Welcome to this course on Expense Management under IPSAS 1.

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1 Course Name: IPSAS Expense Management - Beginners Page 1 Course Introduction Welcome to this course on Expense Management under IPSAS 1. This course is organised into fourteen independent units, with each of them being represented by an icon in the course menu. Let's now find out about the content in each unit: Introduction, the current unit you are browsing through is where you will be acquainted with the course and its contents. Unit 1 will help you understand the learning outcomes of this course. Unit 2 presents the key messages about expense management. Unit 3 provides an introduction to expense management. Unit 4 explains the differences between UNSAS and IPSAS. Unit 5 introduces the key accounting changes under IPSAS. In Unit 6, you will understand the effect of IPSAS on UNDP's operation and the implementation modalities. Unit 7 will outline the journey of a project with the help of a DIM case study. Unit 8 explains how to handle lease expenses. Unit 9 will hep you understand the value-adds and challenges of adapting IPSAS. Unit 10 will outline the expectations from Country Offices and Headquarter units. In Unit 11, you will learn the key messages for our donors. Unit 12 will sum up the learning outcomes of this course for you. You can click the icon of the puzzle to check your understanding of the concepts you had learnt in this course. And finally in Unit 14, the assessment allows you to evaluate your overall performance by answering questions generated at random. Click the icons on screen to get started.

2 Topic 1 Page 1 - Course Objectives By the end of this course, you will be able to: Understand the concept of accrual accounting as applied to expenses for goods and services. List the key changes related to the implementation of accrual accounting. Summarise how IPSAS will impact projects. Explain the changes to donors. Topic 2 Page 1 - Key Messages of Expense Management IPSAS will introduce accrual accounting which will impact expense recognition. Encumbrance accounting will no longer apply, and delivery will no longer include ULOs. IPSAS will require new procedures. Timely receipting of goods and services will be extremely important. Recording and tracking prepayments will be required. DIM and Agency programme delivery will be impacted by IPSAS. In general, NIM programme delivery is not impacted. Topic 3 Page 1 Click the booklet to browse through the pages. The fundamental principle of accrual accounting arises under IPSAS 1, Presentation of Financial Statements. Definition of Accrual Basis in IPSAS 1 Accrual basis means a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognised under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses.

3 Under IPSAS, the following transactions are classified as expense: Goods (e.g. supplies) Services (e.g. utilities, consultants) Lease payments Employee benefits (e.g. salaries, ASHI, leave, etc.) Use of plant, property and equipment (e.g. buildings, vehicles, computers, etc.) Finance costs (e.g. bank charges, fees, etc) Transfers/grants e.g. micro-finance grants) Topic 4 Page 1 - UNSAS vs. IPSAS Click a panel to learn more about the transition from UNSAS to IPSAS. Currently, the UNDP operates under the UNSAS, which is based on the concept of modified cash accounting. This type of accounting allows expenditure to include unliquidated obligations (ULOs). IPSAS adoption requires UNDP to move from "modified cash" to "accrual" accounting. The accrual basis provides more meaningful and comprehensive information on expenses. It supports accountability and decision making and also provides a better basis for evaluating performance in terms of resources management. In a nutshell, IPSAS improves consistency, comparability and reliability of financial reports, which strengthens overall confidence in the financial information, provided by UNDP. UNSAS Cash-basis It is a basis of accounting that recognises transactions and other events when cash is received or paid. IPSAS Accrual-basis It is a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognised under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses.

