J.R. Björgvinsson. Contents

Transcription

1 Contents J.R. Björgvinsson Reconciliation of Accounting and Statistical Standards The fiscal policy and the GFSM 2001 Main features of GFSM 2001 & GFSM 1986 GFS Classifications Benefits from Introducing Accrual Principles Accounting rules

2 General Government and other sectors of the economy Private sector Public sector Nonfinancial corporations PNFC Financial corporations PFC General government Nonprofit Institutions Serving Households Households Central government State governments Local governments Budgetary accounts Extra Budgetary accounts Social Security accounts

3 No single method for organizing data Transactions and stocks Accounting systems (analytical framework) Accountability Operations/ planning Billing/ control... Macroeconomic analysis The accounting system should be capable of serving and fulfilling different demands.

4 The National Budgetary Classification 1 Tax Revenue 11 Taxes on income, profits and capital gains 12 Domestic taxes on goods and services 13 Taxes on fees on special services and perform activities 14 Taxes on international trade 15 Property taxes 16 Social and health security contributions 2 Non-tax Revenue 21 Income from own activities and surplus transfers of direct related organizations 22 Received sanction payments and transfer returns 23 Income from sales of non-capital assets 24 Repayments of loans, received 1 3 Capital Revenue 31 Income from sales of capital assets and other capital income 32 Income from sales of shares and other equities 1 4 Transfers received 41 Currently received transfers 42 Received capital transfers 5 Current Expenditure 51 Wages, other remuneration payments and social contributions 52 Non-capital purchases and related expenditure 53 Non-capital transfers to enterprises and non-profit organizations 54 Non-capital transfers and some other payments to budgets 55 Non-capital transfers to households 56 Non-capital transfers abroad 57 Non-capital loans 1 58 Current transfers to the National Fund 59 Other non-capital expenditures 6 Capital Expenditure 61 Capital expenditure 62 Acquisition of shares and other equity 1 63 Capital transfers 64 Capital loans 1 65 Capital transfers to the National Fund 66 Other capital expenditure 7 Financing 71 Domestic financing 72 Financing from abroad 73 Adjustment to financial transactions ) According to internationally recognized standards, this subsection should be classified under the Financing group (8).

5 Three international standards on government accounts Accounting system Government operations IPSAS, 2007 (IC) GFSM 2001 Statistical systems Government operations ESA95 (Table 0200) Revenue Taxes Fees, fines, penalties and licenses Revenue from exchange transactions Transfers from other gov. entities Other revenue Expenses Wages, salaries and employee benefits Grants and other transfers payments Supplies and consumables used Depreciation and amortization expense Impairment of property, plant and equip. Other expenses Finance costs [Share of surplus of associates] Surplus/deficit for the period Continual development 1 Revenue 11 Taxes 12 Social contributions 13 Grants 14 Other revenue 2. Expenses 21 Compensation of employees 22 Use of goods and services 23 Consumption of fixed capital 24 Interest 25 Subsidies 26 Grants 27 Social benefits 28 Other expense Operating balance (1-2) 31 Net acquisition of nonfinancial assets Net lending / borrowing (NLB) 1986 and 2001 TRP1 Output TRP2 Intermediate consumption TRK1 Consumption of fixed capital = Value added, net... TRD1PAY Compensation of employee. etc. Production account (Value added) Generation of income account (Operating surplus) Allocation of primary income account (Balance of primary income) Secondary distribution of income acc. (Disposable income) Redistribution of income in kind acc. Use of income account (Saving) Capital account (net lending /borrowing) Financial account (net lending / borrowing).. Net lending / borrowing (NLB) Total General government expenditure Total General government revenue 1970, 1979 and 1995 IPSAS = International Public Sector Accounting Standards; IC = International Federation of Accountants

6 Reconciliation of accounting and statistical standards VH-I IC IPSAS GFSM 2001 VH-II SNA93 ESA95 The TFHPSA main task was to reconcile the international accounting and statistical standards on the general government finances (and public sector) Standards: System of National Accounts 1993 (SNA 93) European System of Accounts 1995 (ESA 95) Government Finance Statistics Manual 2001 (GFSM 2001) International Accounting Standards (IAS) International Finance Reporting Standards (IFRS) International Public Sector Accounting Standards (IPSAS) Organizations: OECD IMF Eurostat ECB World Bank IC-PSC TFHPSA = The Task Force on Harmonization of Public Sector Accounting

7 Reconciliation of accounting and statistical standards VH-I IC IPSAS GFSM 2001 VH-II SNA93 ESA95 Organizations: OECD IMF Eurostat ECB World Bank IC-PSC Working group I: Reconcile definitions and concepts Coverage (public sector vs. general government sector) Separation of transactions and other economic flows Using market price (fair value) when valuating assets and liabilities IC: International Public Sector Accounting Standards (IPSASs) and Statistical Bases of Financial Reporting: An Analysis of Differences and Recommendations for Convergence.

