COMMENTS ON STANDARDS OF GENERALLY ACCEPTED MUNICIPAL ACCOUNTING PRACTICE (GAMAP)

Transcription

1 COMMENTS ON STANDARDS OF GENERALLY ACCEPTED MUNICIPAL ACCOUNTING PRACTICE (GAMAP) Introduction The Accounting Standards Board (Board) approved the exposure of the Standards of GAMAP, at the Board meeting held on 23 September 2003, for a period of two months. The exposure draft was also published on the Board s website and in the Government Gazette of 24 October The comment period closed on 15 December The Board received 6 comment letters from respondents representing various stakeholders of the Board. The comment letters are summarised into general and specific issues and include the Board s responses to the comments received. After the comments received were considered, the Board approved the GAMAP Standards for issue at the Board meeting of 6 February Page 1

2 The respondents listed under their relative representative categories are as follows: Submission Number Name/Organisation Preparers Users Auditors/ Accountants Academics Other Interested Parties 1 Deloitte Touché Tohmatsu 2 Institute of Municipal Officers (IMFO) 3 Dr Oscar Somers 5 The South African Institute of Chartered Accountants (SAICA) The table above can be summarised as follows: Category % 1 Preparers 17% 2 Users 50% 3 Auditors/Accountants 33% 4 Academics 0 5 Other Interested Parties 0% Total 100 The following is a summary of responses on the specific questions that were in the request for comments: Summary of responses Submission Number Name/Organisation Q1. Other aspects in statement on Revenue to be included Q2. Agree or disagree with amendments to revise old GAMAP Q3. Elaborate on guidance on segment reporting 1 Deloitte Touché Tohmatsu 2 Institute of Municipal Officers N N N (IMFO) 3 Dr Oscar Somers N N N 5 The South African Institute of Chartered Accountants (SAICA) Key N Meaning In support Against Could not be answered question to general Neutral The table above reflects that the majority of the respondents indicated that: Page 2

3 Question 1 There are omissions or aspects of revenue that will have to be incorporated in the Standard on Revenue. Question 2 They agree with the amendments made to old GAMAP. Question 3 Guidance on segment reporting should be elaborated. Page 3

4 Comments on Specific Questions (1 3) Submission Number Name/ Organisation Comment Board Response Q1. Scope for Revenue 1 Deloitte Touché Tohmatsu It is our view that additional guidance on transfers/ grants should be issued. Such guidance could include but is not limited to: Transfer or grant of non monetary assets: Non monetary assets transferred to an entity that is not subject to conditions, should be recognised as revenue once transferred. Non-monetary assets that are transferred subject to conditions should be recognised by the recipient as assets and revenue except to the extent that a liability is recognised in respect of those conditions. Transfer or grant with attached stipulations/conditions/restrictions The difference between a stipulation, condition or restriction is described below: Stipulations Terms imposed upon the use of transferred assets by parties external to the entity. Restrictions Stipulations that limit or direct the purpose for which the transferred assets may be used, but do not specify that the assets must be returned to the contributor if not deployed as specified. Conditions Stipulations that specify that transferred assets must be returned to the contributor if not deployed as specified, or if a specified future event occurs or does not occur. Noted. An additional example has been included in the GAMAP Standard on Revenue to illustrate the principle of conditions versus no conditions. The GAMAP Standard on Revenue addresses the principle of timing requirements but no additional guidance has been included on the difference between restrictions and conditions, as internationally no consensus has been reached on the difference between a stipulation, condition or restriction. The Board has resolved that additional guidance on these differences will only be provided once consensus has been reached internationally. This will probably occur once the comments on the ITC on Non- Exchange Revenue are received and evaluated by IFAC PSC. Page 4

5 Revenue should be recognised when a reporting entity recognises an increase in net assets or equity, other than those relating to contributions from owners. An increase in net assets/equity will occur when an entity recognises an asset and does not at the same time recognise a liability for the same amount. To be recognised as an asset, an inflow must meet the definition of an asset and satisfy the criteria for recognition as an asset. When an entity recognises an inflow of resources as an asset, the asset should be measured at its fair value. The entity would recognise revenue for the amount of the increase in net assets or equity. When an inflow of economic resources is recognised as an asset, the reporting entity should determine whether or not it has outstanding obligations in relation to the inflow that is included in the definition of a liability and the criteria for recognition as a liability, such obligations are imposed by stipulations, which are discussed in detail in the section on transfers. Transfers include grants, appropriations, gifts, donations and certain fines. The most significant issue that arises in respect of these transactions is whether the recipient entity should recognise a liability in respect of the stipulations imposed by the contributor entity on transfers of resources. There are three types of stipulations: restrictions (which restrict the use of the asset, but do not require its return in the event of breach), conditions (which restrict the use of the asset and require its return in the event of a breach) and time requirements (which prohibit the use of the asset until a specified point in time). The Standard requires that recipient entities recognise liabilities in respect of conditions and time requirements. As conditions are satisfied an entity reduces the liability and recognises revenue. Time requirements are satisfied with the passage of time and when the prohibition on the use of the asset expires, the liability is reduced and revenue recognised. The scope paragraph.01 (a) (d) is very limiting. There are other forms of revenue, which accrues to a municipality for example insurance claims, government grants (which do not fall under (c)) etc. The scope paragraph should therefore be amended as follows: Agreed. The scope paragraph has been amended. Page 5

