Accounting Policies, Standards and Support Services.          

 Question (ASSETS)

How many registers should a department have and how are assets disclosed in the annual financial statements?

Major and minor asset register

A department should have a major and minor asset register. All assets over R5000 are recorded in the major asset register and all assets under R5000 are recorded in the minor asset register.

All major assets are reflected under note 37 and 38. Minor assets are not reflected under note 37 and 38.

However, as a departmental best practice, where minor assets represent a material amount in relation to total assets, it may be useful to reflect a disclosure note under note 37 and 38, indicating the value of the minor assets held.

This is not a compulsory requirement but would enhance the information reflected in the AFS.


Operating lease register

All assets held under operating leases should have separate registers to reflect all operating lease assets under control of the department. The register would reflect all relevant details of the asset to allow for optimum control and management of the asset. Operating lease assets are not owned by a department but operation of the asset vests with the department and maintaining a register would be regarded as good asset management practice.

No details of Operating lease assets need to be disclosed under note 37 and 38 as the asset is not capitalized by the department.

Finance lease register

All assets held under finance leases should have separate registers to reflect all finance lease assets under control of the department. The register would reflect all relevant details of the asset to allow for optimum control and management of the asset. Finance lease assets are “owned” by a department and control of the asset vests with the department and maintaining a register would be regarded as good asset management practice.

The Finance lease liability for all finance leases held needs to be reflected under note 30.

The asset cost of Finance lease assets are not required to be disclosed under note 37 and 38 as these notes reflect only the value of major assets as defined for government purposes and does not include specific finance lease assets.

However, as a departmental best practice, where finance lease assets represent a material amount in relation to total assets, it is useful to reflect a disclosure note under note 37 and 38, indicating the value of the finance lease assets held.

Question

At what values do I reflect my assets?

The accounting policy for assets indicates that Cost, Fair Value (FV) or R1 may be used.

Ideally Cost should be used as this is most accurate. Where cost cannot be determined, a FV calculation must be done. Where it is not possible to determine a FV, R1 may be used.

Care must however, be exercised when using the R1 option as it lends the least amount of credibility to the valuation of an asset and was primarily used to facilitate the completeness of an Asset register.

According to our guidelines, all assets purchased after 1April 2002 need to be reflected at Cost or FV. We have aligned this requirement to the need for departments to keep records of documents under TR 17.2.

We have indicated in our Asset Management reform broad plan that all assets (excluding immovable assets) need to be properly valued by 31 March 2008.

Where assets purchased after 1 April 2002 is still not properly valued, the department needs to implement a plan whereby the assets are properly valued. This will facilitate the classification of assets into major and minor assets.

Where assets valued at R1 and have not yet been reflected at cost or FV represents a material amount, it would be good management practice to reflect this estimated value under note 37 and 38 to enhance the information in the AFS.

Question (UNAUTHORISED EXPENDITURE)

How should a department account for any unauthorized expenditure approved with funding in terms of No. 2 of 2007 Finance Act, 2007, dated 31 March 2007?

The accounting policy for the recognition of unauthorized expenditure approved with funding states that “Unauthorised expenditure approved with funding is recognised in the statement of financial performance when the unauthorised expenditure is approved and the related funds are received”.

Although the unauthorised expenditure was approved in terms of the Finance Act No. 2 of 2007 Finance Act, departments will not be able to derecognise the unauthorised expenditure asset (or part thereof) from the statement of financial position unless the funds were deposited into the bank account of the department before 31 March 2007. Both conditions in the accounting policy must be met before the approval can be reflected in the statement of financial performance.

The unauthorised expenditure note (note 11 in the specimen) should however be amended to reflect the fact that all or some of the unauthorised expenditure has been approved. This means that the amount approved should be reflected as part of “Amounts approved by Parliament/Legislature (with funding)” in the unauthorized expenditure note. Departments should include a narrative underneath this note explaining that even though some or all of the unauthorised expenditure has been approved it could not be recognised in the statement of financial performance due to the current basis of accounting.

It would also be acceptable for a department has reallocated the amount approved in terms of the Finance Act to a receivable in the statement of financial position. A narrative discussion should also be included under the note to receivables (note 16 in the specimen).

Departments are requested to contact either the National Treasury or the Provincial Treasury (in the case of a provincial department) to make the necessary amendments to the template to remove any exceptions created by the above.

Question (LOCAL AND FOREIGN AID ASSISTANCE)

How does the department account for donor funds paid into the RDP but not requested by the department on or before 31 March?

According to the local and foreign aid assistance accounting policy, any amounts due to a department directly from a donor (not via the RDP) should only be recognised in the statement of financial performance when received. However, the accounting policy relating to local and foreign aid assistance flowing through the RDP suggests that the amount should be recognised in the statement of financial performance at an earlier date (“when notification of the assistance is received from the National Treasury”).

For the 2006/07 financial year the total amount recognised as local and foreign aid assistance in the statement of financial performance should be limited to the actual amounts received throughout the financial year.

