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					                                          J.R. Björgvinsson
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• Reconciliation of Accounting and Statistical Standards
• The fiscal policy and the GFSM 2001
• Main features of GFSM 2001 & GFSM 1986
• GFS Classifications
• Benefits from Introducing Accrual Principles
• Accounting rules
            General Government and other sectors of the economy


 Private sector                          Public sector

                                                          Nonprofit
   Nonfinancial       Financial        General           Institutions     Households
   corporations      corporations     government           Serving
                                                         Households
             PNFC               PFC




                      Central            State                 Local
                    government        governments           governments




                      Extra              Social
Budgetary
                    Budgetary           Security
 accounts
                     accounts           accounts
           No single method for organizing data



                            Transactions
                             and stocks




                             Accounting systems
                           (analytical framework)




                                                                Macro-
Accountability
                  Operations/
                   planning
                                        Billing/
                                        control
                                                    ........   economic
                                                                analysis




        The accounting system should be capable of serving and
                     fulfilling different demands.
                                  The National Budgetary Classification
1       Tax Revenue
11      Taxes on income, profits and capital gains
12      Domestic taxes on goods and services
13      Taxes on fees on special services and perform activities
14      Taxes on international trade
15      Property taxes
16      Social and health security contributions
2       Non-tax Revenue
21      Income from own activities and surplus transfers of direct related organizations
22      Received sanction payments and transfer returns
23      Income from sales of non-capital assets
24      Repayments of loans, received 1
3       Capital Revenue
31      Income from sales of capital assets and other capital income
32      Income from sales of shares and other equities 1
4       Transfers received
41      Currently received transfers
42      Received capital transfers
5       Current Expenditure
51      Wages, other remuneration payments and social contributions
52      Non-capital purchases and related expenditure
53      Non-capital transfers to enterprises and non-profit organizations
54      Non-capital transfers and some other payments to budgets
55      Non-capital transfers to households
56      Non-capital transfers abroad
57      Non-capital loans 1
58      Current transfers to the National Fund
59      Other non-capital expenditures
6       Capital Expenditure
61      Capital expenditure
62      Acquisition of shares and other equity 1
63      Capital transfers
64      Capital loans 1
65      Capital transfers to the National Fund
66      Other capital expenditure
7       Financing
71      Domestic financing
72      Financing from abroad
73      Adjustment to financial transactions
------------------------------------------------------------------------------------------------------------------------------------
1) According to internationally recognized standards, this subsection should be classified under the Financing group (8).
                    Three international standards on government accounts
       Accounting system                                               Statistical systems
       Government operations                                           Government operations
IPSAS, 2007 (IFAC)                         GFSM 2001                                 ESA95 (Table 0200)
Revenue                                    1 Revenue                                 TRP1 Output
Taxes                                      11 Taxes                                  TRP2 Intermediate consumption
Fees, fines, penalties and licenses        12 Social contributions                   TRK1 Consumption of fixed capital
Revenue from exchange transactions         13 Grants                                 =       Value added, net
Transfers from other gov. entities         14 Other revenue                          ......
                                                                                     TRD1PAY Compensation of employee
Other revenue
                                           2. Expenses                               …. etc.
Expenses                                   21   Compensation of employees            Production account (Value added)
Wages, salaries and employee benefits      22   Use of goods and services            Generation of income account
Grants and other transfers payments        23   Consumption of fixed capital                        (Operating surplus)
Supplies and consumables used              24   Interest                             Allocation of primary income account
Depreciation and amortization expense      25   Subsidies                                           (Balance of primary income)
Impairment of property, plant and equip.   26   Grants                               Secondary distribution of income acc.
Other expenses                             27   Social benefits                                     (Disposable income)

Finance costs                              28   Other expense                        Redistribution of income in kind acc.
                                                                                     Use of income account (Saving)
                                           Operating balance (1-2)                   Capital account (net lending /borrowing)
[Share of surplus of associates]                                                     Financial account (net lending / borrowing)
                                           31    Net acquisition of                  …..
Surplus/deficit for the period
                                                 nonfinancial assets
                                           Net lending / borrowing (NLB)             Net lending / borrowing (NLB)

                                                                                     Total General government expenditure
                                                                                     Total General government revenue
•      Continual development               •     1986 and 2001                       •      1970, 1979 and 1995

    IPSAS = International Public Sector Accounting Standards; IFAC = International Federation of Accountants
             Reconciliation of accounting and statistical standards


                    GFSM
                     2001                         The TFHPSA main task was to reconcile
       VH-I                       VH-II          the international accounting and statistical
                                                    standards on the general government
                                                         finances (and public sector)
       IFAC                       SNA93
      IPSAS                       ESA95




Standards:                                                                 Organizations:
• System of National Accounts 1993 (SNA 93)                                 • OECD
• European System of Accounts 1995 (ESA 95)                                 • IMF
• Government Finance Statistics Manual 2001 (GFSM 2001)                     • Eurostat
• International Accounting Standards (IAS)                                  • ECB
• International Finance Reporting Standards (IFRS)                          • World Bank
• International Public Sector Accounting Standards (IPSAS)                  • IFAC-PSC


  TFHPSA = The Task Force on Harmonization of Public Sector Accounting
         Reconciliation of accounting and statistical standards

                                                         Organizations:
                         GFSM                             • OECD
                          2001
             VH-I                        VH-II            • IMF
                                                          • Eurostat
                                                          • ECB
             IFAC                       SNA93             • World Bank
            IPSAS                       ESA95             • IFAC-PSC



Working group I:
 • Reconcile definitions and concepts
 • Coverage (public sector vs. general government sector)
 • Separation of transactions and other economic flows
 • Using market price (fair value) when valuating assets and liabilities
  IFAC: “International Public Sector Accounting Standards (IPSASs) and
  Statistical Bases of Financial Reporting: An Analysis of Differences and
  Recommendations for Convergence”.
         Reconciliation of accounting and statistical standards

