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                                               Financial Guideline Series No. 1

                                                      Revised December 1999

                  Financial Management

Consultative Group On International Agricultural Research - CGIAR
Financial Guidelines Series

   No. 1   Financial Management (Revised 1999)
   No. 2   Accounting Policies and Reporting Practices Manual (Revised 1999)
   No. 3   Audit Policies and Procedures (Revised 1995)
   No. 4   CGIAR Research Allocation: Developing and Financing the CGIAR
           Research Agenda (Revised 1998)

These policy guidelines have been prepared by the CGIAR Secretariat to assist the
International Agricultural Research Centers supported by the Consultative Group on
International Agricultural Research. Each IARC is encouraged to draw up its own
policies and procedures manuals for its internal use.

Questions or suggestions about these guidelines should be sent to:

     CGIAR Secretariat
     (Attn: Ravi Tadvalkar)
     1818 H. Street, N.W.
     Washington, D.C. 20433, USA

                Financial Management

                Table of Contents
                                                                       Page no.

1.   Introduction                                                            1

2.   Overview                                                                2

3.   Financial Planning
          3.1 Introduction                                                   4
          3.2 Strategic plan                                                 4
          3.3 Medium-term plan
               3.3.1 Timetable                                               5
               3.3.2 Information required                                    6
          3.4 Annual financing plan
               3.4.1 Timetable                                               6
               3.4.2 Information required                                    6
          3.5 Annual operating budget
               3.5.1 Introduction                                            6
               3.5.2 Reasons for budgeting                                   7
               3.5.3 Budget cycle                                            7
          3.6 Annual capital budget                                          8
          3.7 Cash flow analysis                                             8
          3.8 Fund-raising strategy                                          8

4.   Financial Recording and Control
          4.1 Recording                                                      9
          4.2 Controls                                                       9
          4.3 Internal audit                                                 10
          4.4 Use of financial indicators                                    11
          4.5 Financial compliance
              4.5.1 Compliance with CG accounting policies                   12
              4.5.2 Compliance with donor agreements                         13
              4.5.3 Compliance with intellectual property rights, software
                    licenses, and copyrights                                 13

5.   Treasury Management
          5.1 Introduction                                                   14
          5.2 Liquidity                                                      14
          5.3 Investments                                                    14
          5.4 Foreign currency transactions                                  15

6.   Financial Reporting
          6.1 Introduction                                             17
          6.2 Annual financial statement
              6.2.1 Introduction                                       17
              6.2.2. Contents of financial statements                  17
          6.3 Management accounts
              6.3.1 Introduction                                       18
              6.3.2 Requirements                                       18
              6.3.3 Other financial performance measurements           18
              6.3.4 Criteria for high-quality management information   19

7.   Computerization & Information Management
        7.1 Introduction                                               20
        7.2 Selection and implementation of accounting software        20

8.   Designation of Financial Responsibilities
          8.1 Center management                                        22
          8.2 Executive, audit, or finance committee                   22

9.   Financial Risk Management
          9.1 Introduction                                             24
          9.2 Financial risks                                          24
          9.3 Financial risk management                                24


Appendix 1   Income and Expenditure Projection

Appendix 2   Projected Funding
             Projected Funding Status
             Restricted Funding - active projects
             Restricted Funding - proposals in progress

Appendix 3   Monthly Management Accounts - summary
             Monthly Management Accounts - by cost center

Appendix 4   Summary Annual Operating Budget
             Project/Cost center Budget by Source of Funding
             Staff Budget

Appendix 5   Cash Flow

Appendix 6   Projected Fund Balances

1. Introduction

This manual establishes general guidelines for financial management practice by
CGIAR centers. It aims to provide guidance not only to financial managers, who
are becoming responsible for an increasingly wide range of activities, but also to
center directors, senior managers, and Board of Trustee executive/finance/audit
committee members. Although this manual sets forth overall policy guidelines,
individual centers are expected to establish their own detailed financial policies
and procedures.

This manual presents a new framework of financial management, a framework
that goes beyond the more formalistic fiduciary nature of traditional financial
management to embrace efficiency and effectiveness. Modern financial
management is moving from a “chief accountant as controller” mindset toward a
more mature controllership concept in which the finance department is viewed as
a service department that helps the institute achieve its goals.

