EPSAS Task Force Governance November 2014 Luxembourg THE FRENCH EXPERIENCE OF IMPLEMENTING ACCRUAL BASIS ACCOUNTING Danièle LAJOUMARD, Inspecteur général des Finances
Summary The French Central Government Accounting Reform at a glance Preparation of first accrual basis opening balance sheet Lessons learnt from the transition and key success factors 2
The French Central Government Accounting Reform : a part of a main Constitutional Bylaw of 1.1.2001 Prior to the reform, the budgetary procedure and the accounting rules were governed by texts of 1959 and 1962 : Accounting system : a cash basis/modified cash basis accounts The Reform : the Constitutional Bylaw regarding budget procedures of 1 August 2001 (so called «L.O.L.F») provided two main accounting systems: Cash basis accounts of budgetary receipts and expenditures Budgetary receipts and expenditures shall be recognised on a cash basis at their date of payment or receipt (article 28) Accrual basis general purpose accounts for all transactions «General purpose accounting system is based on the accrual basis principle. Transactions are entered for the financial year to which they apply, regardless of their date of payment or receipt» (article 30) The reform must become effective the 1.1.2006
Evolution of the accounting system Before 1.1.2006 After 1.1.2006 1 accounting (cash basis) - Budgetary accounts (main accounts / details in Auxiliary accounting) -Payable and receivable accounts -Cash accounts Statements - Trial balance - Budgetary reporting End year restatement (modified cash basis) - Financial Statements Recording of commitments - For capital expenditures 2 separated accountings: General purpose accounting (accrual basis) Financial statements Budgetary accounting (cash basis) Budgetary reporting Recording of commitments - For all expenditures
Preparation of first accrual basis opening balance sheet
The French public accounting reform timeframe limited to Central Government Preparatory stages Vote of LOLF* by the Parliament First Central Government accounting standards First opening balance sheet 2001 2004 2006 2007 2011 2012-2013 2014 Accrual based accounts for Central government First external First audit accounts on accounts (2006) (2006) certified by by the the Court State of audit auditors office First budgetary accounting based on SAP Chorus Accrual accounting full implemented on SAP Chorus Central government (2013) accounts full SAP certified by the Court of auditors Implementation stages 4
A focus on the preparatory phase The Framework Regulation L.O.L.F Preparation Change of accounting system 1 August 2001 1.Transposition of accounting standards 2. Definition of a new chart of accounts 3. Adaptation of information system 4.Training, new directives, internal control 5. Organizational changes 6.Preparation of a starting balance 1 January 2006 Cash basis // modified cash basis accounting Accrual basis accounting 5
Requirements prior to the implementation phase Creation of bodies dedicated to providing Technical input by a standards setter created for this purpose (initially the Comité des normes de la Comptabilité publique, now the CNOCP) Project management input (control at highest level and political support) Intense standard-setting activity to Identify public sector specificities Propose relevant accounting solutions Develop new standards using existing set of standards for the private sector => In less than two years, a consistent set of accrual based set of standards comprising 13 standards 6
General approach to set up the opening balance sheet Approach retained Consensus on the scope of the opening balance sheet Tests performed prior to the real life implementation Development phase-in Preparatory phase Test phase Reliability phase => Thresholds for the initial recognition and measurement of assets Significant assets were fully recognised based on inventories Other assets were partially recognised Non significant equipment were recognised for their global value based on cumulated acquisition cash outflows 7
Preparation of the opening balance sheet Assets To set up ASSETS of the statement of financial position at 1.1.2006, a census of fixed assets (tangible and intangible) and inventories was carried out in 2004-2005 : Method: physical inventory and valuation at market value Nota : Fixed assets were previously identified by budgetary flows reprocessing in a particular application (STGPN), for their acquisition and production cost Intangible assets were not identified prior to 1.1.2006 Inventories were not previously registered in accounting Accounting impact of the new valuation method Fixed assets : + 209 billion Euros Inventories: + 32 billion Euros 8
Preparation of the opening balance sheet Liabilities and net assets (net position) Liabilities more straightforward process than for assets Financial liabilities well delineated Provisions limited to disputes with other parties Net assets No capital requirements (no contributions from owners) Presentation of a statement of change in net assets 9
Consequences of the reform on net assets CGE 2006 : the application of the new accounting standards has a positive effect on the opening net assets of bn 161 i.e. an increase in assets of bn 265 and in liabilities of bn 104 10
Actual day to day standard-setting activity Review the set of standards for the central government Maintenance Addressing new issues Set up specific sets of standards for Public entities other than central government, Social security and Local authorities Conceptual Framework for the public sector in France Addressing specific accounting issues Responses to public consultation from the IPSASB 11
Lessons learnt from the transition and key success factors
Addressing the challenges of first time application Objective of the Framework Regulation (2001) : Provide more transparent financial information to the Parliament and to the public Cash Basis Accounting Adoption of the Framework Regulation Cash Basis Budgetary Accounting Accrual Basis Accounting Key success factors of French accounting reform Adaptation of IT system then New IT system SAP based Staff s training (50 000 daily users in 2012) Internal control process and guidelines Internal audit independent external audit Comprehensive and consistent accounting system for the whole of central government 13
Lessons learned from French accounting reform Pillars of a successful accounting reform reengineering of IT system and reengineering of processes Duration of implementation Costs of implementation Substantial political support on long term period 14 Internal control and audit, major instruments of the accounting quality Capitalisation on internal expertise Reorganisation of services Appropriation of accounting standards Strong involvement of human resources
First time application Way forward It is critical that the timetable and the ressources of such a project should be realistic More than 10 years between the vote of the LOLF and its full implementation (with a scope limited to the Central Government); => The conduct of such a project requires strong political support over time Such a project should be launched on sound, clear and well thought bases It requires a set of standards adapted to the specific needs of the public sector and with clear guidance It requires stable standards so as to minimise IT costs (more than bn 1 for Central Government excluding consolidation processes) The design of the transitory period depends critically on the initial state of the system of each member state Requirements for first recognition and measurement should allow flexibility Full retrospective application is unrealistic Exemptions/exceptions should be proposed for comparability purposes Consolidation/aggregation should be carefully thought through Users needs for such information Purpose of financial information provided 15 by aggregated accounts
For more details The English text of the Constitutional bylaw regarding budget procedure of 1. August 2001 and other documents about French reform are available on the French Government s website : www.performance-publique.gouv.fr The English text of Central Government Accounting Standards (February 2013), Public Conceptual Framework (English version available in January 2015) Comments to IPSAS board consultations Are available on the CNOCP s website www.economie.gouv.fr/cnocp 16
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