Public Sector Accounting and Finance · November 2020

a. Revenue from exchange transactions

i. Aid and grants receivable as at December 31, 2015 If on or before December 31, 2015, a public sector entity is entitled to an un-conditional aid/grants and funds have not been received as at January 1, 2016, the amount due to that entity and not yet received shall be recognised as receivable in the opening statement of financial position.

ii. Debt forgiveness approved on or after January 1, 2016 Debt forgiven on or after January 1, 2016 shall be immediately recognised as revenue in the books of the recipient when both the grantor and the recipient have approved a debt forgiveness agreement/MoU and no conditions are attached. Where there are conditions attached to the debt forgiven to the extent that if not met the amount will be repayable, and there is a possibility of failure to meet such condition(s), the amount forgiven (or portion with conditions) will remain a liability until such conditions are met.

iii. Personal income on or after January 1, 2016 The personal income tax is recognised at the point when the taxpayer has earned assessable income. In Nigeria, the recognition of personal income tax is to be considered in two-folds:

• At the point of collection in the books of Relevant Tax Authority (RTA), personal income tax is recognised when taxpayer or employer has submitted returns.

• In the books of the government (Federal/State treasury), personal income tax is recognised upon remittance of tax by RTA to Consolidated Revenue Fund (CRF) of the respective treasury. 97

b. Oranta State Government Statement of financial performance for the year ended December 31 2018 Working notes N’ million N’ million Revenue: Share of federation account allocation 324,000.00 Value added tax allocation 234,000.00 Tax revenue - Personal income tax 185,000.00 Non- tax revenue

- Fees. 35,000.00 - Fines. 36,000.00 - Penalty 33,000.00 Revolving loan interest iii. 2,020.00 Interest on treasury bills 10,000.00 Aids and grants 51,800.00 Donation of computers 50.00 Total revenue 910,870.00 Expenditures: Salaries & wages ii. 756,500.00 Bonds interest iii. 4,000.00 External loan interest iii. 7,000.00 Transport and travelling 1,900.00 Hotel accommodation 2,600.00 Office consumables ii. 200.00 Rent expenses 1,200.00 General repairs and maintenance ii. 820.00 Utilities ii. 3,078.00 Consultancy ii. 6,850.00 Other overheads 2,100.00 Pension and gratuity ii. 50,000.00 Finance charge- Insurance 350.00 Miscellaneous expenses 450.00 Contingency - Judgement debt 50.00 Depreciation: - Motor vehicles i. 5,000.00 - Building i. 460.00 - Plant and machinery i. 2,250.00 - Equipment i. 1,057.50 845,865.50 Surplus for the year 65,004.50 98 Working Notes

i. Depreciation on new PPE Land & building Equipment Motor vehicles Plant and machinery Rate 2% 15% 20% 10% 15% N’ million N’ million N’ million N’ million N’ million Depreciation to be charged N460.00 1,057.50 5,000.00 00 2,250.00

ii. Analysis of expenses Salaries and wages Pension and gratuity Consultancy Utility Repairs and maintenance Office consumables N’ million N’ million N’ million N’ million N’ million N’ million Bank 750,000 35,000 6,700 3,050 800 750 Value of consumable b/f -- -- -- -- -- -- Accrued c/f 6,500 15,000 150 28 20 -- Prepaid c/f -- -- -- -- -- -550 Amount charged 756,500 50,000 6,850 3,078 820 200

