Public Sector Accounting and Finance · May 2021

a. Government Business Enterprise (GBE) is an entity that has all the following characteristics:

i. It is an entity with the power to contract in its own name; ii. It has been assigned the financial and operational authority to carry on a business; iii. It sells goods and services, in the normal course of its business to other entities at a profit or full cost recovery; iv. It is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm’s length); and v. It is controlled by a public sector entity. 94

b. Okuku State University Journal entries to record transactions not recognised for the year ended December 31, 2018 S/N Details DR CR N’m N’m i. Office equipment 153 Bank 78 Accounts payable 75 Being the cost of assets made up of the purchase cost plus all attributable costs ii. Building 500 Take over grant/ reserve 500 Being the fair value of building taken over from State College of Education

iii. Motor vehicles 20 Laboratory equipment 50 Donation 70 Being aids and grants received during the year from a UK based research institute.

iv. Motor vehicles 150 Bank 150 Being cost of motor vehicle acquired during the Year Depreciation charged 30 Accumulated depreciation 30 Being depreciation charged during the year.

v. Impairment 30 Accumulated impairment 30 Being impairment loss written off on building.

vi. Disposal account 8 Motor vehicles 8 Being the cost of motor vehicle disposed off during the year. Accumulated depreciation 3.2 Disposal account 3.2 Being accumulated depreciation on disposed motor Vehicle. 95 Bank 4 Disposal account 4.8 Loss on disposal 0.8 Being loss on the sale of the motor vehicle.

vii. Accumulated depreciation 0.4 Loss on disposal 0.6 Computer 1 Being loss on computer gutted by fire during the year.

viii. Investment property 300 Bank 300 Being the cost of investment property acquired during the year. Depreciation a/c 10 Accumulated depreciation 10 Being deprecation charged during the year.

c. Okuku State University Statement of financial position as at December 31, 2018 Cost Accumulated depreciation Carrying amount Non-current assets N’m N’m N’m Land and buildings 15,500.00 280.00 15,220.00 Equipment 1,202.00 140.20 1,061.80 Furniture 800.00 80.00 720.00 Plant and Machinery 550.00 50.00 500.00 Motor vehicles 612.00 75.80 536.20 Investment property 300.00 10.00 290.00 Total 18,964.00 636.00 18,328.00 Current assets: Inventories 11,000.00 Receivables 15,000.00 Bank 2,476.00 Total 28,476.00 Total assets 46,804.00 Less liabilities: Non current liabilities 30,000.00 Current liabilities 8,075.00 Total liabilities 38,075.00 Net assets 8,729.00 96 Equity Reserves 8,729.00

Workings W (i) Property, Plant and Equipment (PPE) Land and buildings Office & laboratory equipment Furniture Plant and equipment Motor vehicles Non-current assets N' million N' million N' million N' million N'million Unadjusted balanceb/f 15,000 1,000 800 550 450 Additions 153 150 Disposal (1) (8) Transfer 500 Donation -- 50 -- -- 20 Bal. at December 31, 2018 15,500 1,202 800 550 612 Accumulated depreciation/impairment Unadjusted balanceb/f 250 100 80 50 45 Depreciation charges 40.6 34 Impairment charges 30 -3.2 Disposal -- (0.4) -- -- -- Bal. at December 31, 2018 280 140.2 80 50 75.8 Carrying amount as at December 31, 2018 15,220 1,061.8 720 500 536.2 W (ii) Calculation of additional depreciation charges for the year N' million Office, computer and laboratory equipment (N203m X 20%) 40.6 Motor vehicles (N170million X 20%) 34.0 Investment property (N250million /25) 10.0 Total 84.6 97 W (iii) Calculation of adjusted cash balance for the year ended December 31, 2018 N'million N'million Bank Bal. 3,000 Sale of motor vehicle 4 Total 3,004 Expenditure Office equipment 78 Motor vehicle 150 Investment 300 528 Adjusted cash balance 2,476 Calculation of adjusted reserves balance for the year ended December 31, 2018 Reserves N'million N'million Bal b/d 8,275 Add Building taken over 500 Donation 70 570 8,845 Less Loss on disposal of vehicle 0.8 Depreciation charges 57.6 Impairment charges 30.0 Computer loss due to fire 0.6 89 Bal c/d 8,729