                                                        Organizations:
                           GFSM                          • OECD
                            2001
              VH-I                      VH-II            • IMF
                                                         • Eurostat
                                                         • ECB
               IFAC                   SNA93              • World Bank
              IPSAS                   ESA95              • IFAC-PSC



Working group II:
 • revenue definitions
 • definition of tax credits
 • coverage (sharper definition of control & economically significant prices)
 • treatment of guarantees
 • treatment of reinvested earnings
 • treatment of PPP, SPV, etc.
         Reconciliation of accounting and statistical standards

• IPSAS, 2007
• IPSAS 22 Disclosure of Information About the General Government Sector (p. 689-716)
• http://www.ifac.org/Members/DownLoads/2007_IPSASB_Handbook.pdf
“Basic Conclusion 4 (BC4): The IPSASB supports the convergence of IPSASs with statistical
bases of reporting where appropriate. The statistical community encouraged the IPSASB to
develop an IPSAS addressing the presentation of GGS (General government sector)
information as part of a government’s consolidated financial statements as a means of
facilitating convergence.”

“BC7: Statistical bases of financial reporting and IPSASs have many similarities in their
treatment of particular transactions and events. However, there are also differences. For
example, statistical bases of financial reporting:
    (a) .......
    (b) ......
    (c) Make a distinction between transactions and other economic flows for presentation of
financial information. IPSASs do not currently make a similar distinction;“

“The IBSAS Statement of Financial Performance is similar in structure to the revenue and
expense component of the [GFS] Statement of Government Operations and the Statement of
Other Economic Flows but does not distinguish transactions from other economic flows and
consequently does not identify the analytical balances in GFS.”
                         The fiscal policy role

•   One of the main tasks of the Ministry of Finance is to set the fiscal policy
    which is reflected in its budget proposals and to overview the current
    performance.
•   To do this properly, the government needs a framework where the main
    economic indicators measuring the fiscal impacts like the Net lending
    /borrowing (NLB) are presented and retrieved in an integrated system.
    This needs to be done on at least quarterly basis.

•   It seems to be logical to use a framework that connects the accounting view
    (standards) and the economic view in an easy way. The GFSM 2001 system
    has been developed with that in mind. It reflects many of the features of the
    traditional business accounting systems and at the same time it is based on
    the concepts of the national accounts as SNA93 and ESA95. So it is in a way
    a bridge between the business accounting and national accounts and brings
    forward the main fiscal indicators that matters.
•   The GFSM 2001 statements are: (1) The Statement of Government Operations, (2)
    The Statement of Other Economic Flows, (3) The Balance Sheet and (4) The
    Statement of Sources and Uses of Cash.
                 Why implementing GFSM 2001 ?

                                  Monetary
                                   policy



          Economic                                     Economic
           theories                                    indicators


                                                         • operating balance
                                    Fiscal               • net lending / borrowing
                                                         • net worth
                                    policy


The primary purpose of the GFSM 2001 is to provide a comprehensive conceptual
and accounting framework suitable for analyzing and evaluating fiscal policy,
especially the performance of the general government sector and the broader public
sector of any country (GFSM 2001, paragraph 1.2)
             Two approaches for compiling GFSM 2001 data

                                                GFSM 2001
                                               Fiscal statistics




                             Source                                    ESA 95
                              data                                     Tables


                                                                   • See my IMF paper on the relationships
         BCG-units          ECG-units      LG-units                  between the GFSM 2001 and ESA 95.
                                                                   • See the Supplement to the IMF’s 2002
                                                                     GFS Yearbook
• The GFSM 2001 system is tailored for fiscal analysis
                                                                   • Bridge Tables where created from the
• It can be used effectively in measuring fiscal impacts             ESA 95 Tables 2, 9 and 8 (partial)
  and the composition of revenue and expenditure
• It can be used in forecasts and for intermediate budget
  2005    2006       2007     2008      2009     2010


      CI, MEF, Istat                 MEF, CI
               GFSM 2001 as a fiscal policy instrument
                  Internal sectors (domestic sectors)                   External sector


                              General                  Households &       Rest of
     Corporate
                             Government                  Nonprofit       the world
      sectors
                               sector                   Institutions

+ Revenues                + Revenues                 + Revenues        + Revenues
- Expenditures            - Expenditures1)           - Expenditures    - Expenditures
= Net L/B                 = Net L/B                  = Net L/B         = Net L/B
= Financing               = Financing                = Financing       = Financing

1) Acquisition of non financial assets is included in expenditure

          + Surplus (CS) + Deficit (GG) + Surplus (HH) = Balance (RW)
            => Deficit (Net L/B) financed internally
          + Deficit (CS) + Deficit (GG) + Deficit (HH) = - Deficit (RW)
            => GG ↑ taxes or↓expenditures
          • Fiscal policy / many combinations
                        Net worth / sustainability
                Internal sector (domestic sector)                    External sector


                          General
   Corporation                               Households &             Rest of the
                         Government
      sector                                   NPISHs                   world
                           sector

  = Net worth          = Net worth          = Net worth
  + Nonfinancial     + Nonfinancial     + Nonfinancial
    assets             assets             assets
  + Financial assets + Financial assets + Financial assets          + Financial assets
  - Liabilities      - Liabilities      - Liabilities               - Liabilities


Sustainability:
                                          1997       1998   1999       2000       2001
6 Net Worth (61+62-63)                       0         30      80        150       180
   61 Nonfinancial assets                  500        650     740        850       920
   62 Financial assets                     500        480     540        600       660
   63 Liabilities                        1,000      1,100   1,200      1,300     1,400
             GFS as a fiscal policy instrument

                           GFSM 2001
                           Transactions


                             Revenue


Accounting                                  Other
                                                                            ESA 95
  system         Opening     Expense                 Closing
                                          economic
                 balance                    flows    balance


                                                                             Current
                   NFA        NFA           NFA       NFA
                                                                             Accounts


 Chart of                                                                  Accumulation
                   FA          FA           FA         FA
 Accounts                                                                    Accounts


                   Liab       Liab          Liab      Liab                   Balance
                                                                              Sheet




