1. INTRODUCTION TO THE GENERAL PURPOSE FINANCIAL STATEMENTS (GPFS)- ACCRUAL Being Paper Presentation at Training Workshop on Adoption of IPSAS in Lagos State 1

2. PAPER OUTLINE Objective of the Paper Definition Purpose of GPFS Major difference between GPFS- Cash and Accrual Steps involved in Preparation of GPFS Components of GPFS Statement of Financial Position and Performance Statement of Cash flow Statement of Changes in Net Assets/Equity Notes to the F/Statements and other Disclosures Challenges involved in Migration to Accrual Basis of Accounting Preconditions for Migration Accrual Basis of Accounting Case Study 2

3. Objective of the Paper Participants at the end of the Presentation of this Paper would be able to :  Differentiate between Accrual and Cash Basis of Accounting  Understand major components of GPFS- Accrual  Appreciate the benefit of Migrating to Accrual basis of accounting  Prepare and Interpret Accrual Based GPFS 3

4. 1.0Definition General Purpose Financial statements (GPFS) are a structured representation of the financial position of and the transactions undertaken by an entity. Accrual Based GPFS are Financial Statements prepared based on Accrual basis of Accounting. Accrual basis means a basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). 4

5. 2.0PURPOSE for GPFS- ACCRUAL GPFS are Statements issued periodically for users that are unable to demand financial information to meet their specific information needs. These users include Citizens, Voters, their representatives and other members of the public. Specifically, the GPFS should be able to provide to the User the following information: (a) Information about the sources, allocation and uses of financial resources; (b) Information about how the entity financed its activities and met its cash requirements; (c) Information that is useful in evaluating the entity’s ability to finance its activities and to meet its liabilities and commitments; 5

6. Purpose of GPFS- Accrual Cont’d. (d) Information about the financial condition of the entity and changes in it; and (e) aggregate information useful in evaluating the entity’s performance in terms of service costs, efficiency and accomplishments. 6

7. 3.0 Major Difference between GPFS- Cash and GPFS- Accrual The difference between Cash and Accrual GPFS stem from the basis of Accounting adopted by reporting entity. Under accrual basis transactions and other events are recognized when they occur, while cash basis recognized transactions and other events when cash or its equivalent is received or paid. Accrual based GPFS discloses information on Fixed Assets, Accounts Receivables and Payables while cash based GPFS doesn’t disclose them. Accrual based GPFS also differs from Cash based GPFS in terms its components. Principal statements in Accrual Based GPFS are different from that of Cash Based. 7

8. 4.0 Responsibility for GPFS The key offices involved in the process of financial statement preparation and presentation are:  The National/State Assemblies whose responsibility is to appropriate the Budgets.  The Minister/Commissioner of Finance whose responsibility is to issue warrants.  MDAs that ensure funds released to them are utilized as appropriated and reports are made available to the AGF/AGS in that regard.  The AGF/AGS/Treasurer who has the final responsibility in respect of the preparation of financial statements. 8

9. 5.0 Steps involved in Preparation of Accrual Based GPFS Posting Payment Vouchers, Receipt Vouchers, Journal Vouchers etc. Balancing of Cashbooks Balancing of General Ledger and Subsidiary Ledgers Extraction of Trial Balance from the General Ledger Preparation of Statements and Notes from the Trial Balance NOTE: This can be done manually or electronically. 9

10. 6.0 Major Components of Accrual Based GPFS IPSAS 1 covers presentation of Financial Statements as a whole while issues of recognition, measurement and presentation of line items in the financial statements are covered by other issued Standards (IPSAS 2-32). A complete set of Accrual Based GPFS includes the following components: (a) Statement of financial position; (b) Statement of financial performance; (c) Statement of changes in net assets/equity; (d) Cash flow statement; and (e) Accounting policies and (f) Notes to the financial/statements and other disclosures. 10

11. 7.0Statement of Financial Position Statement of Financial Position is a Statement that shows Assets, Liabilities and Net Assets/Equity of an Entity. Both Assets and Liabilities are categorized as Current and Non-Current in the Statement of Financial Position. Current Assets include the following:  Cash & its Equivalents  Receivables  Inventories  Prepayments  Other Current Assets 11

12. Statement of Financial Position Cont’d Non- Current Assets is made up of :  Loans Granted (Receivables)  Investments  Infrastructure, Plant and Equipment  Investment Property, Plant & equipment  Intangible Assets – Current Liabilities include:  Deposits  Short Term Loans & Advances  Unremitted Deductions  Accrued Expenses  Current Portion of Borrowings 12

13. Statement of Financial Position Cont’d Non- Current Liabilities is made up of:  Public Funds  Long Term Borrowings All the above sub groupings as a minimum requirement must be disclosed at the face of the Statement of Financial position. Assets are however treated in the Financial Position net of all Provisions while details are disclosed in the Notes to the Financial Statements. 13

14. 8.0Statement of Financial Performance The Statement of Financial Performance (Income and Expenditure Accounts) shows income accrued to the entity from all sources and Expenditure incurred during the period. As a minimum requirement, the face of the statement of financial performance should include the following line items: (a) Revenue from operating activities; (b) Surplus or deficit from operating activities; (c) Finance costs; (d ) Share of net surpluses or deficits of associates and joint ventures accounted for using the equity method; (e) Surplus or deficit from ordinary activities ; 14