4 Topic 5 Page 1 - Key Accounting Changes under IPSAS The IPSAS Gazette Key Accounting Changes under IPSAS Expenses are reported in the period in which they occur rather than in the period in which: The cash is paid or, The purchase order is approved and dispatched. Specifically, an expense is reported when UNDP goods or services have been rendered. This is the point at which UNDP is required to make a payment. This is at a later point than when the purchase order is approved and dispatched. Expenses will only be accurate if goods and services are timely receipted. This change in accounting policy will impact when UNDP reports programme expenses. Better planning and coordination will be required to achieve delivery targets. Topic 6 Page 1 - Effect of IPSAS on UNDP s Operation and the Implementation Modalities Let s now analyse the effect of moving to accrual accounting on UNDP s operation and the implementation modalities. We will learn about the effect in the following areas: Purchase of goods and services under Management projects Purchase of goods and services under: - Direct implementation (DIM) projects - Full country office support to NIM projects - National implementation (NIM) projects - Agency implementation We will also walk through a case study, based on a DIM project, to illustrate how its expenses will be recorded. Click the files to know more about the effect of IPSAS on the different UNDP operation areas.

5 Note: As you are probably aware, UNDP will be rolling out a new procurement catalogue early in the summer. This procurement catalogue has been designed to automate numerous things, including the general ledger accounts that will need to be used to accurately reflect what you have procured. This automation should ease the burden of the IPSAS adoption and enable you to work more efficiently. Purchases under Management projects Includes expenses incurred in running UNDP operations excluding development projects. Key purchases are office rent, utilities and supplies, consultants' costs and other service contracts, etc. The following aspects of recording purchases will change: o o Services will be recorded as expense when services are rendered and not when PO is approved and dispatched. Goods will be recorded as expense when goods are received and not when PO is approved and dispatched. Note: UNDP FRR define Assets as follows: Assets tangible and intangible possession which has a value known under IPSAS as Property, Plant and Equipment (PP&E). If the goods are PP&E, instead of an expense, UNDP will record a fixed asset that will be depreciated over time. If the goods or services have been received but the invoice has not yet been received, an accrual will be calculated in ATLAS and recorded. If the vendor has been paid in advance of providing the goods or services, then a prepayment must be recorded. Project Purchases Under DIM/Full CO Support to NIM The accounting for purchases of goods and services will be exactly the same for DIM and Full country office support to NIM as for the Management projects. Project Activity Under NIM or NGO NIM or NGO implementation is where UNDP advances cash to a government or NGO (or makes direct payments on their behalf) for them to perform a development project. The government or NGO is responsible for all procurement of goods and services and reports purchase activity on the Funding Authorisation and Certification Expenditures (FACE) report. No aspects of NIM or NGO implementation will change:

6 o Goods and services will continue to be recorded as expense by UNDP when reported on FACE report, including both: Where the government procures based on advances made by UNDP and, Where UNDP pays vendors directly based on government procurement. o Any disbursements for PP&E will continue to be expensed based on what is reported on the FACE report. Note: UNDP will continue to use the FACE report to record the activity of the government or NGO. The cash payment made to the government or NGO will continue to be recorded as an "advance payment". Project Activity Under Agency Implementation Agency implementation arises where UNDP engages a sister agency (e.g. UNOPS or FAO) to execute a development project. Agency is accountable for all procurement of goods and services and reports expense activity on the PDR. Country Office support to Agency implemented projects will continue to be reported through the Service Clearing Account (SCA) as disbursement. Note: UNDP will continue to use the PDR to record the activity of the Agency. The cash payment made to the Agency will continue to be recorded as an "advance payment". Topic 7 Page 1 - The Journey of a Project DIM Case Study Click a label to learn about the journey of a DIM project. Requisition This example will focus on the procurement of the electoral supplies. In January 2012 the project manager defines and formalises his needs and prepares an e-req in Atlas, for electoral supplies totalling USD 3.0M. The e-req is sent to the buyer for a total amount of electoral supplies of $ 3.0 million.