iii. Interest credited and charged on revolving/ domestic and external loans Revolving loan Bonds External loan N’ million N’ million N’ million Bank 2,000 (1,000) (2,000) Interest receivable/payable 20 (3,000) (5,000) Credited/(charged) 2,020 (4,000) (7,000) 99 Furniture and fittings Oranta State Government Statement of financial position as at December 31 2018 Non-current assets: Working notes Cost/ valuation Accumulated depreciation Carrying amount N’ million N’ million N’ million Land & buildings iv. 253,000.00 460.00 252,540.00 Motor vehicles iv. 40,000.00 5,000.00 35,000.00 Furniture and fittings iv. 80,000.00 00 80,000.00 Equipment iv. 57,050.00 1,057.50 55,992.50 Plant & machinery iv. 90,000.00 2,250.00 87,750.00 Total non- current assets 520,050.00 8,767.50 511,282.50 Current assets: Office consumables ii. 550.00 Cash and cash equivalents v. 95,400.00 Investment: Treasury Bills 100,000.00 Advances 95,000.00 Revolving loan vi. 200,500.00 Revolving loan interest (4% of 500) iii. 20.00 Total current assets 491,470.00 Total assets 1,002,752.50 Non- current liabilities: Long term borrowing - Bonds vi. 263,000.00 - Foreign vi. 120,000.00 Total non- current liabilities: 383,000.00 Current liabilities Salaries & wages ii. 6,500.00 Consultancy ii. 150.00 Utility ii. 28.00 Repairs & maintenance ii. 20.00 Pensions & gratuity ii. 15,000.00 Contingent liability 50.00 Interest payable - Domestic iii. 3,000.00 - External iii. 5,000.00 Total current liabilities 29,748.00 Total liabilities 412,748.00 Net assets 590,004.50 Equity Reserves vii & viii 525,000.00 Surplus for the year 65,004.50 Total equity 590,004.50 100 Working notes:

iv. Property, plant & equipment. Land building and Equipment vehicles Motor Plant and machinery New property, plant & equipment N’ million N’ million N’ million N’ million N’ million Bank 23,000 7,000 25,000 -- 15,000 Donation of computers -- 50 -- -- -- Valuation of old assets 230,000 50,000 15,000 80,000 75,000 Balance as at December 31 2018 253,000 57,050 40,000 80,000 90,000

v. Calculation of cash and its equivalents as at December 31, 2018 N’ million Balance b/f 55,000 Total receipts 960,800 1,015,800 Total payments -920,400 Balance c/f 95,400

vi. Revolving/domestic and external loans Revolving loan receivable Bonds payable External loan payable N’ million N’ million N’ million Balance b/f 250,000 275,000 150,000 Repayment -50,000 -12,000 -30,000 Additions 500 - - Balance c/f 200,500 263,000 120,000

vii. Revaluation surplus Land building and Equipment vehicles. Motor Furniture and Fittings Plant and machinery Old property plant & equipment N’ million N’ million N’ million N’ million N’ million Valuation 135,000 50,000 15,000 80,000 75,000 Vacant Land Valuation 95,000 - - - - Revaluation surplus 230,000 50,000 15,000 80,000 75,000 101 Furniture and Fittings viii Reserves Revaluation N’ million Land and building 230,000.00 Equipment 50,000.00 Motor vehicles. 15,000.00 Furniture and fittings 80,000.00 Plant and machinery 75,000.00 Sub-total 450,000.00 CRF balance 75,000.00 Total 525,000.00

Marking Guide Marks Marks a. Revenue from exchange transactions: Aid and grants receivable as at December 31, 2015 2 Debt forgiveness approved on or after January 1, 2016 2 Personal income on or after January 1 2016 2 6 b. Statement of financial performance: Correct title ½ Calculation of total revenue 3 Calculation of total expenditure 5 Calculation of net surplus for the year 1½ 10

Workings: i. Property, plant and equipment: Calculation of depreciation charges for the year on PPE 2½ ii. Analysis of expenses: Calculation of expenses to be charged during the year 3 iii. Interest on revolving credited/domestic and external loans interests charged Calculation of interest on revolving credited/domestic and external loans interests charged 1½ 7 Sub-total 17 Statement of financial position: Correct title ½ Calculation of total non-current assets 4½ Calculation of total current assets 1¾ Calculation of total assets ¼ Calculation of non- current liabilities ¾ Calculation of total current liabilities 2¼ Calculation of total liabilities ¼ Calculation of total net assets ¼ Calculation of total net assets/equity 1½ 12 102

Workings iv. Property, plant and equipment: Calculation of the cost of PPE at the end of the year 1¼ v. Cash and its equivalents c/f: Calculation of cash & its equivalents 1 vi. Revolving receivable/domestic and external loans payable: Calculation of revolving/domestic and external loans c/f ¾ vii. Calculation of revaluation surplus 1¼ viii. Calculation of reserves ¾ 5 Sub- Total 17 Total 40

