Article by: Midrand Accountant: Dr Peter Masegare
GRAP-Compliant Annual Financial Statements – Compiling Financial Statements or Technically Independently Reviews.
The preparation of the annual financial statements is the end of the transactions and events that occurred during the year under review, as well as the related prior year's balances. It is the Board’s responsibility to ensure that annually, officials tasked with the preparation and oversight of the AFS need to consider information impacting the AFS. This includes a financial statement that complies with Generally Recognised Accounting Practice (GRAP) and/or International Financial Reporting Standards (IFRS), which are standards that are presumed to result in a fair presentation of the financial statements.
In many instances, the preparation of this information is outside the direct management and control of the finance department itself. The preparers will, therefore, implement a sound process to gather such information as well as to ensure the accurate capturing of this information on the IT accounting system. This must be done in an effective and timely manner within the prescribed format and timelines set by legislation and as support for the subsequent audit.
Masegare & Associates Incorporated (MAI) has set out integrated financial reporting processes to assist officials with managing and monitoring the year-end procedures and AFS compilation process. This also includes key GRAP implementation issues, as well as its execution processes, which allow adequate and accurate information to prepare the AFS. For example, key GRAP implementation challenges impacting municipalities and the public sector in general, as identified by the Auditor-General South Africa (AGSA), reports, technical enquiries and frequently asked questions. This is to provide context and understanding of the GRAP requirements and the underlying AFS information required.
Our tried and tested procedures to monitor and manage the AFS preparation process, included information gathering procedures, which form part of the AFS considerations of recognition, measurement and disclosure of transactions and balances in the AFS. This also addresses the compilation of supporting audit file information which can also be used by the Auditor-General in the audit of the AFS, as well as meeting the Audit and Risk Committees prerequisites.
Strategic Approach to the Annual Financial Statements (AFS) Year-End Timeframes
Our timeframe related to key AFS processes and activities such as the compilation and implementation of a comprehensive AFS plan of action, key reconciliations, review of draft & final AFS (CFO, CEO, MM, Internal Audit, Audit Committee), submission to National Treasury, (NT) and the Auditor-General, management of audit queries system and subsequent implementation and monitoring of corrective measures are fully addressed during this crucial phase of our value-add accounting services.
In addition to the above, this process will also address the process allocation to individuals in terms of a responsibility matrix, which sets out transactions and responsibility levels and target execution dates. These individuals may include the CEO, MM, CFO, Divisional Heads (Budget & Treasury, Expenditure, Income, SCM), Heads of Departments, Managers (Corporate-, Developmental-, Electrical-, Technical Services), Internal Audit, Performance Management Officer, just to mention a few.
Key Supporting Information Memoranda
To assist the AFS prepares to gather and obtain the information as part of the Year-End AFS completion plan, we also have a repository of template memorandums which are tailored and circulated by the AFS preparers to the relevant departmental managers, where applicable, to identify and explain the information for each of the AFS line items required.
Our Memoranda examples include; Income / Accounts Receivable:
Splitting of debtor age analysis, impairment of debtors not included in the billing system, prepayments received (building plan approvals. Prepayments, hall rentals); and Grant detail summaries. Asset / Inventory Management: Verification of assets [GRAP17] & inventory; review of useful lives and depreciation, sub-store stock, summary details of finance & operating leases, spare parts and servicing equipment, inventory NRV considerations, donated PPE items and its FV considerations; theft, losses and damage of assets (impairment).
Other disclosures: unauthorised, irregular, fruitless and wasteful expenditure; adjusting and non-adjusting events after reporting date; provisions assumptions and estimates (cleaning of illegal dumping, clearing of alien vegetation); potential assets and liabilities (litigation and arbitration, etc.); related party interests and transactions.
Audit File & NT GRAP Disclosure Compliance Checklist
Our overview includes the supporting information required by the Auditor-General in their audit of the information in the annual financial statements. This also includes an overview of the National Treasury’s GRAP Disclosure / Compliance Checklist, which is part of the AFS submission processes and a self-review mechanism for the AFS. This audit file information is to support the information included in the Statements of Financial Position, Financial Performance, Net Assets and Cash Flows, which the Auditor-General considers in expressing an audit opinion whether the AFS are free from material misstatements, whether due to fraud or error.
The information includes; Component lead sheets and reconciliations. These reconciliations include unspent grants, work-in-progress statement reconciliations, VAT reconciliations, stores & consumables (inventory counts, valuations, impairments, loss reconciliations), etc.
Financial management information: Management finance-related policies, procedure manuals, etc.
