CHAPTER ONE 1.1. Historical overview of Ethiopian Government Accounting System The Federal Government of Ethiopia accounting system used up to GC 2002 was in service for more than half a century. Government decided that there was a need to reform the accounting processes as an integral part of the Civil Service Reform to achieve the following set of objectives: Simplify the accounting system by changing it from the single entry bookkeeping system to the double entry bookkeeping system, Improve disclosure of information to stakeholders by revising the chart of accounts and enhancing the reports generated by the system to meet the information needs of Government and its development partners. Expand the current accounting system by changing the basis of accounting from cash basis to a modified cash basis of accounting to include the recording and reporting of select current assets and current liabilities. Improve internal controls by reviewing the roles and responsibilities of staff working in the accounts department and introducing enhanced procedures to capture and approve transactions as well manage and control cash in safe and cash at bank. Improve cash and financial management practices by rationalizing the number of bank accounts and minimizing the amount of idle funds. Improve budget control by introducing procedures to record and monitor commitments (Amount of budgeted funds that are reserved for a specific future expenditure) against the available budget prior to the approving expenditure. Produce accurate, timely and complete information and improve the quality of information provided to Government and its development partners to create a platform that allows for better decision making based on timely, accurate and comprehensive information. Enhance transparency by implementing a system that is understandable to key stakeholders and meets international standards in terms of the accounting principles and policies employed and the automation of the accounting system. 1.2. FGE chart of account A chart of accounts is a system of coding used to identify and classify financial entities and events. The current chart of accounts, described in the Budget Reform Manual incorporates detailed codes for items of: Domestic revenue, External assistance, External loans, and Items of expenditure. This unit completes the FGE chart of accounts by adding detailed codes for Transfers, Assets, Liabilities, Letters Of Credit And Net Assets/equity. 1 The classification of the chart of accounts is structured in a systematic manner and facilitates the recording of transactions and the reporting of information in accordance with the budget. The chart of accounts treats all detailed account codes as temporary accounts and permanent accounts. Temporary accounts are accounts that begin each year with a zero balance. Permanent accounts are detailed account codes whose balance at the end of a year becomes the balance in the account at the beginning of the next year. The summary of the account codes for the chart of accounts is as follows: Codes starting from 1000-1799 are reserved for domestic revenue Codes starting from 2000-2999 are reserved for external assistance Codes starting from 3000-3999 are reserved for external loans Codes starting from 4000 up to 4099 are reserved for transfers. Codes starting from 4100 up to 4999 are reserved for assets. Codes starting from 5000 up to 5599 are reserved for liabilities. Codes starting from 5600 up to 5699 are reserved for net assets/equity. Codes starting from 6000 up to 6999 are reserved for expenditure Revenue, expenditure and transfers are temporary accounts that begin each year with a zero balance. Assets and liabilities are permanent accounts whose balance at the end of a year becomes the balance in the account at the beginning of the next year. Although a complete description of the account codes is attached in annex 2, a brief description of each follows: Assets: Assets are formally defined by the International Federation of Accountants - Public Sector Accounting Standards (IPSAS) as "resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.” The categories of assets in the accounting system are: Cash and Cash Equivalents: Cash is cash on hand and at bank. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Receivables: Receivables are amounts owed to a government unit by another government unit, a person, or a non-government entity except public enterprises. Salary advances to employees and advances to suppliers are two examples of receivables commonly occurring. Goods in Transit: Goods in transit are goods that are owned by the government but not yet in its physical possession. Stocks: Stocks are goods that are expected to be consumed within one year. Fixed Assets: Fixed assets are physical items that are expected to have a useful life of longer than one year and have a certain minimum value. Loans Receivable: Loans receivables are amounts due from public enterprises over a period of time exceeding one year. Investments: Investments are FGE investments in public enterprises and private organizations that are held for more than one year. Liabilities Liabilities are formally defined by the IPSAS as "present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential." 