Accounting systems


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Accounting systems

  1. 1. Accounting systems
  2. 2. Accounting System (AS) <ul><li>Decisions regarding the accounting system of a project depend on the answers to some questions: </li></ul><ul><ul><li>First question : why do we need an accounting system? To provide information, usually in form of reports </li></ul></ul>
  3. 3. Accounting System (AS – cont.) <ul><li>Second question : who needs the information or reports? Several stakeholders do: </li></ul><ul><ul><li>Project management (PC U) </li></ul></ul><ul><ul><li>Government (typical project owner) </li></ul></ul><ul><ul><li>Beneficiaries </li></ul></ul><ul><ul><li>Bilateral donors (e.g. USAID, SIDA, CIDA, etc.) </li></ul></ul><ul><ul><li>Lenders (e.g. IFAD) </li></ul></ul>
  4. 4. Accounting System (AS – cont.) <ul><ul><li>A good project accounting system should produce information that meet the needs of all stakeholders </li></ul></ul><ul><ul><li>Harmonizing users’ information needs would help avoid setting up parallel systems to meet the need of different stakeholders </li></ul></ul>
  5. 5. Accounting System (AS – cont.) <ul><li>Having ascertained stakeholder requirements, the third question is: What do we need to account for? These are typically project activities and transactions, including: </li></ul><ul><ul><li>Receipts </li></ul></ul><ul><ul><li>Commitments </li></ul></ul><ul><ul><li>Expenditures </li></ul></ul><ul><ul><li>Inputs </li></ul></ul><ul><ul><li>Outputs </li></ul></ul><ul><ul><li>Results </li></ul></ul>
  6. 6. Accounting System (AS – cont.) <ul><li>Project transactions are either generic or specific. Generic activities and transactions include: </li></ul><ul><ul><li>Receipts of government, lender, or donor disbursement </li></ul></ul><ul><ul><li>Payment of salaries </li></ul></ul><ul><ul><li>Procurement of vehicles and computers </li></ul></ul><ul><ul><li>Payment of consultants </li></ul></ul><ul><ul><li>Payment for local training workshops </li></ul></ul>
  7. 7. <ul><li>Examples of transactions specific to a particular sector include: </li></ul><ul><ul><li>In a health project, purchase of medicines </li></ul></ul><ul><ul><li>In a rural development project, credit to farmers </li></ul></ul><ul><ul><li>In an education project, purchase of textbooks </li></ul></ul><ul><ul><li>In a railway rehabilitation project, purchase of new wagons </li></ul></ul><ul><li>After listing what needs to be accounted for, the fourth question is: </li></ul><ul><ul><li>What kinds of records are needed to account for them? </li></ul></ul>Accounting System (AS – cont.)
  8. 8. Accounting System (AS – cont.) <ul><li>By way of illustration only, a traditional project accounting system should include: </li></ul><ul><ul><li>Purchase orders, receipts, check books and other similar evidence of receipt, commitment or expenditure of funds </li></ul></ul><ul><ul><li>A journal for primary entry of all items (including adjustments) destined for ledger posting </li></ul></ul><ul><ul><li>A petty cash book (PCB) for very small payments, with credit side analysed by project component </li></ul></ul>
  9. 9. Accounting System (AS – cont.) <ul><ul><li>A bank cash book for each source of financing, with the credit side analysis columns by component (like the PCB) </li></ul></ul><ul><ul><li>A ledger with a separate account for each component, and the debit side analysed with a column for each procurement and disbursement category (e.g. Civil works, vehicles, etc.) </li></ul></ul><ul><ul><li>A fixed assets register , recording location price and date of acquisition of each project fixed asset, and divided into sections for buildings, vehicles, computers, etc. </li></ul></ul>
  10. 10. Accounting System (AS – cont.) <ul><li>The accounting system should help to generate at the end of each month, at least, the following: </li></ul><ul><ul><li>Total project expenditures </li></ul></ul><ul><ul><li>Total contribution from each financier </li></ul></ul><ul><ul><li>Total expenditure on each project component </li></ul></ul><ul><ul><li>Analysis of all project expenditures into civil works and all other procurement and disbursement categories </li></ul></ul>
  11. 11. <ul><li>Having decided on books and records to keep, the fifth question is: What entries should be made in these books on the occurrence of each transaction? </li></ul><ul><ul><li>It is useful to record these in the form of accounting instructions which should be part of the project financial management manual (PFMM) for all project staff. </li></ul></ul>Accounting System (AS – cont.)
  12. 12. Accounting System (AS – cont.) <ul><li>The sixth question is: What systemic choices should we make regarding the project account? </li></ul><ul><ul><li>Accounting entries (single or double) </li></ul></ul><ul><ul><li>Accounting basis : accrual, cash or modified version of one or the other, cash basis is: </li></ul></ul><ul><ul><ul><li>Measurement or valuation basis : normally historical cost, unless some other basis is justified </li></ul></ul></ul><ul><ul><ul><li>Accounting standards : International Accounting Standards (IAS) are the preferred ones </li></ul></ul></ul>
  13. 13. Computerization <ul><li>Computerization of accounting systems does not tell us what information we need, or what to do </li></ul><ul><li>It merely helps us to obtain faster or more easily the information we have already decided should be prepared </li></ul>
  14. 14. Special Accounting Issues <ul><li>Certain types of project raise special issues requiring attention during the design of an accounting system: </li></ul><ul><ul><li>Multiple institutional participants or implementing agencies </li></ul></ul><ul><ul><li>One agency implementing a project in several locations </li></ul></ul>
  15. 15. Year and Financial Statements (as per World Bank’s Operations Policy and Country Services)
  16. 16. Annual Financial Reporting <ul><li>OP 10.02 on accounting and reporting standards for: </li></ul><ul><li>Revenue-earning entities </li></ul><ul><li>Non-revenue-earning entities </li></ul><ul><li>There is no established standard or format for financial reporting by non-revenue-earning entities </li></ul>
  17. 17. Annual Financial Reporting (cont.) Article IV of practically every development credit agreement (DCA) or loan agreement contains financial covenants, including the OP 10.02 requirement for every project to send the Bank audited financial statements within 6 months following the end of the fiscal year.
  18. 18. Annual Financial Reporting (cont.) <ul><li>FARAH discusses extensively in chapter iv how to meet the need for annual financial reporting. </li></ul><ul><li>FARAH also presents two basic models of financial reporting: </li></ul><ul><li>One for revenue-earning </li></ul><ul><li>One for non-revenue-earning </li></ul>
  19. 19. Projects implemented by revenue-earning entities Projects implemented by revenue-earning entities typically involve on-lending Bank/IDA funds from government to the implementing agency through a subsidiary loan agreement between government and agency.
  20. 20. Projects implemented by revenue-earning entities (cont.) <ul><li>They also usually involve the Bank requiring, not only annual financial statements of the project, but also those of the implementing agency, because: </li></ul><ul><ul><li>The success and viability of the project depend on the financial health of the agency </li></ul></ul><ul><ul><li>Capacity building within the agency is one of the project objectives </li></ul></ul>
  21. 21. Projects implemented by revenue-earning entities (cont.) <ul><li>Entity financial statements required from such projects generally include: </li></ul><ul><ul><li>A balance sheet - financial snapshot taken at the year end - showing assets, liabilities and equity </li></ul></ul><ul><ul><li>An income statement showing income, expenses, and results of operations for the covered period </li></ul></ul>
  22. 22. Projects implemented by revenue-earning entities (cont.) <ul><li>A cash flow statement showing the cash provided by and used in operations and activities during the covered period </li></ul><ul><li>Notes on the financial statements explaining the main accounting disclosures, including risks and uncertainties affecting the organization, and any resources or obligations not recognized in the financial statement </li></ul>
  23. 23. Projects implemented by revenue-earning entities (cont.) <ul><li>Sometimes the project financial statements are integrated in the entity financial statements. </li></ul><ul><li>In other cases they are shown as a separate attachment to the entity financial statements. </li></ul><ul><li>Whichever solution is adopted, the Bank always requires, through the DCA, that project expenditures be accounted separately from other entity expenditures. </li></ul>
  24. 24. Projects implemented by non-revenue-earning entities <ul><li>It is likely that the majority Bank financed projects are implemented by government ministries (or PIUs), or other entities. </li></ul><ul><li>Regardless of the type of implementing agency, the Bank requires financial statements to monitor project performance and utilization of the loan. </li></ul>
  25. 25. Projects implemented by non-revenue-earning entities (cont.) <ul><li>For non-revenue-earning agencies, the main feature of the annual financial statements is the statement of sources and application of funds for the current year and cumulatively since the start of the project. </li></ul><ul><li>Actual project expenditures should be compared with the original (PAD) or amended projections. </li></ul>