Examiner’s Report The question tests candidates’ knowledge of recognition of revenue on exchange transactions under IPSAS 33 First-Time Adoption of Accrual Basis in part (a) of the question, while part (b) tests candidates’ knowledge on the preparation of statement of financial performance and statement of financial position using vertical format. All the candidates attempted the question and their performance was average. The commonest pitfalls was the inability of the candidates to understand the treatment aids and grant; debt forgiveness; and personal income tax under IPSAS 33. Candidates were unable to incorporate the additional information given in the notes to the question in the preparation of financial statement. Candidates are advised to acquire adequate knowledge of relevant provisions of International Public Sector Accounting Standards (IPSAS) for better performance in the Institute’s future examinations.

a.i. Reliance of the external auditors on the internal auditors’ work Before external auditors could rely on the work of the internal auditors, the former would have made the following assessments:

• The degree of independence of the internal auditors;

• The scope and objectives of the internal audit functions as defined by the management;

• Due professional care, that is, whether or not the internal audit work is properly planned, recorded and reviewed; 103

• The technical competence of the internal auditors. This raises the question as to whether the internal auditors belong to any reputable professional accounting body or has relevant practical experience in internal audit work;

• The quality of the internal audit reports and to what extent they are being acted upon by the management are of interest to the external auditors; and

• The quality and standard of internal audit working papers are of significance, showing the extent of work done.

ii. Areas where the internal auditors can assist the external auditors Some the areas where external auditors may rely on the work of internal auditors are as follows:

• Attendance at inventory taking and cash counts of an organisation where external auditors is not able to do them himself;

• Conducting pay parade of the staff of the organisation;

• Where the internal auditors have special knowledge in the particular areas of business of the organisation;

• Strengthening relationship between the external and internal auditors, thereby resulting in identifying accounting and auditing issues that are of importance to the external auditors;

• Checking the underlying audit evidence for some of the work performed by the internal auditors;

• With the knowledge of the internal auditors, the external auditors can gain additional insights into the entity;

• Conducting compliance tests on accounting controls, on a continuous basis to provide assurance that such controls have operated satisfactorily throughout the period under review;

• Testing transactions and balances such as payables, receivables, non- current assets, etc.;

• Documentation of the accounting and internal control systems; and

• Assisting by making his work plans, programmes, working papers, etc. available to the external auditors in confidence.

b. Reasons for rising public expenditure The reasons for rising in public expenditure over the years in Nigeria are as follows:

• Traditional function The traditional responsibilities of government such as defence, maintenance of law and order, as well as general administration are becoming extensive and cumbersome. Defence is becoming expensive more than ever. Within the country, administrative set up is increasing both in coverage and intensity, that is, professionals in different fields have to be recruited to handle government machinery (operations). In addition, various complexities of economic and social 104 measures emerge which may cause government to increase expenditure in this area;

• Additional responsibility Besides the traditional functions of the State, there is growing awareness of additional responsibilities. Embarking on welfare measures which include measures to enrich the cultural life of the society and those designed to provide social securities to the people such as pensions, old peoples' homes, etc. Furthermore, government involvement in organisation of various socio-cultural and sporting activities also has the consequence of causing increase in government expenditure;

• Population Increasing population may also be an important determinant of public expenditure growth. As the population is rising, there will be changes in the demand structure of the society which will evoke some changes in the provision of public goods and services. The volume of various public goods and services has to rise in conformity with the growth of population;

• Urbanisation It has been argued that urbanisation and the resulting congestion has increased the need for more infrastructure and public goods and services. For example, a number of incidental services like those connected with traffic, roads, sanitation, pollution and so on have to be provided. In some states in Nigeria, street managers sweeping on regular basis to ensure cleanliness of the environment are now visible.

