What is Financial Reporting?
Financial reports or statements are formal records of the financial activities and position of a businessperson, or other entity for a period, usually a year. They contain all the relevant financial information of an entity, be it individual, business, or government, presented in a structured manner and in a form easy to understand. They are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. They are usually considered the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organization over a specified period. In summary, it is usually considered an end product of accounting.
Objective of Financial Reporting in the Public Sector
Nature of Public Sector
The public sector is part of the economy concerned with providing basic government services. It usually comprised Government and Government organizations that exist to provide service for its citizens. In any society, the roles of Government include service provision, resource allocation, long-term stewardship of public resources, including political, financial, social, economic, non – economic and environmental responsibilities, etc.
Unlike in the private sector where the objective is aimed at maximizing profit and wealth for shareholders and therefore focuses on valuation for decision making by investors and creditors, the objective of financial reporting in the public sector is to provide information for accountability purposes. Such information aids in understanding and assessing the finances of the public sector entity.
Why Government financial reporting?
A number of reasons can be adduced for the production and presentation of financial reports by the public sector and these include:
i) Citizens and other resource providers want accountability: This accountability arises because powers, rights, and responsibilities granted to governments demand public accountability and are to be applied to serve and protect the public interest. ii) Decision-makers need a reliable basis for their decisions e.g. Lenders, Creditors, Donors;
iii) Taxpayers who provide the resources for the use of government want value for the resources they have provided.
iv) International influence–The international Monetary Fund (IMF) takes the issue of transparency seriously, G20 Ministers press release of Feb 2013 raised the issue of strengthening the government balance sheet and looking at financial reporting to improve debt management. v) For decision-making purposes for political considerations such as informing individuals that are voting in elections or advocating for programs, or informing elected officials that are making future policy decisions, defining future programs, or setting budget objectives.
vi) Feedback purposes: To enable the Government to assess its own position with a view to making corrections for improvements.
What is IPSAS?
The International Public Sector Accounting Standards (IPSASs) are a set of accounting standards issued by the IPSAS Board (IPSASB) for use by public sector entities around the world in the preparation of financial statements. IPASB is a board of the International Federation of Accountants (IFAC) and the responsible body formed to develop and issue IPSASs under its own authority. The standards are based on International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Boards (ISAB).
The major objective of IPSASs is to improve the quality of General Purpose Financial Reporting (GPFR) by public sector entities. This is expected to lead to better-informed assessments of the resource allocation decisions made by governments, thereby increasing transparency and accountability. It is pertinent to mention that most IPSASs consist of International Financial Reporting Standards (IFRSs) that are modified to meet the needs of the public sector and drawn primarily from International Accounting Standards. (IAS 1).
Benefits of IPSAS Accrual
The presentation of financial reports/statements under IPSAS brings about a number of benefits, such as: i) It increases transparency and accountability in government transactions.
ii) Improved in decision making especially in areas with capital; expenditure, e.g government interventions (loans, asset purchase) and non – exchange transactions; iii) It strengthens government financial management; iv) Assets are more actively managed, leading to disinvestment or better usage; v) It enhances long-term fiscal sustainability and service performance;
vi) It improves the quality of general purpose financial reporting by public sector entities;
i) It leads to well-informed assessments of the resource allocation decisions made by governments.
Cash vs Accrual IPSAS
There are two major methods used in accounting to record transactions, namely:
a) Cash Basis: This is an accounting method in which income is recognized and recorded when cash is received, and expenses are recognized and recorded when cash is paid, irrespective of when the transactions occur.
b) Accrual Basis: This is one under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate.
Why Accrual? i) Accrual Basis is the only generally accepted information system that provides a complete and reliable picture of the financial and economic position and performance of a government because it provides for the full picture of all assets and liabilities and reliable information about cost and income.
ii) It enhances the quality and transparency of public sector financial reporting and strengthens stakeholders’ confidence in public financial management.
iii) It reflects the long – term financial consequences of past and current transactions and activities.
IPSAS 1 – Presentation of Financial Statements
IPSAS 1 is of particular importance for the financial reporting of public sector entities as it is applicable for all General Purpose Financial Statements (GPFS) prepared under the accrual basis of accounting.
Objective of IPSAS 1
The objective of IPSAS 1 i) To prescribe the basis for presentation of general purpose financial statements,
ii) To ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities.
iii) To provide overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.