d. Qualitative characteristics of financial reporting The qualitative characteristics are:

i. Understandability Information is understandable when users might reasonably be expected to comprehend its meaning. For this purpose, users are assumed to have a reasonable knowledge of the entity’s activities, the environment in which it operates and be willing to study the information. Information about complex matters should not be excluded from the financial statements merely on the grounds that it may be too difficult for certain users to understand. 98

ii. Relevance Information is relevant to users, if it can be used to evaluate past, present or future events or to confirm, or correct past evaluations. In order to be relevant, information must also be timely.

iii. Materiality The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the decisions of users or assessments made on the basis of the financial statements. Materiality depends on the nature or size of the item or error of judgment in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have, if it is to be useful.

iv. Reliability Reliable information is free from material error and bias and can be depended on by users to represent faithfully that which it purports to represent or could reasonably be expected to represent.

v. Faithful representation For information to faithfully represent transactions and other events, it should be presented in accordance with the substance of the transactions and other events, and not merely in their legal form.

vi. Substance over form If information is to faithfully represent the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely in their legal form. The substance of transactions or other events is not always consistent with their legal form.

vii. Neutrality Information is neutral if it is free from bias. Financial statements are not neutral if the information they contain has been selected or presented in a manner designed to influence the making of a decision or judgment in order to achieve a predetermined result or outcome.

vii. Prudence Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or revenue are not overstated and liabilities or expenses are not understated. However, the exercise of 99 prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or revenue, or the deliberate overstatement of liabilities or expenses, because the financial statements would not be neutral and, therefore, not have the quality of reliability.

viii. Completeness The information in financial statements should be complete within the bounds of materiality and cost.

ix. Comparability Information in financial statements is comparable when users are able to identify similarities and differences between that and information in other reports. Comparability applies to the:

• Comparison of financial statements of different entities; and

• Comparison of the financial statements of the same entity over periods of time. An important implication of the characteristic of comparability is that users need to be informed of the policies employed in the preparation of financial statements, changes to those policies and the effects of those changes. Since users wish to compare the performance of an entity over time, it is important that financial statements show corresponding information for preceding periods.

x. Timeliness If there is an undue delay in the reporting of information, it may lose its relevance. To provide information on a timely basis, it may often be necessary to report before all aspects of a transaction are known, thus encouraging reliability. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decisions in the interim. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the decision-making needs of users.

xi. Balance between benefit and cost The balance between benefit and cost is a pervasive constraint. The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a matter of judgment. Furthermore, the costs do not always fall on those users who enjoy the benefits. Users other than those for whom the information was prepared may also enjoy benefits. For these reasons, it is difficult to apply a benefit-cost test in any particular case. Nevertheless, standard-setters, as well as those responsible for the preparation of financial statements and users of financial statements, should be aware of this constraint. 100