• Inflation The tendency for prices to go up has equally contributed to the growth of public expenditure. The increase in prices of input and other goods purchased by public sector has resulted in an increase in public expenditure;

• Debt servicing Increasing public expenditure can also be explained in terms of increasing cost of debt servicing. Incremental provisions made yearly in the national budget for debt servicing confirms the effect of debt service on expenditure growth;

• Unforeseen occurrences Any unanticipated occurrence(s) that exert(s) pressure on government finance might contribute to increase in public expenditure. The reason being that government would be committed to restoring normalcy to the environment in addition to providing palliative measures to reduce pain and suffering. This is usually the case for the victims of flood, earthquake and other disasters both natural and man-made;

• Political instability The instability in the economic and political terrain of most developing countries may be a potent factor to explaining increase in public expenditure. Such instability will always lead to destruction by 105 each succeeding regime, or structures put in place by the preceding regimes. The lack of continuity in government programmes and policies result in wasteful use of public resources; and

• Corruption/leakages Corrupt practices lead to over invoicing and over bloating of contract bidding. These give rise to increase in public expenditures. Leakages within the system should be discouraged in order to reduce expenditure

Marking Guide Marks Marks a. Reliance of the external auditors on the internal auditors’ work and areas of assistance: Any five criteria to assess reliance Any five areas of assistant 5 5 10 b. Reasons for rising public expenditure: Identification of five reasons for rising public expenditure Explanation of five reasons for rising public expenditure. 5 5 10 Total 20

Examiner’s Report Part (a) of the question requires candidates to explain the criteria employed by the external auditors to assess the likely effectiveness and relevance of internal audit functions; and areas where the internal audit functions can be of assistance to the external audit. Part (b) of the question tests the reasons for increase in public expenditure over the years. Majority of the candidates attempted the question and performance was above average. The commonest pitfall was the inability of the candidates to explain the areas where the internal audit functions can be of assistance to the external auditors. They also lack the knowledge of reasons for increase in public expenditure over the years. Candidates are advised to make use of the Pathfinder and Study Text for better performance in future examinations. 106

a. Factors militating against effective budgeting system in the public sector The key factors, militating against efficient and effective budget implementation in the public sector are as follows:

(i) Human element Top management members see budgeting as restraining and challenging. They tend to develop a lot of apathy towards its adoption and implementation. The lack of probity and accountability of some operatives affect successful budgeting;

(ii) Uncertainties underlying data inputs There are a lot of uncertainties in the data used for the budget preparation. The projections in revenue accruing from oil may not be forthcoming in view of the vagaries in the world market. Lack of efficient database also hamstrings reliable forecasts;

(iii) The type of project for which budget is prepared How successful a budget will be, depends on the type of project to which it relates. Some projects are popular while others are not. Those that are not popular, may face stiff implementation problems;

(iv) The problem of inflation Inflation tends to reduce the purchasing power. When the value of money is falling, budget implementation may run into problems. The revenue available will not be able to cover the expenditure;

(v) Political, social and cultural elements Each segment of the nation has its own cultural beliefs and taboos, which may take time to change. Introducing innovation may be met with stiff opposition. For example, a section of the country may not be willing to provide land for development purposes. Secondly, where there is political instability, budget implementation is at risk.

(vi) Changing government policies To implement a budget, a lot depends on the policy of government. For effective budget implementation, government policies have to be harmonised and consistent. Frequent changes in government policies affect budget implementation; 107

(vii) The problem of debt management and optimal use of limited resources There is the challenge of striking a balance between which parts of the nation’s resources should be used for servicing debts and the amount that should be utilised for economic development;

(viii) Low agricultural output Agricultural output is fast dwindling because the method of farming is outdated and the younger population is not attracted. The resources that should be used for economic development are therefore being diverted to the importation of food items; and

(ix) Fiscal indiscipline Most government officers are always maximising their budget. Under the incremental budgeting system, they tend to expend the last naira available in a year’s budget in order to justify the demand for increased allocation in the subsequent year, with little or nothing to show under the current year.

b. Domestic borrowing instruments The following are the domestic borrowing instruments:

(i) Treasury bills These are highly liquid financial instruments issued by the Central Bank on behalf of the federal government. They are issued in multiples of N1,000 for 91 days maturity, with a minimum investment of N10,000. Treasury bills are issued and traded at discount. The income is the difference between the purchase price and the maturity value;

(ii) Treasury certificates These are interest paying obligations of the federal government issued by the Central Bank for maturities ranging from one to two years. Treasury certificate rate is usually higher than that of treasury bills because of its longer tenure and hence higher risk to investors. As with the treasury bills, the major investors in treasury certificates are the Central Bank, commercial banks, discount houses and to a lesser extent merchant banks;

