J.R. Björgvinsson Contents • 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.