8 Reconciliation of accounting and statistical standards VH-I IC IPSAS GFSM 2001 VH-II SNA93 ESA95 Organizations: OECD IMF Eurostat ECB World Bank IC-PSC Working group II: revenue definitions definition of tax credits coverage (sharper definition of control & economically significant prices) treatment of guarantees treatment of reinvested earnings treatment of PPP, SPV, etc.

9 Reconciliation of accounting and statistical standards IPSAS, 2007 IPSAS 22 Disclosure of Information About the General Government Sector (p ) Basic Conclusion 4 (BC4): The IPSASB supports the convergence of IPSASs with statistical bases of reporting where appropriate. The statistical community encouraged the IPSASB to develop an IPSAS addressing the presentation of GGS (General government sector) information as part of a government s consolidated financial statements as a means of facilitating convergence. BC7: Statistical bases of financial reporting and IPSASs have many similarities in their treatment of particular transactions and events. However, there are also differences. For example, statistical bases of financial reporting: (a)... (b)... (c) Make a distinction between transactions and other economic flows for presentation of financial information. IPSASs do not currently make a similar distinction; The IBSAS Statement of Financial Performance is similar in structure to the revenue and expense component of the [GFS] Statement of Government Operations and the Statement of Other Economic Flows but does not distinguish transactions from other economic flows and consequently does not identify the analytical balances in GFS.

10 The fiscal policy role One of the main tasks of the Ministry of Finance is to set the fiscal policy which is reflected in its budget proposals and to overview the current performance. To do this properly, the government needs a framework where the main economic indicators measuring the fiscal impacts like the Net lending /borrowing (NLB) are presented and retrieved in an integrated system. This needs to be done on at least quarterly basis. It seems to be logical to use a framework that connects the accounting view (standards) and the economic view in an easy way. The GFSM 2001 system has been developed with that in mind. It reflects many of the features of the traditional business accounting systems and at the same time it is based on the concepts of the national accounts as SNA93 and ESA95. So it is in a way a bridge between the business accounting and national accounts and brings forward the main fiscal indicators that matters. The GFSM 2001 statements are: (1) The Statement of Government Operations, (2) The Statement of Other Economic Flows, (3) The Balance Sheet and (4) The Statement of Sources and Uses of Cash.

11 Why implementing GFSM 2001? Monetary policy Economic theories Economic indicators Fiscal policy operating balance net lending / borrowing net worth The primary purpose of the GFSM 2001 is to provide a comprehensive conceptual and accounting framework suitable for analyzing and evaluating fiscal policy, especially the performance of the general government sector and the broader public sector of any country (GFSM 2001, paragraph 1.2)

12 Two approaches for compiling GFSM 2001 data GFSM 2001 Fiscal statistics Source data ESA 95 Tables BCG-units ECG-units LG-units The GFSM 2001 system is tailored for fiscal analysis It can be used effectively in measuring fiscal impacts and the composition of revenue and expenditure It can be used in forecasts and for intermediate budget See my IMF paper on the relationships between the GFSM 2001 and ESA 95. See the Supplement to the IMF s 2002 GFS Yearbook Bridge Tables where created from the ESA 95 Tables 2, 9 and 8 (partial) CI, MEF, Istat MEF, CI

13 GFSM 2001 as a fiscal policy instrument Internal sectors (domestic sectors) External sector Corporate sectors General Government sector Households & Nonprofit Institutions Rest of the world + Revenues - Expenditures + Revenues - Expenditures 1) + Revenues - Expenditures + Revenues - Expenditures = Net L/B = Net L/B = Net L/B = Net L/B = Financing = Financing = Financing = Financing 1) Acquisition of non financial assets is included in expenditure + Surplus (CS) + Deficit (GG) + Surplus (HH) = Balance (RW) => Deficit (Net L/B) financed internally + Deficit (CS) + Deficit (GG) + Deficit (HH) = - Deficit (RW) => GG taxes or expenditures Fiscal policy / many combinations