6 An entity which prepares and presents financial statements under the accrual basis of accounting should apply this Statement in accounting for revenue including: 5 SAICA It is our view that additional guidance on transfers/grants should be issued. Such guidance could include but is not limited to: Transfer or grant of non-monetary assets Non-monetary assets transferred to an entity that is not subject to conditions, should be recognised as assets and revenue once transferred. Non-monetary assets that are transferred subject to conditions should be recognised by the recipient as assets and revenue except to the extent that a liability is recognised in respect of those conditions. Noted. An additional example was included in the GAMAP Standard on Revenue to illustrate the principle of conditions versus no conditions. Transfer or grant with attached stipulations/conditions/restrictions The difference between a stipulation, condition or restriction is described below: Stipulations : Terms imposed upon the use of transferred assets by parties external to the entity. Restrictions : Stipulations that limit or direct the purpose for which the transferred assets may be used, but do not specify that the assets must be returned to the contributor if not deployed as specified. Conditions : Stipulations that specify that transferred assets must be returned to the contributor if not deployed as specified, or if a specified future event occurs or does not occur. Revenue should be recognised when a reporting entity recognises an The GAMAP Standard on Revenue addresses the principle of timing requirements but no additional guidance has been included on the difference between restrictions and conditions as internationally no consensus has been reached on the difference between a stipulation, condition or restriction. The Board has resolved that additional guidance on these differences will only be provided once consensus has been reached internationally. This will probably be finalised when comments on the ITC on Non- Exchange Revenue are received Page 6

7 increase in net assets or equity, other than those relating to contributions from owners. An increase in net assets/equity will occur when an entity recognises an asset and does not at the same time recognise a liability for the same amount. To be recognised as an asset, an inflow must meet the definition of an asset and satisfy the criteria for recognition as an asset. When an entity recognises an inflow of resources as an asset, the asset should be measured at its fair value. The entity would recognise revenue for the amount of the increase in net assets or equity. When an inflow of economic resources is recognised as an asset, the reporting entity should determine whether or not it has outstanding obligations in relation to the inflow that is included in the definition of a liability and the criteria for recognition as a liability. Such obligations are imposed by stipulations, which are discussed below relating to transfers. Transfers include grants, appropriations, gifts and donations. The most significant issue that arises in respect of these transactions is whether the recipient entity should recognise a liability in respect of the stipulations imposed by the contributor entity on transfers of resources. There are three types of stipulations: restrictions (which restrict the use of the asset, but do not require its return in the event of breach), conditions (which restrict the use of the asset and require its return in the event of a breach) and time requirements (which prohibit the use of the asset until a specified point in time). The Statement requires that recipient entities recognise liabilities in respect of conditions and time requirements. As conditions are satisfied an entity reduces the liability and recognises revenue. Time requirements are satisfied with the passage of time and when the prohibition on the use of the asset expires, the liability is reduced and revenue recognised. and evaluated by IFAC PSC. Page 7

8 GAMAP 9 appears to include in Revenue any form of Capital income. If this then requires it to be displayed in the Operating account the logic regarding the impact of the corresponding expenditure not being shown needs to be explained. Also refer to the suggested solution in our last submission. The statement of financial performance is not an operating account. The purpose of the statement of financial performance is not to achieve matching of income and expenditure. However, the depreciation charge in the statement of financial performance is the corresponding entry for income invested in capital expenditure that will equal the revenue over the life of the asset. Reference should be made to The Standard of Generally Recognised Accounting Practice on Presentation of Financial Statements for more guidance on the statement of financial performance. Page 8

9 Submission Number Name/ Organisation Comment Board Response Q2. List of General and Specific differences 1 Deloitte Touché Tohmatsu We agree with the decision to revise the old GAMAP. We agree that old GAMAP needed to be revised, however it is clear that the local legislation was not entirely considered and that the examples used were not always relevant to the local government environment. Noted Noted. The Municipal Management, Act No. 45 of 2003 (MFMA) was not final at the time the Exposure Draft was issued. The principle and practice internationally is not to make reference to legislation in Standards. The Preface to Standards of GAMAP was amended to specify that additional disclosures as required by legislation are not repeated in the Standards. For the comment made on examples, reference should be made to specific responses elsewhere in the summary that deals with examples. Page 9