                                                     Statistical systems
                         Government Finance Statistics systems
GFSM 1986:                                  GFSM 2001:
               Transactions                                 Transactions
                                                                                          * deficit/surplus
                                                                                          ** operating balance
                 Revenue                                      Revenue                     *** net lending / borrowing



                                                              Expense
                                              Opening                      Other economic flows          Closing
                 Expend-                      balance                      Revaluation / Volume change   balance
                  iture                                          **
                                                 Non-
                                              financial        NFA            NFA          NFA             NFA
                                                assets
                    *                                           ***
 Opening Financial             Closing        Financial
                                                                FA             FA           FA              FA
             assets                             assets
 liabilities                  liabilities


 Liabilities      Liab          Liab          Liabilities      Liab           Liab         Liab            Liab




                                             Net worth                Change in net worth                Net worth
                      Integrated Statement of Flows and Stocks

                                                                                                  Year 1999
            INTEGRATED STATEMENT
                                                                                                               Other
             OF FLOWS AND STOCKS                                             Opening    Trans-     Revalu-    volume    Closing
                                                                             balance    actions     ation     changes   balance
  Revenue ............................................................                   71,680
  Expense ............................................................                   64,135
Net worth (operating balance) .............................                    92,100     7,545     27,734    -19,578   107,802
   Nonfinancial assets ..............................................        120,329     10,260     23,561          0   154,150
Net financial worth (net lending/borrowing) ...........                       -28,229    -2,715       4,173   -19,578    -46,348
    Financial assets ...............................................           19,370     2,813       2,986         0     25,169
      Domestic .........................................................       19,370     2,813       2,986         0     25,169
      Foreign ...........................................................           0         0           0         0          0
    Liabilities ..........................................................     47,599     5,527      -1,187    19,578     71,517
      Domestic .........................................................       37,601     3,093        -602    19,578     59,670
      Foreign ...........................................................       9,998     2,434        -585         0     11,847
            Main Features of GFSM 2001/GFSM 1986 (1/3)

1. Time of recording
GFS 2001 – accrual basis                               Transactions
Entries are recorded when economic
value is created, transformed, exchanged,                Revenue
transferred, or extinguished

GFS 1986 – cash basis                                                   Other
                                                         Expense
Transactions are recorded when cash in       Opening                  economic   Closing
received or paid (cash equivalent)           balance                    flows    balance

    1999          2000          2001
                                              NFA         NFA           NFA       NFA


2. Coverage of events
                                              FA           FA           FA        FA
GFS 2001 – broader system
All economic events that affect assets or
liabilities are included                      Liab        Liab          Liab      Liab

GFS 1986 – narrow system
Excludes e.g. accrued interest, pension
liabilities, consumption of fixed capital,
in-kind transactions, and arrears
            Main Features of GFSM 2001/GFSM 1986 (2/3)

3. Coverage of units                    GFSM 2001 / GFSM 1986
GFS 2001 – institutional units                    Transactions
Includes all resident government
units and all resident NPI that are                 Revenue
controlled and mainly financed by
government

GFS 1986 – functional basis                                        Other
                                                    Expense
                                        Opening                  economic   Closing
Includes the relevant transactions of   balance                    flows    balance
any unit carrying out a function of
government

                                         NFA         NFA           NFA       NFA
4. Valuation
 GFS 2001:
 At current market value                 FA           FA           FA        FA
 GFS 1986:
 At face value or redemption value
                                         Liab        Liab          Liab      Liab
              Main Features of GFSM 2001/GFSM 1986 (3/3)

5. Integration of flows and stocks             GFSM 2001 / GFSM 1986
GFS 2001 – integrated system                            Transactions
All events that affect the financial                                       ** operating balance
performance, position or liquidity                        Revenue          *** net lending / borrowing
situation of GG are included

same as SNA, BOP and MFS frameworks
                                                                         Other
                                                          Expense
GFS 1986 – not integrated system              Opening                  economic    Closing
                                              balance                    flows     balance
The stock data included are limited to                      **
debt liabilities

                                                NFA         NFA          NFA         NFA
6. Balancing items
GFS 2001 – integrated system                                ***
• net operating balance                         FA           FA          FA           FA
• net lending / borrowing
• net worth
• net financial worth                           Liab        Liab         Liab        Liab
• change in net worth
• change in net financial worth

GFS 1986 – not integrated system

• the overall deficit / surplus*
                                         *Revenue plus grants minus expenditure minus net lending
                           GFSM 2001 analytical framework
Four statements:                                                Statement of
                                                                Government
Statement of Government Operations                               Operations

summarizes government’s
                                                                  Revenue
transactions in a given accounting
period. Transactions are classified                                   -
according to whether they:                   Opening                                 Statement of             Closing
  - increase net worth (revenue)           Balance Sheet          Expense           Other Economic         Balance Sheet
  - decrease net worth (expense)                                                        Flows
                                                                      =
  - change the stocks of NFA
  - change the stocks of FA or Liab.                            Net operating        Change in net
                                             Net worth                                                       Net worth
                                                                  balance             worth OEF

Statement of Other Economic Flows                 =                   =                       =                   =
                                                Non-                Non-                    Non-                Non-
shows influences of govt’s financial         financial           financial               financial           financial
                                               assets              assets                  assets              assets
position in accounting period from
                                                  +                   +                       +                   +
flows other than transactions, i.e.
   - revaluations in A&L                    Net finanical       Net lending/         Change in net         Net financial
                                               worth        +    borrowing      +     f.worth OEF      =       worth
   - other volume changes in A&L
                                                  =                   =                       =                   =
Balance Sheet                                Financial           Financial               Financial           Financial
                                               assets              assets                  assets              assets
shows the stocks of assets, liabilities,          -                   -              -                            -
and net worth at beginning and end
of accounting period                         Liabilities         Liabilities             Liabilities         Liabilities



                                              Stocks            Transactions          Other flows             Stocks
                 GFSM2001 Classification of Revenue