2 The categories of liabilities in the improved and expanded accounting system are: Payables: Payables are obligations to pay that are due in less than one year. Examples of FGE payables are deposits, salary payable, grace period payables and treasury bills. Long-term Debt: Long-term debt is an obligation to pay that is due in more than one year. Net Assets/Equity Net assets/equity is formally defined by the IPSAS as "the residual interest in the assets of the entity after deducting all its liabilities." Net assets/equity is the balance remaining after liabilities are deducted from assets. This balance represents the equity interest of FGE. 1.3. FGE Budget process There are ten major stages in the Budget Cycle/process up to approval: Stage 1 – Budget preparation by public bodies (PB) Each public body needs to take the initiative to start budget preparations before they receive the budget call letter from MOFED with their budget ceilings. There is much preliminary budget preparation work they can carry out prior to receiving the official budget call letter. This preliminary work is dominated by the policy and planning aspects of budgeting; that which differentiates PB from line item budgeting. Note: public body is an institution that has a legal mandate, receives a partial or complete budget directly from the respective finance and planning bodies, submits its final accounts directly to MOFED, and is on the approved list of public bodies issued by the Office of the Prime Minister. Stage 2 – Mid-year program review Regular reviews of organizational performance through PB, are part of normal management practice. A mid-year review of program performance should be carried out by the end of January. The review should be conducted in the context of the PB measurement framework; the economy of inputs, the efficiency of outputs and the effectiveness of impact. This will apply to the integrated nature of capital and recurrent expenditure, in the PB format. Stage 3 – Work plan preparation – redefined as program construction In PB terms, a work plan is something that is prepared after the budget is approved. That is to say, the budget defines the total amount of expenditure. The subsequent work plan defines ‘for what’ and ‘when’ the expenditure will be incurred within the year, monthly! The work plan therefore takes on two roles. First is project management – when things will be implemented, plus its monthly expenditure. Secondly is the quarterly budget review role, through variance analysis. With this principle accepted, Stage 3 of the budget cycle concerns program construction; introduced, from a policy perspective. Program construction The core task in budget preparation is program construction. Program construction concerns both capital and recurrent expenditure. Programs specify in detail, the targeted outputs, the activities to achieve them, the inputs required, and their resource requirements. Note: Program is the main objective of a PB as stated in its establishment law. 3 Stage 4 – Notification of annual funding Using the approved subsidy funds formula, MOFED prepares the budget for the subsidies to regional governments and administrative councils. MOFED will notify each regional government and administrative council of their annual subsidy by February 8. Stage 5 – Issue of the budget call The Budget Call is a letter from MOFED sent to all public bodies which provides them with the following: 1. Their ceiling for program expenditure for the coming fiscal year; 2. The deadline for submitting their budget request; 3. A review of the policies that affect the expenditure of public bodies; 4. General guidelines for the preparation of the program budget submission; and 5. Detailed instructions and formats for preparing the request for the program budgets. The Budget Call informs public bodies not only what their ceilings are and how and when to prepare their budget requests but also, the formats for submitting these requests. MOFED will issue the Budget Call letter to all public bodies by February 8 of each year. Stage 6 – Budget Requests The ‘budget request’ stage of the budget cycle begins when public bodies receive the Budget Call. The central task for public bodies during the request stage is to fit their request within the budget ceiling issued in the Budget Call. To “fit” the request, two tasks have to be completed by public bodies: 1. Adjust their PBs to the budget ceiling notified; and 2. Complete the necessary forms for submitting their PB requests to MOFED. Stage 7 - Budget Hearings Having received the budget requests from public bodies, and before preparing a draft recommended budget, MOFED will conduct ‘budget hearings’. These hearings are designed to respond to any issues raised during MOFED’s initial review of any public body’s PB. Officials from each public body will be questioned about their budget requests, and sometimes invited to submit additional supporting information. The information obtained from these budget hearings enables MOFED to proceed to the preparation of a draft recommended budget. Stage 8 - Preparation of the draft recommended budget The draft recommended budget is the consolidated budget that MOFED prepares and submits to the Council of Ministers. In turn, the Council reviews it and recommends it to the Council of Peoples’ Representatives. MOFED prepares the draft recommended budget based on the budget requests it has received from all of the public bodies, and from up to date information on resources that will be available to fund expenditures. During this stage, the budget requests from public bodies are reviewed, adjusted and consolidated into a single budget for capital and recurrent expenditure; the new consolidated PB format. The draft recommended PB budget will be finalized by MOFED and printed from the (revised) computerized budget system. MOFED is required to submit its draft recommended budget to the Council of Ministers by May 23. 4 Stage 9 - Recommended budget reviewed by council of ministers The Council of Ministers receives the draft recommended budget from MOFED, and carries out its own review of that draft recommended budget. The Council of Ministers will carry out its review from the 3rd week of May to the first week of June (15 days). The Council of Ministers may ask MOFED to make adjustments or revisions to the draft recommended budget before the Council ‘recommends’ it to the House of Peoples’ Representatives. MOFED will make these changes using the computerized budget system, and then provide the Council of Ministers with the recommended budget. The recommended budget must be submitted by the Council of Ministers to the House of Peoples’ Representatives no later than June 7. The recommended budget is now ready for review, approval and appropriation by the House of Peoples’ Representatives. Stage 10 – Legislative approval and appropriation of the budget The recommended budget will be presented in a Budget Speech by the Minister of Finance, to the House of Peoples’ Representatives (HPR), on a designated date. After consideration, HPR will send the budget document to the Permanent