10 5 SAICA We agree with the decision to revise the old Statements of GAMAP. Noted. This cannot be answered in a general manner as there are individual comments against some of the changes in the detailed Statements themselves. It is too general a question. Noted Page 10

11 Submission Number Name/ Organisation Comment Board Response Q3. Segment Reporting 1 Deloitte Touché Tohmatsu It is our view that the guidance on reportable segments should be elaborated on. We also recommend the inclusion of specimen segment report in order to enhance uniform reporting of segment information. No definition is provided for trading service mentioned in paragraph.15. This paragraph was included in GAMAP 100 and was devised to ensure that Municipalities disclosed financial performance and expenditure on property, plant and equipment to facilitate comparison. It should be noted that this was done before the design of Budget Reforms by National. The old GAMAP requirement was also developed taking into account current Municipal systems and record keeping. The new Budget Reforms are based on GFS classifications and will provide National with the required classifications of income and expenditure, including operating and capital. Municipalities will have to report on actual versus budget in terms of legislation when the Budget Reforms are mandatory. However, GAMAP 18 takes the segment definition in paragraph.15 too far. How will and why must Municipalities keep separate records of, for example, their fire service and engineers department in respect of creditors, loans and other balance The Board agreed that GAMAP 18 Segment Reporting should not be issued, but that reference should be made to IPSAS 18 Segment Reporting in Appendix 2 of the Preface to Standards of GAMAP. National should then refer to IPSAS 18 Segment Reporting when determining the format of the segment report to be included in the specimen financial statements. Agreed. The relevant paragraphs were incorporated from old GAMAP on the assumption that they were internal formats used by management to manage the municipalities. The Board agreed that GAMAP 18 Segment Reporting should not be issued, but that reference should be made to IPSAS 18 Segment Reporting in Appendix 2 Page 11

12 sheet items? This will create a significant administrative burden on Municipalities that will have significant cost implications. We have no doubt that the cost of preparing this information will far outweigh the benefit to users. We request that subject to the definition of trading service, that reportable segments only include rate and general services, trading services (electricity, water, refuse and sanitation), housing and regional council levies. The remaining part of this paragraph should be deleted. We also request that segment reporting be limited to income, expenditure, property, plant and equipment and long-term liabilities. All Municipal IT systems can generate this information. To request further information on current liabilities, for example, will require Municipalities to reconfigure their IT systems and have significant work process implications. If this is not considered, there will be significant cost implications to Municipalities. Alternatively, a longer transitional period (minimum of 5 years) should be considered. of the Preface to Standards of GAMAP. National should then refer to IPSAS 18 Segment Reporting when determining the format of the segment report to be included in the specimen financial statements. 5 SAICA In our opinion, the guidance on reportable segments should be elaborated upon, in order to enhance the uniform understanding and interpretation of the statement by municipalities. We also recommend the inclusion of specimen segment reports in order to enhance uniform reporting of segment information. The Board agreed that GAMAP 18 Segment Reporting should not be issued, but that reference should be made to IPSAS 18 Segment Reporting in Appendix 2 of the Preface to Standards of GAMAP. National should include a specimen segment report as part of the specimen financial statements based on the principles dealt with in IPSAS 18 Segment Reporting. Page 12

13 As stated in the comments against the proposed statement, it may be desirable for National give guidance on the reportable segments; otherwise there will be inconsistent application across all municipalities and added complexities caused by the necessity to provide GFS functional information. Noted. The Board agreed that GAMAP 18 Segment Reporting should not be issued, but that reference should be made to IPSAS 18 Segment Reporting in Appendix 2 of the Preface to Standards of GAMAP. National should include a specimen segment report as part of the specimen financial statements based on the principles dealt with in IPSAS 18 Segment Reporting. Page 13

14 Summary of General Comments General Submission Number Name/ Organisation Comment Board Response 1 Deloitte Touché Tohmatsu We support the fact that old GAMAP has been revised to take into account amendments to South African Statements of Generally Accepted Accounting Practice ( SA GAAP ) and International Public Sector Accounting Standards ( IPSAS ) issued since the initial development of GAMAP. The new GAMAP is thus more relevant in the current accounting environment. The proposed revised GAMAP is a combination of Statements of GAMAP, Statements of Generally Recognised Accounting Practice ( GRAP ), IPSAS and SA GAAP AC s. The GRAP Exposure Drafts ( GRAP ED s ) incorporate changes proposed by the International Accountings Standards Board Improvements Project. Statements of GAMAP, IPSAS and SA GAAP AC s have not been revised to include the provisions of the Improvements Project. We are thus concerned that the different statements used are potentially inconsistent. The one set of statements (ED GRAP) is based on the proposed improvements and therefore more technically up to date than the other Statements (GAMAP, IPSAS & AC s). This is illustrated by the different definitions in ED GRAP 1 which include definitions such as functional currency and presentation currency. These definitions have been included in the Improvements Project. These definitions are not used at all in the rest of the GAMAP statements. GAMAP 4 refers to the definition of reporting currency, a term no longer used in GRAP. Noted. Agreed. The definitions dealt with in GRAP 1 to 3 were incorporated in the GAMAP Standards, where no accounting principles were changed. The scope of the GAMAP project was to harmonise old GAMAP with the IPSASs. Amendments from the IASB improvements project will be dealt with in the GRAP project as Standards of GAMAP is only an interim solution. Page 14