15. Statement of Financial Performance Cont’d (f) Extraordinary items; (g) Minority interest share of net surplus or deficit; and (h) Net surplus or deficit for the period. The Expenses are classified either by nature or by their function within the entity. If an entity decides to classify expenses by function, it must also provide a presentation by nature of expenses in the notes. 15

16. 9.0 Statement of Cash Flow Statement of Cash flow is one of the Statements required by IPSAS 1 to be presented in the GPFS. The cash flow statement identifies the sources of cash inflows, the items on which cash was expended during the reporting period, and the cash balance as at the reporting date. The preparation and presentation of Cash flow is covered by IPSAS 2 Cash flows are basically reported under three (3) separate activities as follows: 16

17. Statement of Cash Flow Cont’d Operating Activities- activities of the entity that are not investing or financing activities. These are day to activities of an entity. Investing Activities- the acquisition and disposal of long term assets and other investments not included in cash equivalent Financial Activities- activities that result in changes in the size and composition of the contributed capital and borrowings Cash flow of an entity must fall within the above three activities 17

18. 10. Methods of Preparing Cash flows IPSAS 2 recognizes two methods of preparing cash flow, that is Direct and Indirect Method. Under direct method, major classes of gross cash receipts and gross cash payments are disclosed While under indirect method, net surplus/deficit is adjusted for the effect of, for instance transactions of non-cash nature like depreciation. Entities using direct method should provide a reconciliation of the surplus/deficit with the net cash from operating activities. IPSAS however recommend Direct method. 18

19. 11 Statement of Changes in Net Assets/Equity Net Assets/Equity simply refers to Assets less Liabilities. Net Assets/Equity is financed by Reserves, Accumulated Surpluses/Deficit, Minority Interest etc. The Statement is important in GPFS because it enables users to ascertains causes for movement in Net Equity of an entity. Changes in Net Assets/Equity is therefore normally caused by: Significant Changes in Accounting Policies Correction of Prior years’ errors Revaluation of the Assets Surplus or Deficit for the period Changes in Currency Translation etc 19

20. 12. Notes and Other Disclosures to GPFS Notes and other disclosures to GPFS are additional information presented in the GPFS to enable users understand the financial statements better and compare them with those of other entities: Notes include narrative descriptions or more detailed schedules or analyses of amounts shown on the face of the statement of financial performance, statement of financial position, cash flow statement and statement of changes in net assets/equity, as well as additional information such as contingent liabilities and commitments. 20

21. Notes and Other Disclosures to GPFS Cont’d IPSAS has not specifically provided formats for preparation of Notes and other disclosures to the Financial Statements but as a minimum requirement, Notes are normally presented in the following order: Statement of compliance with IPSAS Statement of the measurement basis (bases) and accounting policies applied; Supporting information for items presented on the face of each financial statement in the order in which each line item and each financial statement is presented; and Other disclosures, including: Contingencies, commitments and other financial disclosures and non financial disclosures 21

22. Notes and Other Disclosures to GPFS Cont’d Non- Financial Disclosures include:  Domicile and legal form of the entity,  Nature of the entity’s operations and principal activities  Reference to Relevant legislation governing the entity’ operations and  The name of the controlling entity and the ultimate controlling entity of the economic entity (where applicable). 22

23. 13 Statement of Accounting Policies Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements. They are part of the financial statements. Entities should select and apply accounting policies so that the financial statements comply with all the requirements of each applicable International Public Sector Accounting Standard. Examples of Accounting Policies issued by FAAC Sub – Committee can be seen from the Format of GPFS made available. 23

24. 14. Migration to Accrual Basis of Accounting Migration to Accrual Basis of Accounting come 2016 will not be without Challenges. These Challenges include: Systematic identification and valuation of assets and liabilities as at the date from which accrual accounting is to commence. Lack of adequate technical resources Political ownership- Inadequate support at the highest levels of the executive Consolidation issues 24

25. 15 Preconditions for a Successful Move to Accrual Accounting The following are conditions precedence for a successful migration to Accrual Basis of Accounting: An acceptable cash accounting based system- Countries with inadequate budget classification, no Unified COA or double- entry based general ledger system, and inadequate fiscal reporting are advised to adopt Cash Basis of Accounting before migrating to Accrual Basis. Entities or Government considering a move to accrual accounting must have either a core of officials with required technical (accounting, IT, etc.) skills, or the capacity to recruit such people for its key positions Total support from Political Class 25

26. Preconditions for a Successful Move to Accrual Accounting Cont’d Adequate Systems. With multi dimensional reporting requirements of Accrual based IPSAS, implementation of full accrual accounting can only be effective with the aid of a modern government financial management information system (GIFMIS) with proven functionality in areas such as general ledger, accounts payable, purchases, assets management, etc. 26

27. Attachments Format of Statement 1–Financial Position; Format of Statement 2- Financial Performance; Format of Statement 3- Cash flow- Direct Method; Format of Statement 4- Cash Flow- Indirect Method; Format of Statement 5- Changes in Net Assets/Equity; Case Study. 27

28. 16. Conclusion IPSAS is all about disclosure of information that will meet information needs of all users of the Financial Statement. Preparation and Presentation of Financial Statements is not new in Public Sector Accounting System. What need to be done is ensuring that GPFS prepared and presented comply fully with relevant provisions of IPSAS. 28