7 A Request for Proposal (RFP) is formalised describing the type of electoral supplies needed and the delivery date as follows: o o o 30 June, 2012 ($0.5 million) 15 November, 2012 ($1.0 million) 28 December, 2012 ($1.5 million) With IPSAS, a requisition is an internal process. It does not create an obligation for UNDP to contract or pay. As a consequence, no specific entry is required by IPSAS at this stage of the process. Remember: A buyer will still create purchase order (PO) and the PO will still be budget checked (IPSAS is not creating more budget flexibility). However, no expense is recorded at this stage of the process. Month End (31 Jan 2012): Although no expense is recorded at this stage of the process as no goods have been received and UNDP does not owe any money a commitment will be recorded. Under IPSAS, commitments are disclosed in the notes to the financial statements but are not recognised as a liability. Purchase Order The RFP is launched and a supplier selected. The supplier agrees to the delivery dates and the terms and conditions of the contract. The Purchase Order is created by the Buyer based on the information provided by the project manager for a total amount of $ 3.0 million. The purchase order is approved and dispatched. The supplies are to be directly delivered to a Government warehouse. At the end of the month, the project manager tries to extract from Atlas the total of expenses for the project. After looking at the result, the project manager doesn t understand why the $3.0 million of the Purchase Order is not reported under the project expenditures. With IPSAS, ULOs disappear. The Buyer will create a Purchase Order, which will still be budget checked (IPSAS is not creating more budget flexibility). But no expense is recorded at this stage of the process. If you remember, under accrual accounting, the project is not charged until the event (in this example delivery) has occurred. Under IPSAS, outstanding commitments (unreceived value of purchase orders) are disclosed in the notes to the financial statements but are not recognised as a liability. Receipt of Goods During 2012, the electoral supplies are delivered to the government warehouse in accordance with the terms and conditions of the contract. Goods are received in:

8 Goods received USD Invoice received in June 0.5M July November 1.0M Dec 12 December 1.5M Jan 13 Goods Receipt Notes are recorded in Atlas within 48 hrs of the delivery. Invoices are received one month after the goods are received (i.e. in July, December 12 and January 13). In January 2013, the Atlas General Ledger shows the project expenses for 2012 for $3.0 million and an accrual for $1.5 million. Even though there was no invoice, under IPSAS an accrual is recognised because the goods have been received. The programme office notes that, under IPSAS, UNDP is now using the receipts accrual function in ATLAS. Note: You must not delay recording the receipt of goods and services in Atlas as this is the trigger for the calculation of expense accrual. AP PO Voucher Receipt of the invoice and payment Finance receives the third invoice in January. Finance creates the AP PO voucher and once it is approved and matched, it is budget checked. Again, IPSAS is not changing the budget control. We can spend only if resources are available. Then, the payment is executed. At this stage of the procurement process, there is no difference between UNSAS and IPSAS. Summary of Process The schedule for delivery, invoice and payment was as follows: PO 1 PO 2 PO 3 Supply Value: $ $ 500,000 $ 1,000,000 $ 1,500,000 Delivery date: 30-Jun Nov Dec-12 Invoice date: 12-Jul Dec Jan-13 Payment date: 12-Aug Aug Feb-13 Summary of Accounting Based on IPSAS, the following will be reflected in the books of UNDP as on 31 December 2012:

9 General Ledger: Amount: Description: Expense: $3m The expense is recognised at the time that the goods are received and not the time that a PO created. Accounts payable: $1m An obligation to pay the supplier has been created as the goods have been delivered on 15-Nov-12 but payment is yet to be made in Jan-13. ($0.5m already paid on 12-Aug-12 so there is no obligation to pay for the shipment as of 31-Dec-12). Accrual: $1.5m On 31 Dec 2012, the invoice for the goods had not been received. Therefore, an accrual for the goods received on the 28th of Dec is created. Again, IPSAS is not changing the budget control. We can spend only if resources are available. Remember: In accordance with IPSAS, the expense is recognised at the time that the goods or services are received. To determine if the concept of ownership should be discussed i.e. it is possible that the risks and rewards of ownership have passed to the UNDP before the goods are received. As a result, an expense will be recognised when ownership transfer in the case of PP7E which is shipped FOB. Topic 8 Page 1 - Lease Expenses UNDP will have a large number of leases of varying sizes and complexity. Most leases will relate to property but there may also be leases related to the following: Office equipment Security and other specialized equipment Vehicles IPSAS classifies leases as either finance lease or operating lease. The classification is based on the extent to which the lease agreement transfers the risk and rewards of ownership of the leased asset from the lessor to the lessee.

