1. Funding and Finalising the Budget in mSCOA
2016 IMFO CONFERENCE
4th October 2016
Funding and Finalising the Budget in mSCOA
Presented by: Kashnee Sewnarain KZN mSCOA Project Manager

2. Agenda The impact of mSCOA Regulation on Budgeting
Understanding the Fund Segment
Overview of the process for preparation of an mSCOA compliant budget
Determining funding sources for the budget
Finalising the budget in mSCOA
Impact on business processes

3. The impact of mSCOA Regulation on Budgeting
Problem Statement
Every municipality manages and reports its financial affairs in accordance with its own organisational structure and unique chart of accounts;
The budget is therefore prepared on this basis and this impacts on National Government’s ability to
formulate coherent policies due to limited transparency, comparability, and accuracy of data;
Inadequate standardisation and alignment of the local government accountability cycle from IDP to the Budget, SDBIP, In year reporting, annual financial statements, and annual report;
Budgets are generally prepared based on incremental budgeting, with limited zero base budgeting principles applied;
Evaluation of budgets often indicate that budgets are underfunded, and this often results in cash flow management constraints;
Revenue targets is often unrealistic and non cash items are often inadequately budgeted for
Solution
National Treasury issued Government Gazette No on 22 April 2014, Municipal Regulations on Standard Chart of Accounts, which is effective 01 July 2017.

4. Impact of mSCOA Regulation on Budgeting
Objective of the Regulation
To provide a national standard for uniform recording and classification of municipal budget and financial information at a transactional level by providing a Standardised Chart of Accounts:
aligned to budget formats and accounting standards with those of national and provincial government;
enable uniform information sets across the whole of government to better inform national policy coordination and reporting, benchmarking and performance measurement.
Additional objectives
Improved data quality and credibility therefore improving Council and management decision making;
Standardisation of key business processes and consistency in management of municipal finances;
Improved transparency, accountability and governance through uniform recording of transactions at a posting level;
Enabling deeper data analysis and sector comparisons to improve financial performance;
The standardisation of the account classification to facilitate mobility in financial skills within local government and to enhance the ability of local government to attract and retain skilled personnel.

5. Impact of mSCOA Regulation on Budgeting
Project
Function
Item
Fund
Regional Indicator
Costing
Municipal Standard Classification
NERSA/COGTA Requirements - linked to procurement planning
Internal management decision making
GFS Reporting National Treasury reporting on Service Delivery
mSCOA SEGMENTS INCLUDED IN BUDGETING
Tariff setting
GRAP Requirements
Cash Flow Management and Consolidation of Financial Statements for Government
Community information and Council decision making

6. Impact of mSCOA Regulation on Budgeting
Project
Function
Item
Fund
Regional Indicator
Costing
Municipal Standard Classification
“To which project does this expenditure contribute?”
“To which cost centre does the transaction get allocated, based on your organisational structure?”
“Against which function and sub-function should the transaction being recorded?”
mSCOA SEGMENTS INCLUDED IN BUDGETING
“Should the cost be reallocated to functions rendering the service?”
“What is being bought or money received for?”
“In which region does the service get delivered?”
“Against which source of funding should the transaction be allocated?”

7. Impact of mSCOA Regulation on Budgeting
Seven segments that are to be complied with on a transaction (posting) level, and in turn this implies that the budget must be prepared using all segments.
Integrated Development Plan (IDP) must include both capital and operational projects, and the Project, Function and Region Segments as per mSCOA tables
Budgeting will need to be driven from the Project Segment, and it is no longer an item based budgeting process
mSCOA implementation is driven from the IDP and Budgeting Process – if incorrectly applied, it is likely to impact negatively on daily transacting and in turn, service delivery
SCOA Version 6.0 has been released by National Treasury, and it is required that the 2017/18 Financial Year Budget must be prepared using this version
Capacitation in mSCOA knowledge for all business units is significant requirement for successful implementation
Preparation of the 2017/18 Budget should commence in October 2016 in order to allow National and Provincial Treasuries in support municipalities in this regard.

