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Developing a New Chart of
Accounts
JEAN-MARC LEPAIN, PFM ADVISOR
DECEMBER 13TH, 2018
Agenda
1. Principles
2. Coding structure
3. CoA architecture
4. Economic classification
Not covered in details: Budget Classification, accounting rules and reporting framework
Documents under preparation
Documents being presently prepared:
Methodology for developing the accounting system
Chart of Accounts
Assets Management methodology
Documents to be prepared in future
Accounting rules
Accounting manual
Concept Note on financial reporting
Templates for financial reports
Manual for financial reporting
1. Principles
What is Government Accounting?
Definition: Government accounting is the process of recording, analysing, classifying,
summarizing, communicating and interpreting financial information about
government’s revenue and expenditure at the aggregated and disaggregated level,
reflecting transactions and other economic events involving the receipt, spending,
transfer, usability and disposition of assets and liabilities.
KEY COMPONENTS OF AN
ACCOUNTING/REPORTING FRAMEWORK
Chart of Accounts
Budget Classification
General Ledger and subsidiary records
Accounting principles
Accounting processes (rule-based IFMIS, procedures, manuals, etc.)
Definition of standard reports and reporting framework
Accounting and reporting policy
Understanding the difference
between CoA and Budget Classification
Issues with current Chart of Accounts
Not based on a distinction between Chart of Accounts and Budget Classification.
Without a proper distinction between CoA and BC there is no proper general ledger system
and no asset and liability accounting, making preparation of end-of-the-year financial
statements cumbersome and difficult with unreliable data.
Is not compliant with international standards (GFS, IPSAS, GAAP).
Designed mainly for expenditure control and allows only simple budgetary accounting.
Is not detailed enough to do budget analysis/cost analysis;
Does not allow developing a comprehensive reporting framework that should include
reporting on assets and liabilities;
Is not consistent in its coding segments.
Government Finance Statistics (GFS)
Standards
GSF provides reporting standards. To meet the standards the CoA must be GFS compliant.
It requires a strict distinction between recurrent expenditure, investments, subsidies and social
transfers;
It requires moving away from cash-based accounting toward accrual accounting;
It requires expending the coverage of reporting from Central Government to General
Government
Cash-based vs. Accrual Accounting
Cash-based Accounting Accrual-based Accounting
Revenue / expenditure transaction are recognised
only when there a debit or credit in cash accounts
with the consequences that:
 It ignores liabilities until due for payment;
 It ignores non-cash operation altering stocks of
government assets and / or liabilities;
 It needs to be supplemented by memoranda
items and hoc reports for reporting transaction
not captured by the accounting system.
 Government cash position might be misleading
and cash bed easily manipulated by pushing
expenditure from on fiscal year to the other.
Economic flows are recorded at the time
economic value is created, transformed,
exchanged, transferred, or extinguished, with
the consequences that:
 All economic flows, and not just cash flows,
are recorded to better reflect the
Government financial position;
 The accounting system is based on clear
rules allowing for recognising economic
flows at the time they occur;
 Cash position of the Government is reported
separately (Cash Flow Statement).
The four reporting options
Cash-based accounting: recognised transactions only when they have a cash flow
impact.
Modified cash-based accounting: recognised transactions initiated during the fiscal
year which should have been disbursed but have been delayed.
Accrual accounting: recognised transactions when they create an economic value.
Modified accrual accounting: recognised certain operations like expenditure
commitments before any cash operation. Can provide a migration path from cash
based accounting to accrual based accounting
Recommendations
Define a clear path and time frame for moving to accrual accounting.
Start from modified cash-based accounting recognising all payments that should have been
made during the fiscal year.
Report multi-year commitments and liabilities separately
IPSAS Disclosure rules (1)
Financial statements of public sector entities should include a comparison of actual
budget and approved budget even if supplementary budgets have been approved.
TAFIS should be able to keep record of the approved budget as well as of the
modified budget.
Financial statements should include an explanation of material differences between
the approved budget and the actual budget.
The Financial statements should include a reconciliation of actual amounts on a
budget basis, with actual amounts presented in the financial statements when the
accounting and budget basis differs (meaning when actual amounted reported differs
from the cash-based actual budget).
IPSAS Disclosure rules (2)
IPSAS allows comparison of budget and actual amounts to be made in the financial
statements as additional budget columns in the primary financial statements only
where the financial statements and the budget are prepared on a comparable basis.
IPSAS requires a disclosure of an explanation of the reasons for differences between
the original and final budget, including whether those differences arise from
reallocations within the budget or other factors such as policy shifts, natural disaster,
or other unforeseen events.
2. Coding Structure
Types of classification
Administrative classification
Geographical location or cost centres
Programmes and activities
Functional Classification (COFOG)
Economic classification
Other possible classifications: sources of funding (not required), geographic location
COA CODING STRUCTURE
Segment
Group No
Segment Group Segment No of
digits
1 Organisation Ministries (2 digits)
Department (2 digit)
Budget users (2 digit)
Geographic location/ sub-national (to be
decide)
6
2 Programmes and Activities Programmes (2 digits)
Activities (2 digits)
Projects (2 digits)
6
3 Functions of Government Functions (2 digits)
Sub-functions (2 digits)
4
4 Economic classification Categories (2 digits)
Objects (1 digit)
Sub-objects (2 digits)
5
5 Fiscal year Fiscal year 4
Total number of codding characters 25
JAMAICA COA CODING STRUCTURE
Segment
Group No
Segment Group Segment No of
digits
1 Organisation Level 1 – Ministry code (2 digits)
Level 2 – Organisation Type (1 digit)
Level 3 – Organisation Code (3 digits)
Level 4 – Internal Organisation (3 digit)
9
2 Financial Pattern Type : Capital / Recurrent (1 digit)
Sub-types (1 digit)
2
3 Fund Source Funding Body (3 digits)
Loan/Grant (1 digit)
4
4 Functions of Government Functions (2 digits)
Sub-functions (2 digits)
4
5 Programme Programme (3 digits)
Sub-programmes (2 digits)
5
6 Project Project (4 digits)
Sub-project or components (2 digits)
6
7 Activity Activity (4 digits)
Sub-activity (2 digits)
6
8 Economic classification Categories (2 digits)
Objects (1 digit)
Sub-objects (2 digits)
Detailed sub-objects (2 digits)
6
8 Location Parish (2 digits)
Constituency (2 digits)
4
Total number of codding characters 46
Issues with administrative classification
The dualism between ministries/departments on one hand and business units must
be solved
It should be decided if the administrative structure has only one level (national) or
two level (national and sub-national). Introduction of a subnational level requires
some elements of fiscal decentralisation.
Administrative classification should indicate the geographical location of each direct
and indirect budget users or its cost centres.
Cost centres should be revamp to reflect geographical location
Other issues with coding structure
Do we need to distinguish the financial pattern
(capital /recurrent ; special funds, earmarked funds, etc.)?
Do we need sub-types in the financial pattern (approved / supplementary, other or non
applicable)?
Do we need to indicate the source of funding? – Probably not.
Can we have projects under activities or should it be under programme?
Classification of the function of
Government
The Classification of the Functions of Government (COFOG) is established by the United Nation
and is part of the GFS standards.
COFOG organizes activities according to their purposes (eg.: education, housing, social security,
etc.
COFOG Classification consists into 14 major groups of accounts, 61 groups and 127 sub-groups.
Issue with functional classification:
Who is going to enter the codes and when?
Do we want to customized the classification (not recommended) or ignore the subgroups?