Budget Committee (PBC) for further scrutiny. PBC, in the presence of MOFED officials, will then invite selected stakeholders to finalize consultation on the annual budget. Once approved by the House of Peoples’ Representatives, the ‘recommended budget’ becomes the ‘approved budget’. However, the expenditures proposed in the approved budget cannot be implemented until an appropriation law is also proclaimed by the House of Peoples’ Representatives. It is important to distinguish between the approved budget and the annual appropriations. The budget that is approved by the House of Peoples’ Representatives is a detailed budget. However, the appropriations are at a more aggregate or global level. An appropriation is a legal mandate to spend money out of the consolidated fund. The House of Peoples’ Representatives is required to vote on the annual appropriations for the approved budget no later than July 7. The appropriation Proclamation will specify the following; first, for government as a whole: 1. Total revenue source; both domestic and external; 2. Total federal recurrent expenditure; 3. Total federal capital expenditure; 4. Total of all subsidies to regional governments and administrative councils; and 5. The total subsidy for each regional government and administrative councils. Then, for each public body: 1. Total budget for each public body; 2. Total budget for each program; 3. Total budget for each output; and 4. Source of funding for each output. The approved budget includes the appropriation Proclamation, as well as more detailed schedules of the budgeted allocations to and within each public body, and of forecast revenue collections by each public body. The approved budget and the annual appropriations can now be referred to as the Proclaimed Budget, and is published in the Negarit Gazeta – ready for 5 implementation. Copies are distributed to all public bodies and made available of the MOFED website. 1.4. Fundamentals of FGE program Budget Purpose of PB The essence of Public Body is to allocate resources to outputs, in a program structure. The program structure is the analytical core of Public Body. It is the key to linking not only planning and budgeting but also, capital and recurrent expenditure. The program is also the means for delivering and measuring the results, ultimately, of infrastructure and service provision. In many countries, PB is known as performance budgeting. In this view, program budgeting is the analytical core of the wider performance budgeting concept. Scope of Public Body Infrastructure and services are delivered through specific organizations. Thus, programmers are analyzed at the practical level of the organization: the federal public body (and ultimately, the regional state and individual woredas (district councils)). Thus, PB is pursued through the sovereignty of each federal public body (the budgeting organization of either a ministry or an independent executive agency), in order to ensure practical infrastructure and service delivery. Development The demand for infrastructure and services confronts every government in the developing world. Such governments are therefore faced with the enormous challenge of finding ways to provide infrastructure and services, within their eternal financial constraints. The fundamental importance of access to infrastructure and services, as a means of supporting both economic development and poverty reduction, is now accepted as common understanding. PB has the advantage of not only ‘measuring’ such provision but also, encouraging sound practice in its ‘delivery’. Measurement and accountability Public Body measures performance. This is through the economy, efficiency and effectiveness of infrastructure and service delivery. Therefore, it also supports public accountability. Ultimately, PB can encourage program managers to be more accountable for expenditure to achieve results. PB can therefore be seen as the foundation for individual performance assessments. Infrastructure and service delivery Infrastructure and services are delivered through specific organizations. Thus, programs are analyzed at the practical level of the organization: The federal public body; The regional state; The individual woreda. For this to be done successfully, we need to embrace the principles of Public Body, captured in its checklist. 6 Budget Classification scheme, Budget Categories and their standardized codes There are eleven budget categories in the budget classification scheme presented below. The presentation of codes in the budget begins with the "head" class of accounts that are assigned to the budget categories of: Functional classification, Sub-functional classification, and Public body. Public Bodies have the discretion to code their programs, sub-agencies, sub-programs and projects. Each Public Body in consultation with MOFED does the coding of these budget categories Table 1.1 Budget Classification Scheme Budget Category Class of Account Jurisdiction Type of Budget Functional classification Sub-Functional classification Public body Programs Sub-Agency Sub-Program Project Item of Expenditure Source Finance Head Head Head S-Head S-S-Head S-S-S-Head S-S-S-S-Head Item Source Code (#Of digits, Standardized or Discretionary codes) 2, Standardized 1, Standardized 1, Standardized 1, Standardized 1, Standardized 2, Discretionary 2, Discretionary 2, Discretionary 3, Discretionary 4, Standardized 4, Standardized The eleven budget categories listed in the table above are defined as follows and the codes for the categories that are standardized are to be discussed and listed below. Jurisdiction: Jurisdiction is the government level to which the budget applies. There are twelve jurisdictions that include The Federal Government. Nine Regions. Two Administrative Councils (Addis Ababa and Dire Dawa). The code for jurisdictions is a standardized two-digit code. Type of Budget: There are two types of expenditure budgets: recurrent and capital. The code is one digit and standardized. Functional classification: Functional classifications are the broad areas of expenditure that are used for analysis and national accounts. There are four functional classifications of expenditure: Administrative and General, Economic, Social, and Other. 