Drafting Financial Statements (Central Government) (DFSC) (2003 standards) Suggested Answers SECTION 1 Task 1.1 Journal Entries Ref Account Account code Dr 000 Cr 000 a Prepayments Rent 2522 7130 21 21 b Charge for long-term office repairs Provision for long-term office repairs 7605 3620 11 11 c Contract laboratory fees Accruals 7215 3155 8 8 d Audit fee Accruals 7550 3155 12 12 e Cash from sale of motor vehicle Motor vehicles cumulative depreciation Motor vehicle cost or valuation Loss on sale of motor vehicle 5820 1060 1010 7921 6 10 2 18 f Bad Debts charge Provision for bad debts 7430 3630 13 13 g Interest on capital General fund 7919 4120 20 20 1
Task 1.2 (a) The National Gene Laboratory Income and Expenditure Account for the year ended 31 March 2003 Workings 000 000 Income: Fees charged for services 1 1,477 Less: Staff costs 2 663 Depreciation 43 Other operating costs 3 774 1,480 Operating Deficit (3) Less: Interest on Capital Excess of Expenditure over Income for the year (20) (23) Statement of Total Recognised Gains and Losses for the year ended 31 March 2003 000 Surplus/(Deficit) for the year (23) Surplus on revaluation of fixed assets Total recognised gains/(losses) for the year 21 (2) 2
Task 1.2 (a), continued The National Gene Laboratory Workings Account code 000 1 Income 5140 824 5320 465 5420 188 1,477 2 Staff costs 6130 521 6220 94 6310 48 663 3 Other operating costs 7130 119 Jnl a - 21 7215 409 Jnl c 8 7325 69 7501 37 Jnl b 11 7902 43 7904 45 Jnl e 2 Jnl f 13 Jnl d 12 7920 27 774 3
Task 1.2 (b) The National Gene Laboratory Balance Sheet as at 31 March 2003 Workings 000 000 Fixed Assets Tangible fixed assets 4 303 Current assets Stock - Debtors 5 75 Cash at bank 14 89 Current liabilities Creditors - amounts falling due within one year 6 (142) Net current liabilities (53) Total assets less current liabilities 250 Financed by: Provision for liabilities and charges 11 General fund 7 181 Revaluation reserve 34 Donated assets reserve 24 250 4
Task 1.2 (b), continued The National Gene Laboratory Workings Account code 000 4 Fixed assets 1010 185 1205 203 1302 148 1060-102 1255-75 1352-48 Jnl e 10 Jnl e -18 303 5 Debtors 2502 54 Jnl f -13 2522 13 Jnl a 21 75 6 Creditors under one year 3150 122 Jnl d 12 Jnl c 8 142 7 General fund 4120 184 Jnl g 20 Year s Deficit -23 181 Task 1.3 (a) (i) (ii) (iii) (iv) The PCSPS is unfunded. It is a defined benefit scheme, because the rules define the benefits. Pensions are linked to final salary. The agency has no liability when pensions are paid. This is because the PCSPS pays pensions when due out of funds voted to it by Parliament. In staff costs in the operating cost statement. 5
Task 1.3 (b) Employer s contributions are calculated as a percentage of salary paid each month. Various percentage rates are used for different levels of staff. These rates are supplied by the Treasury after calculation by actuaries. Task 1.4 Forecast Cash Requirement for the next year Workings 000 Net Resource Outturn 10,346 Adjustment for non-cash transactions 1 (666) Adjustments for movements in working capital other than cash 2 103 Investing activities 642 Cash requirement 10,425 Workings for Task 1.4 Cash Requirement 000 1 Adjustment for non-cash transactions Depreciation (412) Audit fee (64) Interest on capital (160) Provisions (30) (666) 2 Adjustments for movements in working capital other than cash Creditors (reduced from 1420 to 1280) 140 Debtors (reduced from 130 to 15% x 620 = 93 (37) 103 6
Task 1.5 MEMO To: Accounting Officer Subject: Auditors Enquiry into Post Balance Sheet Events From: A N Accountant Date: 5 December 2003 In reply to your inquiry, the auditors are looking for reassurance about any material events since the balance sheet date. Some of these may make it necessary to have the accounts changed before the audit report is signed as giving a true and fair view. The two types of post balance sheet events are defined in SSAP 17 and are either: (a) Adjusting events. These are events since the balance sheet date which provide additional evidence of conditions existing at the balance sheet date but the price or cost was not known. They must be material in size. The accounts would have to be changed for these. (b) Non-adjusting events: These are events which did not exist at the balance sheet date or are not material. The accounts will not be adjusted for these. However, there may be some events which have only arisen since the balance sheet but are so important that the accounts could be misleading without them. A note would need to be added to the accounts for these. An example of an adjusting event is a valuation of a building owned by the organisation which provides evidence that it has suffered a permanent reduction in value before the balance sheet date. An example of a non-adjusting event is a fire that destroys furniture and stock after the balance sheet date. In the case of our organisation, I can confirm that no adjusting events have happened since the balance sheet date. A N Accountant 7