3. CoA Architecture
and Economic Classification
CHART OF ACCOUNT ARCHITECTURE
BUDGET ACCOUNTING
01000
02000
03000
04000
05000
06000
Income
Recurrent Expenditure
Special expenditure (disclosed and undisclosed)
Investment
Subsidies and economic transfers
Social transfers
OFF-BUDGET ACCOUNTING
07000
08000
Non-cash expenses
Off-budget disbursement
ASSETS AND LIABILITIES
09000
10000
11000
12000
Assets
Liabilities
Depreciation of assets
Suspense accounts
RECCURENT EXPENDITURE
Account
No
Account object
02100
02200
02300
02400
02500
02600
02700
02800
02900
Salaries
Other compensation and personnel benefit contribution
Supplies and Consumables
Maintenance of Government Assets
Travelling Expenses
Utility and telecommunication expenses
Professional Services
Financial expenses
Other expenses
Account Disaggregation Principles
We can have 2 or three levels of disaggregation of some account categories.
Two levels for most major account categories:
02000 – Recurrent Expenses (Account category)
• 02300 – Supplies and Consumable (Account object)
• 02314 – Gasoline, oil and lubricant (Account sub-object)
Or three level of disaggregation for investment
030000 – Investment (Account category)
• 0331200 – Telecommunication Equipment and IT (Account object)
• 0331220 – Transmission equipment (Account sub-object)
• 0331223 – Base transceiver station (Account detailed sub-object or account item)
Issues with Budgetary Accounting to be
addressed
Taxes require a legal definition.
We need an exhaustive list of revenue including all fees and charges, all excise taxes, etc.
We need to revise the list of allowances.
Special Expenditure need to be defined.
We need to identify all subsidies and economic transfers.
We need a list of social transfers.
Issues with asset and liability accounting
to be addressed
Scope of central and general government must be defined.
Investment object list must be discussed and agreed with stakeholders.
Do we need investment “detailed sub-object” or “item”?
We need to define a path for full asset management reporting that might include at
one point in future depreciation.
Policy issues
How fast do we want to move to accrual accounting and how can we do it in stages?
What is the disclosure policy?
How we define “General Government”
How fiscal policy is integrated in the reporting framework?
Information Technology issues
Implementation of the CoA and of Budget Classification require clarification of TAFIS
policy. The system will require a major overhaul.
The system should have the capacity to do asset and liability accounting.
The system should be able to accommodate new accounting rules.
Coding structure of the CoA and of BC must be agreed with IT people.
Conversion tables must be prepared.
The system should be able to accommodate the new reporting framework that will
include non-financial data. It requires redesigning the database.
THANKS

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Developping a chart_of_accounts

  • 1. Developing a New Chart of Accounts JEAN-MARC LEPAIN, PFM ADVISOR DECEMBER 13TH, 2018
  • 2. Agenda 1. Principles 2. Coding structure 3. CoA architecture 4. Economic classification Not covered in details: Budget Classification, accounting rules and reporting framework
  • 3. Documents under preparation Documents being presently prepared: Methodology for developing the accounting system Chart of Accounts Assets Management methodology Documents to be prepared in future Accounting rules Accounting manual Concept Note on financial reporting Templates for financial reports Manual for financial reporting
  • 5. What is Government Accounting? Definition: Government accounting is the process of recording, analysing, classifying, summarizing, communicating and interpreting financial information about government’s revenue and expenditure at the aggregated and disaggregated level, reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities.
  • 6. KEY COMPONENTS OF AN ACCOUNTING/REPORTING FRAMEWORK Chart of Accounts Budget Classification General Ledger and subsidiary records Accounting principles Accounting processes (rule-based IFMIS, procedures, manuals, etc.) Definition of standard reports and reporting framework Accounting and reporting policy
  • 7. Understanding the difference between CoA and Budget Classification
  • 8. Issues with current Chart of Accounts Not based on a distinction between Chart of Accounts and Budget Classification. Without a proper distinction between CoA and BC there is no proper general ledger system and no asset and liability accounting, making preparation of end-of-the-year financial statements cumbersome and difficult with unreliable data. Is not compliant with international standards (GFS, IPSAS, GAAP). Designed mainly for expenditure control and allows only simple budgetary accounting. Is not detailed enough to do budget analysis/cost analysis; Does not allow developing a comprehensive reporting framework that should include reporting on assets and liabilities; Is not consistent in its coding segments.