IPSAS 1 applies to all 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 particular information needs.
- Users of general-purpose financial statements include taxpayers and ratepayers, members of the legislature, creditors, suppliers, the media, and employees. General-purpose financial statements include those that are presented separately or within another public document such as an annual report.
- It shall apply to all entities and whether or not they need to prepare consolidated financial statements or separate financial statements, as defined in IPSAS 6 ‘’Consolidated Financial Statements”
- It shall apply to all public sector entities other than Government Business Enterprises (GBEs).
Purpose of Financial Statements
Financial statements are a structured representation of the financial position and financial performance of an entity. The objectives are to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making and evaluating decisions about the allocation of resources. The objectives of general purpose financial reporting in the public sector should be to provide information useful for decision-making and to demonstrate the accountability of the entity for the resources entrusted to it by:
a) Providing information about the sources, allocation, and users of financial resources;
b) Providing information about how the entity financed its activities and met its cash requirements;
c) Providing information that is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments;
d) Providing information about the financial condition of the entity and changes in it; and
e) Providing aggregate information useful in evaluating the entity’s performance in terms of service costs, efficiency, and accomplishments.
To meet these objectives, the financial statements provide information about an entity’s assets, liabilities, net assets/equity, revenue, expenses, other changes in net assets/equity, and cash flows.
Responsibility for Financial Statements
The responsibility for the preparation and presentation of financial statements varies within and across jurisdictions. In Nigeria, the Accountant General of the Federation, Accountant-General of the State, Local Government Treasurer and Directors/ Heads of Finance and Account of Ministries, Departments, and Agencies (MDAs) are charged with the responsibility for preparing and presentation of Financial Statements of their entities in a manner that guarantees accountability, probity and transparency.
Key Qualities of GPFS
The key qualities of GPFS include:
a) Financial Statement must be identified clearly and distinguished from other information; b) It must display the following information prominently: i) The name of the reporting entity ii) The reporting date or period iii) The presentation currency iv) The level of rounding c) Relevant to the decision-making needs of user. d) Reliable, in that they: i) Represent faithfully the financial performance and financial position of the entity; ii) Reflect the economic substance of events and transactions and not merely the legal form; iii) Rare neutral, that is, free from bias; iv) Are prudent; and v) Are complete in all material respects. e) Comparability Information in financial statements is comparable when users are able to identify similarities and differences between financial statements. Comparability applies to the: i) Comparison of financial statements of different entities;and ii) Comparison of the financial statements of the same entity over periods of time.
Components of Financial Statements
A complete set of financial statements comprises: i) Statement of Financial Position:
This is also called the Balance Sheet or Statement of Assets and Liabilities. It is a statement that shows Assets, Liabilities and Net Assets/Equity of a company on a given date. In other words, it
lists the resources, obligations, and ownership details of a company on a specific day. Both assets and liabilities are categorized as Current and Non-Current in the Financial Position.
As a minimum requirement, the face of the statement of financial position shall include line items that present the following:
a) Property, Plant and Equipment (PPE): These are tangible items held for use in the production or supply of goods or services for rental to others or for administrative purpose and are expected to be used for more than one reporting period. b) Investment Property: These are cash generating assets held by an entity. c) Intangible Assets: These are identifiable non- monetary assets without physical substance. These are assets that can generate economic benefits but cannot be seen physically or felt. d) Financial Assets: e) Investments accounted for using the equity method
f) Inventories: These are assets in the form of materials or supplies to be consumed in the production process in the form of materials or supplies to be consumed or distributed in rendering of services held for sale or distributed in the ordinary course of operations or in the process of production for sale or distribution.
g) Recoverable from Non-Exchange Transactions (Taxes and Transfers). These are outstanding collections arising from non – exchange transactions.
h) Receivables from exchange transactions: These are outstanding collections from exchange transactions.
i) Cash and cash equivalents: These comprise cash at hand, at bank and cash invested in easily convertible instruments. j) Taxes and transfers payable k) Payables under exchange transactions l) Provisions m) Financial liabilities n) Minority interest, presented within net assets/equity, and o) Net assets/equity attributable to owners of the controlling entity.
Statement of Financial Performance
This is also known as Statement of Revenue and Expenses, Income Statement Operating Statement Profit and Loss. It shows the income accrued to an entity from all sources and expenditure incurred during the period.