Therefore, any amount due to a department by a donor or the RPD that has not been received by year-end should not be recognised in the statement of financial performance as “revenue”. In addition, a receivable is only recognised where a department utilised its own funds to incur expenditure which must be recovered from the donor or the RDP.

Question

The policy on capital assets states that, 'where the cost cannot be determined accurately, the capital asset may be stated at fair value. Where fair value cannot be determined, the capital asset is included in the asset register at R1'.

With fair value determination, departments have expressed a concern and the fact that the implementation plans that they signed only required valuation during the financial year ended 31 March 2008. Departments had no asset management prior to the Asset Management reform. After August 2005, they established asset registers in the departments as per the implementation plans. The focus in this period was recording all assets owned by departments in the register. Departments could only trace supporting documents from 2004/5 but prior to that departments have no supporting documents.

Answer

The National Treasury developed an assets management framework to assist departments in complying with section 38(1) (d) and other asset management provisions in the PFMA. The PFMA grants responsibility of implementation of asset management to the Accounting officer.

In situations where compliance with the Asset Management Framework is still under progress (I.e non valuation of assets due to the March 2008 Implementation dates) , the Accounting Officers should demonstrate progress towards achieving these milestones and the AG will audit completeness of the AR and further audit the demonstrable progress towards achieving these milestone and complying with the accounting policy and the PFMA. The key principle is that , there’s got to be milestones (in other words its not just an end date specified) and progress against these is critical.

 Question

How should cell phone contracts be accounted for?

Departments enter into cell phone contracts on behalf of their employees with a service provider for the use of a cellular network and for mandatory costs such as the cost of the sim-card and cell phone, insurance, call line identification, itemized billing etc.

At the end of the 24 month contract users are provided an opportunity to upgrade their cell phones, implying that a new 24 month contract is entered into in order to receive a new cell phone. Users may however elect not to upgrade, in which case the department will continue to pay the monthly subscription fee without signing a new 24 month contract and receiving a new cell phone

All cell phones are owned by the department. Accordingly, a department should have policies and procedures in place to manage and safeguard the returned cell phones and those that currently are used by employees.

Practice Note 5 of 2006/2007, paragraph 2.8 provides details of the circumstances under which departments, constitutional institutions and public entities may enter into finance lease transactions for “equipment”.

The Office of the Accountant-General (OAG) is of the opinion that all cell phone contracts fall within the scope of paragraph 2.8 of the above mentioned Practice Note provided that the conditions listed in paragraph 2.8.3 are met.

Accounting prepaid electricity

Relevant extracts from accounting standards

Detailed guidance

1.      In the case of prepaid electricity, the significant risks and rewards of ownership only transfers to the consumer at the time of consumption of the electricity.  Consequently, the revenue received from prepaid electricity sales should be deferred and recognised as revenue on the consumption basis, commencing on the date of activation or purchase.

Risk Management 

 1. What are the guidelines/methods for performing effective risk assessment processes?

1.1. The key steps in ensuring that risk assessments are effective and efficient should take into account at least the following:

1.1.1. Project planning (including prioritization, milestones, deliverables, etc)
1.1.2. Communication of the needs and the benefits both to internal and external stakeholders
1.1.3. Introducing RM to all senior management and obtain commitment
1.1.4. Starting the process where it adds value in solving critical problems(e.g. budget process plans)
1.1.5. Keeping it simple
1.1.6. Maintaining focus and have clear direction

1.2. National Treasury Risk Management Framework also includes steps for risk assessment which are:

N.B. The RMF can be downloaded from (http://oag.treasury.gov.za/).

2. Does the Risk Officer (RO) sit in the audit committee meetings or what is the RO’s involvement in the audit committee?

2.1. The RO is usually not a member of the Audit Committee; however, the terms of reference of the Audit Committee will assist in determining whether the RO should be present at its meetings.

2.2. Good practice suggests that the AC should receive briefing on risk management from appropriate personnel. The practice of having RO present at the meetings is therefore encouraged.

2.3. Where there is a functional Risk Management Committee, the chairperson of this committee should be present at meetings of the AC to report on the state of risk management. Where either one or both of the AC charter or RM charter does not give formal effect to this arrangement it is recommended that the charter be amended to formalize this.

3. What are the responsibilities of the Internal Audit unit as opposed to the Risk Management unit?

3.1. For the roles of the RO, please refer to question 6.

3.2. The Internal Audit(IA) unit is established in compliance with the PFMA and the MFMA to provide independent assurance and consultancy to the accounting officer and report to the audit committee on the institution’s internal control, governance and risk management

3.3. The IA function is required to evaluate the efficiency, effectiveness and the economy of the risk management process and systems

3.4. Where the IA is satisfied with the integrity of the RM process, it is required to develop long and short term audit plans that take cognizance of the most important risks that they need to provide assurance or consultancy on.

3.5. Internal Auditors provide an independent and objective review of the adequacy and effectiveness of controls introduced to mitigate risks (including the adequacy & effectiveness of the systems of risk management).