14 Net worth / sustainability Internal sector (domestic sector) External sector Corporation sector General Government sector Households & NPISHs Rest of the world = Net worth = Net worth = Net worth + Nonfinancial assets + Financial assets - ilities + Nonfinancial assets + Financial assets - ilities + Nonfinancial assets + Financial assets - ilities + Financial assets - ilities Sustainability: Net Worth ( ) Nonfinancial assets Financial assets ilities 1,000 1,100 1,200 1,300 1,400

15 GFS as a fiscal policy instrument GFSM 2001 Transactions Revenue Accounting system Opening balance Expense Other economic flows Closing balance ESA 95 Current Accounts Chart of Accounts Accumulation Accounts Balance Sheet Statistical systems

16 Government Finance Statistics systems GFSM 1986: Transactions Revenue GFSM 2001: Transactions Revenue * deficit/surplus ** operating balance *** net lending / borrowing Expenditure Opening balance Expense ** Other economic flows Revaluation / Volume change Closing balance * Nonfinancial assets *** Opening liabilities Financial assets Closing liabilities Financial assets ilities ilities Net worth Change in net worth Net worth

17 Integrated Statement of Flows and Stocks INTEGRATED STATEMENT OF FLOWS AND STOCKS Opening balance Year 1999 Transactions Revaluation Other volume changes Closing balance Revenue... 71,680 Expense... 64,135 Net worth (operating balance)... 92,100 7,545 27,734-19, ,802 Nonfinancial assets ,329 10,260 23, ,150 Net financial worth (net lending/borrowing) ,229-2,715 4,173-19,578-46,348 Financial assets... 19,370 2,813 2, ,169 Domestic... 19,370 2,813 2, ,169 Foreign ilities... 47,599 5,527-1,187 19,578 71,517 Domestic... Foreign... 37,601 9,998 3,093 2, , ,670 11,847

18 Main Features of GFSM 2001/GFSM 1986 (1/3) 1. Time of recording GFS 2001 accrual basis Transactions Entries are recorded when economic value is created, transformed, exchanged, transferred, or extinguished Revenue GFS 1986 cash basis Transactions are recorded when cash in received or paid (cash equivalent) Opening balance Expense Other economic flows Closing balance Coverage of events GFS 2001 broader system All economic events that affect assets or liabilities are included GFS 1986 narrow system Excludes e.g. accrued interest, pension liabilities, consumption of fixed capital, in-kind transactions, and arrears

19 Main Features of GFSM 2001/GFSM 1986 (2/3) 3. Coverage of units GFS 2001 institutional units Includes all resident government units and all resident NPI that are controlled and mainly financed by government GFSM 2001 / GFSM 1986 Transactions Revenue GFS 1986 functional basis Includes the relevant transactions of any unit carrying out a function of government Opening balance Expense Other economic flows Closing balance 4. Valuation GFS 2001: At current market value GFS 1986: At face value or redemption value

20 Main Features of GFSM 2001/GFSM 1986 (3/3) 5. Integration of flows and stocks GFS 2001 integrated system All events that affect the financial performance, position or liquidity situation of GG are included GFSM 2001 / GFSM 1986 Transactions Revenue ** operating balance *** net lending / borrowing same as SNA, BOP and MFS frameworks GFS 1986 not integrated system The stock data included are limited to debt liabilities Opening balance Expense ** Other economic flows Closing balance 6. Balancing items GFS 2001 integrated system *** net operating balance net lending / borrowing net worth net financial worth change in net worth change in net financial worth GFS 1986 not integrated system the overall deficit / surplus* *Revenue plus grants minus expenditure minus net lending

21 GFSM 2001 analytical framework Four statements: Statement of Government Operations summarizes government s transactions in a given accounting period. Transactions are classified according to whether they: - increase net worth (revenue) - decrease net worth (expense) - change the stocks of - change the stocks of or. Statement of Other Economic Flows shows influences of govt s financial position in accounting period from flows other than transactions, i.e. - revaluations in A&L - other volume changes in A&L Balance Sheet shows the stocks of assets, liabilities, and net worth at beginning and end of accounting period Opening Balance Sheet Net worth = Nonfinancial assets Statement of Government Operations Revenue - Expense = Net operating balance = Statement of Other Economic Flows Change in net worth OEF Nonfinancial assets Net finanical worth = Financial assets Financial assets ilities + Nonfinancial assets Net lending/ borrowing = Financial assets ilities = Change in net f.worth OEF + = = ilities Closing Balance Sheet Net worth = Nonfinancial assets Net financial worth = Financial assets ilities Stocks Transactions Other flows Stocks