                 Transactions                          Revenue classification:
                                                       1 Revenue
                   Revenue
                                                       11 Taxes
                                                       111    Taxes on income, profits & cap. gains
                                                       112    Taxes on payroll and workforce
                                                       113    Taxes on property
                   Expense        Other                114    Taxes on goods and services
   Opening                      economic   Closing     115    Taxes on international trade & trans.
                                           balance     116    Other taxes
   balance                        flows
                                                       12    Social contributions
                                                       121    Social security contributions
      Non-                                             122    Other social contributions
   financial        NFA           NFA       NFA
     assets                                            13    Grants
                                                       131    From foreign governments
                                                       132    From international organizations
   Financial                                           133    From other general government units
     assets
                     FA           FA        FA
                                                       14    Other revenue
                                                       141    Property income
                                                       142    Sales of goods and services
                                                       143    Fines, penalties and forfeits
   Liabilities      Liab          Liab      Liab       144    Voluntary transfers other than grants
                                                       145    Miscellaneous and unidentified rev.




• Revenue: transactions that increase net worth (exclude sales of assets)
       GFSM2001 Economic Classification of Expense
                                                          Expense classification:
                    Transactions                          2     Expense
                                                          21    Compensation of employees
                                                          211    Wages and salaries
                      Revenue                             212    Social contributions
                                                          22    Use of goods and services
                                                          23    Consumption of fixed capital
                      Expense        Other
      Opening                      economic     Closing   24    Interest
                                                balance   241    To nonresidents
      balance                        flows
                                                          242    To residents other than GG
                                                          243    To other general government (GG)
         Non-                                             25    Subsidies
      financial        NFA           NFA         NFA      251    To public corporations
        assets                                            252    To private enterprises
                                                          26    Grants
      Financial                                           261    To foreign governments
        assets
                        FA            FA         FA       262    To international organizations
                                                          263    To other general government units
                                                          27    Social benefits
                                                          271    Social security benefits
      Liabilities      Liab          Liab        Liab     272    Social assistance benefits
                                                          273    Employer social benefits
                                                          28    Other expense
                                                          281    Property expense other than interes
                                                          282    Miscellaneous other expense
• Expense: transactions that decrease net worth
              (exclude acquisition of assets)
          GFSM 2001 Classification of Assets and Liabilities
31 Nonfinancial assets
311 Fixed assets                                              Transactions
3111 Buildings and structures
31111     Dwellings
31112     Nonresidential buildings                              Revenue
31113     Other structures
3112     Machinery and equipment
31121     Transport equipment                                                  Other
31122     Other machinery and equipment         Opening         Expense      economic   Closing
3113 Other fixed assets                         balance                        flows    balance
31131     Cultivated assets
31132     Intangible fixed assets
312 Inventories                                    Non-
313 Valuables                                   financial        NFA           NFA       NFA
314 Nonproduced assets                            assets
3141 Land
3142 Subsoil assets                             Financial
                                                  assets
                                                                  FA           FA        FA
3143 Other naturally occurring assets
3144 Intangible nonproduced assets

                                                Liabilities      Liab          Liab      Liab
32      Financial assets (domestic/foreign)
33      Liabilities (domestic/foreign)
Currency and deposits
Securities other than shares
Loans                                         Transactions in nonfinancial assets
Shares and other equity                       • acquisition
Insurance technical reserves
Financial derivatives                         • disposal
Other accounts receivable/payable             • consumption of fixed capital
                           GFSM 2001 Outlays by Functions
Outlays by Functions:
7 Outlays by Functions                                               Transactions
701 General public services
7017    Public debt transactions
7018    Transfers of a general character to other GG                   Revenue
702    Defense
703    Public order and safety
704    Economic affairs                                                               Other
                                                                       Expense
7042    Agriculture, foresty, fishing and hunting      Opening                      economic   Closing
7043    Fuel and energy                                balance                        flows    balance
7044    Mining, manufacturing, and construction
7045    Transport
7046    Communication                                     Non-
705    Environmental protection
                                                       financial        NFA           NFA       NFA
                                                         assets
706    Housing and community amenities
707    Health                                          Financial
                                                         assets
                                                                         FA           FA        FA
7072    Outpatient services
7073    Hospital services
7074    Public health services
708    Recreation, culture and religion                Liabilities      Liab          Liab      Liab
709    Education
7091    Pre-primary and primary education
7092    Secondary education
7094    Tertiary education
710    Social protection
                      Integrated Statement of Flows and Stocks

                                                                                                  Year 1999
            INTEGRATED STATEMENT
                                                                                                               Other
             OF FLOWS AND STOCKS                                             Opening    Trans-     Revalu-    volume    Closing
                                                                             balance    actions     ation     changes   balance
  Revenue ............................................................                   71,680
  Expense ............................................................                   64,135
Net worth (operating balance) .............................                    92,100     7,545     27,734    -19,578   107,802
   Nonfinancial assets ..............................................        120,329     10,260     23,561          0   154,150
Net financial worth (net lending/borrowing) ...........                       -28,229    -2,715       4,173   -19,578    -46,348
    Financial assets ...............................................           19,370     2,813       2,986         0     25,169
      Domestic .........................................................       19,370     2,813       2,986         0     25,169
      Foreign ...........................................................           0         0           0         0          0
    Liabilities ..........................................................     47,599     5,527      -1,187    19,578     71,517
      Domestic .........................................................       37,601     3,093        -602    19,578     59,670
      Foreign ...........................................................       9,998     2,434        -585         0     11,847
                       Summary Statement of Flows and Stocks
                                                                                                              Local governments
        Million of Kronur /Year Ending December 301
                                                                                                         1998        1999     2000
I. STATEMENT OF GOVERNMNET OPERATIONS:
1       Revenue ................................................................................        64,740    71,680     79,288
2       Expense ................................................................................        57,962    64,135     71,298
      Net Operating Balance (1-2=3) ...............................................                       6,788     7,545     7,990
31      Net acquisition of nonfinancial assets ..................................                       11,030    10,260     10,262
      Net lending / Borrowing (3-31=32-33) ...................................                           -4,252    -2,715     -2,272
32      Net acquisition of financial assets ........................................                      1,077     2,813      1,731
33      Net incurrence of liabilities ...................................................                 5,329     5,527      4,003
II. STATEMENT OF OTHER ECONOMIC FLOWS:
4,5    Change in net worth ...............................................................              -3,585     8,156      6,981
41,51 Changes in nonfinancial assets ............................................                       -4,150    23,561     12,180
42,52 Changes in financial assets ..................................................                       412     2,986       -385
43,53 Changes in liabilities .............................................................                -154    18,391      4,814