2. Overview

Financial management is the set of activities by which a center manages its
finances. It encompasses what traditionally have been referred to as financial
accounting and management accounting. The guidelines offered below pertain to
the finance manager’s primary professional responsibilities: financial planning;
budgeting; recording, monitoring and control; financial compliance, treasury
management; external and internal reporting; computerization; and financial risk

Financial planning covers those set of activities by which a center estimates its
resource needs and develops plans for how it will obtain those resources. These
activities are normally undertaken in conjunction with the development of the
center' long-term strategy; mid-term and annual financing plans. The activities
will be reflected in the center’s strategic plan, financing plans, and ad hoc
planning documents which seek to ensure to ensure that the centers' flow of
funding is sufficient to facilitate all centers activities. A long-term appraisal of a
center’s future capital and finance department staffing needs should also be

Budgeting is the process of translating overall objectives into detailed plans,
usually for a period of one year. Budgets should be prepared for each operating
unit and set of research activities. These detailed plans are usually expressed in
financial terms and will be combined in a single financial plan – the master
budget – for the whole center. Annual operating and capital budgets should be

Recording, monitoring, and control is concerned with establishing an
accounting system for recording financial expenditures as a center moves
through the financial year; a monitoring system for comparing actual
expenditures against budget; and an internal control system for ensuring that all
items of expenditure and income are recorded completely, accurately, and on a
timely basis and that center assets are safeguarded from fraud or

Financial compliance is the implementation of processes that ensure a center's
compliance with accepted financial standards and practices and with donor

Treasury management is ensuring that there is sufficient cash for day-to-day
operations, investing surplus cash to maximize investment returns while staying
within acceptable risk limits, and managing foreign currency transactions.

External and internal reporting is production of annual financial statements that
are principally used for external purposes and production of management
accounts that normally are required for internal management purposes.

Computerization and information technology is the selection and installation of
appropriate hardware and software. Its inclusion reflects the fundamental role
which information technology plays in modern business practices.

Designation of financial responsibility is establishment of individual financial
responsibilities within a center.

Financial Risk Management is identification of financial risks and formulation of
a strategy for dealing with these risks.

Over the past three decades there have been great changes in the way in which
financial transactions are processed with a huge consequential reduction in the
number of staff required. The move from mainframe to networked computer
systems is now almost complete. It is likely that in the future the finance function
will consist of small teams, of highly skilled accountants working with a chief
finance office or finance director, operating in a highly computerized
environment. Center should ensure that they are able to recruit and retain high
quality finance staff.

3. Financial Planning

3.1 Introduction
The business of running CG centers is becoming increasingly complex as a
result of greater competition for funds, rapid technological changes, and a more
sophisticated and well-informed investor community. In this environment,
centers must have a clear sense of direction that is supported by thorough
planning if they are to establish and maintain competitive advantage. Centers
also must have effective strategies to compete for funds and to utilize them to
best effect.

The CG financial planning cycle for centers may be represented as follows:

   Financial planning

                                             Three year Rolling

                                             Annual Financial

                               Annual Operating and Capital Budgets

Financial planning involves preparation of several documents for external and
internal use. Documents that all centers should prepare are a strategic plan, a
three-year rolling medium-term plan (MTP), an annual financing plan, annual
operating and capital budgets; a cash flow analysis, and a fund-raising strategy.

3.2 Strategic plan
Strategic planning establishes the long-term direction of a center and the scope
of its activities. In this process, ideally, a center matches its resources to its
changing environment and, in particular, to the needs of its stakeholders.
Strategic planning decisions

   •   relate to the scope of a center’s activities (e.g. on which areas of research
       should the center focus on?),
   •   consider the fit between the activities of a center and the environment in
       which it operate,
   •   consider the fit between a center’s current and planned activities and its
       resource capability, and
   •   impact upon operational decisions, that is their effect will often have a
       cascading implication downwards and throughout a center.

Thus effective strategic planning requires financial considerations to be
integrated as fully as possible with scope, environmental, and operational
decisions. Centers should prepare long-term strategic plans. The role of finance
should be to prepare financial information for input into the strategic plan and to
ensure a fit between proposed activities and the resources available.

Generally a 10- to 15-year time frame is the appropriate time frame for the
purpose of strategic planning. Planning much beyond this time frame may be

The Board of Trustees should periodically review the strategic plan to confirm
that it remains appropriate. If inappropriate, the plan will need to undergo a
major revision. If the long-plan is appropriate, the board should ensure that the
center’s current short-term plan conforms to it.

A good financial management system will always ensure the long-term strategy
of a center is linked to the center’s day-to-day budgets and operations.

3.3 Medium Term Plan
MTPs should be based and derived from strategic plans. Centers are required to
prepare three-year rolling MTPs. As a result, each center’s annual research
agenda is reviewed each year, not only in the context of current developments
and strategies but also in the context of future requirements and opportunities.
Each center must prepare an MTP that is consistent in outline and content with
the standard set forth in the CGIAR Resource Allocation Guideline: Developing
and Financing the CGIAR Research Agenda, Financial Guidelines Series
No. 4.

3.3.1 Timetable
The first three-year rolling MTPs were prepared for the period 1998 - 2000 and
approved at MTM 1997. Annual updates are now required. The timetable for
preparation of MTPs is as follows:

December                    Centers sent updated instructions and financial
                            guidelines by CG Secretariat

Mid-March                   Centers submit draft three-year MTP to Technical
                            Advisory Committee (TAC) and CG Secretariat.