22 GFSM2001 Classification of Revenue Transactions Revenue classification: Opening balance Nonfinancial assets Financial assets ilities Revenue Expense Other economic flows Closing balance 1 Revenue 11 Taxes 111 Taxes on income, profits & cap. gains 112 Taxes on payroll and workforce 113 Taxes on property 114 Taxes on goods and services 115 Taxes on international trade & trans. 116 Other taxes 12 Social contributions 121 Social security contributions 122 Other social contributions 13 Grants 131 From foreign governments 132 From international organizations 133 From other general government units 14 Other revenue 141 Property income 142 Sales of goods and services 143 Fines, penalties and forfeits 144 Voluntary transfers other than grants 145 Miscellaneous and unidentified rev. Revenue: transactions that increase net worth (exclude sales of assets)

23 GFSM2001 Economic Classification of Expense Expense classification: Opening balance Nonfinancial assets Financial assets ilities Transactions Revenue Expense Other economic flows Closing balance Expense: transactions that decrease net worth (exclude acquisition of assets) 2 Expense 21 Compensation of employees 211 Wages and salaries 212 Social contributions 22 Use of goods and services 23 Consumption of fixed capital 24 Interest 241 To nonresidents 242 To residents other than GG 243 To other general government (GG) 25 Subsidies 251 To public corporations 252 To private enterprises 26 Grants 261 To foreign governments 262 To international organizations 263 To other general government units 27 Social benefits 271 Social security benefits 272 Social assistance benefits 273 Employer social benefits 28 Other expense 281 Property expense other than interes 282 Miscellaneous other expense

24 GFSM 2001 Classification of Assets and ilities 31 Nonfinancial assets 311 Fixed assets 3111 Buildings and structures Dwellings Nonresidential buildings Other structures 3112 Machinery and equipment Transport equipment Other machinery and equipment 3113 Other fixed assets Cultivated assets Intangible fixed assets 312 Inventories 313 Valuables 314 Nonproduced assets 3141 Land 3142 Subsoil assets 3143 Other naturally occurring assets 3144 Intangible nonproduced assets Opening balance Nonfinancial assets Financial assets Transactions Revenue Expense Other economic flows Closing balance 32 Financial assets (domestic/foreign) 33 ilities (domestic/foreign) Currency and deposits Securities other than shares Loans Shares and other equity Insurance technical reserves Financial derivatives Other accounts receivable/payable ilities Transactions in nonfinancial assets acquisition disposal consumption of fixed capital

25 GFSM 2001 Outlays by Functions Outlays by Functions: 7 Outlays by Functions 701 General public services 7017 Public debt transactions 7018 Transfers of a general character to other GG 702 Defense Transactions Revenue 703 Public order and safety 704 Economic affairs 7042 Agriculture, foresty, fishing and hunting 7043 Fuel and energy 7044 Mining, manufacturing, and construction 7045 Transport 7046 Communication 705 Environmental protection 706 Housing and community amenities Opening balance Nonfinancial assets Expense Other economic flows Closing balance 707 Health 7072 Outpatient services 7073 Hospital services 7074 Public health services Financial assets 708 Recreation, culture and religion ilities 709 Education 7091 Pre-primary and primary education 7092 Secondary education 7094 Tertiary education 710 Social protection

26 Integrated Statement of Flows and Stocks INTEGRATED STATEMENT OF FLOWS AND STOCKS Opening balance Year 1999 Transactions Revaluation Other volume changes Closing balance Revenue... 71,680 Expense... 64,135 Net worth (operating balance)... 92,100 7,545 27,734-19, ,802 Nonfinancial assets ,329 10,260 23, ,150 Net financial worth (net lending/borrowing) ,229-2,715 4,173-19,578-46,348 Financial assets... 19,370 2,813 2, ,169 Domestic... 19,370 2,813 2, ,169 Foreign ilities... 47,599 5,527-1,187 19,578 71,517 Domestic... Foreign... 37,601 9,998 3,093 2, , ,670 11,847