Strategic Planning documentation, including IDP evaluations and SDBIP, with linkages to MTREF, strategic plan, risk assessment, risk strategy, performance information, fraud prevention plan, and minutes of meetings of the Board /Council. Internal audit: audit plan, charter, reports. Auditor-General / Audit Committee specific: evidence of remedial action taken to address previously raised matters of concern, audit queries or qualifications, minutes of meetings, progress reports from the audit committee, and measures taken by municipalities to address outstanding concerns.
Applied Year-end AFS Completion Plan
Our comprehensive plan sets out the various activities per department, covering all components of the AFS and activities within each component, with timeframe and responsible personnel allocations. This provides guidelines for the collation and preparation of supporting documentation and working papers as part of the evidence for the audit file to be used by the Auditor-General.
Examples of these AFS components include:
Transactions: the accounting guidelines and standards applicable to the entity, GRAP-compliant Chart of Accounts, related party transactions, foreign exchange transactions, financial instruments, contingent liabilities & contingent assets, events after the reporting date, control accounts, suspense accounts, accruals, pre-payments, preparation of cash flow statements.
Revenue: tariffs, program reporting (e.g. property rates and service charges), miscellaneous requirements.
Expenditure: general, employee cost/payroll; borrowing costs, hyperinflationary economics; construction contracts, segment reporting; mergers.
Assets: PPE, intangible assets, investment property, heritage assets, biological assets, non-current investments, investments in controlled entities, joint ventures and associates, long-term receivables.
Liabilities: Long-term Loans, Interest Bearing Borrowings, Finance Leases, Employee Benefits, Defined Benefit Plans, Non-current Provisions, Consumer Deposits, Current Provisions (including Performance Bonuses, Current Portions of Retirement Benefit Liabilities and Non-current Provisions), Accounts Payable, Conditional Grants and Receipts, VAT Payable, Short-term Loans, Operating Lease Payables, Bank Overdrafts. Current Portion of Long-term Liabilities.
Net assets: Reserves, Statutory funds
Disclosures: other gains and losses, discontinued operations, associated operations, non-cash investing & financial transactions, financing activities, utilisation of long-term liabilities reconciliations, unauthorised irregular fruitless & wasteful expenditure, PFMA, MFMA disclosures, commitments for expenditure, multi-employer retirement benefits information, in-kind donations and assistance, comparison with budget, Private-Public Partnerships, Comparative figures, Standards and Interpretation in issue not yet adopted.
Automation of AFS- CaseWare/SAGE/Draftworx
This will cover the automation of the AFS reporting process, based on the generally accepted AFS Reporting Tool, which includes the latest changes applicable to the IFRS/ GRAP accounting reporting framework, accounting policies and NT requirements. This feature provides for account balances and transactions to be populated from the mapped trial balance based on the applicable Chart of Accounts / Vote Structure. The mapped structure and composition are based on the respective votes included for the Financial Performance (revenue, expenditure, appropriations, disposal of assets) or Financial Position Votes (non-current assets & liabilities, community wealth, suspense votes, old vote numbers, CAPEX totals for IYM, etc.) Each transaction and balance category will be further allocated to a sub-category item, item type, movement, etc. It also provides for the rollover of balances from the previous years for comparative information.
Our tool also provides for pro-forma GRAP adjustments to be included in the AFS, which are not reflected in the TB, with separate reconciliation thereto. These include debtors with credit balances, contingent liabilities and/or assets. Once we have mapped the prepared AFS, changes can also still be made in the underlying accounting systems (due to journals or further processing). These changes can then be easily updated and reconciled in the automated AFS to reflect the updated position. Computer check-balances are in place to identify unmapped details. Our data will be integrated, linking it from the TB to the mapped AFS, and detailed working papers and reports can be run. These working papers can be used as lead sheets for audit purposes to be included in the audit files, matching back to the TB. Other reports include:
Unauthorised expenditure comparison reports
Unauthorised expenditure comparison reports, based on actual and budget information included in the AFS (e.g. the difference between actual amount, original budget, actual budget, final budget, variance, unauthorised variance / Thresholds reports based on a percentage of vote variance). Other reports run will include the automated population of the cash flows based on the information, with details of previous years’ audited outcomes, comparison to the original and adjusted budgets, as well as the Medium-Term Revenue & Expenditure Framework information.
How MAI Can Help You:
MAI has significant experience in assisting clients with the changing terrain of regulatory compliance. We take a structured approach to enable clients to achieve and sustain compliance efficiently and cost-effectively.
For more information, please visit our website www.masegare.co.za or give us a call on 011 4200045