8. Understanding the Fund Segment
Identifies the various sources of funding to finance both capital and operational expenditure
Source of funding to be allocated against all revenue and expenditure transactions (budget, ordered, invoiced, payments made/received)
Funding segment is the determinant segment that will be used to validate:
The adequacy of funding of a budget
The funding of day to day transactions being incurred
Budgeting and managing cash flow
Further used to prepare consolidated financial statements for the whole of government
Financial systems will be modified to produce cash flow reports using “bank” as an attribute/flag within the system, focusing on the funding segment.
Normal cash management principles should be applied to determine the adequacy of funding of municipality budgets and day to day cash management using the information from the fund segment
Non-Funding Transactions are non-cash transactions, such as depreciation, impairment, provisions
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

9. Understanding the Fund Segment
Operational
Revenue
Transfers and Subsidies
Borrowing
Cash backed reserves
Capital
Transfer from operational revenue to Capital
Transfers and subsidies
Non funding transactions
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

10. Understanding the Fund Segment
Operational Revenue
General Revenue
Disposal of PPE
Equitable Share
Fines, Penalties and Forfeits
Interest, Rent and Dividend on Land
Licenses and Permits
Rental from Fixed Assets
Agency Services
Service Charges
Taxes (Property Rates)
Sale of Goods and Rendering of Services
Fuel Levy
Transfer to capital funds
Operational Revenue
Commercial Services
Abattoirs
Airports
City Parks, Reserves and Gardens
Civic and Open Air Theatres
Convention Centers
Development Agencies
Fresh Produce Market
Property Agencies
Quarries
Sand-mining
Tourism
Urban Transport
Zoo's and Museums
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

11. Understanding the Fund Segment
Operational: Transfers and Subsidies
Allocation in kind
Department Agencies and Accounts
Social Security Funds
Provincial Department Agencies
National Department Agencies
District Municipalities (by Province and by Function)
Foreign Government and International Organisations
Households
Employee Social Benefits
Social Security Payments
Social Assistance
Other Transfers (Cash)
National Government
Non-profit organisations
Private Enterprises
Provincial Government
Public Corporations
Higher Education Institutions
Operational: Transfers and Subsidies
Monetary allocations
Department Agencies and Accounts
Social Security Funds
Provincial Department Agencies
National Department Agencies
District Municipalities (by Province and by Function)
Foreign Government and International Organisations
Households
Employee Social Benefits
Social Security Payments
Social Assistance
Other Transfers (Cash)
National Government
National Revenue Fund
Non-profit organisations
Private Enterprises
Provincial Government
Public Corporations
Higher Education Institutions
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

12. Understanding the Fund Segment
Capital: Transfers and Subsidies
Allocation in kind
Department Agencies and Accounts
Social Security Funds
Provincial Department Agencies
National Department Agencies
District Municipalities (by Province and by Function)
Foreign Government and International Organisations
Households
Employee Social Benefits
Social Security Payments
Social Assistance
Other Transfers (Cash)
National Government
Non-profit organisations
Private Enterprises
Provincial Government
Public Corporations
Higher Education Institutions
Capital: Transfers and Subsidies
Monetary allocations
Department Agencies and Accounts
Social Security Funds
Provincial Department Agencies
National Department Agencies
District Municipalities (by Province and by Function)
Foreign Government and International Organisations
Households
Employee Social Benefits
Social Security Payments
Social Assistance
Other Transfers (Cash)
National Government
Non-profit organisations
Private Enterprises
Provincial Government
Public Corporations
Higher Education Institutions
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

13. Understanding the Fund Segment Operational: Borrowing
Current
Annuity loans
Bankers Acceptance Certificate
Bank Overdraft
Derivative Financial Liability
Finance lease
Government Loans
Local Registered Stock
Marketable Bonds
Non-annuity loans
Non-marketable bonds
PPP Liabilities
Securities
Capital: Borrowing
Non-Current
Annuity loans
Bankers Acceptance Certificate
Derivative Financial Liability
Finance lease
Government Loans
Local Registered Stock
Marketable Bonds
Non-annuity loans
Non-marketable bonds
PPP Liabilities
Securities
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

14. Overview of the process for preparation of an mSCOA compliant budget
Budget process timetable needs to incorporate mSCOA requirements including the timeframes to ensure quality review on mSCOA budgetary compliance;
Finalise the process of unpacking the current general ledger or budget in terms of the Chart, (performed by the respective business units) which should form the foundation for the 2017/18 budget preparation by end of October 2016;
Financial Management System Budgeting module to be utilised in preparing the detailed mSCOA budget from October 2016 (no longer prepared on excel spreadsheets);
Review the project segment to identify all capital and operational projects relevant to the municipality and ensure that these are included and appropriately recorded in the IDP. Further include Region and Function for each project in the IDP;
Upload the IDP to the Financial Management System and link each strategic objective and developmental priority to a project in the system;
Each functional unit is to prepare their budget using a zero based approach with reference to supporting documentation such as repairs and maintenance plans, payroll information, operational project plans, asset registers, valuation roll etc.

