Financial Statements http://www.cc.cec/budg/.

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Presentation transcript:

Financial Statements http://www.cc.cec/budg/

Overview of session 1. Introduction 2. Components and elements of financial statements 3. Questions

Financial statements 1. Introduction

Framework for preparing F/S Why have a framework? Purpose What does it cover? Scope Does it have constraints? Limitations Purpose: basis for the review of current and development of future IPSAS / E.C. accounting rules Assist preparers, auditors and users in applying and/or interpreting IPSAS / E.C. accounting rules Scope: Defines qualitative characteristics that determine the usefulness of information in financial statements Deals with the definition, recognition and measurement of the elements from which financial statements are constructed

Framework for preparing F/S Objectives of financial statements This section j Qualitative characteristics of financial statements Net assets and net assets maintenance k m l Components and elements of financial statements Section 2

Purpose of F/S F/S are a structured representation of the financial position and of the transactions undertaken by an entity that is useful to a wide range of users in making and evaluating decisions about the allocation of resources. Specifically, the objectives of F/S in the public sector are to provide information useful for decision-making, and to demonstrate the accountability of the entity for the resources entrusted to it. F/S can also have a predictive/prospective role, providing information useful in predicting the level of resources required for continued operations and the resources that may be generated by them.

Scope of the E.C. F/S The E.C. financial statements will: Consolidate those of entities controlled (e.g. Agencies and institutions) Proportionately consolidate those of jointly controlled entities (e.g. Galileo) Report its share in the result and net assets of entities in which it has a significant influence using the equity method of accounting (e.g. European Investment Fund) All entities concerned will have to report to the E.C. using the E.C. accounting rules

Qualitative characteristics of F/S Main objective of FS: Provide reliable information on financial position, performance and changes in financial position Main characteristic: Decision usefulness Major qualitative Understandability Comparability characteristics: Relevance Reliability (Materiality) Substance over form Prudence True and fair view Understandable = understandable to the « average user » - suggests a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence Relevant = relevant to the user when making economic decisions – the relevance of information is affected by its nature and materiality – information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the F/S Reliable = free from material error and bias - information can be depended upon by users to represent faithfully what it can reasonably be expected to represent Substance over form – refer to introduction Prudence – but this is not a reason to include excessive provisions

Constraints Main objective of FS: Provide reliable information on financial position, performance and changes in financial position Main characteristic: Decision usefulness Major qualitative Understandability Comparability characteristics: Relevance Reliability (Materiality) Substance over form Prudence Constraints: Timeliness Cost-benefit balance True and fair view

2. Components and elements of financial statements

Components of F/S IPSAS European Communities (FR) Statement of financial position Balance sheet Statement of financial performance Economic outturn account (including segment reporting) Statement of changes in net assets Statement of changes in net assets Cash flow statement Cash flow table Accounting policies and notes to the financial statements Notes to the financial statements

Balance sheet elements Assets Net assets and Liabilities Net assets Liabilities Total Assets Total Net Assets and Liabilities Resources Controlled as a result from past events Embodying future economic benefits or service potential The residual interest Present obligations Resulting from past events The settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential

Aggregated – Detailed in the notes Balance sheet Assets Net assets and Liabilities Non-current assets Net assets Non-current liabilities Current assets Current liabilities Total assets Total net assets and liabilities Increasing liquidity This year + prior year Aggregated – Detailed in the notes To be realised in the normal course of the E.C.s’ operating cycle or within 12 months + cash and cash equivalents

Balance sheet Detailed structure See financial report 2005 page 15

Economic outturn account elements result of the year - = Income Expenses Increases in economic benefits Decreases in economic benefits The net assets maintenance concept: The excess of income over expense translates into an increase in the residual interest (the excess of assets over liabilities) – and vice-versa Where assets and liabilities are not equal, a residual figure for net assets/equity will be reported; If > 0, can be interpreted as the net resources that may be applied for the provision of goods or services in the future (= the community’s investment in the entity); If < 0, may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities.

Economic outturn account Detailed structure See financial report 2005 page 19

Extraordinary items Net Surplus or Deficit = Surplus or Deficit from ordinary activities and extraordinary items Extraordinary = Rare Unusual Outside control of entity Material Example: Costs associated with the provision of services following a natural or man-made disaster, for example, the provision of shelter to homeless people following an earthquake. In order for a such an event to qualify as an extraordinary event it would need to be of a magnitude that would not normally be expected in either the geographic area in which it occurred or the geographic area associated with the entity, and the provision of emergency services or the restoration of essential services would need to be outside the scope of ordinary activities of the entity concerned. Where an entity has responsibility for providing assistance to those affected by natural disasters then costs associated with this activity would not generally meet the definition of an extraordinary item Indicate that non-recurring items that do not meet the definition of an extraordinary item form part of surplus/(deficit) from ordinary activities but should be disclosed to facilitate understanding of the financial statements, comparability with prior years and prospective analysis.

Statement of changes in net assets Detailed structure See financial report 2005 page 33

Cash flow table Detailed structure See financial report 2005 page 29

Notes to the financial statements Accounting policies Impact of the transition to accrual accounting Notes to the Balance Sheet Notes to the Economic Outturn Account Notes to the Cashflow table Off-Balance Sheet and notes Financial risk management Related party disclosures Events after the balance sheet date Consolidated entities Non-consolidated entities

Accounting policies IPSAS-compliant when ruled out by IPSAS Options retained when an IPSAS allows one or more alternative accounting policies Internally-developed when no specific requirement exists

Changes in accounting policies Changes in accounting policies = change from one allowed basis of accounting to another allowed basis of accounting Example: the initial adoption of a policy to carry assets at revalued amounts Normally applied retrospectively (restate comparative information) Fundamental errors Changes in accounting estimates Give examples of each. The examples should help preparing the exercises.

Fundamental errors Significant errors in a prior year’s financial statements as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, fraud or oversights Example: omission of a major class of expenses in the financial statements Normally correct retrospectively: restate comparative information Give examples of each. The examples should help preparing the exercises.

Changes in accounting estimates Many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. Estimates may be required, for example, of GNI-based revenue revenue due by Member States, bad debts arising from uncollected receivables, or the useful lives of depreciable assets Accounting estimates by their nature are approximations that may need revision as additional information becomes known Recognise the effect in the period of the change Give examples of each. The examples should help preparing the exercises.

Segment information A distinguishable activity or group of activities of an entity for which it is appropriate to separately report financial information for the purpose of evaluating past performance and for making decisions about the future allocation of resources « Service segments » are naturally aligned with activities identified in budget documentation E.g. At a national « whole-government » level financial information is generally aggregated and reported in a manner which reflects major economic classifications of activities undertaken and/or portfolio responsibilities of individual ministers: health, defence, education, …

The E.C.s’ segment information Current Prior E.C. policy areas e. g. Expenses Operating assets Operating liabilities Reconciliation to total amounts reported Accounting policies Agriculture Regional policy Humanitarian Aid Internal Market External Relations Others

Financial statements 3. Questions http://www.cc.cec/budg/