  26. 26. Projects implemented by non-revenue-earning entities (cont.) <ul><li>The reporting should include the total project, regardless of funding sources for particular activities. </li></ul><ul><li>The Bank still receives financial project statements showing only world Bank-financed activities and excluding others. </li></ul><ul><li>This is unacceptable and contrary to OP/BP 10.02. </li></ul>
  27. 27. Some issues in project annual financing reporting <ul><li>Application of IAS to projects in agencies that do not apply IAS </li></ul><ul><li>This requests project reporting standards that differ from those applying to: </li></ul><ul><ul><li>The ministry’s other business </li></ul></ul><ul><ul><li>Projects reports to, say, ministry of finance since all governments report differently, applying IAS to all projects ensures their financial statements information would be more directly comparable than if government reporting standards were applied </li></ul></ul>
  28. 28. Some issues in project annual financing reporting (cont.) <ul><li>Even within the private sector, reporting practices vary across countries . </li></ul><ul><li>One of the most striking international differences is between: </li></ul><ul><ul><li>Anglo-Saxon practice , allowing freedom in reporting format, and </li></ul></ul><ul><ul><li>Napoleonic law (practised in most western Europe, French, Portuguese and Spanish speaking countries) where financial statement format must conform to a standard “plan compatible”, “Plano de contras” or the equivalent </li></ul></ul>
  29. 29. Some issues in project annual financing reporting (cont.) <ul><li>Even within the Anglo-Saxon countries, the typical UK format is different from the typical U.S.A. Format. </li></ul><ul><li>So, in the private as well as the public sector, application of IAS facilitates matters by introducing a degree of uniformity and comparability of project financial reporting which would not exist otherwise. </li></ul><ul><li>How to report on a project with multiple implementing agencies </li></ul>
  30. 30. Some issues in project annual financing reporting (cont.) <ul><li>Example: a capacity building project benefiting 10 different institutions, each implementing its own project component/s independently of all other. </li></ul><ul><li>Usually, the best solution to this case is to create one small umbrella PIU, consolidate the project financial statements of all the 10 agencies in that umbrella and send only one consolidated annual financial statement to the Bank. </li></ul>
  31. 31. Some issues in project annual financing reporting (cont.) <ul><li>In practice, apart from entity financial statements, a typical world Bank-financed project produces the following annual financial statements: </li></ul><ul><ul><li>A statement of sources and application of funds, or </li></ul></ul><ul><ul><li>A receipts and payments account, showing cash received and paid by the project </li></ul></ul>
  32. 32. Some issues in project annual financing reporting (cont.) <ul><li>A balance sheet, always required when accounts are prepared on an accrual basis </li></ul><ul><li>A summary of special account transactions and balance for the year, sometimes combined with, or in the form of: </li></ul><ul><ul><li>A special account reconciliation statement </li></ul></ul>
  33. 33. Some issues in project annual financing reporting (cont.) <ul><li>A summary of statements of expenditure (SOEs) issued during the year, where the project is using SOEs </li></ul><ul><li>A summary of the financial monitoring reports (FMR) issued during the year, where the project is disbursing through FMR </li></ul><ul><li>A list of project fixed assets and, where applicable </li></ul>
  34. 34. Some issues in project annual financing reporting (cont.) <ul><li>A list of important financial commitments which, although they are not yet payable, will definitely become payable in the future, showing when payments will become due (e.g. Scholarship payments during the next 7 years). </li></ul><ul><li>Specific financial reporting requirements vary from project to project, even though general requirements in article iv of the DCA are standard. The specific requirements are also included in financial covenants in the DCA. </li></ul>
  35. 35. Some issues in project annual financing reporting (cont.) <ul><li>For most projects, relevant grouping for annual financial reporting are determined by: </li></ul><ul><ul><li>Project components as presented in the PAD </li></ul></ul><ul><ul><li>Procurement/disbursement categories in the DCA </li></ul></ul><ul><li>Under a good PFM system, projects components in the pad and disbursement categories determine: </li></ul>
  36. 36. Some issues in project annual financing reporting (cont.) <ul><li>The ledger and other accounts to maintained by the project </li></ul><ul><li>The FMR reporting format </li></ul><ul><li>The annual project financial statement format </li></ul><ul><li>It is important to this bear in mind when preparing the PAD and the DCA </li></ul>
  37. 37. <ul><li>Note also that having the same format for both the FMR and the annual financial statements, particularly the statement of sources and application of funds, means that last annual FMR is effectively the annual financial statement. </li></ul>Some issues in project annual financing reporting (cont.)