7 The "Administrative and General" functional classification covers expenditures for the following services: Executive, Legislative, Judicial, Financial and fiscal affairs, Defense, public order, General services (personnel management, and standards)." The "Economic" functional classification covers expenditures that directly deliver economic services or provide services that enable economic services. The "social" functional classification covers expenditures that deliver social services and includes the sub-areas of : Education, Culture and Sport and health. The "Other functional classification covers expenditures that are not classified by the other three categories and includes transfers. The Functional classification code is one digit and standardized. The Other functional classification coded with the 400 series includes four sub-functional classifications: Transfers- Transfers include the subsidies to regions. Debt- debt includes domestic and external obligations. Contingency- contingency covers past commitments and write-offs. Miscellaneous can include items such as duty drawbacks and capital contributions. The functional classification is the first digit of the three-digit head code. For example, A. The functional classification code for economic expenditure is 200. B. The second digit of the three digit code is the sub-functional classification and C. The third digit is the public body code. Sub-Functional classification: The four functional classifications are further divided into sub-functional classification of expenditure. Sub-functional classification is the second digit of the three-digit "head" code. Public bodies are assigned a unique three-digit head code under the budget classification scheme presented in the above table. The first digit of the head code identifies the public body's functional classification, The second digit identifies the sub-functional classification, and The third digit is a unique number for public body within the sub-functional classification. The second table provides the current list of federal public bodies and their head codes. Programs: A public body may have programs that are broad objectives of expenditure. Programs are a sub-head class of account and are coded with one digit assigned by the public body in consultation with the MOFED. Sub-Agencies: A public body is often divided into administrative units of subagencies. Sub-agencies are usually the departments of a public body. Sub-agencies are a sub-sub-head class of account and are coded with a unique two-digit number assigned by the public body in consultation with the MOFED. 8 1.5. Budget ledger card Purpose: The purpose of the budget ledger card is to maintain a continuous and updated record for each budgeted item of expenditure by BI and source or finance with respect to: Approved budget. Additions/reductions to the approved budget. Revised budget. Payments received for budgeted expenditure. Amount remaining to be requested Commitments. Balance in the revised budget that is not committees. Completion The budget ledger card is divided in to two parts: The Top of the card contains information to identify the BI, Type of budget, and Item of expenditure. The table on the card contains detailed information about each budget transaction Table 4.1 Indicates the field in the budget ledger card, the source documents used to fill each field and the timing for completion of each field. The Budget section maintains a budget ledger card for each individual item of budgeted expenditure by BI and source of finance. The appropriate budget ledger card is updated each time a transaction occurs. The format of the budget ledger card is provided in figure 1.1 9 BUDGET LEDGER CARD Page No: Name of Public Body Name of Program: Name of Sub Agency: Name of Sub program: Name of Project: Source of Finance No Date Description Reference No Code: ______ Code: ___ Code: Code: ______ Code: ______ Code: Approved Addition to Budget Budget Type of Budget: Item of Expenditure: Reduction to Revised Budget Budget 10 Payment Received Unpaid Balance Commitment Code: Code: Balance not committed Purpose of Each Field in the Budget card Top of the Budget Ledger Card Name of Public Body and Public Body Code: The field is to identify the PB to which the budgeted expenditure is related. Name of program and program code: The field is identify the program to which the budgeted expenditure is related. Name of sub Agency & Sub program Code: The field is to identify the PB to which the budgeted expenditure is related. Name of sub program and sub program code: The field is identify the sub program to which the budgeted expenditure is related. Name of project & project Code: The field is to identify the BI to which the budgeted expenditure is related Source of Finance & code: The field is to identify the source of funding that is recorded on the ledger card. Page Number: The field identifies the page number of the budget ledger card. Type of budget and Code: The field is to identify whether the item of expenditure is a part of the recurrent or capital expenditure budget. Item of Expenditure & code: The field is to identify and describe the item of expenditure by its budget code. Table on the Budget ledger card Number: The sequential number of the transaction. Date: The date of the transaction. Description: A brief narrative of the description of the transaction. Reference Number: The reference number of the source document to the transaction. Approved Budget: The field identifies the amount of original approved for the item of expenditure. Additions /Reductions to Approved Budget: The fields are used to track changes to the approved budget and provide information to computer the revised budget. Revised budget: The field contains the approved budget adjusted for any additions or reductions. The revised budget is key for budget control. An item of expenditure must not exceed its revised budget. Payment received for Budgeted Expenditure: The field is used to record payments received (whether as cash or non-cash) from the appropriate source of funding and assists in keeping track of the amounts of money received for item of expenditure. Unpaid Balance: The field is the different between the revised budget and the amount of funds received (whether as cash or non-cash) to meet the budget expenditure and assists in keeping track of the remaining amounts of money that may be requested for an item of expenditure. Commitment: The field is used to record current commitments and assists in identifying the balance available in the budget for expenditure. Balance not commitment: The field contains the difference between the revised budget and the commitments. The balance not commitment is the available budget for future spending. Once the uncommitted balance is reduced to zero, the Budget Section will approve no further spending. 