As a minimum requirement, the face of the statement should include the following line items: a) Revenue from operating activities b) Surplus or deficit from operating activities c) Finance costs
d) Share of net surplus or deficits of associates and ventures accounted for using equity method e) Surplus or deficits from ordinary activities f) Extraordinary items g) Minority interest share of net surplus or deficit, and h) Net surplus or deficit for the period.
Statement of Changes in Net Assets/Equity
This Statement explains the changes in Net Assets of an entity. It details the change between the current and prior period for the net assets balances. Net assets/equity refers to the residual measure in the statement of financial position (assets less liabilities). It may be positive or negative. These changes may be caused by many factors including: a) Surplus/deficit during the period b) Significant changes in Accounting Policies c) Correction of Prior Year Errors d) Assets Revaluation e) Effect of Translation of Foreign Exchange transactions etc.
Statement of Cash Flow – IPSAS 2
This is a statement that reports inflows and outflows of cash equivalent during a reporting period. The cash flow statement identifies the sources of cash inflows, the items on which cash was expended during the reporting period, and the cash balance as at the reporting date. Cash flow information provides users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilize those cash flows. It serves to analyse the changes in cash and cash equivalents.
IPSAS 2 sets out requirements for the presentation of the cash flow statement and related disclosures.
The standard provides for two methods of preparing Cash flow under the Accrual Basis Accounting namely: a) Direct b) Indirect.
The standard also provides that cash flows of entities should be categorized into three activities as follows:
c) Operating Activities – These are cash flows from operating activities, primarily derived from the principal cash-generating activities of the entity including cash receipts from charges for goods and services, taxes, grants, royalties and cash payments to suppliers for goods and services, employees, and others.
d) Investing Activities – These are items of cash flow that report the aggregate changes in an entity’s position resulting from amount spent on investment in non-current assets such as Property, Plant and Equipment, Investment property, Financial Instruments etc. Cash outflows that result in a recognised asset in the statement of financial position are eligible for classification as investing activities.
e) Financing Activities – These are activities that result in changes in the size and composition of the capital structure of a reporting entity that are not its primarily business. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity.
Statement of Comparison of Budget and Actual Amount
This is covered in IPSAS 29 as Presentation of budget information in Financial Statements. The statement is a comparison of Budget and Actual Amount, otherwise refers to Performance Report and shows the performance of a reporting entity. It compares actual performance of an entity with the approved budget and the report enables users to ascertain the budget performance.
The information expected to be disclosed in the Financial Statement include whether changes between the original and final budget are a consequence of re-allocation within the budget, explanation on the budget basis and classification, period of the approved budget and entities included in the approved budget.
Statement of Accounting Policies
This is one of the Statements that should be presented in the Financial Statements. They are the specific principles, bases, conventions rules and practices applied by an entity in preparing and presenting financial statements.
Users of Financial Statements
These users include: i) Taxpayers ii) Legislators or members of parliaments iii) Creditors iv) Suppliers v) The Media vi) Public Sector employees
Fair presentation of Financial Statements and Compliance with IPSASs
Financial statements shall present fairly the financial position, financial performance, and cash flows of an entity. Fair presentation presumes the application of IPSASs, with additional disclosures when necessary.
In addition to the above, a fair presentation also requires an entity to
i) To select and apply accounting policies in accordance with IPSAS 3, ‘’Accounting Policies, Changes in Accounting Estimates and Errors’’
ii) To present information, including accounting policies, in a manner that provides relevant, reliable comparable and understandable information.
iii) To provide additional disclosures when compliance with the specific requirements in IPSASAs is insufficient to enable users to understand the impact of [articular transactions, other events and conditions on the entity’s financial position and financial performance.
iv) To disclose, when there is a departure from a requirement of a standard, that it has complied with the applicable IPSASs, except that it has departed from a particular requirement to achieve a fair presentation;
v) State the title , nature of the departure, including the treatment that the standard would require, the reason why that treatment would be so misleading, the treatment adopted, the period presented and the financial impact of the departure on each of the item in the financial statement that would have been reported in complying with the requirement.