27 Summary Statement of Flows and Stocks Million of Kronur /Year Ending December 301 Local governments I. STATEMENT OF GOVERNMNET OPERATIONS: 1 Revenue... 2 Expense... Net Operating Balance (1-2=3) Net acquisition of nonfinancial assets... Net lending / Borrowing (3-31=32-33) Net acquisition of financial assets Net incurrence of liabilities... II. STATEMENT OF OTHER ECONOMIC FLOWS: 4,5 Change in net worth... 41,51 Changes in nonfinancial assets... 42,52 Changes in financial assets... 43,53 Changes in liabilities... III. BALANCE SHEET: 6 Net worth Nonfinancial assets Financial assets ilities... 64,740 71,680 79,288 57,962 64,135 71,298 6,788 7,545 7,990 11,030 10,260 10,262-4,252-2,715-2,272 1,077 2,813 1,731 5,329 5,527 4,003-3,585 8,156 6,981-4,150 23,561 12, , ,391 4,814 92, , , , , ,592 19,369 25,169 26,515 47,599 71,517 80,333

28 Benefits from Introducing Accrual Principles

29 Benefits from Introducing Accrual Principles into Government Finances Micro economic benefits Macro economic benefits Democratic benefits Recognition of all assets and liabilities: Accountability -full costs accounts payable consumption of fixed capital employee-related costs - net wealth equities (PC & QC) infrastructure Assets & liabilities management - working capital - fixed assets in general -valuables (LÍ) - natural occurring assets - liabilities (pensions) Fiscal indicators reflect much better economic reality (behavior & interactions) -full costs - net wealth (sustainability) - assets & liabilities recognition Fiscal policy Fiscal theories GFS Fiscal policy indicators Accrual Accounting System Reduces scope for political corruption or misuse of fiscal data PNFC GG PFC Making or buying decisions

30 Benefits from full costs of government s activities For governments to have better information on the full costs of their activities, they can: (1) consider the cost consequences of particular policy objectives and the cost of alternative mechanisms for meeting these objectives; (2) assess the most efficient way of producing their goods and services and of managing the resources over which they have been delegated authority; (3) decide whether to fund the production of services within government subentities, or whether to purchase goods and services directly from nongovernment organizations; (4) promote incentives for greater efficiency within the public sector by creating competition between private and public sector suppliers; and (5) decide whether user fees should cover the costs associated with a service. Effectively, the government is often facing a make or buy decision. Comparison between public sector and private sector suppliers can only take place when information on the full cost of both options is available.

31 Fiscal theories / Fiscal statistics t 1 t 2 t 3 time Coverage of economic events Time of recording A B A B transactions economic events/theorizing NFC FC GG NPISH HH Example: HH / pension liabilities => Fiscal theories / fiscal statistics / reflecting economic behavior & interactions

32 Benefits from consumption of fixed capital By recognizing consumption of fixed capital the managers of government entities will have a better understanding of the impact of using nonfinancial assets in the delivery of goods and services, which might encourage them to consider alternative ways of managing costs and delivering goods and services. Statement of Government Operations: 1 Revenue 2 Expenses 21 Compensation of employees 22 Use of goods and services 23 Consumption of fixed capital Other expenses NOB Net Operating Balance (1-2) 31 Net Acquisition of Nonfinancial Assets + Acquisition of fixed capital - Disposal of fixed capital - Consumption of fixed capital NLB Net Lending / Borrowing (1-2-31)

33 Practical Methods of Accrual Revenue Recording

34 Practical Methods of Accrual Revenue Recording Rules on how to record taxes on an accrual basis are presented in the GFSM These rules clarify the main principles behind accrual recording, as regarding the time of recording and the amounts to be recorded. But these principles may need more clarification to meet the practical requirements for compiling revenue data. For example, some assessed taxes will never be collected; others will take years to be fully assessed. Such recording issues need to be tackled in practice. The GFSM 2001, which replaces the old GFS cash-based system, is expected to play a greater role as a fiscal analytical framework. It is therefore vital that both the accuracy and reliability of the accrual recording and the timeliness of revenue data are adequate for this fiscal role. For the GFS to play its expected role in fiscal analysis and fiscal decision making, the development of practical rules for revenue recording has to take account of this requirement and optimize the trade-off between the quality of accrual recording and the timeliness of the data.