Mid-march                   TAC reviews MTPs

Mid April                   Centers submit final MTP to the CGIAR

May                         CGIAR approves agenda proposed by TAC for the
                            following year on the basis of new three-year MTPs.

3.3.2 Information required
Detailed financial tables are presented in Attachment 4 of CGIAR Resource
Allocation Guideline: Developing and Financing the CGIAR Research Agenda,
Financial Guidelines Series. No. 4

3.4 Annual financing plan
Following the approval of the agenda for the next year centers are required to
submit an annual financing plan.

After the MTM, centers prepare their financing plans for the following year on the
basis of their MTP and financing information solicited through bilateral contacts
with members and indicated by past trends. This step represents matching
current and planned activities with resources.

3.4.1 Timetable
The timetable for preparation of annual financing plans is as follows:

June                       CG Secretariat issues guidelines on the basis of
                           centers final MTP

June - September           Centers prepare financing plans

September - October        TAC reviews financing plans and approve the conte nt
                           of center programs; Following TAC approval the
                           Finance Committee reviews financing plans for
                           consistency and feasibility (at ICW).

October                    Research agendas and financing plans are approved
                           at International Centers Week (ICW)

3.4.2 Information required
The information that must be presented in annual financing plans is contained in
the guideline issued by the Secretariat in June of each year.

3.5 Annual operating budget

3.5.1 Introduction
After the annual financing plans have been formulated and approved at ICW,
centers must translate them into detailed budgets for each of their activities and
service units for the coming year. Budget schedules should indicate the expected
financial performance of each of these projects and units. In addition each center
should prepare a detailed schedule setting out expected income (both donor and
center generated) for the coming year. This should be in line with the financing

3.5.2. Reasons for budgeting

Planning; budgets provide a planning framework which obliges management,
program and project leaders and administrative cost center managers to think
ahead and identify their requirements for next year.

Resource allocation; it enables management to allocate resources. By thinking
ahead, it also enables managers to identify in advance shortages (or surpluses)
of the resources needed to achieve their units objectives. By identifying
problems, there is the time to take the necessary action i.e. to raise new funds or
to reduce/increase activity.

Forecasting; budgets provide the base data necessary to draw up cash
requirement forecasts.

Performance measurement; the budgets provide one of the yardsticks for
measuring performance. The information on actual results against budget can be
used to;
• take action to correct adverse variances
• hold managers to account for the results of their activities

Control; budgets help to control the center and may provide an indication when
measured against actual performance whether or not a program/project is on
target in achieving its financial objectives.

3.5.3 Budget cycle

With guidance from the institute’s senior managers, who are guided by the
annual financing plan, program/project leaders and administration cost center
managers consider their financing requirements for the next financial year.

The second stage involves aggregating the funds needed by each of the center’s
operational units. If the total exceeds the total resources available to the center
(often the case), adjustments in resource allocations will need to be made.

Senior managers and the budget holder negotiate resource allocations to ensure
that resources will be used as effectively as possible.

Senior managers monitor actual expenditures against budgeted expenditures
and periodically provide project leaders and administrative with comparisons of
actual financial performance and planned financial performance by the project or
unit for which these leaders and managers are responsible.

Sample income/expenditure budget is presented in Appendix 4.

3.6 Annual capital budget
In addition to preparing annual operating budgets, centers should prepare annual
capital budgets. The budgets indicate a center’s capital needs for the coming
year but should be prepared in the context of these needs for the longer-term.
These longer-term needs will have been addressed in the center’s strategic plan
and MTP. Like the annual operating budget, the annual capital budget should be
prepared from the bottom up but with guidance from senior management.

Capital budgets should be presented by program/project and by administrative
service unit cost center. They should be organized by type in accordance with
the fixed asset categories contained in Accounting Policies and Reporting
Practices number 2 of the Financial Guidelines Series:

Centers should situate their annual capital budget within the context of a three to
five-year capital planning horizon. As a rough rule of thumb, centers should aim
to maintain an optimum capital base by expending on average, over a period of
five years, an amount equal to the annual depreciation charge. Exceptions may
be made to this guideline in certain circumstances, such as undertaking of a
major new initiative that is capital-intensive.

3.7 Cash flow analysis
See Section 5.2.

3.8 Fund raising strategy
The external funding environment has changed in ways that can negatively affect
a center’s ability to operate. To ensure its financial well-being and stability, each
center should have a written fund-raising strategy describing how it intends to
raise funding sufficient to finance its operations.

For a fund raising strategy to be fully effective it should be supported by

•   the conduct of high-quality research that has a demonstrable impact at the
    farm level,
•   the submission of many high-quality proposals, and
•   improved targeting of investors.

4.     Financial Recording and Control

4.1 Recording
Centers should ensure that they have an adequate accounting system which will
record all financial transactions completely and accurately. These transactions
must be processed on a timely basis. A system of internal control is an essential
component of any accounting system and helps to ensure that financial
transactions are recorded completely and accurately.