Financial statements are also required to comply with the following to comply with IPSAS 1, otherwise, there should be disclosure.
vi) Going Concern- When preparing financial statements an assessment of an entity’s ability to continue as a going concern shall be made. This assessment shall be made by those responsible for the preparation of financial statements. Financial statements shall be prepared on a going concern basis unless there is an intention to liquidate the entity or to cease operating, or if there is no realistic alternative but to do so.
vii) Going Concern – When those responsible for the preparation of the financial statements are aware, in making their assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.
viii) Consistency of Presentation – The presentation and classification of items in the financial statements shall be retained from one period to the next unless:
(a) It is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IPSAS 3; or
(b) An IPSAS requires a change in presentation.
ix) Materiality and Aggregation- Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial. Applying the concept of materiality means that a specific disclosure requirement in an IPSAS need not be satisfied if the information is not material.
x) Offsetting – Assets and liabilities, and revenue and expenses, shall not be offset unless required or permitted by an IPSAS. It is important that assets and liabilities, and revenue and expenses, are reported separately. Offsetting in the statement of financial performance or the statement of financial position, except when offsetting reflects the substance of the transaction or other event, detracts from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows. Measuring assets net of valuation allowances – for example, obsolescence allowances on inventories and doubtful debts allowances on receivables – is not offsetting.
xi) Comparative Information – Except when an IPSAS permits or requires otherwise, comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements. Comparative information shall be included for narrative and descriptive information when it is relevant to an
understanding of the current period’s financial statements. Enhancing the interperiod comparability of information assists users in making and evaluating decisions, especially by allowing the assessment of trends in financial information for predictive purposes.
Compliance with IPSASs
An entity whose financial statements comply with IPSASs should disclose that fact in the notes to the Financial Statements.
Financial statements should not be described as complying with IPSASs unless they comply with all the requirements of IPSASs.
Structure and Content – Identification of the Financial Statements
The standard requires particular disclosures on the face of the financial position, statement of financial performance and statement of changes in net assets/equity and requires disclosures of other line items either on the face of those statements or in their notes. IPSAS 2 sets out requirements for the presentation of a cash flow statement.
The financial statements must be clearly identified and distinguished from other information in the same published document. Each component of the financial statements shall be identified clearly with the following information displayed prominently: i) The name of the reporting entity ii) Whether the financial statements cover the individual entity or economic entity; iii) The reporting date or the period covered by the financial statements,
iv) The presentation currency, as defined in IPSAS 4, “The Effects of Changes in Foreign Exchange Rates;” v) The level of rounding used in the presenting amounts in the financial statements.
Structure and Content – Reporting Period
Financial statements shall be presented at least annually. When an entity’s reporting date changes and the annual financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:
(i) The reason for using a longer or shorter period; and
(ii) The fact that comparative amounts for certain statements such as the statement of financial performance, statement of changes in net Assets or equity, cash flow statement and related notes are not entirely comparable.
Structure and Content – Timeliness
The usefulness of financial statements is impaired if they are not made available to users within a reasonable period after the reporting date. An entity should be in a position to issue its financial statements within six months of the reporting date. Ongoing factors such as the complexity of an entity’s operations are not sufficient reason for failing to report on a timely basis. More specific deadlines are dealt with by legislation and regulations in many jurisdictions.
Conclusion – Key Areas of Change
In concluding this paper, I will like to mention briefly the areas that are impacted when making transition from cash to IPSAS accrual implementation in Ministries, Departments and Agencies (MDAs).
a) Accounting Policies and Procedures: Implementation of IPSAS will require MDAs to establish a new set of accounting policies and review existing guidelines, rules, regulations and procedures. It will require a review of operational guidelines, chart of accounts, accounting manuals and posting rules to guide the recording and accounting for transactions, activities and events. Most of these activities were carried out centrally by the Office of the Accountant General of the Federation. b) Information Systems: A robust information system is a critical factor to successful implementation of IPSAS. MDAs implementing IPSAS should carry out an assessment to establish the current situation to determine their shortfalls and basic requirements. Staff training in the new system is vital to the successful implementation. c) Data collection Processes and Workflows: There will be need for additional data collection to support changes in the accounting and reporting with the new system and these should be provided to make it a success. d) Audit Issues: The role of internal auditors in the successful implementation of IPSAS cannot be over emphasized. It is important that auditors establish a cooperative working relationship with the accounts from the beginning without necessarily jeopardizing their independence. They would provide useful advice regarding the criteria to be used in assessing the system or process, how opening balances were determined as well as test for compliance with IPSAS.