15 The definitions provided at the beginning of a Statement are not always relevant to the subject of the Statement. We suggest that the definitions be provided in a glossary of terms instead of at the beginning of each Statement. Agreed. The definitions that were not used in a Standard were deleted. The Board has decided not to issue a separate glossary of terms until a number of Standards has been issued. Thus, no separate glossary of terms will be compiled at present. In the comment on the Application of new GAMAP, the ASB stated that boards, commissions, companies, corporations, funds or other entities under the control of Municipalities have to comply with GRAP. Such entities must comply with GAAP according to the Companies Act, The ASB has mentioned in the Preface to Statements on GRAP that GRAP is applicable to the above entities. The Companies Act only applies to companies. Boards, commissions, companies, corporations, funds or other entities under the control of municipalities are not necessarily regulated by legislation. With the promulgation of the Public Management Act (PFMA) in 1999, the requirement for companies under the control of municipalities to comply with the Companies Act was amended to the extent that they must comply with grap. Accordingly, the Board has resolved that companies under the control of municipalities should comply with generally recognised accounting practice (GRAP) in accordance with the powers granted to the Board. The Page 15

16 Board also resolved that entities with publicly traded debt must comply with Statements of GAAP. To determine whether an entity should comply with GRAP, reference should be made to the Preface to Standards of GRAP. The Preface to Standards of GAMAP states that Standards of GAMAP is applicable to municipalities only. Boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality are encouraged to comply with Standards of GAMAP in order to facilitate the preparation of consolidated financial statements by municipalities. Municipalities and their boards, commissions, companies, corporations, funds or other entities under their ownership control also have to comply with Standards of GRAP. Exemptions from compliance with Standards of GRAP and/or Standards of GAMAP can only be granted by the Minister of. Page 16

17 The Board should consider section 92 of the Public Management Act 1 of 1999, whereby the Minister of by notice in the National Government Gazette may exempt any institution from any specific provisions of the Public Management Act 1 of 1999 for a period determined in the notice. The ASB has therefore no authority to exempt a municipality from complying with GAMAP. Noted. Exemptions from compliance with Standards of GAMAP can only be granted by the Minister of. AC 126 in appendix II should be changed to AC 128. Reference amended. 5 SAICA We support the fact that Statements of Generally Accepted Municipal Accounting Practice (GAMAP) have been revised to take into account amendments to South African Statements of Generally Accepted Accounting Practice (GAAP) and International Public Sector Accounting Standards (IPSAS) issued since the initial development of GAMAP. The new GAMAP is thus more relevant in the current accounting environment. Noted. 5 SAICA Effective Dates The revised Statements of GAMAP, applicable to municipalities, boards, commissions, companies, corporations, funds or other entities under the control of a municipality, will be applied for the preparation of financial statements by all such entities for financial years commencing on or after 1 July The preface to Statements of GAMAP states that, when Statements of Generally Recognised Accounting Practice (GRAP) are issued, they will supersede the equivalent Statement of GAMAP. This implies that entities will undertake a two phase process as it is our understanding that certain of the Statements of GRAP will be issued in In the light of the impact on the municipalities, we recommend that the effective date be reconsidered in order to afford them time to prepare for the transition. We further recommend that the effective dates of the Statements of GRAP and Statements of GAMAP be the same where appropriate. GAMAP has always been seen as an interim solution for municipalities to assist with the implementation prior to the release of Standards of GRAP. Accordingly, it has been recognised by the Board that Standards of GAMAP will result in a two stage implementation. The Preface to Standards of GAMAP states that Standards of GAMAP is applicable to municipalities only. Boards, Page 17

18 commissions, companies, corporations, funds or other entities under the ownership control of a municipality are encouraged to comply with Standards of GAMAP in order to facilitate the preparation of consolidated financial statements by municipalities. 5 SAICA Whilst we understand that the practice of revising statements is common occurrence in the accounting standard-setting process for the private sector, it has not been the case in the public sector. The impact of this should therefore not be underestimated. The process of adopting Statements of GAMAP and then changing to Statements of GRAP will be an expensive exercise and may require entities to commit resources, in terms of changes in the systems and training staff during the adoption of Statements of GAMAP and subsequent change to Statements of GRAP. Notwithstanding the challenges mentioned above, we recognise the training that has already taken place in the public sector with regards to Statements of GAMAP and there is a willingness of the public sector to implement financial reforms as initiated by National. Noted. The difference between the Standards of GAMAP and Standards of GRAP might be minor as the basis for both these Standards are IPSAS. However, it is difficult to determine upfront what the impact will be on the systems and whether additional resources will be required. Also, Standards of GAMAP is an interim solution that was a priority for National. If the Board only implemented the previous GAMAP, the change to GRAP would have been more difficult. It should also be noted that assistance has been granted by National in the form of a finance management grant and technical assistance program. Page 18