35 Practical Methods of Accrual Revenue Recording Summary: The main purpose of the paper is to show some practical methods of how to record personal income tax on an accrual basis. Numerical examples have been used to illustrate the different methods. These methods can also, in most circumstances, be used to record other types of taxes and are therefore, in a way, guidelines for tax recording in general. One of the main conclusion from this analysis is that the so-called PTA-method is one of the most efficient methods of revenue recording and makes it possible for the government to close their books in three to four months (depending on the length of the complimentary period) after the end of the income year and record relatively good accrual data (95,714 out of 96,000 in the presented example). This method has been used in Iceland since accrual accounting presentation (1998) was introduced into the central government budget.

36 Accrual Recording of Taxes (1/9) Like most transactions, taxes and social contributions should be recorded on an accrual basis in the GFS and ESA. Accrual recording means basically that flows have to be recorded when economic value is created, transformed, exchanged or extinguished. The implementation of this recommendation for taxes and social contributions raises questions regarding (1) the time of recording, and (2) the amounts to be recorded. There is no need for major change in GFS and ESA

37 1. The time of recording Accrual Recording of Taxes (2/9) This is when the activities, transactions or other events occur which create the liability to pay taxes, and not when they are actually paid. In the case of taxes, this usually means when income is paid or when a transactions (purchase and services etc.) generating the liability is made. Some flexibility is permitted in two cases: Taxes on income: in some cases the liability to pay income taxes can only be determined in a later accounting period than in which the income accrues. Parallel economy: some activities, transactions or events escape the attention of the tax authorities. The liability to pay taxes cannot be related to the underlying economic event, but only to the time when the tax assessment is made. Therefore, in these two cases, the right time of recording the taxes is not the time when they accrued (the time when the economic event generated the obligation to pay taxes), but the time when the taxes were known as due to be paid with sufficient certainty. This is not necessarily similar to the accounting period of the payment.

38 Accrual Recording of Taxes (3/9) 2. Amounts to be recorded The difficulty here is that the recording of taxes at the time they are due or generated should not lead to recording of amounts that are uncollectible or unlikely to be collected The general recommendation on amounts to be recorded regarding uncollectible taxes is: a) to adjust the assessed amount by a coefficient to eliminate uncollectible taxes. The adjustment should be made on the revenue side. Regular revision of the coefficients is recommended to smooth out uncollectible taxes over longer period b) to adjust the cashed amounts (but at the time they were accrued, or due) c) a combination of a and b with some flexibility

39 Accrual Recording of Taxes (4/9) The tax assessment methods D.1 and D.2 Net tax 1) assessment Gross tax 1) assessment method method REVENUE 96,000 cr 100,000 cr Individual (personal) income tax 96,000 cr 100,000 cr Gross tax assessment 100,000 cr 100,000 cr Tax coefficient adjustment (2003) -4,000 dr 0 EXPENDITURE 0 4,000 dr Capital transfers 0 4,000dr Tax coefficient adjustment (2003) 0 4,000 dr NET LENDING/BORROWING 96,000 96,000 FINANCIAL ASSETS 96,000 dr 96,000 dr Cash 90,000 dr 90,000 dr Accounts receivable 6,000 dr 6,000 dr Taxes outstanding (gross / due to 2003) 10,000 dr 10,000 dr Coefficient adjustment (2003) -4,000 cr -4,000 cr If assessments and declarations are used, the amounts shall be adjusted by a coefficient reflecting assessed and declared amounts never collected. As an alternative treatment, a capital transfer, to the relevant sectors could be recorded equal to the same adjustment. The coefficients shall be estimated on the basis of past experience and current expectations in respect of assessed and declared amounts never collected ( ). LIABILITIES 0 0 1) Both the net and the gross tax assessment methods use coefficient to assess the uncollectible taxes, and their effects on the Net lending & borrowing are the same

40 Accrual Recording of Taxes (5/9) a) to adjust the assessed amount by a coefficient to eliminate uncollectible taxes. The adjustment should be made on the revenue side. Regular revision of the coefficients is recommended to smooth out uncollectible taxes over longer period Why uncollectible taxes! The main reasons for uncollectible taxes are: 1) Over-assessment 2) Bankruptcy 3) Tax corrections 4) Tax forgiveness Government Operations: 1 Revenue 11 Taxes 12 Social contributions 13 Grants 14 Other revenue 2 Expense 21 Compensation of employees 22 Use of goods and services 23 Consumption of fixed capital 24 Interest 25 Subsidies 26 Grants 27 Social benefits 28 Other expense incl. capital transfers NOB Net operating balance (1-2) 31 Net acq. of nonfinancial capital NLB Net lending / borrowing (1-2-31) Outlays by Functions: 7 Outlays by Functions 701 General public services 702 Defense 703 Public order and safety 704 Economic affairs 7042 Agriculture, forestry, fishing, etc 7043 Fuel and energy 7044 Mining, manufacturing, etc Transport 7046 Communication 7047 Other industries 7048 R&D Economic affairs 705 Environmental protection 706 Housing and community, etc 707 Health 708 Recreation, culture and religion 709 Education 710 Social protection

41 Accrual Recording of Taxes (6/9) Sections Methods Recorded amounts Timeliness C.1 Time-adjusted cash method (no complementary period) 96,000 T+3 years C.2 D.11 D.12 D.21 D.22 E F Time-adjusted cash method (with complementary period) 95,526 Net tax assessment method (time-adjusted to the activity period) 96,000 Net tax assessment method (recorded when determined) 91,429 Gross tax assessment method (time-adjusted to activity period) Gross tax assessment method (recorded when determined) 100,000/ 4,000 95,238/ 3,810 PAYE / Assessment method (PA-method) 95,239 PAYE / Time-adjustment / Assessment method (PTA-method) 95,714 T+4 months T+8 months T+0 months T+8 months T+0 months T+1 month T+4 months

42 Accrual Recording of Taxes (7/9) Time-adjusted cash method (no complementary period) 20,000 20,000 20,000 20,000 Personl income tax in 2003 The total accrual amount is 96,000 10,000 1,000 1,000 1,

43 Accrual Recording of Taxes (8/9) Time-adjusted cash method using complementary period (three months) Personal income tax recorded in 2003 is 95,526 and is based on time-adjusted cash m ethod using three m onths complementary period. 20,000 20,000 20,000 20,000 Personal incom e tax in 2003 Total accrual amount is 96, : ,000 1,000 1,000 1, ,048 19,048 19,048 19,048 Personal incom e tax in 2002 Total accrual amount is : 9, ,141 18,141 18,141 18,141 Personal incom e tax in 2001 Total accrual amount is : 9, ,277 17,277 17,277 17,277 Personal incom e tax in 2000 Total accrual amount is : 8,

44 Accrual Recording of Taxes (9/9) F. PAYE / Time-Adjustment / Assessment Method (PTA-method) Cash payments related to income tax year ,000 20,000 20,000 20,000 The recording year is 2003 The PAYE and time-adjusted income tax (3 months complementary period) related to 2003 is 90,000 and the corresponding figure for 2002 is PAYE and time-adjusted income tax is 90,000 recorded in ,000 1,000 1,000 1, The gross income tax assessment related to 2003 is 100,000 made in July 2004, and the corresponding gross assessment for 2002 is 95,238 made in July 2003 The cofficient used to adjust for uncollectible taxes is 4% in this example 5,715 (91,429 (i.e. 95,238*0,96) - 85,714) is recorded in 2003 under this method 19,048 19,048 19,048 19,048 9,524 Assessment made in July 2003 and the assessed amounts recorded in the period the activities took place, i.e Recorded amount in 2003 is 95,715 The timeliness is T+4 month

45 Coefficient calculation (general principle) Coefficient calculation for income tax on individuals (general principle): Sum Income tax assessment (July 96) 100,000 Cash payments (Jan95-Jan96) 90,000 Tax liability (Y1995) paid each following year 4,000 1, ,000 Taxes (Y1995) never collected 2,000 1, ,000 Outstanding tax liability (Y1995) 10,000 4,000 2,000 1, The tax-coefficient for income tax on individuals is $4,000 / $100,000 = 4%. For some countries the information above may not be available, which calls for the best approach to this main principle. Over longer period the coefficient can, of course, change due to e.g. changes in tax collection methods or the economic prosperity, and might therefore need a revision. See DAFFE/C/WP2(2003)44, page 7

46 Practical Principles for Recording (1) If assessments and declarations are used, the amounts shall be adjusted by a coefficient reflecting assessed and declared amounts never collected. As an alternative treatment, a capital transfer, to the relevant sectors could be recorded equal to the same adjustment. The coefficients shall be estimated on the basis of past experience and current expectations in respect of assessed and declared amounts never collected. They shall be specific to different types of taxes. (2) If cash receipts are used, they shall be time-adjusted so that the cash is attributed when the activity, transactions or other events took place to generate the tax liability (or when the amount of tax was determined, in the case of some income taxes). This adjustment may be based on average time difference between the activities, transactions or other events (or the determination of the amount of tax) and cash tax receipt. See DAFFE/C/WP2(2003)44, page 6