11 Examples of typical transaction A set of six transactions is detailed below to illustrate the process of completing the budget ledger card for each transaction. The examples are not intended to be comprehensive or include all possible types of transactions, but only to serve as an illustration for users. Transaction # 1: MOFED is notified of its approved recurrent budget on Me/Be/Ma 4 at the beginning of a fiscal year. The Me/Be/Ma 4 dated July 14, 2001 contains the following information for the sub-agency Administration & General Service: The reference number of Me/Be/Ma 4 is N/94 The name of the public body is MOFED-code 152 and the sub-agency code is 01 The approved budget for stationery is Birr 250,000 The item of expenditure if office supplies-code 6212 The source of funding is treasury-code 1800 This information is used to complete the identification information required at the top of a budget card, and to record the first transaction in the table on a budget card. Transaction # 2: The procurement section approves a purchase order No. PO/1/94 dated August 2001 for Birr 150,000 for purchase of stationery. The approved purchase order is taken to the budget section for recording the commitment. Transaction # 3: On 1 September the BI requests Birr 150,000 for stationery from MOFED from the request for the unused balance of stationery stocks from the previous year. The actual payment received by the BI is Birr 130,000. Note: The BI will record the payment received as Birr 130,000 for the actual cash received the non-cash transfer of Birr 20,000 Transaction # 4: The procurement section approves a purchase order No. PO/2/94 dated 2 September 2001 for Birr 100,000 for purchase of stationery from another supplier. The approved purchase order is taken to the Budget section for recording the commitment. Transaction # 5: On September 10, the procurement sections cancel purchase order no. PO/2/94 dated 2 September 2001 for Birr 100,000 for purchase of stationery. The purchase order is marked VOID by the procurement section and is taken to the Budget section for canceling the commitment. Transaction # 6: Notification of a budget supplement is made on Me/Be/Ma 6 dated 15 September 2001 with reference number RC/1/94. The notification adds Birr 50,000 to the stationery budget. Required: Prepare Budget ledger card. 1.6. Overview of IBEX and IFMIS 1.6.1. Overview of IBEX The Integrated Budget and Expenditure System (IBEX) is a financial information system that has been designed and developed to automate and support public finance in Ethiopia. It is comprised of different modules including a Budget, Accounts, Budget Adjustment, Budget Control, Accounts Consolidation, Disbursement and Administration Module. 12 Budget Module This module executes all the budget preparation activities performed by government financial offices. Accounts This module executes all the budget execution activities of government budgetary institutions. More specifically, the accounts module records the financial transactions of the budgetary institutions, records the aggregated monthly accounting reports and provides accounting reports for ledgers, financial statements, management reports, transactions, expenditures and revenues. Accounts Consolidation This module consolidates the budget and accounting data for the entire country. This module allows for the generation of regional and national consolidated reports. Budget Control This module manages the activities of recording budget commitments and disbursement payments in order to enable budgetary control over expenditures. Budget Adjustment This module provides the functionality to address changes to the approved budget during budget execution. It specifically enables the recording of budget transfers and budget supplements and the subsequent production of the adjusted budget. Disbursement This module manages the public treasury functions associated with cash management and disbursing funds between public financial institutions. Administration Module This module provides an interface to manage users and user’s profiles that interact with the IBEX system. In general IBEX is not a system for an auditor general to perform their own task, but they can get raw data from the system for their analysis and verification purpose. 1.6.2. Overview of IFMIS The Integrated Financial Management Information System (IFMIS) is an integrated public financial management system being implemented by Federal Government of Ethiopia (FGE) to improve the public expenditure management processes, enhance greater accountability and transparency across Federal Ministries, Agencies, Regions, City Administrations, Zones and Woredas. It is designed to make use of modern information and communication technologies. The IFMIS implemented by FGE is the latest version of Oracle E-Business Suite (EBS) comprising the following 9 modules. 13 Oracle E – Business Suite IFMIS Financials Supply Chain Mgt. Budget (PSB) Procurement General Ledger Inventory HRMS Payroll Cash Management Accounts Payable Fixed Asset General Ledger The objective of IFMIS implementation include Standardizing the processes across all Ministries on the financial accounting and reporting Enables all Federal Public Bodies and Regions to use a single system with extensive reporting facility from the same physical source Facilitate fast and quality reporting procedures within and across the ministries Enable quick consolidation mechanism Pave a platform to prepare the current budgeting system to output based budgeting methods Provides interfaces with other systems in Banks, Customs and Revenue, Debt and Aid Management, or other available systems at Pilot Sites Provide orientation and facilitation to the other Ministries which are not under pilot sites to become part of Future IFMIS. 