19 5 SAICA Transitional Guidance We recommend that guidance be drafted to deal with the specific transitional problems on the first time adoption of Statements of GAMAP and Statements of GRAP. The principles in IFRS 1 (AC 138) First-time Adoption of International Financial Reporting Standards could be used as a base. This transitional guidance should be extended to the transition from Statements of GAMAP to Statements of GRAP. The transitional provisions in the public sector differ from the transitional provisions in the private sector. Transitional provision should be read in conjunction with the implementation date. The Board has resolved that transitional provisions should be dealt with in each Standard, which is in line with the IFAC PSC decision in this regard. Exemptions can only be granted by the Minister of. 5 SAICA Definitions and Terminology The proposed revised set of accounting references for the public sector is a combination of Statements of GAMAP, Statements of GRAP, IPSAS and Statements of GAAP. The GRAP exposure drafts (GRAP EDs) incorporate changes proposed by the International Accountings Standards Board s improvements project. Statements of GAMAP, IPSAS and Statements of GAAP have not been revised to include the proposals of the improvements project. We are thus concerned that the different statements used are potentially inconsistent. The ED GRAP set is more technically up to date than the other Statements of GAMAP, IPSAS & GAAP. This is illustrated by the different definitions in ED GRAP 1 versus the definitions and terminology used in the Statements of GAMAP. We believe that the different definitions and terminology will confuse the preparers and hence recommend that the ASB should provide a glossary of Agreed. The definitions dealt with in GRAP 1 to 3 were incorporated in the GAMAP Standards, where no accounting principles were changed. The scope of the GAMAP project was to harmonise old GAMAP with the IPSASs. Amendments from the IASB improvements project will be dealt with in the GRAP project as Standards of GAMAP is only an interim solution. Page 19

20 terms/definitions concurrently when issuing the final statements. This would obviously require updating as a new statement is issued. The Board has decided not to issue a separate glossary of terms until a number of Standards has been issued. Thus, no separate glossary of terms will be compiled at present. 5 SAICA Consideration should also be given to revising definitions and concepts in terms of the relevant legislation before finalising and issuing the Statements of GAMAP. An example is the definition of control in GAMAP 6 Consolidated Financial Statements and Accounting for Controlled Entities, which is not the same as the definition of control in the Municipal Systems Act. We believe that this would require contextualisation for the preparers. Control is not only determined in legislation, but reference should also be made to the accounting principles dealt with in the GAMAP Standard on Consolidated Financial Statements and Accounting for Controlled Entities. The Board did not amend the Standard with any definitions included in legislation. The additional guidance incorporated in the Standard may lead to conclude that an entity has met the definition and therefore has control, which might not be clear when only considering legislation. It should also be noted that the MFMA and the Systems Act have been aligned. 5 SAICA Entity / Municipal Entity The term entity has been applied throughout the proposed Statements of GAMAP. However, in some cases entity is used and in others municipal Noted. Standards of GAMAP have been amended to refer to Page 20

21 entity is used. We suggest that the term is consistently applied throughout all Statements of GAMAP, unless it is to distinguish between a municipality and a municipal entity in the particular section. entity consistently. 5 SAICA Duplication of definitions The definitions included in GRAP 1 - Presentation of financial statements, are duplicated and repeated in other Statements of GAMAP. These duplications do not contribute to a better understanding of the relevant Statements of GAMAP. We recommend that only those definitions relevant to that specific Statement of GAMAP should be included in each statement. Agreed. The definitions that were not relevant to a specific Standard of GAMAP have been deleted. 5 SAICA Withdrawal of GAMAP Statutory Funds, Reserves and Capital Receipts We understand that GAMAP 114 is conceptually flawed and inconsistent with the framework and therefore needs to be withdrawn. However, we believe that a fundamental mind shift will be required by the municipalities to move away from traditional fund accounting. In our opinion, GAMAP 9 Revenue, does not provide sufficient guidance in this area (see our comments under Question 1). We therefore recommend that the ASB provide guidance on the accounting and disclosure in the following areas: statutory reserves; cash-backed reserves; capital grants. Guidance should be provided by National in the specimen financial statements and through training. Guidance on statutory reserves is provided in the Standard of GRAP on Presentation of Financial Statements, whereas capital grants are dealt with in GAMAP 9 Revenue. Cashbacked reserves should be discontinued as there is no legal requirement for the establishment of such reserves. Also, the MFMA states that the annual budget may only be funded from cash-back accumulated funds from previous year s surpluses not committed for other purposes. Page 21