3.6. Where there is no RO, the IA can perform the duties of the RO but then cannot audit the systems of RM (May have to outsource the audit of the RM systems and processes).

4. Under which Directorate should the Risk Management functions be placed?

It is not prescribed under which Directorate the functions of RM should be placed, however it is recommended that the functions rest within a unit where the head of the unit reports directly to the Accounting officer in order for the issues of RM to receive serious attention. (See Q 8).

5. What is the difference between a Risk Manager and a Risk Officer?

5.1. The term “risk manager” is often used interchangeably (and incorrectly) with “risk officer” when referring to the individual tasked with facilitating the risk management activity of an institution.

5.2. A distinction needs to be made between a “risk manager” and a “risk officer” (commonly referred to as the Chief Risk Officer).

5.3. A risk manager is an individual responsible and accountable for
i. identifying risks relating to certain objectives;
ii. assessing the seriousness of the identified risks; and
iii. putting into action measures to mitigate particular risk.

5.4. In other words a risk manager is somebody that actually manages risk in their area of responsibility on a day to day basis. A risk manager can therefore be anyone in an organisation, from a line manager to a junior official.

5.5. The Chief Risk Officer (CRO) is a professional that brings structure and formality to the way risk management is implemented and practiced in an organisation. The CRO is responsible for leading, coordinating and consolidating the entire risk management effort of an institution by providing expert support, guidance and advice. (See Q 6 for the duties of the CRO. You will notice that it does not include any responsibilities for actually managing risks. Actual management of risks, however, is explicitly of line management/risk manager.

6. What are the duties of a Chief Risk Officer?

6.1. The core functions of CRO include the following:

* Provide expect guidance and support to line management on risk management processes
* Coordinating, facilitating and guiding the process of identifying, assessing and monitoring risks at all business levels.
* Collating, analysing, interpreting and reporting on the outcomes of risk assessments.
* Maintaining the enterprise risk register.
* Reporting to various stakeholders on the status and progress of the organisation’s risk management programme (e.g. Accounting Officer, EXCO, Audit Committee, Risk Management Committee)
* Developing the overall organizational risk management strategy for approval by the Accounting Officer.
* Developing appropriate tools and techniques for identifying, assessing and responding to risks.
* Develop an ERM maturity model.
* Provide training and promote advocacy of RM.

7. At what level should the CRO be appointed? 

7.1. It is recommended that the position of a CRO should be informed by:

* The organisation’s appreciation and embrace of risk management
(i.e. how seriously risk management is taken);
* The nature, scope and extent of responsibilities that the position entails; and
* An evaluation of the CRO job description (done through job evaluation processes)

 7.1. It is recommended that the position of a CRO should be informed by:

* The organisation’s appreciation and embrace of risk management
(i.e. how seriously risk management is taken);
* The nature, scope and extent of responsibilities that the position entails; and
* An evaluation of the CRO job description (done through job evaluation processes)

8. Who should the Chief Risk Officer report to?

 8.1. The accountability and reporting lines of the public sector CRO are not prescribed.

8.2. In an ideal situation, the CRO would report at a level that has sufficient authority and influence to ensure that risk management enjoys the necessary organisational support and profile. Accordingly, it is preferable that the CRO is accountable and reports to the Accounting Officer, however if this is not possible, it is recommended that the CRO reports to someone of sufficient influence to promote the organizational status of RM.

8.3. Alternatively it would be ideal for the CRO to report at an executive senior level (such as the Chief Operations Officer).

8.4. The reporting and accountability lines of the CRO will vary from institution to institution, given the operational dynamics, organizational structure, etc.

8.5. The CRO should attend the executive senior management meeting if she/he does not report directly to the accounting officer.

9. Is it a norm for each Province to have its own Enterprise Risk Management strategy from internal audit to which all departments need to comply/align?

9.1. In terms of section 18(2)(d) of the PMFA, Provincial Treasuries have the principal responsibility for monitoring and assessing the implementation of national and provincial norms and standards (and by implication, systems of risk management) in provincial departments and provincial public entities.

9.2. Provincial treasuries may develop risk management framework/guidelines aligned to the national framework to assist the departments and entities in implementing RM, which takes into account the unique dynamics of the province.
 

10. Control self assessment vs. risk based auditing?

10.1. Control self assessment

 (a) Control self assessment (CSA) is a methodology that can be used by managers to assess the adequacy of their risk management and control processes.

(b) As such it is not independent and the results thereof might lack objectivity. The process allows management and/or work teams directly responsible for a business function to:

i. Participate in the assessment of internal control
ii. Evaluate risk
iii. Develop action plan to address identified weaknesses
iv. Assess the likelihood of achieving business objectives.

10.2. Risk based auditing

 (a) Risk based auditing (RBA) is an approach that focuses internal audit priority and resource on providing assurance/consultancy on the most significant risks to the organization.

(b) RBA is an independent process performed by qualified auditors.

(a) Risk based auditing (RBA) is an approach that focuses internal audit priority and resource on providing assurance/consultancy on the most significant risks to the organization.

(b) RBA is an independent process performed by qualified auditors.