  • 9. Government Finance Statistics (GFS) Standards GSF provides reporting standards. To meet the standards the CoA must be GFS compliant. It requires a strict distinction between recurrent expenditure, investments, subsidies and social transfers; It requires moving away from cash-based accounting toward accrual accounting; It requires expending the coverage of reporting from Central Government to General Government
  • 10. Cash-based vs. Accrual Accounting Cash-based Accounting Accrual-based Accounting Revenue / expenditure transaction are recognised only when there a debit or credit in cash accounts with the consequences that:  It ignores liabilities until due for payment;  It ignores non-cash operation altering stocks of government assets and / or liabilities;  It needs to be supplemented by memoranda items and hoc reports for reporting transaction not captured by the accounting system.  Government cash position might be misleading and cash bed easily manipulated by pushing expenditure from on fiscal year to the other. Economic flows are recorded at the time economic value is created, transformed, exchanged, transferred, or extinguished, with the consequences that:  All economic flows, and not just cash flows, are recorded to better reflect the Government financial position;  The accounting system is based on clear rules allowing for recognising economic flows at the time they occur;  Cash position of the Government is reported separately (Cash Flow Statement).
  • 11. The four reporting options Cash-based accounting: recognised transactions only when they have a cash flow impact. Modified cash-based accounting: recognised transactions initiated during the fiscal year which should have been disbursed but have been delayed. Accrual accounting: recognised transactions when they create an economic value. Modified accrual accounting: recognised certain operations like expenditure commitments before any cash operation. Can provide a migration path from cash based accounting to accrual based accounting
  • 12. Recommendations Define a clear path and time frame for moving to accrual accounting. Start from modified cash-based accounting recognising all payments that should have been made during the fiscal year. Report multi-year commitments and liabilities separately
  • 13. IPSAS Disclosure rules (1) Financial statements of public sector entities should include a comparison of actual budget and approved budget even if supplementary budgets have been approved. TAFIS should be able to keep record of the approved budget as well as of the modified budget. Financial statements should include an explanation of material differences between the approved budget and the actual budget. The Financial statements should include a reconciliation of actual amounts on a budget basis, with actual amounts presented in the financial statements when the accounting and budget basis differs (meaning when actual amounted reported differs from the cash-based actual budget).
  • 14. IPSAS Disclosure rules (2) IPSAS allows comparison of budget and actual amounts to be made in the financial statements as additional budget columns in the primary financial statements only where the financial statements and the budget are prepared on a comparable basis. IPSAS requires a disclosure of an explanation of the reasons for differences between the original and final budget, including whether those differences arise from reallocations within the budget or other factors such as policy shifts, natural disaster, or other unforeseen events.
  • 16. Types of classification Administrative classification Geographical location or cost centres Programmes and activities Functional Classification (COFOG) Economic classification Other possible classifications: sources of funding (not required), geographic location
  • 17. COA CODING STRUCTURE Segment Group No Segment Group Segment No of digits 1 Organisation Ministries (2 digits) Department (2 digit) Budget users (2 digit) Geographic location/ sub-national (to be decide) 6 2 Programmes and Activities Programmes (2 digits) Activities (2 digits) Projects (2 digits) 6 3 Functions of Government Functions (2 digits) Sub-functions (2 digits) 4 4 Economic classification Categories (2 digits) Objects (1 digit) Sub-objects (2 digits) 5 5 Fiscal year Fiscal year 4 Total number of codding characters 25
  • 18. JAMAICA COA CODING STRUCTURE Segment Group No Segment Group Segment No of digits 1 Organisation Level 1 – Ministry code (2 digits) Level 2 – Organisation Type (1 digit) Level 3 – Organisation Code (3 digits) Level 4 – Internal Organisation (3 digit) 9 2 Financial Pattern Type : Capital / Recurrent (1 digit) Sub-types (1 digit) 2 3 Fund Source Funding Body (3 digits) Loan/Grant (1 digit) 4 4 Functions of Government Functions (2 digits) Sub-functions (2 digits) 4 5 Programme Programme (3 digits) Sub-programmes (2 digits) 5 6 Project Project (4 digits) Sub-project or components (2 digits) 6 7 Activity Activity (4 digits) Sub-activity (2 digits) 6 8 Economic classification Categories (2 digits) Objects (1 digit) Sub-objects (2 digits) Detailed sub-objects (2 digits) 6 8 Location Parish (2 digits) Constituency (2 digits) 4 Total number of codding characters 46
  • 19. Issues with administrative classification The dualism between ministries/departments on one hand and business units must be solved It should be decided if the administrative structure has only one level (national) or two level (national and sub-national). Introduction of a subnational level requires some elements of fiscal decentralisation. Administrative classification should indicate the geographical location of each direct and indirect budget users or its cost centres. Cost centres should be revamp to reflect geographical location
  • 20. Other issues with coding structure Do we need to distinguish the financial pattern (capital /recurrent ; special funds, earmarked funds, etc.)? Do we need sub-types in the financial pattern (approved / supplementary, other or non applicable)? Do we need to indicate the source of funding? – Probably not. Can we have projects under activities or should it be under programme?