(iii) FGN bonds These are debt securities (liabilities) issued by the Debt Management Office (DMO) for and on behalf of the Federal Government of Nigeria (FGN). The FGN has an obligation to pay the bondholders the principal and agreed interest as and when due. FGN bonds have minimum tenor of two (2) years while there are bonds with maturities of 3, 5, 7 108 and 10 years in issue and for the future there may be bonds with maturities of 15, 20,30 years or more;

(iv) FGN Savings Bond (FGNSB) The Debt Management Office (DMO), on behalf of the Federal Government of Nigeria (FGN) issues FGN Savings Bonds. The bonds are issued for the following objectives:

• To deepen the national savings culture;

• To provide opportunity to all citizens irrespective of income level to contribute to national development; and

• To enable all citizens participate in and benefit from the favourable returns available in the capital market. They are issued monthly in tenors of 2 and 3 years, with quarterly payment of interest to the investors. They are offered to the investing public through offer for subscription at an interest rate announced by the DMO. The offer is usually opened for 5 days from the date of announcement. The minimum subscription amount is N5,000 with additions in multiples of N1,000, subject to a maximum of N50,000,000. The bonds are backed by the full faith and credit of the Federal Government of Nigeria. The bonds are acceptable as collateral for loans by banks and can be sold for cash in the secondary market;

(v) Government development stocks Development stocks are either medium or long-term securities usually issued to finance development projects or for lending to lower levels of government. The longer the maturity of these stocks, the higher their yields. The principal investors in development stocks are insurance companies, which are required to invest in them by the virtue of insurance act, commercial and merchant banks, Central Bank, and other savings institutions;

(vi) FGN sovereign Sukuk This is an Islamic investment certificate that represents ownership interest of the holder in an asset or pool of assets. It entitles the holder to receive income from the use of the assets. The Federal Government of Nigeria issues Sukuk bond for the purpose of:

• Funding the construction/rehabilitation of key critical infrastructure projects like roads;

• Diversifying the sources of government funding;

• Offering ethical investors an opportunity to invest in government issued securities; 109

• Achieving higher level of financial inclusion; and

• Serving as a reference pricing of Sukuk for other issuers especially private sector issuers. Like other government debt securities, FGN sovereign Sukuk is issued in multiples of N1,000 with a minimum investment of N10,000. It is backed by the full faith and credit of the Federal Government of Nigeria;

(vi) General obligation bonds A general obligation bond is a common type of municipal bond that is secured by government’s pledge to use legally available resources including tax revenues, to repay the bondholders. These types of bonds are backed by the full faith and credit of the issuer, in addition to the power of the issuer to introduce tax and take any other steps necessary to repay the bondholders. They are frequently used to pay for the construction of roads, schools, prisons and other public infrastructures;

(vii) Revenue bonds These are municipal bonds issued on the premise that both principal and interest will be repaid from the revenue generated from the facilities to be constructed with the proceeds of the issue. In other words, an authority that has constructed physical assets would charge customers for the use of the assets and then dedicate the revenue to servicing of the associated debt; and

(viii) Special assessment bonds These are types of bond for which the payment of interest and principal will be made from a special tax assessed upon the beneficiaries of the facility to be constructed. These types are popular for development of public utilities and service programmes.

Marking Guide Marks Marks a. Factors militating against the budgeting system: Any identification of five factors militating against the budgeting system Explanation of factors identify 5 5 10 b. Domestic borrowing instruments: Identification of five instruments Explanation of domestic borrowing instruments identify 5 5 10 Total 20 110

Examiner’s Report Part (a) of the question tests the candidates’ knowledge of the factors militating against the budgeting system in the public sector, while part (b) examines the candidates’ knowledge on instruments that can be employed for the purpose of raising capital within the domestic economy by government. Majority of the candidates attempted the question and their performance was above average. The commonest pitfalls were the inability of the candidates to identify the factors militating against the budgeting system in the public sector and instruments that can be employed for the purpose of raising capital within the domestic economy by government. Candidates are advised to make use of Pathfinder and Study Text of the Institute for the better performance in future examinations.