The concepts for defining Accounting Systems, namely: Economic Entity; Going
Concern; Monetary Unit; Periodicity; Accounting Equation; and Exchange
Transactions together with the principles for defining Financial Transactions,
namely, Historical Cost/fair value; Accrual Concept; Matching Concept;
Consistency; and Full Disclosure are set out in CGIAR’s Accounting Policies and
Reporting Practices: Financial Guidelines Series No. 2.

One method of assessing the adequacy of a center’s accounting system is to
review the comments made about it by a center’s external auditors. It is a duty of
the external auditor to ascertain the center’s system of recording and processing
transactions and assess its adequacy as a basis for the preparation of financial
statements. External auditors will normally be expected to comment in their
management letter if in their view the accounting system and control procedures
are not adequate. The adequacy of the institute’s accounting system and internal
controls is an issue which should be discussed annually between the external
auditors and the finance/audit committee of the Board of Trustees.

External auditors will normally focus on five areas. These include:

•    Completeness of input
•    Accuracy of input
•    Authorization of transaction
•    Completeness of updating
•    Accuracy of updating

Particular emphasis may need to be given to returns from field offices to ensure
that they are adequate and to ensure that all the necessary information and
explanations have been received. More details on auditing are contained in the
CGIAR Audit Policies and Procedures: Financial Guidelines series No. 3.

4.2 Controls
Although finance managers have always had the primary responsibility for
establishing and maintaining appropriate financial controls, managers throughout
the center’s should assume responsibility for implementing these controls as
well. In addition the control environment within CG centers should reflect the
COSO control environment i.e. business ethics; effective internal control and
corporate governance.

One primary area of controls is cost controls to ensure that centers operate
within approved budgets. Unless a center controls costs on a year-to-year basis,
it risks operating at a permanent deficit. Without cost controls, centers may run
out of reserves and cash and become unable to continue as going concerns.
Control of costs is facilitated by production of timely, accurate, and relevant
management accounts (See Section 8.3).

The other area of controls is internal controls, an integral part of any financial
management system. Center boards and managers must ensure that such
controls exist. A proper system of internal controls helps ensure all transactions
are recorded completely, accurately and timely. In addition it helps to safeguard
the assets of the center. A proper system of internal controls should ensure the
production of accurate and reliable financial information and minimizes the
possibility of error, fraud, and misappropriation. Internal controls are defined in
Section 4 of CGIAR’s Audit Policies and Procedures, Financial Guidelines Series
No. 3; (see page 39 in particular).

4.3 Internal audit
An internal audit function is an essential component of any internal control
system. The scope and objectives of the internal audit function vary widely and
depend on the size and structure of the center, the requirements of management,
and the skills and experience of internal auditors. Normally, however, this
function will involve five activities:

•   review of the accounting system and related internal controls, monitoring of
    their operation, and recommendation of improvements;

•   examination of financial and operating information for management, including
    review of the means to identify, measure, classify, and report financial and
    operating information and inquiry into individual items, including detailed
    testing of transactions, balances, and procedures;

•   examination of the economy, efficiency, and effectiveness of operations,
    including non-financial controls;

•   review of the implementation of corporate policies, plans, and procedures;

•   special investigations.

To maintain his or her independence, the internal auditor should not report
directly to the chief financial officer or director of finance but to the director
general. The internal auditor should have access to the Board of Trustees and
best practice would be for an annual meeting with the Finance/Audit Committee
with management not being present at the meeting.

4.4 Use of financial indicators

The efficiency and effectiveness of planning and controlling operations can be
quantitatively assessed through a series of financial ratios. Although the
information contained in a center’s financial statements is historical, it offers a
good starting point for analysis and can be used to modify plans for future

Ratio                       Calculation                  Use

Operational                Surplus (deficit) as          Protection of the real value
                           % of total income             of fund balance.

The recommended annual surplus (deficit) will depend on whether a center has
reached its recommended long-term stability target.

Long term stability        Capital plus operational      To enable centers to
                           Fund/Turnover *365            maintain activity levels
                                                         in the short term and to
                                                         maintain capital assets
                                                         in the event of unexpected
                                                         funding decreases

The recommended target is 90 – 120 days.


Working capital            Current assets minus          Indication of ability to
                           Current liabilities           meet currently maturing

The recommended target is 90 days of operations.

Current ratio              Current assets divided        Indication of instant debt-
                           by Current liabilities        paying ability

Acid ratio                 Quick assets divided          Indication of instant debt-
                           by Current liabilities        paying ability

As a general rule of thumb, a current ratio of 1.5 and an acid ratio of 1 are

Inventory ratio
Inventory turnover         Cost of goods used            Assessment of efficiency
                           divided by                    of inventory management
                           Average inventory

Debtor days
Centers cannot operate without a certain level of receivables. These usually
comprise grants receivable from investors, amounts advanced to suppliers and
prepayments. It is the objective of centers to

   •   collect cash from investors as soon as possible after grants are pledged or
       research has been completed
   •   minimize advances to suppliers, and
   •   minimize prepayments and deposits.