1.7. Basis of Accounting A transaction is an economic event that affects the financial position of the government. The basis of accounting is the basic set of principles and rules employed by the accounting system to determine when and how to record transactions. 14 Cash, Modified Cash, Modified Accrual and Accrual Basis of Accounting Cash Basis The cash basis of accounting recognizes transactions and events only when cash is received or paid. FGE changed its basis of accounting from cash basis to modified cash basis in the fiscal year 1995. Modified Cash Basis The modified cash basis of accounting recognizes transactions and events which have occurred by the year end and are normally expected to result in cash disbursement within the specific legal grace period stipulated by a country’s financial regulations after year end. Payments over this grace period that are related to transactions of the previous fiscal year are reported as expenditures of the previous fiscal year. Modified Accrual Basis However, the modified accrual basis of accounting recognizes transactions and events when they occur, irrespective of when cash is paid. There is no deferral of costs that will be consumed in future periods. Assets that will provide services in the future are expensed in the period acquired. Therefore, under the modified accrual basis of accounting assets and stocks are considered consumed and expensed off as soon as they are acquired. The difference between the modified cash and modified accrual basis of accounting is whether or not the financial regulations specify a grace period over which cash payments that are related to transactions of the previous fiscal year are reported as expenditures of the previous fiscal year and beyond that grace period cash payments that are related to transactions of the previous fiscal year are to be reported as transactions of the next fiscal year. In Ethiopia, the accounting period includes a legal grace period of 30 days after the close of the fiscal year. Hence, the modified cash basis of accounting is applied in Ethiopia. The modified cash basis of accounting recognizes transactions and events which have occurred by the year end and are normally expected to result in cash disbursement within the specific legal grace period of 30 days after year end. Payments over this grace period that are related to transactions of the previous fiscal year are reported as expenditures of the previous fiscal year. Accrual Basis The accrual basis of accounting recognizes transactions and events when they occur irrespective of when cash is paid or received. Revenues reflect the amounts that came during the year, whether collected or not. Expenses reflect the amount of goods and services consumed during the year, whether or not they are paid for in that period. The costs of assets are deferred and recognized when the assets are used to provide service. Base of Accounting used by FGE The cash basis of accounting is a basis of accounting that recognizes transactions and other events when cash is received or paid. The FGE accounting system employs a modified cash 15 basis of accounting. The modified cash basis of accounting in FGE means that cash basis applies except for recognition of the following transactions: Revenue and expenditure are recognized when aid in kind is received. Interest on salary advances is recognized as revenue when the salary advance is made. Expenditure is recognized: A. When payroll is processed. B. At the end of the year when a grace period payable is recognized. C. When goods are received or services are rendered if payment for the goods or services was rendered in advance. Intergovernmental transfers are recognized in the absence of actual cash movement. Transactions resulting from salary withholdings are recognized in the absence of actual cash movement. Amounts due on treasury bills and direct advances to Government from the National Bank of Ethiopia are recognized as current liabilities The modified cash basis accounting system requires the same temporary accounts as the cash basis of accounting plus the following permanent accounts: cash and cash equivalents, receivables, payables and net asset/equity. The modified cash basis of accounting is consistent with the budgeting process and produces information useful for comparing budgeted and actual revenue and expenditure. The major considerations identified for determining items to include and exclude in the modified cash basis system is the availability, complexity, practicality and efficiency with which information can be obtained to include other categories of assets and liabilities within the accounting system and the need to keep the basis of accounting consistent with the Government’s budgeting system. The FGE accounting system employs a combination of temporary and permanent accounts. All account balances at the end of the year may not have a zero balance. So, a process is necessary that distinguishes temporary accounts and sets them to zero. The process of setting the balance in temporary accounts to zero is called closing the accounts, and the process is performed by a closing entry. The closing entry is an accounting activity that takes place at the end of each budget year. This process requires a net assets/equity account. All assets and liabilities are not recognized in the modified cash basis accounting system. Only those receivables and payables included in the chart of accounts are included in the system. The modified cash basis accounting system produces financial information that is reported in a Statement of Changes in Cash Position and a Statement of Budgeted versus Actual Expenditure. Asset and liability accounts other than cash, receivables, payables, and letters of credit are included in the chart of accounts to allow institutions that have the capacity to maintain accounting records of all assets and liabilities. These other assets and liabilities are recorded using the cost method. The cost method values assets at their original cost and liabilities at the amount still due. 16 Recording these other assets and liabilities is an option for the future in the FGE accounting system. 