4. 4
Framework
for preparing F/S
Why have a framework? Purpose
What does it cover? Scope
Does it have constraints? Limitations
5. 5
Framework
for preparing F/S
Qualitative characteristics
of
financial statements
Components and
elements of
financial statements
Objectives of financial
statements
Net assets and
net assets maintenance
Section 2
This section
6. 6
Purpose of F/S
• F/S are a structured representation of the financial position and
of the transactions undertaken by an entity that is useful to a
wide range of users in making and evaluating decisions about
the allocation of resources.
• Specifically, the objectives of F/S in the public sector are to
provide information useful for decision-making, and to
demonstrate the accountability of the entity for the resources
entrusted to it.
• F/S can also have a predictive/prospective role, providing
information useful in predicting the level of resources required
for continued operations and the resources that may be
generated by them.
7. 7
Scope of the E.C. F/S
• The E.C. financial statements will:
– Consolidate those of entities controlled (e.g. Agencies and
institutions)
– Proportionately consolidate those of jointly controlled entities (e.g.
Galileo)
– Report its share in the result and net assets of entities in which it
has a significant influence using the equity method of accounting
(e.g. European Investment Fund)
• All entities concerned will have to report to the E.C. using the
E.C. accounting rules
8. 8
Qualitative characteristics
of F/S
Main objective of FS: Provide reliable information on financial position,
performance and changes in financial position
Main characteristic: Decision usefulness
Major qualitative Understandability Comparability
characteristics:
Relevance Reliability
(Materiality)
Substance over form Prudence
True and fair view
9. 9
Constraints
Main objective of FS:Main objective of FS: Provide reliable information on financial position,Provide reliable information on financial position,
performance and changes in financial positionperformance and changes in financial position
Main characteristic:Main characteristic: Decision usefulnessDecision usefulness
Major qualitativeMajor qualitative UnderstandabilityUnderstandability ComparabilityComparability
characteristics:characteristics:
RelevanceRelevance ReliabilityReliability
(Materiality)(Materiality)
Substance over formSubstance over form PrudencePrudence
Constraints: Timeliness Cost-benefit
balance
True and fair viewTrue and fair view
11. 11
Components of F/S
IPSAS European Communities (FR)
• Statement of financial position Balance sheet
• Statement of financial performance Economic outturn account
(including segment reporting)
• Statement of changes in net assets Statement of changes in net
assets
• Cash flow statement Cash flow table
• Accounting policies and notes to the
financial statements
Notes to the financial statements
12. 12
Balance sheet elements
Assets Net assets and Liabilities
Net assets
Liabilities
Total Assets Total Net Assets and Liabilities
• Resources
• Controlled as a result from past events
• Embodying future economic benefits
or service potential
The residual interest
• Present obligations
• Resulting from past events
• The settlement of which is expected to
result in an outflow of resources
embodying economic benefits or
service potential
13. 13
Balance sheet
Assets Net assets and Liabilities
Non-current assets Net assets
Non-current liabilities
Current assets Current liabilities
Total assets Total net assets and liabilities
Increasingliquidity
To be realised in the normal course of the E.C.s’ operating
cycle or within 12 months + cash and cash equivalents
Aggregated –
Detailed
in the notes
This year +
prior year
15. 15
Economic outturn account
elements
Income Expenses
Increases in economic
benefits
Decreases in economic
benefits
- =
Economic
result
of the year
The net assets maintenance concept:
The excess of income over expense
translates into an increase
in the residual interest
(the excess of assets over liabilities)
– and vice-versa
• Where assets and liabilities are not equal, a
residual figure for net assets/equity will be
reported;
• If > 0, can be interpreted as the net resources
that may be applied for the provision of goods
or services in the future (= the community’s
investment in the entity);
• If < 0, may be viewed as the amount of future
taxation or other revenues which are already
committed to paying off debt and other
liabilities.