Okoko Local Government Cash budget for the months of January to March, 2020 January February March N '000 N '000 N '000 Receipts Sales 109,800 133,600 144,100 Allocation 15,000 15,000 15,000 Total receipts- A 124,800 148,600 159,100 Payments Payment for purchases 71,000 91,000 83,000 Overhead cost 48,750 61,750 52,000 Total payments- B 119,750 152,750 135,000 Balance b/f. 3,300 8,350 4,200 Total receipts – Total payments (A-B) 5,050 -4,150 24,100 Bal. c/f. 8,350 4,200 28,300 111

Workings Analysis of sales receipt January February March N '000 N '000 N '000 30% of December sales 30,000.00 -- -- 70 % January sales 79,800.00 -- -- 30% of January sales -- 34,200.00 -- 70 % February sales -- 99,400.00 -- 30% of February sales -- -- 42,600.00 70 % March sales -- -- 101,500.00 Total 109,800.00 133,600.00 144,100.00 Analysis of payment on purchases N '000 N '000 N '000 20% of December purchases 11,000.00 -- -- 80% of January purchases 60,000.00 -- -- 20% of January purchases -- 15,000.00 -- 80% of February purchases -- 76,000.00 -- 20% of February purchases -- -- 19,000.00 80% of March purchases -- -- 64,000.00 Total 71,000.00 91,000.00 83,000.00

b. Principles that should guide grant design The following principles should guide grant design:

i. Clarity in grant objectives Grant objectives should be specified clearly and precisely; ii. Autonomy Sub-national governments should have complete independence and flexibility in setting priorities. They should not be constrained by the categorical structure of programmes and uncertainty associated with decision-making by national officials. Tax-base sharing allows sub- national governments to introduce their own tax rates on national bases and formula-based revenue sharing, or block grants are also consistent with this objective;

iii. Revenue adequacy Sub-national governments should have adequate revenue to discharge designated responsibilities;

iv. Responsiveness The grant programme should be flexible enough to accommodate unforeseen changes in the fiscal condition of the recipients;

v. Equity (fairness) Allocated funds should vary directly with fiscal-need factors and inversely with the tax capacity of each jurisdiction; 112

vi. Predictability The grant mechanism should ensure predictability of sub-national governments’ shares by publishing five-year projections of funding availability. The grant formula should specify ceilings and floors for yearly fluctuations. Hold harmless or grandfathering provisions should accompany any major changes in the formula;

vii. Transparency Both the formula and the allocations should be disseminated widely in order to achieve as much as a broad consensus as possible on the objectives and operation of the programme;

viii. Efficiency The grant design should be neutral with respect to sub-national governments’ choices of resource allocation to different sectors or types of activity;

ix. Incentive The design should provide incentives for sound fiscal management and should discourage inefficient practices. Specific transfers should not be made to finance sub-national government deficits; and

x. Accountability for results The grantor must be accountable for the design and operation of the programme. The recipient must be accountable to the grantor and its citizens for financial integrity and results (i.e., improvements in service delivery performance). Citizens’ voice and exit options in grant design can help advance bottom-up accountability objectives.

Marking Guide Marks Marks a. Cash budget: Correct title Calculation of total receipts Calculation of total payments Calculation of balance c/f Workings Analysis of sales receipt Analysis of payment on creditors ¼ 2¼ 2¼ 2¼ 1½ 1½ 10

b. Principles that should guide grant design: Identification of five principles Explanation of five principles 5 5 10 Total 20 113

Examiner’s Report Part (a) of the question tests candidates’ knowledge on the preparation of cash budget, while part (b) tests the principles that should guide grant design. Few candidates attempted the question and performance was below average The commonest pitfalls was the inability of the candidates to identify the principles that should guide grant design. Candidates are advised to pay more attention to this area of the syllabus for better performance in the Institute’s future examinations.

a. i. Calculation of gain/loss on disposal of the old equipment N '000 N '000 Sales proceed on disposal 2,500 Less Old equipment at cost 8,000 Accumulated depreciation 5,500 Carrying amount as at disposal date Jan 2, 2016 2,500 Profit on disposal of equipment Nil

ii. Disclosure requirements of revalued property, plant and equipment as per IPSAS 17 If a class of property, plant and equipment is stated at revalued amounts, the following shall be disclosed:

• The effective date of the revaluation;

• Whether an independent valuer was involved;

• The methods and significant assumptions applied in estimating the assets fair values;

• The extent to which the assets’ fair values were determined directly by reference to observable prices in an active market or recent market transaction on arm’s length terms or were estimated using other valuation techniques;

• The revaluation surplus, indicating the changes for the period and any restrictions on the distribution of the balance to shareholders or other equity holders;

• The sum of all revaluation surpluses for individual items of property, plant and equipment within that classes; and

• The sum of all revaluation deficits for individual items of property, plant and equipment within that classes 114

bi. Procedures for conducting cost-benefit analysis The steps involved in conducting a cost benefit analysis are as follows:

• Examine the problem with the proper definition of the objectives of the analysis in focus;

• Consider alternative courses of actions, which would achieve the defined objectives in (a) above;

• Enumerate the costs involved and the benefits, which would accrue from the particular courses of action, to the establishment and the society;

• Evaluate the costs and benefits;

• Draw conclusions as to the economic and social effects of a particular choice; and

• Re-examine the problem and the chosen objectives to determine accomplishment.

ii. Procedures for conducting cost effectiveness analysis The steps involved in conducting a cost effectiveness analysis are as follows:

• Objective definition is to determine what actual target is;

• Sourcing and assessment of alternatives: After the public project has been determined, what are the cost alternatives that are available? The information in this regard have to be collated;

• Selection of measure to be adopted: What types of approaches will enable management to achieve the set objectives within a reasonable period of time will be determined;

• Development of cost estimates: Cost estimates have to be collated, addressing the issues of what to include and how to measure them; and

• Having ascertained the adequacy of cost effectiveness measures and relying on the information on cost estimates, the public sector organisation evolves the final decision, based on the principle of least cost.

Marking Guide Marks Marks a. Calculation of gain/loss on the disposal of the old equipment calculation of gain/loss 5 b. Disclosure requirements as per IPSAS 17: Any five disclosures 5 10 c Steps to be followed for conducting Cost Benefit Analysis and Cost Effectiveness Analysis: Explanation of steps to be followed for conducting Cost Benefit Analysis. Explanation of steps to be followed for conducting Cost Effectiveness Analysis 5 5 10 Total 20 115

Examiner’s Report Part (a) of the question tests candidates’ knowledge on the calculation of gain or loss on the disposal of old equipment and disclosure requirements of revalued amount of property, plant and equipment under IPSAS 17. Part (b) tests candidates’ knowledge on steps to be followed for conducting Cost Benefit Analysis and Cost Effectiveness Analysis. Few candidates attempted the question and performance was below average. The commonest pitfalls was the inability of the candidates to state the disclosure requirements of property, plant and equipment stated at revalued amount under IPSAS 17. Also they were unable to identify steps to be followed for conducting Cost Benefit Analysis and Cost Effectiveness Analysis. Candidates are advised to acquire adequate knowledge of the relevant provisions of IPSAS.

ai. Objectives of GIFMIS The overall objective is to implement a computerised financial management information system for the FGN, which is efficient, effective, and user friendly. Other specific objectives are as follows:

• Increases the ability of FGN to undertake central control and monitoring of expenditure and receipts in the MDAs;

• Increases the ability to access information on financial and operational performance;

• Increases internal control system to prevent and detect potential and actual fraud;

• Increases the ability to access information on government’s cash position and economic performance;

• Improves medium term planning through a Medium Term Expenditure Framework (MTEF);

• Provides the ability to understand the costs of groups of activities and tasks; and

• Increases the ability to demonstrate accountability and transparency to the public and cooperating partners.

ii. Objectives of IPPIS The objectives of Integrated Personnel and Payroll Information Systems (IPPIS) are as follows:

• Facilitates planning: Having all the civil service records in a centralised database will aid man power planning as well as assist in providing information for decision- making;

• Aids budgeting: An accurate recurrent expenditure budget on emolument could be planned and budgeted for on a yearly basis;

• Monitors the monthly payment of staff emolument against what was provided for in the budget;

• Ensures data base integrity so that personnel information is correct and intact;