22 5 SAICA Internal Loans and Advances The Statements of GAMAP do not provide guidance in respect of the principles and accounting treatment of either, existing internal loans and advances or the raising of new internal loans and advances. It is recommended that the statements be revised to incorporate such principles and guidance in respect of internal loans and advances. The principles surrounding the raising and granting of internal loans e.g. the terms and conditions, arms length transaction whereby commercially acceptable terms of repayment and interest are set, should to be included in the statements in the absence of any legislative requirements. The long-term consequences of a municipality raising inter-segment internal loans or advances could be quite serious, where, for example, that segment is ring-fenced and transferred to another entity, any existing internal loans or advances will in effect become external loans and might be subject to higher interest rates and more aggressive repayment terms. This might have a serious effect on the cash flow of the municipality and will burden future ratepayers. 5 SAICA We recommend that the GAMAP number appear as a header/footer on each page of each Statement for ease of reference. Internal loans and inter departmental transactions should be eliminated when annual financial statements are prepared. Information on internal loans and advances might be relevant in segment reporting but it should be eliminated to reconcile the Statement of Financial Position and the Statement of Financial Performance. In preparing segment reports, it may be appropriate to disclose these loans or advances, but from an entity perspective, they should eliminate. The number of the GAMAP Standard will only appear on the beginning of each Standard. The statements need to be revised in the context of the target audience; i.e. Municipal Entities. Firstly, reference should be made to prescriptive requirements included within the Municipal Management Act, or to relevant frameworks and guidelines issued by the National under the MFMA. Generally the ED is currently written in a generic form as if they were standards that were to apply generally to the commercial world, where as these standards are intended to apply only to municipal entities. For example, GAMAP 4 (Foreign Exchange) refers to transactions relating to foreign exchange loans, but the MFMA has very specific requirements in As indicated in the Preface to Standards of GAMAP, Standards of GAMAP is applicable to municipalities only. The introduction paragraph of each Standard of GAMAP has been revised in line with the amendments to Standards of GRAP, which will further clarify Page 22

23 respect to debt denominated in a currency other than Rand. This approach generally creates the risk of confusing the readers. this. In practice the Board agrees that the MFMA does not allow an entity to enter into foreign transactions, but it should be kept in mind that foreign transactions could have been entered into before the MFMA was promulgated. Legislative requirements should therefore be taken into account in addition to Standards of GAMAP. In addition, because the standards are targeted specifically at Municipal Entities, and as the resulting format, content and substance of the standards has the likely outcome of substantially changing municipal financial management, it would be very beneficial if the reported financial statements required each municipality to publish a description of the financial strategy being employed by that municipality; e.g. self-imposed borrowing limits, tariff increase restrictions, requirement to obtain a credit policy, debt collection strategy etc. Paragraph.04 of the Standard of GAMAP on The Effects of Changes in Foreign Exchange Rates was amended to indicate that legislative requirements should also be considered. Noted. The Board would encourage reporting on the financial strategy as part of the annual report but not part of the annual financial statements. Page 23

24 Generally the move to rationalize all statements in order that we only work towards one common goal or standard is supported. However this can lead to complicated statements that are not easy to understand or interpret and care should be taken to avoid the need to draft statements to cover every eventuality and this makes for too much regulation and complication. Some tests of simplicity and relevance at the end of the drafting and before exposure would assist make the drafts easier to comprehend. Noted. It should be kept in mind that the Standards are principle based. The specimen financial statements and preparation guide to be issued by National should simplify and prescribe the principles in each Standard. Consideration should be given to a possible extension of the comment deadline, to enable a broader response, especially as the holiday period may limit the number of submissions received. The Board agreed to limit the comment period to two months in recognition of the extent of consultation and training that has taken place on old GAMAP. The change in terminology to entity is now confusing when considered with the MFMA which refers to Municipal Entities as a separate body to the Municipality. It would be useful emphasizing within the Statement that entity means both Municipality and entities owned or controlled by Municipalities. Standards of GAMAP only apply to municipalities as indicated in the Preface to Standards of GAMAP. Reference is therefor made to entities and not municipal entities. Page 24

25 The commencement date effectively requires that the annual financial statements for the 2004/05 financial year must be GRAP/GAMAP compliant. Whilst there could possibly a number of municipalities can achieve this, there are likely to be many who do not have the capacity to achieve all the required changes. A possible solution is to align the commencement date to the National fazed implementation of the MFMA based on municipal capacity. Agreed. The implementation date will be published in the Government Gazette once approved by the Minister of. Page 25