The normal measure used in commercial organizations to control receivables is
debtors days: the amount of sales not yet paid for at the balance sheet dates
against annual turnover. The lower the debtor days, the better and quicker the
turnover of working capital. This measure is not applicable to centers because to
a large extent centers’ annual turnover is fixed in advance and is not affected by
the speed of working capital turnover. However, centers could use debtor days to
determine on an annual basis the speed with which donations from investors are

Creditors days
Centers should attempt to obtain the best possible credit terms for the purchase
of goods and services. The normal measure used in commercial organizations to
control creditors is creditor days. This is a measure of how quickly an
organization pays its creditors. It is calculated by comparing creditors at the
balance sheet date with the total cost of sales. Centers should use creditors days
as a measure to control how quickly they pays creditors.

4.5 Financial compliance
Centers must prepare financial statements in compliance with CG accounting
policies and observe any restrictions or conditions that CG members place on the
use of their funds. In addition, they must observe intellectual property rights,
licenses, and copyrights.

4.5.1 Compliance with CG accounting policies
Traditionally, CG centers have been established as autonomous international
not-for-profit entities. They have not been registered as limited companies or as
companies limited by guarantee in their host countries. Consequently, they are
not subject to the requirements of their host countries’ laws for production of
annual financial statements. This means that centers face no statutory
requirements. To assure investors that they are operating in a bone fide,
accountable, and transparent manner, CG centers are expected to prepare their
annual financial statements in compliance with CGIAR’s Accounting Policies and
Reporting Practices: Financial Guidelines Series No. 2). External auditors should
ensure that centers are in compliance with this manual and should report any
material exceptions. This manual ensures that centers are in compliance with
generally accepted accounting principles for not-for-profit organizations.

4.5.2 Compliance with donor agreements
Traditionally in the CGIAR, funding has been divided into two broad categories,
depending on the degree of flexibility in its use. The first category is unrestricted
support, of which there are two types. The first type is unrestricted funds
designated for support of the institution as a whole. Centers can allocate
unrestricted funds to any program or cost center within the research agenda on
the basis of institutional priorities and needs. Other than annual audited financial
statements, no specific financial accountability is required of them. The second
type of unrestricted support is unrestricted support with attribution. Centers are
required to document their allocation – to a program or region, for example – of
these funds. However, use of the funds within a program or region is

The second category of funding is highly restricted support, which is targeted to a
specific project, subproject, or activity. Highly restricted funds must be used in
strict accordance with a detailed contract between a member and the center
implementing a project, subproject, or activity. Funds for each line item in the
budget are specified. Any reallocation of funds within the budget generally
requires the prior consent of the member. Accountability is detailed in the
contract, which often requires financial audits on a periodic (annual) or end-of-
project basis. In addition, restrictions may be placed on the way that centers
may source certain items of expenditure – for example, centers may purchase
airline tickets only from a national carrier. Centers must comply with those
restrictions. External auditing of the use of highly restricted funds, even if not
required by donors, is desirable to ensure compliance with donor agreements.

4.5.3 Compliance with intellectual property rights, software licenses, and
Centers must comply with intellectual property rights, computer software
licenses, and genetic resources manufacturers’ copyrights.

5 Treasury management

5.1 Introduction
Treasury management is concerned with

•   liquidity (i.e., ensuring there is sufficient cash to run operations on a day-to-
    day basis),
•   investments (i.e., investing surplus cash so as to maximize investment returns
    while staying within acceptable risk parameters), and
•   management of foreign currency transactions.

5.2 Liquidity
The CFO will ensure that the center has sufficient cash to meet its obligations on
a day-to-day-basis. He or she must be able to monitor and predict cash flows
from both income and expenditure streams.

An annual cash flow analysis should be prepared for the coming year and
updated regularly. In many businesses cash flows are monitored weekly. In
general, a four-week rolling forecast should be sufficient to provide an early
warning of any potential cash flow problems. A sample cash flow analysis is
presented in Appendix 5.

5.3 Investments
Each center should have a formal investment policy. In general investment
policies should be conservative, taking into account the ratio of risk and return on
investment of what amounts to public funds. This policy should be prepared in
recognition that funding given by investors is for operations, not for investment.
However, centers will have surplus cash reserves, and a formal investment policy
sets out how those funds should be invested. The CFO should prepare such a
policy and present it to the Board of Trustees for approval. The board delegates
authority to carry out investments within that policy to management, which will
make decisions and act according to the powers and limitations of that authority.

Procedures for ensuring maintenance of an adequate control environment for
treasury operations should be presented.