III. BALANCE SHEET:
6      Net worth ................................................................................       92,099    107,802   122,774
61      Nonfinancial assets ...............................................................            120,329    154,150   176,592
62      Financial assets ....................................................................           19,369     25,169    26,515
63      Liabilities ................................................................................    47,599     71,517    80,333

                                   http://www.imf.org/external/pubs/ft/gfs/manual/supp.pdf
    Benefits from Introducing Accrual
                Principles



http://www.johannrunar.is/nyrrigreinar/pdf/Benefits%20of%20accrual%20accounting-October-2004.pdf
                                         Benefits from Introducing
                                          Accrual Principles into
                                          Government Finances



         Micro economic                         Macro economic                                        Democratic
            benefits                               benefits                                            benefits


Recognition of all assets and         Fiscal indicators reflect much                     Reduces scope for political
liabilities:                          better economic reality                            corruption or misuse of fiscal
Accountability                        (behavior & interactions)                          data
 - full costs                            - full costs
     accounts payable                    - net wealth (sustainability)                                         GG
     consumption of fixed capital        - assets & liabilities recognition                             PNFC        PFC
     employee-related costs
 - net wealth
     equities (PC & QC)
                                                     Fiscal policy
     infrastructure
                                                   Fiscal theories
Assets & liabilities management
 - working capital                        GFS – Fiscal policy indicators
 - fixed assets in general
 - valuables (LÍ)                           Accrual Accounting System
 - natural occurring assets
 - liabilities (pensions)

Making or buying decisions
                                    http://www.johannrunar.is/nyrrigreinar/pdf/Benefits%20of%20accrual%20accounting-October-2004.pdf
        Benefits from full costs of government’s activities


For governments to have better information on the full costs of their
    activities, they can:
(1) consider the cost consequences of particular policy objectives and the cost of
    alternative mechanisms for meeting these objectives;
(2) assess the most efficient way of producing their goods and services and of
    managing the resources over which they have been delegated authority;
(3) decide whether to fund the production of services within government sub-
    entities, or whether to purchase goods and services directly from non-
    government organizations;
(4) promote incentives for greater efficiency within the public sector by creating
    competition between private and public sector suppliers; and
(5) decide whether user fees should cover the costs associated with a service.
    Effectively, the government is often facing a make or buy decision. Comparison
    between public sector and private sector suppliers can only take place when
    information on the full cost of both options is available.
                            Fiscal theories / Fiscal statistics

                       t1        t2          t3
                                                                time

                                                                Coverage of economic events
                                                                Time of recording
               A
                   B




            economic
        events/theorizing                   NFC    FC      GG     NPISH     HH

A         B
transactions
                                                           Example: HH / pension liabilities

=> Fiscal theories / fiscal statistics / reflecting economic behavior & interactions
            Benefits from consumption of fixed capital

By recognizing consumption of fixed capital the managers of government entities
will have a better understanding of the impact of using nonfinancial assets in the
delivery of goods and services, which might encourage them to consider alternative
ways of managing costs and delivering goods and services.

              Statement of Government Operations:
              1       Revenue
              2       Expenses
              21       Compensation of employees
              22       Use of goods and services
              23       Consumption of fixed capital
              24-28    Other expenses
              NOB Net Operating Balance (1-2)
              31      Net Acquisition of Nonfinancial Assets
                       + Acquisition of fixed capital
                       - Disposal of fixed capital
                       - Consumption of fixed capital
              NLB Net Lending / Borrowing (1-2-31)
Practical Methods of Accrual Revenue Recording




 http://www.johannrunar.is/nyrrigreinar/pdf/Recording-income-tax.September.2004.pdf
       Practical Methods of Accrual Revenue Recording

•   Rules on how to record taxes on an accrual basis are presented in the GFSM
    2001. These rules clarify the main principles behind accrual recording, as
    regarding the time of recording and the amounts to be recorded. But these
    principles may need more clarification to meet the practical requirements
    for compiling revenue data. For example, some assessed taxes will never be
    collected; others will take years to be fully assessed. Such recording issues
    need to be tackled in practice.

•   The GFSM 2001, which replaces the old GFS cash-based system, is
    expected to play a greater role as a fiscal analytical framework. It is
    therefore vital that both the accuracy and reliability of the accrual recording
    and the timeliness of revenue data are adequate for this fiscal role. For the
    GFS to play its expected role in fiscal analysis and fiscal decision making,
    the development of practical rules for revenue recording has to take account
    of this requirement and optimize the trade-off between the quality of
    accrual recording and the timeliness of the data.
       Practical Methods of Accrual Revenue Recording

Summary:

The main purpose of the paper is to show some practical methods of how to
    record personal income tax on an accrual basis. Numerical examples have
    been used to illustrate the different methods. These methods can also, in
    most circumstances, be used to record other types of taxes and are
    therefore, in a way, guidelines for tax recording in general. One of the main
    conclusion from this analysis is that the so-called PTA-method is one of the
    most efficient methods of revenue recording and makes it possible for the
    government to close their books in three to four months (depending on the
    length of the complimentary period) after the end of the income year and
    record relatively good accrual data (95,714 out of 96,000 in the presented
    example).

This method has been used in Iceland since accrual accounting presentation
    (1998) was introduced into the central government budget.
                  Accrual Recording of Taxes (1/9)

Like most transactions, taxes and social contributions should be recorded
on an accrual basis in the GFS and ESA. Accrual recording means
basically that flows have to be recorded when economic value is created,
transformed, exchanged or extinguished.