26 Summary of General Comments PREFACE TO STATEMENTS OF GAMAP Submission Number Name/ Organisation Comment Board Response 2 IMFO The old GAMAP/replaced by GRAP plus new GAMAP/replaced by GRAP (plus IPSAS and ACs popping up all over the place) will not contribute to stability and good governance in the financial management of many municipalities. The objectives of GAMAP uniformity, transparency, accountability are now being seriously undermined, at least for the foreseeable future. 2 IMFO It should be noted that many municipalities, especially smaller and rural municipalities, may find the interpretation of the statements difficult. The use of GAMAP, GRAP, AC statements and IPSAS, will further complicate the implementation of GAMAP in these municipalities. They may not always know what statement to apply. Good corporate governance is the responsibility of management as determined by the MFMA. The implementation of Standards of GAMAP is the start of the process which overtime will assist to improve accountability. Training initiatives to deal with the implementation of Standards of GAMAP is the responsibility of National. The specimen financial statements and preparation guide to be prepared by National should also clarify any uncertainties. Reference is made in the Preface that no legal framework is in place to support the accounting treatment adopted in GAMAP 114. The MFMA includes that a framework may be prescribed for how a municipality must conduct investments and invest money not immediately requirement. In addition, s18 refers to cash-backed accumulated funds. Whilst it is unlikely that these requirements will require the same guidance as GAMAP 114, it is possible that the new framework will require some accounting guidance. No legislative requirement or any accounting principle currently exists that supports GAMAP 114. The MFMA states that the annual budget may only be funded from cash-back accumulated funds from previous year s surpluses not committed for other purposes. Page 26

27 Reference is made to the Municipal Management Bill. Replace section with acknowledgement that MFMA has been passed and that there will be a staged implementation of the requirement to comply with section 122. Agreed. Reference to the Act was incorporated as the Act was promulgated subsequently. Consideration should be given to an extension of the comment date to ensure that everyone has an opportunity to comment. New GAMAP is applicable to municipalities only. Boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality are encouraged to comply with new GAMAP in order to facilitate the preparation of consolidated financial statements by municipalities. Municipalities and their boards, commissions, companies, corporations, funds or other entities under their ownership control also have to comply with Statements of Generally Recognised Accounting Practice. This section should be worded stronger; i.e. the words encouraged to deleted and replaced with should, and after the title GAMAP insert, unless exceptional circumstances exist. The Board has agreed to limit the comment period to two months in recognition of the extent of consultation and training that has taken place on old GAMAP. There was also urgency from National to publish Standards of GAMAP. As indicated in the Preface to Standards of GAMAP, Standards of GAMAP are applicable to municipalities only. This is in line with the requirements of old GAMAP. The Board has resolved that boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality shall comply with GRAP. Exemption from compliance with Standards of GRAP or Standards of GAMAP can only be granted by the Minister of. Page 27

28 2 IMFO Par 14. The word capabilities is not correct in the context. Agreed. The word was amended. 2 IMFO Exemptions from compliance with GAMAP should be clarified. What will be regarded as insufficient capacity? Will exemption be granted for one financial year only? Exemptions from compliance with Standards of GAMAP can only be granted by the Minister of. The entity s specific circumstances will be evaluated before an exemption will be granted. This procedure that the Board will consider applications for an exemption by a municipality from compliance with a Statement of GAMAP should be removed and replaced with an alignment to the Minister s ability to exempt municipality s under s177 of the MFMA; i.e. that National recommend to the Minister, based on its detailed understanding of the capacity of each municipality, an exemption or partial exemption from s122(3) of the MFMA. Noted. As clarified in the Preface to Standards of GAMAP, the Minister of will grant exemptions from compliance with Standards of GAMAP. The following section in the Preface refers: The Board recognises that the scope of new GAMAP is incomplete and that users will seek guidance in respect of these issues not considered. The attention of preparers is are drawn to the following paragraph in the exposure draft of the Statement of Generally Recognised Accounting Practice on Accounting Policies, Changes in Accounting Estimates and Errors: In the absence of a particular Statement of Generally Recognised Accounting Practice or an Interpretation of a Statement that specifically applies to an item in the financial statements, management shall use its judgement in developing and applying an accounting policy that results in information that is: Page 28

29 (a) (b) relevant to the decision-making needs of users; and reliable in that financial statements: (i) represent faithfully the results and financial position of the entity; (ii) reflect the economic substance of transactions and other events, and not merely the legal form; (iii) are neutral, i.e. free from bias; (iv) are prudent; and (v) are complete in all material respects. In making the judgement described in the paragraph above, management shall consider the following sources in descending order: (a) the requirements and guidance in Statements of Generally Recognised Accounting Practice, and Interpretations of Statements, dealing with similar and related issues, and Appendices and Implementation guidelines issued in respect of those Statements; (b) the definitions, recognition criteria and measurement concepts of assets, liabilities, income and expenses set out in the Framework for the Preparation and Presentation of Financial Statements; and (c) pronouncements of other standard-setting bodies (in descending order, International Federation of Accountants - Public Sector Committee, International Accounting Standards Board, the Accounting Practices Board, the South African Institute of Chartered Accountants Accounting Practices Committee) and other countries that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent that, but only to the extent Page 29