• Eliminates payroll fraud such as ghost workers syndrome; and

• Facilitates easy storage, updating and retrieval of personnel records for administrative and pension processes.

b. Phases of economic cycle The following are the phases of economic cycle:

(i) Expansion In the expansion phase, there is an increase in various economic factors, such as employment, output, wages, profits, demand and supply of products and sales. In addition, the prices of factors of production and output increase simultaneously. In this phase, borrowers are generally in good financial condition to repay their debts, therefore, lenders lend money at higher interest rates. This leads to an increase in the flow of money. Due to increase in investment opportunities, idle funds of organisations or individuals are utilised for various investment purposes. Consequently, the cash inflows and outflows of businesses equilibrate. This expansion continues till the economic conditions become favourable;

(ii) Peak This phase refers to the point at which the increase in growth rate of business activities attains its maximum limit. In the peak phase, the economic factors, such as output, profit, sales, income and employment, are higher but do not increase further. There is a gradual decrease in the demand of various products due to increase in the prices of input. The increase in the prices of input leads to an increase in the prices of final products, while the income of individuals remain constant. This causes consumers to restructure their monthly budgets. Consequently, the demand for products such as jewelries, homes, automobiles, refrigerators and other durables starts falling;

(iii) Recession As discussed in the peak phase, there is a gradual decrease in the demand of various products due to increase in the prices of input and budget adjustment by consumers. When the decline in the demand for products becomes rapid and steady, recession phase sets in. In this phase, all the economic factors such as output, prices, savings and investment, start declining. Generally, producers are unaware of decrease in the demand for products and they continue to produce goods and services. In such a case, the supply of products exceeds the demand. Depression Over time, producers realise the surplus of supply when the cost of manufacturing of a product is more than revenue generated. This condition is firstly experienced by few industries, but slowly spreads to all industries. This situation is firstly considered as a small fluctuation in the market, but as the problem persists for a longer period, producers start noticing it. Consequently, producers cut down on further investment in factors of production such as labour, machinery and furniture. This leads to the reduction in the prices of factors, which results in the decline of demand of inputs as well as output;

(iv) Trough During the trough phase, economic activities of a country decline below the normal level. In this phase, the growth rate of an economy becomes persistently negative. In addition, there is a rapid decline in national income and expenditure, which it becomes difficult for debtors to pay off their debts. As a result, the rate of interest decreases; therefore, banks reduce lending. Consequently, banks face the situation of increase in their cash balances. Apart from this, the level of economic output of the country becomes low and unemployment becomes high. In addition, in trough phase, investors do not invest in stock markets and many weak organisations leave the industries or they liquidate. At this point, an economy reaches the lowest level of shrinking; and

(v) Recovery Once the economy touches the lowest level, it happens to be the end of negativism and beginning of positivism. In this phase, there is a turnaround at the trough and the economy starts recovering from the negative growth rate. Demand starts to pick up due to the lowest prices and consequently, supply starts reacting too. The economy develops a positive attitude towards investment and employment, hence, production starts rising. Employment also begins to rise and due to the accumulated cash balances with bankers, lending also shows positive signals. This will also lead to new investment in production processes and replacement of depreciated capital. Recovery continues until the economy returns to steady growth levels. This completes one full business cycle of boom and contraction. The extreme points are the peak and the trough.

Marking Guide Marks Marks a. Objectives of GIFMIS: Any five objectives: Objectives of IPPIS Any five objectives 5 5 10 b. Phases of economic cycle: Identification of five phases Explanation 2½ 7½ 10 Total 20

Examiner’s Report Part (a) of the question tests candidates’ knowledge of objectives of Government Integrated Financial Management Information Systems (GIFMIS) and Integrated Personnel and Payroll Information Systems (IPPIS), while part (b) asks the candidates to explain the phases of economic cycle as shown in the national gross domestic product during a given period. Majority of the candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to identify objectives of Government Integrated Financial Management Information Systems (GIFMIS) and Integrated Personnel and Payroll Information Systems (IPPIS), while other candidates mixed up their objectives. Also, some candidates could not explain the phases of economic cycle. Candidates are advised to have adequate knowledge of relevant regulations relating to public sector account for better performance in the Institute’s future examinations. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA