial statements that the budgeted amounts have not been exceeded.

• If any budgeted amounts or appropriations have been exceeded, or expenses incurred without appropriation or authority, then details may be disclosed by way of note to the relevant item in the financial statements.

Presentation of a comparison of budget and actual amounts

• Some public entities are required by law to make public their approved budgets while others freely opt to do so to enhance their public accountability and transparency.

• IPSAS 1 & 24 require a public entity which makes public its approved budget to present a comparison of (original or final) budget amount and actual amount in their primary financial statements, and;

• by way of note, an explanation of material differences between the budget and actual amounts, unless such explanation is included in other documents issued with the financial statements and a cross reference to those documents is made in the notes.

Reasons for presentation of budget amounts in the financial statements

• For public entities to demonstrate compliance with the approved budget(s) for which they are held publicly accountable and

• To enhance the accountability and transparency of the entity by enabling the users of the financial statements to identify whether resources were obtained and used in accordance with the approved budget.

• Differences between the actual the budget amounts (variances) may also be explained in the financial statements for completeness.

Form of presentation and disclosure of budget amounts in financial statements

A comparison of budget and actual amounts shall be presented in the financial statements either as:(1) A separate additional financial statement or (2) Additional budget columns in the financial statements.

The comparison of budget and actual amounts in the financial statements shall present separately for each level of the entity:(a) The original and/or final budget amounts;(b) The actual amounts on a comparable basis; and(c) By way of disclosure note, explanation of material variances between actual and budget amounts.

Presentation and disclosure on comparable basis

All comparisons of budget and actual amounts shall be presented on a comparable basis, that is:-‘on the same accrual, cash or other accounting basis, same classification basis and for the same entities and period as for the approved budget.’

This way, information about compliance with the budget is disclosed in the financial statements on the same basis as the budget itself.

Where separate budgets approved for individual controlled entities or activities are recompiled to facilitate comparison of consolidated budget amounts with actual amounts in the consolidated financial statements, such consolidation does not amount to changes or revisions to the approved budgets.

Budget and financial statements prepared on different bases

Where the budget and financial statements are prepared on different basis, disclose by note that the budget and the accounting bases differ and that the Statement of comparison of Budget and Actual Amounts is prepared on the budget basis.

(Such disclosure and reconciliation statement is not required where budgets are prepared on the accrual basis and in the formats adopted for financial statements and additional budget columns can be included in the financial statements for presentation of budget amounts)

Incomparable accounting and budgeting bases

• Governments are encouraged to operate their budgeting and accounting systems on the same basis. If the budgetary system is on a different basis than the accounting system, a statement should be developed to reconcile key differences between the two systems. Since the accrual financial reports include cash flow statements, a reconciliation may be achieved by ensuring these cash flow statements articulate with the cash budget. In those instances where the budgetary system is transitioning to accrual budgeting, a separate reconciliation procedure with the accrual financial reports will be necessary.

Reconciliation of actual amounts on comparative (budget) basis and actual amounts in the financial statements.

• Where the financial statements and the budget are not prepared on a comparable basis, the actual amounts presented on a comparable basis to the budget shall be:(a) If the accrual basis is adopted for the budget, reconciled to total revenues, total expenses and net operating, investing and financing cash flows in the financial statements, or(b) If a basis other than the accrual basis is adopted for the budget, the major totals presented in the statement of budget and actual comparison will be reconciled to net operating, investing and financing cash flows in the financial statements.

• The reconciliation shall be disclosed as part of the statement of comparison of budget and actual amounts or in the notes to the financial statements.

Reconciliation of net cash flows from operations to net surplus/(deficit) from

ordinary activities

Surplus/(deficit) from ordinary activities

20X2

x

20X1

x

Non-cash movements X x

Depreciation and amortization X x

Increase in provision for doubtful debts X X

Increase in payables and borrowings X X

Increase in provisions for employee costs X X

Gains)/losses on sale of assets and investments X X

Increase in receivables and other current assets X X

Increases due to revaluations X X

Extraordinary operating item X X

Net cash flows from operations X X

Institutions in the Budget ProcessThe Preparation of the central Government Budget in

Denmark is done in co-operation between several levels of Government. The different authorities play their own special role - not only in the preparation of the Budget Proposal, but also in implementing the Budget, and controlling the outcome.

The authorities and the functions they perform can be found in every country. A closer study will however show differences with regard to Procedures used in the Budget preparation and appropriation Process, and during Budget implementation, follow-up and control.

This presentation will give an introduction to the authorities and their role in the Danish Budget and appropriation system.

ParliamentThe constitution specifies the budget preparation and presentation

process. Parliament is the central budget appropriation authority. No public expenditure may be paid without a prior appropriation from the Parliament, and no tax may be collected unless it is allowed by law.

Government’s Budget Proposals are presented to Parliament at the latest four months prior to the beginning of the fiscal year.

Parliament’s Finance Committee discusses and comments on the detailed budget proposals and tables them in Parliament. Parliament may amend the Budget Proposals before adopting them.

The Parliament’s Finance Committee authorizes release of appropriated funds for use by spending ministries.

Government

At Cabinet-level only a few general economic discussions take place

Detailed discussions of Government Finance Policy and Economic Programmes take place in the Cabinet’s Economic Committee (of 6 ministers where the Minister for Finance presides). The Committee involves the ministers responsible spending ministries on specific matters.

In January the Cabinet’s Economic Committee sets the broader economic targets and decides on ceilings (spending limits) for each ministry for the coming year.

In June the Cabinet discusses the result of the Budget Preparation Process and decides on the Budget Proposal for presentation to Parliament.

Ministry of Finance

• The Ministry of Finance coordinates the Budget Process. It presents the Budget Proposal to Parliament on behalf of all the cabinet.

To make Guidelines and Directions to be used by the spending ministries when drafting the Budget.

To collect draft Budget Proposals from the ministries and combine these to the final Government Budget Proposal.

To follow-up on Government revenue and spending and make economic forecasts and calculations as preparation for Government decisions on economic policy.

Through the Agency for Economic Management to ensure the preparation and presentation by ministries and agencies.

Spending ministries

Cabinet ministers are held responsible for all the administrative and political decisions taken within their areas, including agencies reporting to them.

They present draft Budget Proposal for their ministries and agencies to the Ministry of Finance.

They follow-up on the actual implementation and take action if the ministry or agency has difficulties to keep within given appropriations.

If a spending ministry during the Budget follow-up finds it necessary to apply for a change to an appropriation, the application and the financing must be approved by the Ministry of Finance before it can be submitted to Parliament.

Spending agencies

The spending agencies operate under ministers to whom they report.

The Budget Process starts with the minister asking the different agencies for draft Proposals to the Budget for their operations. During the fiscal year the spending agencies control spending and follow-up on the allocated appropriations. If this follow-up shows that the given appropriations are about to be exceeded the agency must either take actions to reduce spending or apply for more appropriation. Such an application must go through the relevant minister and approved by the Ministry of Finance before it is presented to Parliament.

Budget execution

Procedures for the execution and monitoring of approved expenditure and for collecting revenue should be clearly specified.

There should be a comprehensive, integrated accounting system which provides a reliable basis for assessing payment arrears.

Procurement and employment regulations should be standardized and accessible to all interested parties.

Budget execution should be internally audited, and audit procedures should be open to review.

The national tax administration should be legally protected from political direction and should report regularly to the public on its activities.

Disclosure on changes from Original to final Budget

By way of note present an explanation of whether changes between the original and final budget are a consequence of reallocations within the budget, or of other factors:(a) By way of note disclosure in the financial statements; or (b) In a report issued before, at the same time as, or in conjunction with the financial statements, and shall include a cross reference to the report in the notes to the financial statements.

That explanation will disclose whether changes arise as a consequence of reallocations within the original budget or as a consequence of other factors, such as changes in the overall budget parameters, including changes in policy. Such disclosures are often made in reports issued with, but not as part of, the financial statements

Disclosures of Budgetary Basis, Period and Scope

Disclose in notes to the financial statements, information about the basis of preparation of the financial statements and the significant accounting policies adopted. This assists users to better understand the relationship between the budget and accounting information disclosed in the financial statements.

Disclose in notes to the financial statements the period of the approved budget. Entities may approve budgets for an annual period or for multi-year periods. Disclosure of the period covered by the budget, where it differs from the reporting period adopted for the financial statements, assists the users of those financial statements to better understand their relationship with the budget.

Identify in notes to the financial statements the entities included in the approved budget.

Disclosure of comparative budget information of the previous periods

• IPSAS 24 requires a comparison of budget and actual amounts to be included in the financial statements of entities which make public their approved budgets). The disclosure of comparative information in respect of the previous period in accordance with the requirements of this Standard is not required.

Effective Date

• An entity shall apply this IPSAS for annual financial statements covering periods beginning on or after January 1, 2009.

• Earlier application is encouraged. If an entity applies this Standard for a period beginning before January 1, 2009 it shall disclose that fact.

• When an entity adopts the accrual basis of accounting, as defined by IPSASs, subsequent to this effective date, this Standard applies to the entity’s annual financial statements covering periods beginning on or after the date of adoption.