17. 17
Extraordinary items
Net Surplus or Deficit
= Surplus or Deficit from ordinary activities and extraordinary items
Extraordinary =
• Rare
• Unusual
• Outside control of entity
• Material
18. 18
Statement of changes in
net assets
• Detailed structure
– See financial report 2005 page 33
20. 20
Notes to the financial
statements
1. Accounting policies
2. Impact of the transition to accrual accounting
3. Notes to the Balance Sheet
4. Notes to the Economic Outturn Account
5. Notes to the Cashflow table
6. Off-Balance Sheet and notes
7. Financial risk management
8. Related party disclosures
9. Events after the balance sheet date
10. Consolidated entities
11. Non-consolidated entities
21. 21
Accounting policies
• IPSAS-compliant when ruled out by IPSAS
• Options retained when an IPSAS allows one or more
alternative accounting policies
• Internally-developed when no specific requirement exists
22. 22
Changes in accounting
policies
• Changes in accounting policies = change from one allowed
basis of accounting to another allowed basis of accounting
• Example: the initial adoption of a policy to carry assets at
revalued amounts
• Normally applied retrospectively (restate comparative
information)
• Fundamental errors
• Changes in accounting estimates≠
≠
23. 23
Fundamental errors
• Significant errors in a prior year’s financial statements as a
result of mathematical mistakes, mistakes in applying
accounting policies, misinterpretation of facts, fraud or
oversights
• Example: omission of a major class of expenses in the financial
statements
• Normally correct retrospectively: restate comparative
information
24. 24
Changes in accounting
estimates
• Many financial statement items cannot be measured with
precision but can only be estimated. The estimation process
involves judgments based on the latest information available.
– Estimates may be required, for example, of GNI-based revenue
revenue due by Member States, bad debts arising from
uncollected receivables, or the useful lives of depreciable assets
• Accounting estimates by their nature are approximations that
may need revision as additional information becomes known
• Recognise the effect in the period of the change
25. 25
Segment information
• A distinguishable activity or group of activities of an entity for
which it is appropriate to separately report financial information
for the purpose of evaluating past performance and for making
decisions about the future allocation of resources
• « Service segments » are naturally aligned with activities
identified in budget documentation
– E.g. At a national « whole-government » level financial
information is generally aggregated and reported in a manner
which reflects major economic classifications of activities
undertaken and/or portfolio responsibilities of individual ministers:
health, defence, education, …
26. 26
The E.C.s’ segment
information
Expenses
Operating assets
Operating liabilities
Reconciliation to total amounts
reported
Accounting policies
Agriculture
Regional policy
Humanitarian Aid
Internal Market
External Relations
Others
Current Prior
E.C. policy areas e. g.
Purpose:
basis for the review of current and development of future IPSAS / E.C. accounting rules
Assist preparers, auditors and users in applying and/or interpreting IPSAS / E.C. accounting rules
Scope:
Defines qualitative characteristics that determine the usefulness of information in financial statements
Deals with the definition, recognition and measurement of the elements from which financial statements are constructed
Understandable = understandable to the « average user » - suggests a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence
Relevant = relevant to the user when making economic decisions – the relevance of information is affected by its nature and materiality – information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the F/S
Reliable = free from material error and bias - information can be depended upon by users to represent faithfully what it can reasonably be expected to represent
Substance over form – refer to introduction
Prudence – but this is not a reason to include excessive provisions
Example:
Costs associated with the provision of services following a natural or man-made disaster, for example, the provision of shelter to homeless people following an earthquake.
In order for a such an event to qualify as an extraordinary event it would need to be of a magnitude that would not normally be expected in either the geographic area in which it occurred or the geographic area associated with the entity, and the provision of emergency services or the restoration of essential services would need to be outside the scope of ordinary activities of the entity concerned.
Where an entity has responsibility for providing assistance to those affected by natural disasters then costs associated with this activity would not generally meet the definition of an extraordinary item
Indicate that non-recurring items that do not meet the definition of an extraordinary item form part of surplus/(deficit) from ordinary activities but should be disclosed to facilitate understanding of the financial statements, comparability with prior years and prospective analysis.
Give examples of each. The examples should help preparing the exercises.
Give examples of each. The examples should help preparing the exercises.
Give examples of each. The examples should help preparing the exercises.