15. Determining Funding Sources for the Budget
Highlight the need to also allocate expenditure to funds as well. Use example of General Revenue- Property Rates and also the linking of expenditure for the repairs of potholes to this fund.

16. Determining funding sources for the Budget
Validate all municipal sources of funding against the Fund Segment therefore ensuring that all sources have been identified
Review own source revenue including any assumptions made to ensure that estimations are based on sound calculations with supporting working papers
Tariff modelling using the costing segment is useful – helps determine if the municipality is under recovering on services or whether tariffs are significantly higher than costs incurred
Baseline amount to be determined for each function should remain within the allocation. Any additional costs above baseline must be specifically motivated
Utilise function revenue to fund function expenditure – shortfall generally funded from equitable share and property rates
Funding sources must be physical cash that will be received in the budget year – no utilisation of future grant allocations
Budgeted Cash Flow Statement to be prepared from the Fund Segment data using bank as an attribute/flag

17. Finalising the Budget in mSCOA
Council needs to clearly direct projects undertaken in terms of IDP for each year – cannot determine adhoc projects during the year
Competing priorities and insufficient funds – Budget reductions to be determined on a project level, and not an item level
Budget calculations should be driven from subsystems (debtors, payroll, assets etc)
Funded Budget is when the Revenue > Expenditure based on cash flow, including asset and liabilities amounts (Funded segment)
Budget schedules will be automatically generated on the system but municipalities are required to complete manual schedules and monthly reporting for the interim to ensure accuracy – most systems currently support this functionality

18. Finalising the Budget in mSCOA
Budget data strings must be submitted to Provincial and National Treasuries for review and validation
Municipalities and entities are required to provide the work in progress draft budgets to Provincial and National Treasuries by January 2017 for comment
Draft 2017/18 budget is to be tabled in mSCOA format to Council by 31 March 2017
Variations will need to be determined in line with budget policy of municipality and processed on the financial system before unbudgeted or insufficient budget items are processed
Where municipalities intend to go live prior to 1 July 2017 – Budget for 2016/17 FY must be broken down in mSCOA Requirements and loaded onto the system in order to transact against this budget.

19. Finalising the Budget in mSCOA
IDP includes all Capital & Operational Projects
Budget alignment to the IDP
IDP Alignment of mSCOA for Projects, Function and Region Segments
Budget to be prepared using seven segments
QUALITY REVIEW
2017/18 MSCOA COMPLIANT BUDGET
Electronic integration of budget between subsystems
Budget to be prepared electronically using budget tool
IDP and Budget data strings to be uploaded to portal for NT/PT validation
Budget based on Version 6 of mSCOA Chart
Seven segments correctly applied

20. Common Business Process Changes
Zero based budgeting applied, with expenditure and income being justified
Principles of budgeting and planning will have to be reinforced – retrain and refresher courses
Budgeting must be in compliance with GRAP
Subsystems will need to be integrated, inclusive of budget – transactions recorded at lowest possible level in compliance with mSCOA
No longer general account descriptions - General ledger accounts increased substantially
Property rates and debtors will need to be raised and classified according to types of properties on valuation roll
Repairs and maintenance no longer an item, it is a project – more detailed budgeting and planning

21. Common Business Process Changes
No longer special programmes – programmes must be specific and identifiable
Customer receipting of ad hoc payments – elimination of general accounts - specific to type of payment being received and therefore budgeted amounts should be allocated
Service delivery transactions and associated budget will have to be recorded by ward or by suburb
Municipality needs to identify between core and noncore functions
Asset management transactions will need to be recorded in compliance with GRAP at the time of transaction – no longer year end breakdown (e.g. depreciation and impairment to be recorded monthly)

22. Planning for Business Process Change
Acquire individual knowledge – Training and Reading
Transfer of knowledge within the organisation
Each function unit compares current budgeting and accounting processes with mSCOA requirements
Implement the changes within the organisation – change internal controls, revise documentation, communicate changes
One on one coaching – improves understanding and application
Planning process - Each functional unit presents on proposed changes

23. THANK YOU!
Contact Details: