1. Use of Budget Classification and Chart of Accounts
ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1)
Use of Budget Classification and Chart of Accounts
March 11, 2010
Day 3, Session 3 1

2. Day 3, Session 3: Advanced uses of BC&COA
Content
Presentation of the Budget
Additional Codes for Accrual Based Accounting.
Examples of Analysis of Budget and Accounting Data
Principles to Consider When Installing an Information System
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3. 1. Presentation of the Budget
Basis of the Budget System
Presentation of the budget:
Major requirement of budget
Budget annexes and other documents
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4. 1. Presentation of the Budget (continue)
Basis of the Budget System
Budget system classified into:
1-Cash budget,
2-Obligation based budget,
3-Accrual based budget and
4-Output budgeting.
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5. 1. Presentation of the Budget (continue)
Basis of the Budget System
1-Cash budget
is a budget where most of the appropriations are on a cash basis.
in a cash-based budget, appropriations define limits for payment and annual commitment, that is, financial obligations met within the fiscal year and the annual tranche of multiyear commitments (e.g. MTEF, Program MAFF).
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6. 1. Presentation of the Budget (continue)
Basis of the Budget System
1-Cash budget (continue)
a cash budget fits well the need for compliance and expenditure control. Commitments and payments are controlled on the basis of the authorizations of the Parliament.
macroeconomic objectives, such as the cash deficit, are directly linked to the appropriations
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7. 1. Presentation of the Budget (continue)
Basis of the Budget System
2-Obligation based budget
appropriations define cash and commitment limits, but for certain, there is no time limit for payment.
needs to be complemented with an annual cash plan for the appropriations that are obligation based.
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8. 1. Presentation of the Budget (continue)
Basis of the Budget System
3-Accrual based budget
An accrual-based budget can be defined in two ways:
A budget where appropriations are on an accrual basis and are not a limit for cash payment or commitment (e.g., the New Zealand budget). Cash payments are controlled, but through separate means rather than on the basis of the appropriations.
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9. 1. Presentation of the Budget (continue)
Basis of the Budget System
3-Accrual based budget (continue)
An accrual-based budget can be defined in two ways:
A budget that presents accrual information and projections of the balance sheet of the government, but where appropriations also define cash limits. (e.g. In Iceland, the budget is presented both on cash and on accrual basis).
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10. 1. Presentation of the Budget (continue)
Basis of the Budget System
4-Output budgeting.
Represents the culmination of the performance budgeting approach and, as such, carries all its advantages and risks.
The data requirements, methodological difficulties, and demands on implementation capacity are vast.
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11. 1. Presentation of the Budget (continue)
Basis of the Budget System
4-Output budgeting (continue)
Output budgeting is based on the “principal-agent” paradigm, whereby the ministers are seen as principals and the executive agencies as their agents.
e.g. The Police Commissioner contracts with the Minister of Police to provide a certain level of policing services, patrols, community security programs, road safety commercials, etc. The commissioner does not contract to lower the crime rate. The crime rate is affected by many variables beyond the control of the Commissioner."
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12. 1. Presentation of the Budget (continue)
1. Major requirements
The budget submitted to the legislature should include all elements needed to assess budgetary and fiscal policy and present the appropriations according to the needs for legislative control by the Parliament. Revenues, expenditures, and the fiscal outturn should be presented together.
 Concerning the expenditure side, one may distinguish: (i) a “main” presentation, on the basis of which appropriations are voted; and (ii) annexes that give additional information.
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13. 1. Presentation of the Budget (continue)
“Main” presentation of the budget
includes estimates that show appropriations; may or may not include sub-items for information only. Some countries present thousands of line items in the budget while others have very few.
Some countries limit, the number of appropriations to 20 or even less. However, most of these countries also have a detailed annual expenditure plan by organization, program, and economic category, which is either internal to the executive (as in China and Vietnam) or presented through various annexes to the budget.
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14. 1. Presentation of the Budget (continue)
“Main” presentation of the budget
Two distinct situations may be found:
the presentation of the budget to Parliament is a pure formality. Where the executive has all the power, many of the issues discussed in this manual are not relevant, notably, the nature of appropriations, the comparison of cash controls with accrual-based controls, accountability rules, financial reporting, etc.
elements of the annual expenditure plan are discussed in Parliament committees. Line ministries go to the committees to negotiate items in expenditure plan prepared by the Ministry of Finance (e.g. some FSU countries, before the current reforms).
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15. 1. Presentation of the Budget (continue)
“Main” presentation of the budget (continue)
The budget should clearly identify responsibilities in budget management.
The appropriations should be presented by line ministry and independent agency, and by their major subdivisions. In several FSU countries, the budget is or was presented by program instead by line ministry or agency. Reforms are currently under way to remedy this problem (e.g., Ukraine for instance, reformed its budget classification system in 1997).
In several developing countries, the recurrent budget is presented by line ministry but the development budget is presented by broad function, program, and project.
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16. 1. Presentation of the Budget (continue)
“Main” presentation of the budget (continue)
 Projects financed by donors are often of composite nature, and may include both current and capital expenditures, particularly in the social sectors.
Nevertheless a single project manager and are often submitted to special reporting requirements from donors. Thus, although the distinction between “recurrent” and “development” expenditures is artificial and questionable, for accountability and management purposes aid-dependent countries are obliged to follow it in the presentation of the budget.
“development” projects must be separated from other expenditures. However, presenting together.
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17. 1. Presentation of the Budget (continue)
“Main” presentation of the budget (continue)
Present development expenditures together with recurrent expenditures under the same administrative headings (but under separate appropriations) is required in order to assess the overall budget of a line ministry or an independent agency.
In countries with dual budgeting, such unified presentation will not eliminate all the negative effects of dual budgeting processes, but will facilitate scrutiny of sector budgets. Within the “main” presentation of the budget, development projects should be seen as an administrative category, and classified according to line ministries or agencies.
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18. 1. Presentation of the Budget (continue)
“Main” presentation of the budget (continue)
in aid-dependent countries or in countries that have a dual budgeting system, the presentation could differ from the one mentioned earlier, as follows:
Ministry (or agency)
Directorate (or other major administrative subdivision)
Program (if any)
Current expenditures
Capital expenditures (items not included in the “development” expenditures) “Development” expenditures (domestic/external resources)
Capital
Current
Memo: Total current expenditure
Total capital expenditure
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19. 1. Presentation of the Budget (continue)
2. Budget annexes and other document
Annexes to the budget presented to Parliament are needed to give other presentations of appropriations needed to analyze the budget. e.g. the following could be attached to the budget:
(I) an annex by function;
(ii) an annex by program, especially if there are multi sectoral programs;
(iii) if the main presentation, shows the breakdown between current and capital expenditures, an annex by development project/program (development budget);
(iv) if the main presentation already includes the “development” budget, an annex to show the true investment component; etc.
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20. 1. Presentation of the Budget (continue)
2. Budget annexes and other document
 Appropriations should be compared with the appropriations of the previous year. An annex by function should show the growth of expenditures over several years (on the basis of actual budget execution).
Other documents can include:
(i) narrative statements on each sector budget policy, presented by programs;
(ii) performance indicators;
(iii) the presentation of the forward costs of multiyear projects; and
(iv) if appropriate, multi-year estimates or a Public Investment Program (PIP).
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21. 2. Additional Codes for Accrual Based Accounting
An accrual-based budget can be defined in two ways:
A budget where appropriations are on an accrual basis and are not a limit for cash payment or commitment (e.g., the New Zealand budget). Cash payments are controlled, but through separate means rather than on the basis of the appropriations.
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22. 2. Additional Codes for Accrual Based Accounting (continue)
An accrual-based budget can be defined in two ways: (continue)
Presents accrual information and projections of the balance sheet of the government, but where appropriations also define cash limits.
Many budgets of local governments in developed countries are presented along these lines.
e.g. In Iceland, the budget is presented both on cash and on accrual basis.
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23. 2. Additional Codes for Accrual Based Accounting (continue)
A.B. is aimed at fostering performance. Since full costs are budgeted, agencies have strong incentives for assessing their costs.
The presentation in the budget of accrual information on liabilities or interests subsidies presents advantages for transparency and policy formulation.
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24. 2. Additional Codes for Accrual Based Accounting (continue)
Generally, the term “accrual-based budget” refers to the former definition, which is adopted in this volume except where specified. Hence, cash payments and commitments cannot be controlled directly from accrual-based appropriations and separate additional mechanisms must be put in place to control cash.
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25. 2. Additional Codes for Accrual Based Accounting (continue)
An accrual-based budget is aimed at fostering performance. Since full costs are budgeted, agencies have strong incentives for assessing their costs.
The presentation in the budget of accrual information on liabilities or interests subsidies presents advantages for transparency and policy formulation.
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26. 2. Additional Codes for Accrual Based Accounting (continue)
An attempting to implement accrual budgeting in developing and transition countries would pose major problems. Before thinking of abandoning a cash budget system, the following elements must be considered:
Accrual budgeting alters the traditional rules for compliance.
Accrual accounting presents advantages
Requirements for “full” accrual accounting
Improving cost measurement and assessing full costs is desirable.
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27. 2. Additional Codes for Accrual Based Accounting (continue)
e.g. Accrual codes- See Spreadsheet COA/RGC, Class 4-Third Party Accounts
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28. 3. Examples of Analysis of Budget and Accounting Data
Medium Term Expenditure Framework
Efficiency, Effectiveness and Value for Money
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29. Medium Term Expenditure Framework
When planning projects and programs it is necessary to look at a longer timescale, which may be three years, five years or longer.
Most countries now agree it is good to produce overall budget estimates for three years so that projects and programs can be better incorporated into the government’s budgets.
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30. Medium Term Expenditure Framework
The Strategic Budget Plan (SBP) and Medium Term Expenditure Framework (MTEF) techniques attempt to do this.
Example:
Budget estimates made for 2010, 2011 and 2012.
Budget for 2010 approved by the legislature as the Annual Budget Law 2010.
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31. Medium Term Expenditure Framework
The following year estimates for 2011, 2012 and 2013 are made. The estimates for 2011 and 2012 will be the previous estimates adjusted for new circumstances, and the estimate for 2013 will be new.
In this way it is possible to plan for longer term activities and projects without having to ‘cram’ all the estimates into one year.
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32. Efficiency, effectiveness and value for money
Spending should be efficient and effective, achieving value for money. This is helped by a number of processes, for example:
Procurement rules:
encourage competition between suppliers
reduce the price paid for goods and services
streamline the process of purchasing by deciding who has the authority to make commitments and imposing more controls on high value purchases than lower value ones.
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33. Efficiency, effectiveness and value for money
Monitoring and evaluation of projects and programs:
will link money spent to results achieved.
Development of internal audit:
will assist in monitoring controls over expenditure, eliminating wastage
will allow special investigations and assignments to be carried out on behalf of the Minister of Rural Development
improves cooperation with MED and the National Audit Authority.
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34. 4. Principles to Consider When Installing an Information System
Concept Notes on PFMRP Annual Review Meeting Sihanaukville, dated January 2010.
Other Consideration for Information System
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35. The Public Financial Management Reform Program
Implemented since 2004.
Designed as four ‘platforms’ of progressive improvement, with the following objectives:
Platform 1: Making the budget more credible in terms of timely and effective delivery of funds to budget managers.
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36. The Public Financial Management Reform Program
Platform 2: Implementing effective financial accountability. Platform 3:Linking policy to the budget to create a fully affordable policy agenda. Platform 4: Integrating performance accountability and financial accountability.
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37. The Public Financial Management Reform Program
The first stage of PMFRP concentrated on Platform 1 and was mainly focused at Ministry of Economy and Finance. The target of achieving a more credible budget was achieved in 2006.
We are now in Stage 2 of PFMRP which is mainly concerned with implementing Platform 2, that is improving the financial accountability of budget managers. This stage therefore involves managers in all ministries, departments and agencies of the Royal Government of Cambodia, at national and sub-national level.
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38. The Public Financial Management Reform Program
Main objective of financial accountability:
Managers should be able to show how they have used the money they have been entrusted with.
Systems needed:
Good records of budgets and actual transactions, so that regular comparisons can be made and differences explained.
Achieved by installing Financial Management Information System (FMIS).
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39. The Public Financial Management Reform Program
Installation of FMIS will require improvements to many work processes and controls in ministries.
Planning:
The master document for PFMRP Stage 2 is the Consolidated Action Plan (CAP).
Based on this, ministries have produced their own Ministry Action Plans (MAP).
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40. ADB Grant 0133-CAM: Component 1
Ministry Action Plan
The MAP for MRD follows the suggested structure given in the CAP.
There are six areas of reform activities.
Revenue Policy: Not much needs to be done in this area, as MRD does not have sources of revenue.
Budget Preparation: This is a major area. Work includes:
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41. ADB Grant 0133-CAM: Component 1
Ministry Action Plan
defining the roles and responsibilities of budget managers
extending the budget classification
extending program budgeting
integrating the different budgets which are used at the moment (program budget, non-program budget, project budgets)
improving budget reporting.
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42. ADB Grant 0133-CAM: Component 1
Ministry Action Plan
The MAP for MRD follows the suggested structure given in the CAP.
There are six areas of reform activities.
Budget Implementation: Another major area. Includes:
cash planning,
improvements to procurement,
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43. ADB Grant 0133-CAM: Component 1
Ministry Action Plan
streamlining the approval of payments,
improving the accounting and reporting system so that it is ready for transition to the FMIS.
Audit and Monitoring: This area covers the role and effective operation of internal audit, which is a vital part of the system to improve accountability.
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44. ADB Grant 0133-CAM: Component 1
Ministry Action Plan
The MAP for MRD follows the suggested structure given in the CAP.
There are six areas of reform activities.
Financial Management Information System: This is not just a ‘computer project’. Introduction of the FMIS will require proper documentation of existing systems and proposed new systems, changing of workflows, training and change management. It will affect the work of financial managers and line managers and provide them with greatly improved information.
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45. ADB Grant 0133-CAM: Component 1
Ministry Action Plan
Capacity Development: This area covers the functional review of the ministry, recruitment retention and job rotation policies, identification of skills gaps, training needs and plans, and motivation including the MBPI scheme.
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46. Ministry of Rural Development PFM Working Groups
MRD has set up a PFM Working Group and four subgroups, as follows:
Subgroup Number
Name
Areas of MAP covered
Subgroup 1
Planning Policies, Budget Strategy and FMIS
Areas 2 and 5
Subgroup 2
Setting up policies and income-expenditure management
Areas 1 and 3
Subgroup 3
Auditing and monitoring
Area 4
Subgroup 4
Capacity building and function analysis
Area 6
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47. Other Consideration for Information System
ORACLE FINANCIALS application software
Treasury is currently in the process of upgrading the technological infra-structure for the treasury system and has chosen the ORACLE FINANCIALS application software
Package to implement Treasury functions. This is one of the first cases in a country of the Former Soviet Union where an off the shelf application software package has been shown to be fully responsive to the Treasury’s functional requirements, without customization.
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48. Other Consideration for Information System
ORACLE FINANCIALS application software
Remote treasury offices will communicate with the center via satellite based communication links that are currently being installed. (Page 62, Treasury Reference Model, 2001, World Bank).
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49. Finish for Day 3 Thank You !!!!