Investment policies set out the board’s approved decisions on the placement of
surplus funds. Accordingly, the board should review and approve:

    •   the objectives of the investment policy;
    •   short-, medium- and long-term investment instruments;
    •   procedures for deciding among instruments;
    •   methods for choosing among periods of investment; and
    •   limits to the powers delegated to a center’s Director General and center
        financial officer.

Many instruments are available for investing surplus funds. In general, the
instrument selected should represent the optimal compromise among:

   •   security of principal amount,
   •   flexibility or liquidity,
   •   return,
   •   risk, and
   •   ease of operation.

The most common instruments include deposit accounts with banks, money
market accounts with banks or through money brokers, term deposit accounts
with banks and financial institutions, certificates of deposit issued by banks and
financial institutions, commercial paper issued by large corporations and financial
institutions, and government bonds or gilts. In addition, equity-based investment
are available.

An inter-center working group is currently developing specific investment
guidelines for CGIAR centers.

5.4 Foreign currency transactions
For CG centers, foreign currency transactions refer to receipts or payments in
currency other than US$. The issue is the impact of exchange rate volatility on
center operations. With the recent introduction of the Euro, the basket of income
currencies has become significantly smaller. Financial risks from currency
exposure can be dealt with in two ways. The first approach is to translate
currency receipts or payments into US$ as they arise i.e. at disbursement or
receipt. This approach leaves the currency exposure open. The assumption
underlying this approach is that currency gains and losses will cancel each other
out over a four- to five-year period.

The second approach is to fix the home currency value (in the case of CG
centers, US$) of foreign receipts and payments at the time of exposure i.e. at
commitment. The assumption underlying this approach is that fixing the US$
value of receipts or expenditure at the time of the commitment provides greater
operating stability. Each approach and some combination approaches have
advantages and disadvantages. A center’s approach to foreign currency
transactions must be clearly spelled out as part of its treasury management

Avoiding exposure to Fluctuating Exchange Rates

Three principal approaches for avoiding exposures to fluctuating exchange rates
are to:

   •   incorporate currency adjustments clauses in contracts and
   •   create natural hedges for exposure.
   •   Purchase hedging instruments

The first approach may not always be open to CG centers. The second, which
requires matching of inflows/outflows by currency may not be practical for most
currencies. However, centers can purchase a hedge by using the forward market
to buy or sell the currency forward or by using options to add flexibility. Options
increase the cost of hedging because the option premium includes compensation
to the option writer for accepting the uncertainty of the transaction’s outcome,
they can be used to adjust for uncertainties about timing or amount. The option
holder can leave the option unexercised if either the value or the timing is not
advantageous. Each center must decide whether a program of currency hedging
should be implemented and, if so, whether hedging should be accomplished with
forward contracts or options.

6.       Financial Reporting

6.1 Introduction
Center finance divisions have two key financial reporting responsibilities. The first
is the preparation of annual financial statements. Such statements concentrate
on the past performance of the center and are primarily used for external
purposes. The second is to prepare financial information for management
purposes. This information is often different from that included in financial
statements because it must be useful for internal management accounting.

6.2 Annual financial statements

6.2.1 Introduction
The primary financial report prepared by centers is the annual financial
statement. This statement will normally be audited by a reputable firm of
accountants with an international reputation and demonstrated experience in
auditing international not-for-profit organizations in the center’s host country. The
principal objective of the audit is to provide assurance to CG members and the
Board of Trustees that the statement accurately presents the financial results of a
center for the year, its financial position at the year end, and its cash flows during
the year. Regulations with regard to the audit of annual financial statements are
found in Audit Policies and Procedures, (Financial Guidelines Series No. 3).

6.2.2 Contents of financial statements
As noted in the Accounting Manual center financial statements should be
prepared primarily on the basis of international accounting standards (IAS) but,
where applicable, should also take into account U.S. generally accepted
accounting principles (GAAP). U.S. GAAP include (FAS) 116 (“Accounting for
Contributions Received and Made”), FAS 117 (“Financial Statements for Not-for-
Profit Organizations”), and FAS 124 (“Accounting for Certain Investments Held
by Not-for-Profit Organizations”).

Financial statements contain three basic statements: Statement of Activities,
Statement of Financial Position, and Statement of Cash Flows. Samples of
these statements are presented in the CGIAR’s Accounting Manual (Accounting
Policies and Reporting Practices No. 2 of the Financial Guidelines Series). In
addition to the primary financial statements, a center’s annual accounts should
also include various notes that

     •    explain the accounting policies that have been applied to calculate the
          figures disclosed in the statements,
     •    analyze amounts that appear in the statements, and
     •    provide details on events that had an effect on these amounts.

External auditors should ensure that a center’s financial statements have been
prepared and are in agreement with Financial Series Guidelines No. 2.

6.3 Management accounts

6.3.1 Introduction
Centers operate in an environment of unprecedented change and such change is
now accepted as a given. The key issue facing many centers is how to adapt or
respond to such change. One of the key inputs into determining a center’s
reaction is the availability of quality financial information.

The main objectives of management accounting are to help centers plan their
future and monitor their performance to ensure that objectives are achieved.
Management accounts enable managers to measure actual financial
performance against projected financial performance. In CG centers
responsibility for historical book keeping (financial statements) and for
management accounting is combined within the finance division

Management accounts must reflect operational complexity yet remain simple
enough to be understood; otherwise, they will not be used. Centers that make
their financial reports intelligible to researchers should reap the most benefit from
the reports. Much of management accounting is concerned not only with
production of financial information but also with analysis, investigation and
forecasting of financial data.

Effective management accounting involves

    •   production of timely, relevant, and accurate management accounts;
    •   communication of those accounts in an effective manner;
    •   comparison of actual and budgeted expenditures; and
    •   recommendation of corrective actions to balance these expenditures.

6.3.2 Requirements
Monthly management accounts should be prepared by each center. Actual
expenditures should be measured against budgeted expenditures and any
significant variances should be investigated. The level of detail of the accounts
will be determined by the needs and operational complexity of each center. They
should at a minimum reflect sub-units of expenditure within each line item of
expenditure for each project and sub-project as well as each administrative and
research support cost center. A sample management report is presented in
Appendix 2.

6.3.3 Other financial performance measurements
In addition to producing the standard monthly management accounts centers
should also consider producing other financial measurements of performance.
These may include such effective use of resources measures as:

•   Purchase at best value
•   Maximizing the cost effective use of existing capacity
•   Highlighting projected free capacity

6.3.4. Criteria for high-quality management information
High-quality management information meets the following criteria:

Precision; Information should be sufficiently precise to meet the needs of its
users. There is the need for balance between being accurate enough to be useful
without being unduly delayed or excessively costly.

Adequacy; The data presented should be sufficiently complete and contain
enough detail to enable the reader to interpret the data. Vague general
information may be interesting but is unlikely to be useful.

Reliability; The information presented on a month to month basis must be
consistently reliable. If it is not managers will cease to use the information.

Timeliness; information must reach users in time for it to be acted upon. A
frequent criticism of financial reports is that they arrive too late to be of use to
program/project leaders.

Necessity; The information must be necessary. Most people receive too much
rather than too little information. Modern information systems with their ability to
process and output data in enormous volumes and at great speeds have
magnified this problem.

Economy; Information costs money to produce and it is important that the
benefits to the center outweigh the costs. Information produced should represent
value for money to the institute.

Readability; A frequent criticism of financial reports is that they are too difficult to
read. The financial reports produced should be clearly set out and easy to read.

7.       Computerization and Information Management

7.1 Introduction
The information technology (IT) function plays an ever increasing role in overall
financial management by improving the quality, timeliness and accessibility of
financial information. Selection and implementation of accounting software plays
a significant role in such management.

7.2 Selection and implementation of accounting software
Guidelines for the seven steps in selecting and implementing a new accounting
software are summarized below.

1. Planning and organization – A project team should be selected. (A team-
   based approach recognizes the importance of people to the process and the
   need to communicate information at every stage of this process.) In addition,
   the projects objectives, scope, and overall approach should be established.

2. Systems strategy – The team should ensure that the new software is
   consistent with the overall IT strategy of the center. In particular, it should

     •       establish the status of existing systems,
     •       determine the overall target system’s structure,
     •       outline the key functional information requirements,
     •       consider the potential use of some or all of the existing hardware,
     •       determine the required budget,
     •       outline training needs, and
     •       address points for immediate and short-term action.

     The team should reach consensus on information needs and provide
     managers and all main users with details on the scope, scale, and
     approximate budget for the new software.

3. Statement of requirements - Once the scope and scale of the new software
   have been determined, detailed requirements for the software and criteria for
   selection of supplies should be established. The requirements will form the
   basis for a formal invitation to tender (ITT), which will be sent to appropriate
   suppliers to obtain detailed quotations.

4. Evaluation – The proposals received from the suppliers should be evaluated
   against selection criteria for accounting software:

         •    multi-dimensional reporting
         •    multiple currency facility,
         •    price, and
         •    ease of use

The supplier should be able to provide local support and any modules needed.

5. Final selection - The final selection process should begin with software
   demonstrations by short-listed suppliers. Following these demonstrations,
   more detailed demonstrations using the center’s own test data are likely to be
   required, together with discussions to resolve outstanding issues. Following
   these investigations, a preferred supplier will be chosen. A statement of
   intent can be made subject to management approval, agreement of contract
   terms, and satisfactory visits to reference sites.

6. Implementation -- Implementation should be managed by project managers
   from both the user organization and the supplier. A detailed implementation
   plan should be prepared and monitored through regular, minuted progress
   meetings. Critical to the success of the implementation are assistance from
   the chosen supplier, consultants, or both during the final systems design and
   the preparation and execution of an appropriate training plan for all relevant

7. Post-implementation review - A few months after implementation of the
   software, a post-implementation review should be performed to identify
   potential areas of improvement in the system and to confirm that the system
   is meeting users' expectations.

Failure to follow a methodical approach almost always results in the
implementation of inappropriate or ineffective systems.

8. Designation of Financial Responsibilities

8.1 Center management
Each center director general, together with the chief financial officer/director of
finance, is responsible for ensuring that

•   the center has prepared an overall financial plan (comprising strategic plan;
    MTP; Annual Financing Plan; and detailed Operating and Capital Budgets), a
    cash flow analysis, and a fund-raising plan;
•   an adequate accounting system and system of internal controls are in place;
•   all financial transactions are recorded completely and accurately and assets
    are safeguarded;
•   professional treasury management practices are observed;
•   annual audited financial statements are produced;
•   expenditures are controlled through production of timely and accurate
    management accounts; and
•   information technology is well managed.

8.2 Executive, audit or finance committee
A key feature of any effective financial management system is a strong
committee to provide the necessary overview and control of the institutional
finances. This function is handled in different centers by different committees. It
may be an executive, finance, or audit committee. This committee assists to
Board of Trustees fulfill its fiduciary responsibilities relating to the center’s
accounting practices, investments, internal financial controls and reporting
practices, and other administrative policies and procedures. Specifically, the
committee provides financial oversight of the center by;

    •   ensuring that an adequate accounting system and internal controls are in

    •   ensuring that the center is adequately financed for its level of activity

    •   ensuring that the assets of the center are safeguarded from

    •   annually recommending to the full board the appointment of a public
        accounting firm as the center’s external auditor;

    •   reviewing the report prepared by the external auditors and organizing an
        annual meeting with auditors

    •   ensuring that the center’s accounts and financial statements are properly
        audited by the external auditors;

    •   ensuring that investments are made within the established policy; and

   •   approving overall guidelines for the preparation of annual budgets.

The role and responsibilities of the Board of Trustees and various committees
with regard to effective management of center finances are outlined in The Role,
Responsibilities, and Accountability of Center Boards of Trustees; Reference
Guide for CGIAR Agricultural Research Centers and Their Board of Trustees No.
1; and Building Effective Committees,; Reference Guide for CGIAR Agricultural
Research Centers and Their Board of Trustees No. 4.

9. Financial risk management

9.1 Introduction
The knowledge of risk is basically the understanding of those events or non-
events which would cause a center not to meet its objectives or not to fulfill its
mission. It seeks to identify those events or actions which inhibit a center from
achieving its outputs, its purpose and goals. Management of that risk focuses on
minimizing the occurrence and impact of those events such that a center is able
to achieve its outputs, purpose, goals and mission. Since risk is universal, risk
management is the responsibility of everyone within a center. This guideline
concentrates on financial risk.

9.2 Financial risks
Each center faces four types of financial risks.

Business risk
Business risk can be categorized as inherent risk and objectives-related risk.
The former arises from a center’s inability to anticipate and react to changes in
external conditions that could adversely the center’s ability to meet its objectives.
Inherent risk may include environmental risk. Objectives-related risk is related to
the establishment of clear and consistent objectives and the consistency of plans
and strategies to meet those objectives

Financial risk
Financial risk is related to the institution’s ability to effectively manage the
financing of its operations and the safeguarding of its assets.

Internal risk
Internal risk arises from a lack of proper management, organizational, and
management reporting structures; poor implementation of business strategies;
inadequate resources; lack of expertise; poor systems, operations, and control
procedures; ineffective monitoring; poor internal information; and internal fraud.

Reputational risk
Reputational risk is risk of an incident that will negatively affect the public image
of a center, diminishing its ability to raise funds.

9.3 Financial risk management
Management of risk should be executed in three phases: risk identification, risk
analysis, and change management.

Risk identification is an ongoing, iterative process and a critical component of an
effective internal control system. External risk factors include technological
developments and changing donor needs and expectations. Internal risk factors
include disruptions in information systems processing or hiring of unqualified

Risk analysis usually involves

   •   estimation of the significance of a risk,
   •   assessment of the likelihood (or frequency) of the risk occurring, and
   •   consideration of how the risk should be managed.

Myriad decisions that managers make every day reduce risks. However,
elimination of all risks is impossible not only because resources are always
limited but also because every control system is subject to limitations.

Change management is crucial to risk management because an internal control
system that is effective under one set of conditions will not necessarily be
effective under another set of conditions. Changes requiring management
include change in personnel, information systems, programs or activities,
operating environment, and the geographical location of activities.

By identifying and analyzing risk and managing change, centers can minimize
disruptions and better achieve their goals and fulfill their missions.


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