47 GFSM 2001 as fiscal policy instrument accountability aspect fiscal policy instrument 1986 GFS COA AS GFS accrual adjustments NA practical accrual recording rules GFSM 2001 (1) COA AS GFS NA GFSM 2001 (2) COA AS accrual adjustments NA OECD Revenue Statistics GFS Optimize the trade-off between quality of accrual reporting and the timeliness of the data

48 Harmonization of COA, GFS and SNA(ESA) accountability aspect fiscal policy instrument GFSM 2001 (1) COA AS GFS practical accrual recording rules GFS NA COA AS Task Force on Harmonization of Public Sector Accounting consistency and transparency between accrual recording GFSM 2001 for different sub-sectors of the government

49 Taxes are imposed on different tax-bases Underlying tax item: Tax relates to a particular time or timeperiod Tax levied at indicators measured at a particular time or during a period Main types of indicators used as tax base 1. a transaction or an event time-point time-point value 1) 2. a class of transactions time-period time-point value 1) 3. income, profits and capital gains time-period time-period value 4. net wealth time-period time-point value 5. ownership (uses) of a property time-period time-point value 6. use of goods and permission to use goods or perform activities time-period time-point fixed amount 2) 7. persons (legal or not) time-point time-point fixed amount 1) Other indicators than value can be used. 2) Types of goods and activities, value, quantity, weight, etc. can be the underlying indicators.

50 Practical Principles for Recording 3.59 Flexibility in tax-recording In principle, income taxes and social contributions based on income should be attributed to the period in which the income is earned, even though there may be a significant delay between the end of the accounting period and the time at which it is feasible to determine the actual liability. In practice, however, some flexibility is permitted. In particular, as a practical deviation from the general principle, income taxes deducted at source, such as pay-as-you-earn taxes, and regular prepayments of income taxes may be recorded in the periods in which they are paid, and any tax liability on income may be recorded in the period in which it is determined.

51 Example 1: Income taxes on individuals; combination of option 1(assessment adjusted by coefficients) and option 3 (time-adjustment) A combination of option 1 (income tax assessment adjusted by coefficients) and option 3 (time-adjustment), might be the most practical way to record income taxes on individuals related to a particular year. 1) This method requires (1) recording of all income taxes deducted at source related to the recording year, (2) time-adjustment, according to the due for payment principle, 2) of those taxes related to the year, but paid in following year, and (3) a recording of the final tax liability, related to the recording year, in the period in which it is determined and an adjustment of the liability by a coefficient reflecting the assessments never collected and the amount already paid. J F M A M J J A S O N D ) To optimize the trade-off between the quality of accrual accounting and the timeliness of the data. 2) Due for payment recording shows transactions at the latest times that the corresponding payments can be made without additional charges or penalties.

52 Example 1: Personal Income Tax $90,000 PAYE, timeadjusted by 2 months Declarations for 1995 submitted by taxpayers Gross assessment for 1995 is $100,000 made in July 1996 $100,000 Gross assessment - $4,000 Coefficient effects $96,000 Adjusted assessment - $90,000 PAYE (time-adjusted) $6,000 Tax liabilities (recorded in 1996, i.e. when determined) J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Due for payment $98,000 PAYE, timeadjusted by 2 months 3.59 Flexibility in tax-recording... In practice, however, some flexibility is permitted. In particular, as a practical deviation from the general principle, income taxes deducted at source, such as pay-as-you-earn taxes, and regular prepayments of income taxes may be recorded in the periods in which they are paid, and any tax liability on income may be recorded in the period in which it is determined.

53 Example 2: Prepayment $10,000 Corporate Income Tax Prepayment $10,000 Adjusted assessment $50,220 $54,000 Gross assessment - $3,780 Coefficient effects (7%) $50,220 Adjusted assessment - $20,000 Prepaid in 1995 $24,000 Prepaid in $54,220 Income tax recorded ======================== J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Prepayment $10,000 Prepayment $10,000 $54,220 recorded Prepayment $12,000 Prepayment $12, Flexibility in tax-recording... In practice, however, some flexibility is permitted. In particular, as a practical deviation from the general principle, income taxes deducted at source, such as pay-as-you-earn taxes, and regular prepayments of income taxes may be recorded in the periods in which they are paid, and any tax liability on income may be recorded in the period in which it is determined.