The implementation of this recommendation for taxes and social
contributions raises questions regarding (1) the time of recording, and (2)
the amounts to be recorded.

There is no need for major change in GFS and ESA
                   Accrual Recording of Taxes (2/9)
1. The time of recording
   This is when the activities, transactions or other events occur which create the
   liability to pay taxes, and not when they are actually paid. In the case of taxes,
   this usually means when income is paid or when a transactions (purchase and
   services etc.) generating the liability is made.
   Some flexibility is permitted in two cases:
   Taxes on income: in some cases the liability to pay income taxes can only be
   determined in a later accounting period than in which the income accrues.
   Parallel economy: some activities, transactions or events escape the attention of
   the tax authorities. The liability to pay taxes cannot be related to the underlying
   economic event, but only to the time when the tax assessment is made.
   Therefore, in these two cases, the right time of recording the taxes is not the time
   when they accrued (the time when the economic event generated the obligation to
   pay taxes), but the time when the taxes were known as due to be paid with
   sufficient certainty. This is not necessarily similar to the accounting period of the
   payment.
                    Accrual Recording of Taxes (3/9)

2.   Amounts to be recorded
     The difficulty here is that the recording of taxes – at the time they are due
     or generated – should not lead to recording of amounts that are
     uncollectible or unlikely to be collected


The general recommendation on amounts to be recorded regarding
uncollectible taxes is:
a)   to adjust the assessed amount by a coefficient to eliminate uncollectible taxes.
     The adjustment should be made on the revenue side. Regular revision of the
     coefficients is recommended to smooth out uncollectible taxes over longer
     period

b)   to adjust the cashed amounts (but at the time they were accrued, or due)

c)   a combination of a and b with some flexibility
                                       Accrual Recording of Taxes (4/9)
                                                          Net tax1)         Gross tax1)
The tax assessment methods                               assessment         assessment
D.1 and D.2                                                method             method
                                                                                           “If assessments and declarations are
                                                             2003               2003       used, the amounts shall be adjusted
REVENUE                                                    96,000 cr         100,000 cr    by a coefficient reflecting assessed
 Individual (personal) income tax                          96,000 cr         100,000 cr    and declared amounts never
   Gross tax assessment                                   100,000 cr         100,000 cr    collected. As an alternative
   Tax coefficient adjustment (2003)                       -4,000 dr               0       treatment, a capital transfer, to the
EXPENDITURE                                                       0             4,000 dr   relevant sectors could be recorded
 Capital transfers                                                0             4,000 dr   equal to the same adjustment. The
  Tax coefficient adjustment (2003)                               0             4,000 dr   coefficients shall be estimated on the
                                                                                           basis of past experience and current
NET LENDING/BORROWING                                       96,000            96,000       expectations in respect of assessed
FINANCIAL ASSETS                                            96,000 dr         96,000 dr    and declared amounts never
 Cash                                                       90,000 dr         90,000 dr    collected (…).”
 Accounts receivable                                         6,000 dr          6,000 dr
   Taxes outstanding (gross / due to 2003)                  10,000 dr         10,000 dr
   Coefficient adjustment (2003)                            -4,000 cr         -4,000 cr

LIABILITIES                                                       0                 0

1) Both the net and the gross tax assessment methods use coefficient to assess the
   uncollectible taxes, and their effects on the Net lending & borrowing are the same
                           Accrual Recording of Taxes (5/9)
a)   to adjust the assessed amount by a coefficient to eliminate uncollectible taxes. The
     adjustment should be made on the revenue side. Regular revision of the coefficients is
     recommended to smooth out uncollectible taxes over longer period

Why uncollectible taxes !     Government Operations:                   Outlays by Functions:
                              1 Revenue                                7 Outlays by Functions
The main reasons for          11 Taxes                                 701 General public services
uncollectible taxes are:      12 Social contributions                  702 Defense
                              13 Grants                                703 Public order and safety
1)   Over-assessment          14 Other revenue                         704 Economic affairs
2)   Bankruptcy                                                        7042 Agriculture, forestry, fishing, etc
                              2 Expense
3)   Tax corrections          21 Compensation of employees             7043 Fuel and energy
4)   Tax forgiveness          22 Use of goods and services             7044 Mining, manufacturing, etc.
                              23 Consumption of fixed capital          7045 Transport
                              24 Interest                              7046  Communication
                              25 Subsidies                             7047  Other industries
                              26 Grants                                7048  R&D Economic affairs
                              27 Social benefits                       705 Environmental protection
                              28 Other expense                         706 Housing and community, etc
                                   incl. capital transfers             707 Health
                                                                       708 Recreation, culture and religion
                              NOB Net operating balance (1-2)
                                                                       709 Education
                              31    Net acq. of nonfinancial capital   710 Social protection
                              NLB Net lending / borrowing (1-2-31)
                       Accrual Recording of Taxes (6/9)


                                                                              Recorded    Time-
Sections                               Methods                                            liness
                                                                              amounts

  C.1      Time-adjusted cash method (no complementary period)                 96,000    T+3 years
                                                                                          T+4
  C.2      Time-adjusted cash method (with complementary period)               95,526
                                                                                         months
                                                                                          T+8
  D.11     Net tax assessment method (time-adjusted to the activity period)    96,000
                                                                                         months
                                                                                          T+0
  D.12     Net tax assessment method (recorded when determined)                91,429
                                                                                         months
                                                                              100,000/    T+8
  D.21     Gross tax assessment method (time-adjusted to activity period)                months
                                                                                4,000
                                                                               95,238/    T+0
  D.22     Gross tax assessment method (recorded when determined)                        months
                                                                                3,810
                                                                                           T+1
   E       PAYE / Assessment method (PA-method)                                95,239
                                                                                          month
                                                                                          T+4
   F       PAYE / Time-adjustment / Assessment method (PTA-method)             95,714
                                                                                         months
                                Accrual Recording of Taxes (7/9)



Time-adjusted cash method (no complementary period)



                                                                               Personl income tax in 2003
     20,000

              20,000

                       20,000

                                20,000



                                                                            The total accrual amount is 96,000
                                         10,000

                                                  1,000

                                                          1,000

                                                                  1,000
                                                                          450   450   450   450
                                                                                                  300   300   300   300

                2003                                2004                         2005                    2006
                                                          Accrual Recording of Taxes (8/9)
T im e - a d j u s t e d c a s h m e t h o d u s in g c o m p le m e n t a r y p e r io d ( t h r e e m o n t h s )

            P e r s o n a l in c o m e ta x re c o rd e d in 2 0 0 3 is
            9 5 ,5 2 6 a n d is b a s e d o n tim e - a d ju s te d c a s h                                                                                                                     P e rs o n a l in c o m e ta x in 2 0 0 3
            m e th o d u s in g th r e e m o n th s




                                                                                                                         20,000


                                                                                                                                  20,000


                                                                                                                                           20,000


                                                                                                                                                    20,000
                                                                                                                                                                                               T o ta l a c c ru a l a m o u n t is 9 6 ,0 0 0
            c o m p le m e n ta ry p e r io d .




                                                                                                                                                             10,000
 2003:




                                                                                                                                                                      1,000


                                                                                                                                                                              1,000


                                                                                                                                                                                      1,000
                                                                                                                                                                                              450   450   450    450
                                                                                                                                                                                                                        300   300    300    300
                          2000                                2001                                2002                                2003                               2004                         2005                      2006




                                                                                                                                                                                                P e rs o n a l in c o m e ta x in 2 0 0 2

                                                                                     19,048


                                                                                              19,048


                                                                                                       19,048


                                                                                                                19,048
                                                                                                                                                                                               T o ta l a c c ru a l a m o u n t is 9 1 .4 2 9




                                                                                                                         9,524
 2002:




                                                                                                                                  952


                                                                                                                                           952


                                                                                                                                                    952
                                                                                                                                                             429      429     429     429
                                                                                                                                                                                              286   286   286    286
                          2000                                2001                                2002                                2003                               2004                         2005




                                                                                                                                                                                                P e rs o n a l in c o m e ta x in 2 0 0 1
                                                 18,141


                                                          18,141


                                                                   18,141


                                                                            18,141




                                                                                                                                                                                               T o ta l a c c ru a l a m o u n t is 8 7 .0 7 5
                                                                                     9,070




 2001:
                                                                                              907


                                                                                                       907


                                                                                                                907




                                                                                                                         408      408      408      408
                                                                                                                                                             272      272     272     272
                          2000                                2001                                2002                                2003                               2004
             17,277


                      17,277


                               17,277


                                        17,277




                                                                                                                                                                                                P e rs o n a l in c o m e ta x in 2 0 0 0
                                                                                                                                                                                               T o ta l a c c ru a l a m o u n t is 8 2 .9 2 8
                                                 8,638




 2000:
                                                          864


                                                                   864


                                                                            864




                                                                                     389      389      389      389
                                                                                                                         259      259      259      259
                          2000                                2001                                2002                                2003
                                                               Accrual Recording of Taxes (9/9)
F. PAYE / Time-Adjustment / Assessment Method (PTA-method)


                                                                                                The recording year is 2003
Cash payments
                                                                                                The PAYE and time-adjusted income tax (3 months complementary period)
                                                                                                related to 2003 is 90,000 and the corresponding figure for 2002 is 85.714
                                           20,000

                                                    20,000

                                                             20,000

                                                                      20,000
related to income tax
year 2003                                                                                       PAYE and time-adjusted income tax is 90,000 recorded in 2003




                                                                               10,000

                                                                                        1,000

                                                                                                 1,000

                                                                                                         1,000
                                                                                                                 450   450   450   450
                                                                                                                                         300   300   300   300
                  2002                                2003                                2004                          2005                    2006

                                                                                                The gross income tax assessment related to 2003 is 100,000 made in July 2004,
                                                                                                and the corresponding gross assessment for 2002 is 95,238 made in July 2003
                                                                                                The cofficient used to adjust for uncollectible taxes is 4% in this example
                                                                                                5,715 (91,429 (i.e. 95,238*0,96) - 85,714) is recorded in 2003 under this method
       19,048

                19,048

                         19,048

                                  19,048




                                                                                                Assessment made in July 2003 and the assessed amounts recorded in the
                                                                                                period the activities took place, i.e. 2003
                                           9,524

                                                    952

                                                             952

                                                                      952




                                                                               429      429     429      429
                                                                                                                 286   286   286   286
                  2002                                 2003                               2004                          2005




                                              Recorded
                                           amount in 2003 is
                                               95,715

                                           The timeliness is
                                             T+4 month
                      Coefficient calculation (general principle)


Coefficient calculation for income tax on individuals (general principle):

                                             1995    1996 1997 1998 1999 2000 Sum
Income tax assessment (July 96)            100,000
Cash payments (Jan95-Jan96)                 90,000
Tax liability (Y1995) paid each following year       4,000 1,000 500     250    250 6,000
Taxes (Y1995) never collected                        2,000 1,000 500     250    250 4,000
Outstanding tax liability (Y1995)           10,000   4,000 2,000 1,000   500      0

The tax-coefficient for income tax on individuals is $4,000 / $100,000 = 4%. For some
countries the information above may not be available, which calls for the best approach to
this main principle. Over longer period the coefficient can, of course, change due to e.g.
changes in tax collection methods or the economic prosperity, and might therefore need a
revision.




      See DAFFE/CFA/WP2(2003)44, page 7
              Practical Principles for Recording
(1) If assessments and declarations are used, the amounts shall be
    adjusted by a coefficient reflecting assessed and declared amounts
    never collected.
    As an alternative treatment, a capital transfer, to the relevant sectors
    could be recorded equal to the same adjustment.
    The coefficients shall be estimated on the basis of past experience and
    current expectations in respect of assessed and declared amounts never
    collected. They shall be specific to different types of taxes.