  • 21. Classification of the function of Government The Classification of the Functions of Government (COFOG) is established by the United Nation and is part of the GFS standards. COFOG organizes activities according to their purposes (eg.: education, housing, social security, etc. COFOG Classification consists into 14 major groups of accounts, 61 groups and 127 sub-groups. Issue with functional classification: Who is going to enter the codes and when? Do we want to customized the classification (not recommended) or ignore the subgroups?
  • 22. 3. CoA Architecture and Economic Classification
  • 23. CHART OF ACCOUNT ARCHITECTURE BUDGET ACCOUNTING 01000 02000 03000 04000 05000 06000 Income Recurrent Expenditure Special expenditure (disclosed and undisclosed) Investment Subsidies and economic transfers Social transfers OFF-BUDGET ACCOUNTING 07000 08000 Non-cash expenses Off-budget disbursement ASSETS AND LIABILITIES 09000 10000 11000 12000 Assets Liabilities Depreciation of assets Suspense accounts
  • 24. RECCURENT EXPENDITURE Account No Account object 02100 02200 02300 02400 02500 02600 02700 02800 02900 Salaries Other compensation and personnel benefit contribution Supplies and Consumables Maintenance of Government Assets Travelling Expenses Utility and telecommunication expenses Professional Services Financial expenses Other expenses
  • 25. Account Disaggregation Principles We can have 2 or three levels of disaggregation of some account categories. Two levels for most major account categories: 02000 – Recurrent Expenses (Account category) • 02300 – Supplies and Consumable (Account object) • 02314 – Gasoline, oil and lubricant (Account sub-object) Or three level of disaggregation for investment 030000 – Investment (Account category) • 0331200 – Telecommunication Equipment and IT (Account object) • 0331220 – Transmission equipment (Account sub-object) • 0331223 – Base transceiver station (Account detailed sub-object or account item)
  • 26. Issues with Budgetary Accounting to be addressed Taxes require a legal definition. We need an exhaustive list of revenue including all fees and charges, all excise taxes, etc. We need to revise the list of allowances. Special Expenditure need to be defined. We need to identify all subsidies and economic transfers. We need a list of social transfers.
  • 27. Issues with asset and liability accounting to be addressed Scope of central and general government must be defined. Investment object list must be discussed and agreed with stakeholders. Do we need investment “detailed sub-object” or “item”? We need to define a path for full asset management reporting that might include at one point in future depreciation.
  • 28. Policy issues How fast do we want to move to accrual accounting and how can we do it in stages? What is the disclosure policy? How we define “General Government” How fiscal policy is integrated in the reporting framework?
  • 29. Information Technology issues Implementation of the CoA and of Budget Classification require clarification of TAFIS policy. The system will require a major overhaul. The system should have the capacity to do asset and liability accounting. The system should be able to accommodate new accounting rules. Coding structure of the CoA and of BC must be agreed with IT people. Conversion tables must be prepared. The system should be able to accommodate the new reporting framework that will include non-financial data. It requires redesigning the database.