30 that these are consistent with (a) and (b) of this paragraph). Our comments are as follow: Replace the word management with municipality or similar the municipality (including the Council and its management) has responsibility for the preparation of financial statements under s122 of the MFMA, not just management. Section 122 of the MFMA legislates the obligation for the annual financial statements to Fairly present the state of affairs of the municipality. To be consistent the same terminology should be used and not introduce the word faithfully which may have a different meaning. In addition to paragraph (c), consideration should be given to adding Pronouncements, frameworks and guidelines issued by National that may be issued in respect to financial management under the MFMA. o Reference from the Standard of GRAP on Presentation of Financial Statements was incorporated in this paragraph, which is applicable to more entities than municipalities, and thus the Board cannot be more specific. Furthermore, a definition for management has also been included in the Standard of GRAP on Presentation of Financial Statements. Furthermore the Board also encourage implementation of Standards of GAMAP by entities controlled by municipalities. o Fairly present is an opinion of the items listed in the sections referred to. The recommended change is therefore not relevant. o The framework issued by National is not a conceptual framework in terms of standard setting. 2 IMFO The effective date may pose problems. The implication of implementation commencing 1 July 2004, is that all municipalities must prepare their budgets on GAMAP principles for the 2004/2005 financial year. This may An adjustment budget within the financial year is available to provide additional funding. Page 30

31 not be possible as these budgets are currently being compiled. It is proposed that the implementation date be extended to financial years commencing on 1 July Accordingly, the implementation date should not influence the budget process. The Minister will determine the implementation date after consultation with the Board. The effective date for the application of Statements of GAMAP is on or after 1 July Earlier implementation by pilot municipalities is encouraged. The words pilot municipalities should be removed as pilots have a large capacity variation; i.e. some have been on the National for 2 years and some have only commenced very recently. The words Early implementation is encouraged should be used instead, although it is questionable whether there is an earlier opportunity for most municipalities. The words pilot municipalities is terminology used by National. The reference was taken out from the Preface to Standards of GAMAP as the Minister will determine the implementation date. 5 SAICA Appendix II Impairment of Assets is referred to as AC 126 and should be referred to as AC 128. Agreed. The reference was amended. Page 31

32 Summary of General Comments GAMAP 4 The Effects of Changes in Foreign Exchange Rates Submission Number Name/ Organisation Comment Paragraph.04 provides the following examples of foreign currency transactions which are not permitted in terms of the Municipal Management Bill No. 1b of 2002: (a) Buying and selling of goods or services where the price is dominated in a foreign currency; (b) Borrowing or lending of funds when the amounts payable or receivable are dominated in a foreign currency; (c) Becoming a party to an unperformed foreign exchange contract; or (d) Acquires or disposes of assets, or incurs or settles liabilities dominated in foreign currency. e According to sections 47 and 164 of the Municipal Management Bill No. 1b of 2002, a Municipality or Municipal Entity may not incur a liability or risk payable in a foreign currency unless the debt is dominated in Rand and is not indexed to, or affected by, fluctuations in the value of the Rand against any foreign currency. This GAMAP Statement is therefore not necessary due to the fact that the Rand amount payable will not fluctuate and hence no foreign exchange profit or loss will be recognised on the payment or reporting date. Board Response Noted, but section 164 of the MFMA refers to debt and not liability. In practice the Board agrees that the MFMA does not allow an entity to enter into foreign transactions, but it should be kept in mind that foreign transactions could have been entered into before the MFMA was promulgated. Legislative requirements should thereforebe taken into account in addition to Standards of GAMAP. Furthermore this paragraph refers to foreign exchange contracts but the Statement does not provide a guideline on the accounting of such contracts especially at year-end i.e. the recognition of a FEC asset/liability. Page 32

33 This Statement applies to Municipalities and therefore should be worded to take into account the restrictions that may apply under the MFMA, to prevent confusing readers. Agreed. In practice the Board agrees that the MFMA does not allow an entity to enter into foreign transactions, but it should be kept in mind that foreign transactions could have been entered into before the MFMA was promulgated. Legislative requirements should therefor be taken into account in addition to Standards of GAMAP. Paragraph.04 of the Standard of GAMAP on The Effects of Changes in Foreign Exchange Rates was amended to indicate that legislative requirements should also be considered. The definition of an exchange difference, foreign currency and reporting currency has been changed in the GRAP exposure drafts. This change was not incorporated in the GAMAP Statement. Agreed. The definitions dealt with in GRAP 1 to 3 were incorporated in the GAMAP Standards where no accounting principles were changed. Paragraph.04 - Add the words, Subject to the restrictions imposed by sections 47 and 163 of the MFMA, to indicate that municipalities are now subject to foreign currency transaction controls. Agreed. Paragraph.04 was amended to indicate that reference to legislation should be considered. Page 33