IPSASB - Presentation of Budget Information in Financial Statements
Comments from ACCA
February 2006
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on Exposure Draft 27, Presentation of Budget Information in Financial Statements. These comments have been prepared in consultation with members of ACCA's Public Sector Technical Issues Panel, a group of experienced accountants working in the public sector.
ACCA believes that one of the prime purposes of the financial statements for any public sector organisation should be to fulfil the stewardship function by providing an audited comparison of the actual use of resources with that agreed in the budget. A government’s financial accountability arises from the budget-setting process, during which it gains agreement to the levels of taxation which are to be levied and to the funding which will be allocated to the various services which it intends to provide. Thus, the budget out-turn report, a comparison of actual expenditure and income compared with the budget originally agreed by parliament, is one of the prime documents by which governments should be held to account for the regularity and probity of their financial management.
Thus, ACCA supports the IPSASB’s proposal to require a comparison of budget(s) and actual amounts being included in the general-purpose financial statements of public-sector entities which are required to make publicly available budget(s) for which they are accountable. We also support the proposal to require disclosure of an explanation of the reasons for material differences between the budget and actual amounts.
ACCA also particularly supports paragraph 21 of the Exposure Draft, which encourages a cross-reference from general-purpose financial statements to additional budget information, including information about service achievements, particularly to link from budget and actual data to non-financial budget data and service achievements.
Specific Questions Raised in the Invitation to Comment
ACCA agrees with most of the specific matters on which the IPSASB has asked for comment. In this section we provide brief comments on each of the Board’s proposals on which it asked for specific comment.
1. To require a comparison of actual amounts with amounts in the original and final budget as part of the general purpose financial statements (GPFSs) (paragraph 12).
ACCA supports the proposal to require a comparison of actual amounts with the amounts in the original budget to be included within the GPFSs. We do not support the proposal to extend this comparison to the final budget. This is for two main reasons:
A final budget may be used to reduce the differences between budgeted and actual amounts and so reduce the extent to which such differences have to be accounted for or explained; this is particularly the case where such a budget may be agreed late in the budget year or even after the end of the year, as is the case in some countries.
The inclusion of the additional set of figures for the final budget would significantly increase the complexity of the accounts and thus make them less easy to understand.
2. To require disclosure of the reasons for material differences between budget and actual amounts unless such explanation is included in other public documents issued at the same time as, or in conjunction with, the financial statements (paragraph 12). The IPSASB would welcome views on whether such disclosure should be required or encouraged.
ACCA would support making the disclosure of the reasons for material differences to be required, rather than just encouraged. We consider that accounting for and explaining such differences is fundamental to public- sector accountability.
3. That an entity shall present a comparison of budget and actual amounts in the GPFSs as additional budget columns in the primary financial statements only where the GPFSs and the budget are on the same basis of accounting and adopt the same classification structure (paragraph 15). The IPSASB would also welcome views on whether the budget figures should be required to be presented on the face of the primary financial statements when the budget amounts and the actual amounts in the GPFSs are prepared on a comparable basis.
ACCA does not consider that the proposed standard should require the budget figures to be presented on the face of the primary financial statements, that is, the statement of financial position, the statement of financial performance and the cash flow statement. We believe that a separate statement of comparison of budget and actual amounts should be provided, as is suggested by page 23 of the Exposure Draft and as is the practice for UK Government Departments.
The structure of the budgets for national and other governments should be a matter for national determination in the light of local requirements and information needs. These should not be determined by international accounting standards. Thus we would not support the suggestion in paragraph BC5 of the Exposure Draft that consideration will in future be given to include specific presentation requirements for approved budgets.
4. To require that disclosure of an explanation of the following be made in a report issued in conjunction with, or at the same time as, the financial statements: whether differences between the original and final budget arise from reallocations within the budget or other factors such as policy shifts, natural disasters, or other unforeseen events (paragraphs 25-26).
ACCA does not support such a requirement. We consider that explanations of differences between the original and final budget may detract from the more important consideration of differences between the actual amounts in the GPFS and the original budget.
5. To require the comparison of actual and budget amounts to be made on the same basis of accounting as adopted for the budget, even if that basis is different from the basis adopted for the GPFSs (paragraph 27).
ACCA supports this proposal.
6. To require a reconciliation of actual amounts on a budget basis with actual amounts presented in the GPFSs (paragraph 44).
ACCA supports this proposal.
7. The IPSASB would also welcome views on whether:
• separate IPSASs specifying requirements for the comparison of budget and actual amounts should be issued for application when the accrual basis is adopted and when the cash basis is adopted; or
• the requirements proposed in this ED should be included in IPSAS 1 for those entities adopting the accrual basis of accounting, and in the Cash Basis IPSAS for those adopting the cash basis of accounting.
ACCA supports the development of separate International Public Sector Accounting Standards (IPSASs) for each of the accrual and cash bases. This is as a result of the importance of this aspect of public-sector financial reporting in terms of transparency and accountability. Thus, we would not support the alternative of including this information within existing IPSASs.
Detailed Comments
ACCA considers that it is unnecessary to include the words, ‘under the accrual or cash basis of accounting’ in the bold-lettered paragraph two of the Exposure Draft. This point is adequately covered within paragraph four. We believe that repetition of this phrase in paragraph two may imply, for example, that the requirements of the proposed Standard do not apply to entities preparing and presenting general-purpose financial statements under the modified cash basis.
ACCA notes that the proposed standard ‘does not require approved budgets to be made publicly available, nor does it require that the GPFSs disclose information about, or make comparisons with, budgets which are not required to be made publicly available’ (paragraph 5). We also note that paragraph BC5 of the Exposure Draft indicates that in future this may be a requirement. ACCA believes that the proposed standard should at least encourage public disclosure. Thus, paragraph 5 should include the expectation that the good practice outline in the Public Expenditure and Financial Accountability (PEFA) Performance Measurement Framework (www.pefa.com, June 2005) would be followed. Specifically, this would mean that the following elements of budgetary documentation should be publicly available:
‘1. Macro-economic assumptions, including at least estimates of aggregate growth, inflation and exchange rate.
2. Fiscal deficit, defined according to GPFS or other internationally recognized standard.
3. Deficit financing, describing anticipated composition.
4. Debt stock, including details at least for the beginning of the current year.
5. Financial assets, including details at least for the beginning of the current year.
6. Prior year’s budget out-turn, presented in the same format as the budget proposal.
7. Current year’s budget (either the revised budget or the estimated out-turn), presented in the same format as the budget proposal.
8. Summarized budget data for both revenue and expenditure according to the main heads of the classifications used (ref. PI-5), including data for the current and previous year.
9. Explanation of budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to expenditure programs.’
(Performance Measurement Framework (PEFA), page 18).
ACCA believes that transparency and accountability would be improved if comparative information for the previous period were to be provided for the budget and actual amounts provided in general-purpose financial statements. For this reason, we consider that paragraph 12 of the Exposure Draft should be amended to require the provision of such information and that the final sentence of this paragraph should be deleted.
In paragraph 12 (a) the phrase ‘where applicable’ should be added between the words ‘and’ and ‘final’ on page 11. This would clarify the presentation of information on any final budget.