(2) If cash receipts are used, they shall be time-adjusted so that the cash is
    attributed when the activity, transactions or other events took place to
    generate the tax liability (or when the amount of tax was determined, in
    the case of some income taxes). This adjustment may be based on
    average time difference between the activities, transactions or other
    events (or the determination of the amount of tax) and cash tax receipt.
    See DAFFE/CFA/WP2(2003)44, page 6
                 GFSM 2001 as fiscal policy instrument

accountability aspect •           • fiscal policy instrument


                    COA                        accrual adjustments
 1986 GFS                        GFS                                          NA
                     AS




                            • practical accrual recording rules


                    COA
GFSM 2001                        GFS                                          NA
                     AS
   (1)


                                                                                    OECD
                                                                                   Revenue
GFSM 2001           COA           accrual adjustments                              Statistics
                                                                  NA
   (2)               AS

                                                                                    GFS

  • Optimize the trade-off between quality of accrual reporting and the timeliness of the data
            Harmonization of COA, GFS and SNA(ESA)

accountability aspect •           • fiscal policy instrument

 GFSM 2001          COA
                                GFS
    (1)              AS


                            • practical accrual recording rules



                                           GFS



                                                       COA
                                NA
                                                        AS


              • Task Force on Harmonization of Public Sector Accounting
              • consistency and transparency between accrual recording
              • GFSM 2001 for different sub-sectors of the government
                      Taxes are imposed on different tax-bases


                                                                             Tax levied at
                                                        Tax relates           indicators
                                                            to a             measured at             Main types of
Underlying tax item:                                     particular          a particular          indicators used as
                                                       time or time-            time or                 tax base
                                                          period               during a
                                                                                period
1. a transaction or an event                             time-point            time-point                  value 1)
2. a class of transactions                              time-period            time-point                  value 1)
3. income, profits and capital gains                    time-period           time-period                   value
4. net wealth                                           time-period            time-point                   value
5. ownership (uses) of a property                       time-period            time-point                   value
6. use of goods and permission to use                   time-period            time-point            fixed amount 2)
   goods or perform activities
7. persons (legal or not)                                time-point            time-point                fixed amount


     1) Other indicators than value can be used.
     2) Types of goods and activities, value, quantity, weight, etc. can be the underlying indicators.
         Practical Principles for Recording

3.59    Flexibility in tax-recording
In principle, income taxes and social contributions based on income
should be attributed to the period in which the income is earned, even
though there may be a significant delay between the end of the
accounting period and the time at which it is feasible to determine the
actual liability.

In practice, however, some flexibility is permitted. In particular, as a
practical deviation from the general principle, income taxes deducted
at source, such as pay-as-you-earn taxes, and regular prepayments of
income taxes may be recorded in the periods in which they are paid,
and any tax liability on income may be recorded in the period in which
it is determined.
     Example 1: Income taxes on individuals; combination of
                option 1(assessment adjusted by coefficients) and
                option 3 (time-adjustment)

     A combination of option 1 (income tax assessment adjusted by coefficients)
     and option 3 (time-adjustment), might be the most practical way to record
     income taxes on individuals related to a particular year.1) This method
     requires (1) recording of all income taxes deducted at source related to the
     recording year, (2) time-adjustment, according to the due for payment
     principle,2) of those taxes related to the year, but paid in following year,
     and (3) a recording of the final tax liability, related to the recording year,
     in the period in which it is determined and an adjustment of the liability by
     a coefficient reflecting the assessments never collected and the amount
     already paid.
                                                                    J F M A M J       J A S O N D


                2001                             2002                             2003


1)   To optimize the trade-off between the quality of accrual accounting and the timeliness of the data.
2)    Due for payment recording shows transactions at the latest times that the corresponding payments
     can be made without additional charges or penalties.
Example 1: Personal Income Tax                                          $100,000 Gross assessment
                                                                          - $4,000 Coefficient effects
                                                                        ------------------------------------
                         Declarations for 1995                            $96,000 Adjusted assessment
                        submitted by taxpayers                          - $90,000 PAYE (time-adjusted)
                                                                        ------------------------------------
                                           Gross assessment for             $6,000 Tax liabilities
         $90,000 PAYE, time-             1995 is $100,000 made in                   (recorded in 1996, i.e.
         adjusted by 2 months                    July 1996                            when determined)



J F M A M J   J A S O N D       J F M A M J      J A S O N D        J F M A M J     J A S O N D


            1995                            1996                               1997


            Due for payment             $98,000 PAYE, time-
                                        adjusted by 2 months


   3.59 Flexibility in tax-recording
        .......... In practice, however, some flexibility is permitted. In particular, as a
        practical deviation from the general principle, income taxes deducted at source,
        such as pay-as-you-earn taxes, and regular prepayments of income taxes may
        be recorded in the periods in which they are paid, and any tax liability on
        income may be recorded in the period in which it is determined.
Example 2: Corporate Income Tax                                   $54,000 Gross assessment
                                                                  - $3,780 Coefficient effects (7%)
                                                                ------------------------------------
                                                                  $50,220 Adjusted assessment
                                                                - $20,000 Prepaid in 1995
                                                                  $24,000 Prepaid in 1996
                                          Adjusted              ------------------------------------
                                         assessment               $54,220 Income tax recorded
                     Prepayment
      Prepayment                           $50,220              ========================
                       $10,000
        $10,000

J F M A M J   J A S O N D      J F M A M J     J A S O N D     J F M A M J        J A S O N D


            1995                           1996                               1997


        Prepayment                      $54,220 recorded                      Prepayment
                     Prepayment                                Prepayment       $12,000
          $10,000                                                $12,000
                       $10,000

   3.59 Flexibility in tax-recording
        .......... In practice, however, some flexibility is permitted. In particular, as a
        practical deviation from the general principle, income taxes deducted at source,
        such as pay-as-you-earn taxes, and regular prepayments of income taxes may
        be recorded in the periods in which they are paid, and any tax liability on
        income may be recorded in the period in which it is determined.

				
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