Financial statements of public sector entities that are similar in nature, have the same or similar users, and apply the Standards of GRAP would present information in the same way. Right?
The Accounting Standards Board (ASB) recently undertook research on the presentation of information in the statement of financial performance. This results from feedback from stakeholders that the current requirements may need to be re-considered and diversity with how information is presented in practice.
The ASB found there are a number of issues with the way in which information is presented in the statement of financial performance. The presentation did not comply with the Standards, and the quality of information was found to be poor and not useful.
The reduced comparability between financial statements because of the issues identified and the poor quality of information provided are challenges that users face.
On the other hand, preparers indicated they experience several difficulties, including:
Applying some requirements of the Standards
Keeping up-to-date with amendments to the Standards, and
Being unaware of guidance on implementing and applying existing Standards This is not surprising, given the wide-ranging legislative environment that public sector entities operate in, the pace at which financial management reforms are introduced, and the limited resources available in the public sector.
As a result of the project, the ASB will take a number of steps to assist preparers with how information should be presented to comply with the requirements of the Standards while still meeting users’ information needs.
The ASB will publish a research paper outlining the complete results of the research on the ASB website. Some prevalent issues are outlined below.
The ASB will provide additional guidance as a result of the project.
Analysing expenditure by nature or function. Most preparers do not present an analysis of expenditure by either nature or function in a way that meets the requirements of the Standards. There is a misconception of the meaning of analysing expenditure by nature or function. For example, items such as ‘repairs and maintenance’, ‘grant expenditure’, ‘contracted services’, and ‘project expenditure’ are often included as items analysed by nature.
The private sector has also acknowledged having difficulty with the classification of expenditure, and consequently the International Accounting Standards Board (IASB) is currently looking at ways to improve the International Financial Reporting Standards.
Locally, the Secretariat of the ASB issued a frequently asked question (FAQ) on presentation of repairs and maintenance early in 2017. As a result of the research, the FAQ was expanded to deal with the analysis of all expenditure. The expanded FAQ also explains what each method of analysing expenditure – nature or function – means, with examples provided from the research.
Recognition and disclosure of services received in kind. Public sector entities frequently receive goods and services in kind from other public sector entities, the private sector, and international donors. Services in kind are, however, often not recognised in the financial statements when required by the Standards. Preparers find it difficult to measure the benefit they have received and don’t always disclose to the users information about the nature and type of services received in kind. The secretariat of the ASB has updated an existing FAQ to make the requirements of the Standards clear, and included examples of the items that could be recognised, as well as the disclosure required for recognised and unrecognised services in-kind.
Uncertainties about presenting a comparison of budget and actual information. Preparers are unsure about the format in which to present a comparison of budget and actual information required by the Standards, and often include the same information more than once. This detracts from the user’s ability to understand the information presented in the financial statements. As part of the research paper, the ASB will provide guidance on how the comparison of budget and actual information and any additional information, when necessary, should be presented in the financial statements.
Presentation of reserves to provide useful information to users. The research done by the ASB found that preparers are inclined to present reserves not required by the Standards in the statement of changes in net assets. To comply with the Standards, all items of revenue and expenditure are first recognised in the statement of financial performance so that the reserve is created, or increased, or decreased from accumulated surplus or deficit.
When done correctly, the research found additional reserves are valuable to enable users to make decisions and hold entities accountable, particularly where capital grants are received in advance of a project commencement or where funds are ring-fenced for specific purposes.
Entities should continue with this practice when it provides meaningful information to users. Care should be taken, however, that only those reserves necessary for external users’ understanding are presented in the financial statements, or when required by legislation.
Issues identified with the quality of information. A number of issues related to the quality of information in the financial statements were identified, for example:
- Immaterial items are presented separately in the financial statements. This clutters financial statements so that users are unable to determine what information is important.
- Separate line items are included for items that are not relevant, for example ‘taxation’ where entities are exempt from income tax.
- Identical items are presented separately.
- Template accounting policies and accounting policies that are not applicable are included. Users are unable to understand the nature of the transactions an entity enters into and how they are recognised and measured in the financial statements.
- Insufficient disclosure is made of management’s significant judgements and key sources of estimation uncertainty.
The ASB has a current project to develop guidance on ‘The Application of Materiality in the Financial Statements’ which would address these issues.
Informing preparers of changes to the Standards. To assist preparers with the difficulty they face to keep up to date with amendments to the Standards, the secretariat of the ASB will annually publish a summary of changes in the reporting framework that become effective in a particular year. The first version, Changes to the Reporting Framework from 2017/18 to 2018/19, has been published and can be accessed on the ASB website: http://www.asb.co.za/
Given the interest noted in the results of the project, the ASB is confident that the research paper will be valuable to stakeholders. The results of the research and additional guidance included in the research paper will assist preparers to apply the Standards, while meeting users’ information needs. Stakeholders will be informed once the research paper has been published on the ASB website, towards the middle of 2018.
AUTHOR l Elizna van der Westhuizen CA(SA), Standard Setter, Accounting Standards Board