1.8. Legal Framework of FGE Financial Administration To describe the FGE accounting system, its operations, and roles and duties within the system, the structure of financial administration and authority in the federal government must be understood to the extent that it impacts the accounting system. Although the structure of financial administration is not standard across all units in the federal government, a general pattern exists. Through this course the following structure of financial administration under MOFED is assumed. Ministry of Financial and Economic Development (MOFED) MOFED administers the financial system for the federal government and has the highest level of administrative authority. MOFED consists of a: Budget Department that prepares and distributes notification of approved federal budgets and administers the budget. Central Accounts Department that records transaction that the authorized and executed at MOFED, receives monthly reports from public Bodies, and compiles financial statements for the federal government. Treasury department that receives and distributes cash from central treasury. Credit Administration Department that manages the federal government’s debt. This is not a complete description of MoFED or of these departments. This is a description of their roles and responsibilities within the accounting system. Central Accounts Department (CAD) The central Accounting Department performs several functions. The major functions are: Entering daily transactions in the FGE general ledger from NBE bank advices and Treasury Department transfer authorizations; Preparing daily cash reports; Preparing and sending information to public Bodies regarding loans from external lenders; Receiving monthly report for SSDP Programs from public Bodies and regions, then preparing and sending reports to donors; Verifying and entering monthly report from public Bodies in the FGE general ledger; Preparing the FGE annual financial statements and submitting them to the federal Office of Auditor general; Consolidating annual reports from regions with the FGE annual financial statements; and Generally Overseeing the accounting function at all public Bodies and Solving any problems that occur in the accounting system 17 Public Body (PB) Public Bodies are the next level of financial administrative authority in the federal government after MoFED. Public Bodies are the institutions that are entitles to request and receive a budget. A public body is defined as follows: it is an institutions that has a legal mandate, receives a partial or complete budget directly from the respective finance and planning bodies, submits its final accounts directly to MoFED, and is on the approved list of public bodies issued by the office of the prime Minister. FIGURE 1.1 shows this administrative structure. FIGURE 3.1 STRUCTURE OF FINANCIAL ADMINISTRATION WITHIN A PUPLIC BODY Head of Public Body Head of Administration and Finance Head of Budget and Accounts Budget Section General Service Accounts Section The remaining sections in this chapter include an overview of the roles and responsibility of MoFED and PBs in the FGE accounting system. Programs Accountant Cashier Programs Planning is conceived in terms of programs and encompasses periods of up to three years. A Sub-Program is a subset of a program. Programs are the main objectives of Public (bodies) PBs) as stated in its establishment law. Programs and PB are not the same. More than one PB may share any single program, and any single PB may have more than one program. Although codes for Program and sub program are included in the chart of accounts, neither receives a budget. A code for PB is part of the chart of accounts. PBs receive budget. 18 To obtain financial information about a program the total of expenditures incurred by the various budgetary units involved in the program must to be consolidated. The FGE accounting system employs the programs and sub-program code for consolidation and reporting purposed only. Programs and sub-programs have no administrative, Role in the accounting system. Budgetary Institution (BI) For purpose of this part, the budget process begins with the appropriated budget. The appropriated budget is the budget approved by the council of people’s representatives (CPR). The appropriated budget is broken down by; Recurrent and capital expenditure for the federal government, and Subsidy for regional government. The federal government’s portion of the appropriated budget is assigned to projects and subagencies within PBs and broken down by sources of funding (domestic, assistance and loan). This is called the approved budget. The approved budget is published in the Negarit Gazeta with the appropriated budget. A PB’s entire approved budget is assigned to projects and sub-agencies under its immediate administrative control. The budget of a PB is the total budget of its projects and sub-agencies. Project and sub-agencies are defined and coded in the chart of accounts. Any entity that receives an approved budget from a PB’s approved budget is called a budgetary Institution (BI) in the manual. Generally: PBs are ministries, authorities, and commission BIs are projects and sub-agencies. BIs are administered by PBs. The entire approved budget of a PB is assigned to BIs. Figure 1.2 Shown the structure of financial administration in the budget process. Figure 1.2: SRTUCTURE OF FINANCIAL ADMINISTRATION IN THE BUDGET PROCESS Ministry of Finance and Economic Development Public Body ACCOUNTING UNIT Budgetary Institution: Project or Sub-Agency 19 For cash management, another entity is created the bank account (BA). The BA does not receive a budget. However, it is important for cash management and control. The FGE accounting system includes the BA in the accounting structure. A PB may administer many BIs BAs, or a PB may have only one BI and