Task 2.1 Mr James Williams 15 Any Street Anytown AF6 7PJ 5 December 2003 Dear Mr Williams Subject: Resource Accounts In answer to your recent enquiry, the explanation is as follows. (a) The general purpose of the Summary of Resource Outturn (SORO) is to report the department s performance over the year compared with the vote. It compares the outturn (that is, actual expenditure) with the Estimate for both resource expenditure and the overall cash requirement. (b) It contains a breakdown of the estimate under column headings for gross expenditure, appropriations in aid and the net total of these. It also shows the outturn analysed over these three headings. Also included are the reconciliation of resources to cash requirement (for the estimate and outturn), a breakdown of significant variances between Estimate and Outturn and an analysis of income to be surrendered to the Consolidated fund. Note: Only three things are asked for in the task. (c) The general purpose of the Operating Cost Statement (OCS) is to show the resources consumed by the department over the year, made up of administration expenditure and programme expenditure less departmental income. (d) This schedule shows the department s costs broken down between staff costs and other administration costs. It also shows the expenditure and income of each programme and the net figure of these. It also shows the Net Resource Outturn as a separate figure. Note: Only three things are asked for in the task. (e) Three ways in which these schedules are different are: 1. The SORO concentrates on comparing the outturn with the estimate for the year, but the OCS compares the net operating cost with last year s figures. 2. The SORO shows at the top, only income which has been approved as appropriations in aid, but the OCS includes all income whether approved in the Estimates or not. 3. The SORO includes a reconciliation to the cash used. However, the OCS is all in accruals terms, leaving the cash figures to be shown in Schedule 3, the Cash Flow Statement. Please let me know if you would like any further clarification. Yours sincerely, A N Accountant 8
Task 2.2 Notes on interpretation of fixed assets (a) (i) Cost/valuation at the year-end (928) depreciation charge for the year (106) = 8.75. (ii) (iii) (iv) This would show roughly the implied asset replacement cycle in years, that is, how long they were expected to last from purchase to scrapping. This would compare with the accounting policy in Note 1, which would normally show the asset life for depreciation and should be similar to the ratio. However, depreciation is often calculated on a monthly basis and this may affect the ratio. This is because fixed assets purchased in the year may not have a full year s depreciation charged on them. Or, different items of plant may have different lives in this class of fixed assets. Note: only one is required in the task. (b) (i) Net book value (182) cost/valuation at the year end (928) x 100 = 19.6%. (ii) (iii) This would give a general indication of how much of these assets useful economic life remained at the year-end (on average). In the figures supplied, the percentage is fairly low. Only 19.6% of the asset s life remains. This might cause the organisation to consider starting a replacement policy, or increasing the expected life for depreciation purposes if this looks justified. Task 2.3 Notes on Accounting Enquiries (a) Assets are shown in the account numbers from 1030 to 2501. And liabilities are in accounts numbered from 3021 to 4582. (b) (i) A performance bonus would increase liabilities by the amount owing to the senior officials. At the same time the ownership interest would be reduced by the same amount This is because the department s net operating cost would be increased and this would reduce the balance of the General Fund which is part of ownership interest. The equation Assets less Liabilities = Ownership Interest would still balance. 9
(c) (ii) (iii) (i) (ii) Receipts being re-classified as CFERs would create an extra liability payable to the Consolidated Fund. The General Fund which is part of ownership interest, would be reduced by the same amount. Thus both sides of the accounting equation would be reduced equally and would still balance. Increasing the cost of capital would be neutral with no change in the top level accounting equation which would still balance. It would increase the net operating cost which would feed through to reduce the General Fund. However as cost of capital is a non-cash cost it is written back to the General Fund. In summary the General Fund is part of the ownership interest and will remain unchanged by this charge and write-back. The term Taxpayer s Equity is another name for ownership interest. In the chart of accounts this is represented by account numbers 5021 to 5581. Working capital is current assets less current liabilities. In the chart of accounts it is assets from 2101 to 2501 inclusive, less liabilities from 4073 to 4582. 10