10 A lease is a finance lease if it substantially transfers all the risks and rewards of ownership. Legal title may or may not eventually be transferred. A lease is an operating lease if it does not substantially transfer all the risks and rewards of ownership. The accounting for lease payments will follow the accrual accounting. Therefore: Accrual for rent to be paid should be recorded if premises have been occupied in accordance with the lease and, if the rent has not yet been paid or invoiced. Record a prepayment if the lessor was paid in advance. IPSAS requires that leases be accounted for even where no cash is paid for the use of the property or equipment. Such situations generally arise where the Government provides a building free of charge and are called donated rights to use. In these cases there is usually a lease agreement between the government and UNDP that sets out the lease terms. It is important to account for all leases even if they are rent free. Under IPSAS: Even though you don t pay rent you have to record rent expense based on the value of the property you are using. Additionally, you will record revenue for the value of the donated right to use that the government has contributed. The amount of rent expense and contribution with be the same for each year. This accounting will require UNDP to determine the fair market value of the rent so that it can estimate the value of the contribution from the government and the amount of rent expense to record. Accounting for leases remains the responsibility of the COs but an important change will arise once the GSSC is up and running. Specifically, all lease agreements should be submitted to the GSSC for review after the signing.

11 Topic 9 Page 1 - Value-Adds and Challenges of IPSAS Pedro: Hello, good morning. This is Pedro here! Alisha: Good morning, Pedro. I m Alisha Siddique from UNDP Pakistan. I know that UNDP will soon be implementing IPSAS across the organisation. I have a few doubts on accrual accounting and thought you would be the best person to approach. Pedro: Sure. I would be happy to answer any queries you might have. Alisha: That s so kind of you. Can you please tell me why it is important to follow accrual accounting in expense management? Pedro: IPSAS recommends accrual accounting with a specific reason. IPSAS provides better basis for resources management, supports accountability, decision making, improves consistency, comparability and reliability of financial reports. Alisha: But, I still don t understand why the Purchase Order shouldn t be shown as an expense. Pedro: See, we are legally obliged to pay for the purchases only after they have been delivered. Alisha: Do you mean that this method of accounting will ensure that our reports will provide more meaningful and comprehensive information? Pedro: Exactly. Alisha: Since this method of accounting is absolutely new to the organisation, do you foresee any challenges it might bring up? Pedro: Good question. There are indeed some challenges. Pedro: This change in accounting policy will impact when UNDP reports programme expenses. Better planning and coordination will be required to achieve delivery targets. Another challenge is the timely receipting of goods received and services rendered in Atlas.

12 Pedro: Hope I ve been able to clarify your doubts, Alisha. Alisha: You certainly did. Thank you very much, Pedro. Topic 10 Page 1 - Expectations on Country Offices/HQ Units Country Offices and HQ units will have to adhere to the revised, procurement workflow in Atlas in order to recognize expenses accurately (i.e. timely receipting). From a process point of view, Country Offices and HQ units are responsible for: The quality and accuracy of the expense information. The proper and timely receipt of goods and services. The regular review by management of the procurement and recording of expenses to ensure completeness of records. Topic 11 Page 1 - Key Messages to Donors The change to IPSAS will benefit us and the people who oversee us. With a clearer idea of our own financial position, we will be better able to plan and manage our own activities. Our Executive Board will receive more informative reports, so it will be better placed to hold us to account. Most importantly, any interested onlooker will have a much clearer picture of what UNDP does with the resources at its disposal. IPSAS will: Improve transparency. Enhance accountability. Provide a better basis for evaluating UNDP performance. Improve consistency, comparability and reliability of financial information, provided by UNDP.

13 Topic 12 Page 1 - Course Summary Congratulations! You have reached the end of this course. You will now be able to: Understand the concept of accrual accounting as applied to expenses for goods and services. List the key changes related to the implementation of accrual accounting. Summarise how IPSAS will impact projects. Explain the changes to donors.