BA. Each BA: Is managed by an accountant May Have many cashiers, Have its own cashier, Share a casher with other BAs, or Have no cashier associated with it (like foreign currency bank accounts). Handles cash flows: For one or more than BI, From one or more source of finance, and For more than one type of budget (capital/Recurrent) Accounting unit is the unit initially captures and records transactions in to the accounting system. If a BA handless cash for only one BI (BI/BA), the accounting unit: Processes transactions for the BI/BA. Maintains registers for the BI/BA. Maintains a general ledger for the BI/BA. Maintains subsidiary ledgers for: Asset accounts. Liability accounts. Prepares a monthly report for the BI/BA. A complete set of accounts and a general ledger is maintained for each BI by BA because: Each sources of funding is budgeted distinctly, and Cash from each source is physically separated in distinct BAS. Each month, a monthly report is prepared from the general ledger for the BA. Cash ledger cards in the general ledger control the cash balances in the bank in the safe. If more than BI shares a single BA, the accounting unit: Processes Transactions for all BIs. Maintains a register for the BA. Maintains a general ledger for the BA. Maintains subsidiary ledgers for: Items of expenditures by BI and type of budget. Asset accounts. Liability accounts. Prepares a monthly expenditure report for each BI. Prepares a consolidated monthly Trial Balance for the BA. One general ledger is maintained for the BA, including a ledger card for each item of expenditure. The only records maintained for each BI are accounts in subsidiary ledgers for 20 items of expenditure recorded in the general ledger. Monthly, the subsidiary ledger information is used to prepare an expenditure report for each BI. These reports are consolidated with information from the general ledger into a monthly report for the BA. The balances of cash in safe and cash in bank are maintained on ledger cards in the general ledger for the BA. Reporting Entity A reporting entity is the entity that sends monthly report to MoFED. Although the accounting unit prepares monthly reports, every accounting unit may not send monthly reports directly to MoFED. The reporting entity may be: The accounting unit, or A higher level of authority (Perhaps a PB) Each of the following is possible: A reporting entity may be an accounting unit, and an accounting unit may consist of only one BI. Therefore, a single BI may be a reporting entity. A reporting entity may be a PB that receives the monthly reports from several accounting units. In this manual, whoever sends the reports to MoFED is the reporting entity. Therefore, the reporting entity is not, necessarily, an accounting unit. Cashier and Accountant In the FGE accounting system of cash control, the cashier’s function and the accountant’s function are distinct. Cash consists of currency and checks. The cashier’s function is maintained and control cash in the safe. The accountant’s function is to maintain and control cash at the hand to the cash book. Only the casher can receive currency and checks (including check payment orders) and make disbursements in currency. Daily, the cashier should count cash on hand and reconcile ending cash on hand to the cashbook. The cash in safe is controlled by an impress system. In the impress system, a balance is established for cash in safe for the public Body. The accountant issues this amount of cash to the cashier using a check. When cash is disbursed, the cashier will issue a receipt voucher. If the amount of cash in safe is to be replenish, the cashier will surrender all payment vouchers to the for the total amount of the payment vouchers that are surrendered. The replenishment should return the balance of cash in safe to the established level. When cash is received from sources other than the accountant, the cashier will: Issue cash receipt. Segregate the cash received from cash available to disburse, Deposit the cash received intact in the bank as soon as practical, usually daily, and. Surrender copies of all cash receipts and a copy of the deposit slip to the accountant. The accountant’s responsibility for cash is to maintain a record of the total cash position of the entity, including cash at the bank and cash in the safe. The accountant records cash movements 21 that flow through the cashier and cash movements that flow directly through the bank. Direct cash movements through the bank normally include bank transfers and charges, checks written, and any other transactions do not require cash handling by the cashier. When a PB has more than one cashier, one cashier is designated as the main cashier. The other cashiers are designated as assistant cashiers. Each PB is responsible for organizing assistant and main cashiers. However, some general principles apply. Assistant cashiers are responsible for: Collecting cash Issuing deposit and/or receipt vouchers Setting deposits The main cashier is responsible for: Reconciling cash and vouchers for each assistant cashier Depositing cash in the bank Disbursing cash for the proper functioning of the PB Managing the petty cash To accomplish these responsibilities these responsibilities, most Public Budget with multiple cashiers are organized as follows: Each assistant cashier: Collects revenue and issues receipt vouchers May summarize receipt vouchers on Model 16 Sends a copy of receipt vouchers and Model 16 to accounts Sends cash to main cashier Receives Model 64 as receipt from main cashier The main cashier: Collects cash from cashiers Verifies cash with accounts Verifies the amount on receipt vouchers equals cash received Verifies amount for each revenue account Completes Model 64 Gives a copy of model 64 to assistant cashiers Deposits cash in bank Attaches the deposit slip to model 64 Gives the copy of Model 64 with the deposit slip to accounts The accountant: Receives receipt vouchers and Model 16 from assistant cashier Verifies accounts and amounts to main cashier Provides accounts and amounts to main cashier Receives Model 64 with deposit slip attached from main cashier Records Model 64 in the transaction register and ledgers 22