Government Finance Statistic and New Budgeting and Accounting Classification Structure

1. Government Finance Statistic and New Budgeting and Accounting Classification Structure CAUCASUS REGIONAL MEETING March 2006

2. Presentation Focus • Overview of Accounting Reform Project in Armenia • New Economic Codes • New Functional Codes • New Account Code Structure • Problems Encountered • Moving Forward

3. Second Generation Accounting and Reform Project • Government financial management information system (GFMIS) • International Public Sector Accounting Standards (IPSAS) • Chart of accounts in compliance with Government Finance Statistics (GFS) 2001

4. Second Generation Accounting and Reform Project • All of these initiatives result from IMF / World Bank conditionalities without a real understanding of the implications or the work necessary to implement

5. IPSAS • IPSAS Standards are international financial reporting standards for the public sector • IPSAS Standards are issued by the IPSAS Board of the International Federation of Accountants (IFAC) www.ifac.org

6. IPSAS • Status • Cash Based Standards Approved by Steering Committee with Transition to Accrual • Steering Committee Approved Work Plan • Cash Based Standards Have Been “Unofficially” Translated into Armenian • MoFE staff is preparing statements based on 2005 financial information

7. IPSAS • Key Dates • Identification of problems to implement cash based standards – 3/31/2006 • Strategy to implement the standards and transition plan for accrual based standards – 6/30/2006 • It is expected that a new reporting format to comply with the new standards will be developed for use by January 1, 2007

8. IPSAS • Problems and Issues • Currently using the Soviet Manual from 1980 which is a coding structure and describes entries • There are no financial policies • Lack of understanding about: • Accrual based IPSAS and unwillingness to “go backwards” • What financial reporting standards mean • There is no certification process or training for governmental accountants and external auditors

9. New Economic and Functional Codes • The primary focus was on meeting a conditionality that required compliance with GFS 2001. • As GFS only addresses economic and function codes, this was the original focus. • We spent two years developing the codes and the annotated manual

10. New Economic and Functional Codes • Objectives of the new economic and functional coding structure were expanded to: • Comply with both GFS and IPSAS • Allow for cash basis with transition to accrual basis • Allow for cash based budgeting and accrual based accounting • Ensure consistency for a GFMIS • Provide enough detail for financial management purposes

11. New Economic and Functional Codes • GFS 2001 • Published by International Monetary Fund • The primary purpose is to “provide a framework suitable for analyzing and evaluating fiscal policy” • GFS is a statistical reporting system NOT an accounting system • The GFS manual focuses on the accrual basis, but cash reporting will be implemented first

12. New Economic and Functional Codes • New Economic and Functional Codes • Used for Budgeting and Accounting • Replace Functional Codes • Replace the Balance Sheet, Revenue and Expense Codes Used for Budgeting and Reporting • Impact All State Budget Institutions, Local Self-Governing Units and NCE’s and JSC’s

13. New Economic Codes • Breakdown of the Fields: • Class • Category • Group • Synthetic • Analytic • Sub-Analytic

14. New Economic Codes • Ten Classes • Balance Sheet • 000000 – Non-Financial Assets • 100000 – Financial Assets • 200000 – Liabilities • 300000 – Net Assets / Equity

15. New Economic Codes • Ten Classes • Expenses • 400000 – Current Expenses • 500000 – Outflows For Non-Financial Assets • 600000 – Outflows For Principal Repayment and Acquisition of Financial Assets

16. New Economic Codes • Ten Classes • Revenues • 700000 – Current Revenues • 800000 – Proceeds From the Sale of Non-Financial Assets • 900000 – Proceeds From Borrowing and The Sale of Financial Assets

17. New Function Codes • Breakdown of Function Code • Section – 2 Digit • Group – 1 Digit • Class – 1 Digit

18. New Function Codes • New Codes By Section: • 1100 GENERAL PUBLIC SERVICES • 1200 DEFENSE • 1300 PUBLIC ORDER AND SAFETY • 1400 ECONOMIC AFFAIRS • 1500 ENVIRONMENTAL PROTECTION • 1600 HOUSING AND COMMUNITY AFFAIRS • 1700 HEALTH • 1800 RECREATION, CULTURE AND RELIGION • 1900 EDUCATION • 2000 SOCIAL PROTECTION

19. New Function Codes

20. Account Code Structure • The primary focus was to meet the conditionality that the current structure comply with GFS 2001. • The new codes were integrated into the current framework • Further work is being done to expand and modernize the structure before a GFMIS is implemented

21. Account Code Structure • Further Work Is Needed To: • Accommodate program budgeting needs • Meet reporting needs of individual budget Institutions • Provide for a richer administrative hierarchy

22. Account Code Structure • Further Work Is Needed To: • Include all future information needs even if they will not be used in the short-term • Ensure that each segment is uniquely numbered to facilitate reporting • Ensure all field segments are uniquely defined so there is no overlap in definition

23. Account Code Structure A uniform classification system is a system for classifying economic events and transactions. It represents the basis for: • Budgeting and Accounting • Financial Reporting • Statistical Reporting • Internal Management Reports

24. Account Code Structure A classification system does NOT dictate the basis of budgeting or accounting or financial reporting

25. Account Code Structure • Flexible • Must meet all of the financial information and needs of all levels of government: • Parliament and Government • Ministers • Managers, budget staff, accountants and other internal staff • International organizations / donors

26. Account Code Structure • Current Structure in Armenia • Administrative / Organization • Geographic • Functional • Economic • Assets • Liabilities & Equity • Revenues • Expenditures • Program

27. Account Code Structure

28. Account Code Structure • Budget Control Versus Accounting • Budget control can be at a different level than the accounting

29. Account Code Structure

30. Account Code Structure

31. Problems Encountered • IMF provided technical oversight, but the oversight was provided by an economist and an IT individual neither of whom understood GFS or accounting needs and concerns. • Current focus on function and the program link to function will necessitate reformulating many programs.

32. Problems Encountered • Lack of cooperation by the MoFE Budget Department over the past two years • The philosophy that MoFE knows best and no input by State ministries and agencies and communities is needed • Training must be conducted for 70 State ministries and agencies and 900 communities

33. Moving Forward • Implementation Dates: • Development of the 2008 budget • Reporting as of January 1, 2008 • Now have the attention of MoFE Budget Department • Working cooperatively with the EC, UNDP and USAID local government projects • Agreement from World Bank to focus on the cash basis and not to use the transaction codes for now

34. Moving Forward • Workshop has been conducted with State ministries and budget analysts • Workshops planned in April for communities and oversight agencies • Training plan is being developed • Identifying changes needed to current Treasury and Budget systems