Examiner’s report The question tests candidates’ knowledge on the features of Government Business Enterprises (GBEs) in part (a), while parts (b) and (c) test candidates’ knowledge on the preparation of journal entries for after year end transactions and the preparation of adjusted statement of financial position respectively. Part (d) of the question also tests candidates’ knowledge on qualitative characteristics of financial reporting as required by appendix 2 of IPSAS 1 on presentation on financial statements. All the candidates attempted the question but their performance was below average. The commonest pitfalls were the inability of the candidates to understand the characteristics of Government Business Enterprises (GBEs) and financial reporting as required by IPSAS 1 on preparation of financial statements. Also, candidates could not prepare journal entries and incorporate the additional information given in the notes to the question in the preparation of adjusted statement of financial position. Candidates are advised to have adequate knowledge of relevant provisions of International Public Sector Accounting Standards (IPSAS) for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Characteristics of Government Business Enterprise Four characteristics 2 b. Journal entries Journal entries including narration 10 c. Statement of financial position Title 1 Calculation: Total non current assets 5¼ Total current assets 1 Total assets ½ Total liabilities ¾ Net assets ½ Equity- reserves ¼ Workings: Adjusted cost on PPE 3 Adjusted accumulated depreciation on PPE 2½ Additional depreciation per annum on PPE and investment 1 Adjusted cash balance at the end of the year 1¾ Adjusted reserves balance at end of the year 2½ 20 d. Qualitative characteristics of financial reporting Identification of four characteristics 4 Explanation of four characteristics 4 8 Total 40 101

SECTION B

a. Debt Sustainability Analysis (DSA) When government is able to service all its debts without undue stress or adjustments to its revenue and expenditure balances in the medium to long term. Debt is sustainable when government’s current and future streams of income cover expenditure. The objectives of DSA

• To evaluate government’s ability to finance its programmes and at the same time service the ensuing debt without undue pressure on its revenue stream.

• To reduce chances of excessive increase of debt.

• To recommend for a borrowing that limits risk of debt distress.

• To help guide countries and donors in mobilising critical financing for low income countries. Benefits of DSA To integrate fiscal and debt issues more effectively into economic analysis; To make comparison across countries, as it raises the profile of fiscal and debt issues in low income countries. To dissuade policy makers from pursuing policies that deliver short–term benefits at the cost of creating unsustainable debts in the future. To allow policy makers to identify the economic sectors responsible for excessive debt accumulation, (be they the national government, sub-national governments and state enterprises or the private sector) To assess the impact of and response to powerful technological and demographic changes that constrain government policies in the long run. To quantify the fiscal impact of population aging, immigration and other long– run population changes.

b. i. The differences between accrual accounting and cash accounting

• In accrual accounting, comprehensive set of financial statements are prepared to measure financial performance, financial position and cash condition of the entity. However, cash accounting reports mainly on cash condition of the entity by emphasising receipts and payments information. 102

• Under accrual accounting, non-financial assets are capitalised and depreciated over their useful life span but under cash accounting cost of non-financial assets are written off in the year of acquisition or construction, hence, no depreciation is charged.

• Under accrual accounting, all obligations of government are disclosed on the statement of financial position but in cash accounting system, such information is not disclosed in the financial statements until they are paid.

• Under accrual accounting, allowances are permitted for receivables but no such allowances are accounted for under cash accounting.

• Under accrual accounting, revenues are reported when they are earned, and expenditures, when incurred but under cash accounting, Revenues are recognised only when received, and expenditures, when actually made.

ii. Justifications for adopting accrual accounting are that:

• It provides superior measure of performance in terms of cost of service, efficiency and effectiveness in service delivery.

• It promotes accountability and transparency in public financial management through increasing disclosure of all assets and liabilities.

• It provides comprehensive financial information that supports decision-making and control.

• It ensures general improvement in the quality of financial reporting in the public sector.

iii. Commitment accounting: It is a basis that records anticipated expenditure evidenced by a contract or a purchase order. In public sector financing, budgetary and accounting systems are closely related to the commitment basis. It is a technique of accounting in which expenditures are recorded when decision is made by management to spend on an activity or item. It is a process by which appropriations are encumbered against future expenditure decisions of management. Commitment accounting strengthens public financial management in the following ways:

• It ensures that departments do not over spend their appropriation without further authorisations;

• It also ensures that spending is done within the ambit of a vote, hence misapplication of funds may be reduced or curtailed;

• It promotes effective planning of expenditure within the available resources and ensures that disbursements are synchronised with commitment;

• Separate payment tabulation is available when required; 103

• Adjustments occurring when actual expenditure has been obtained does not affect the final accounts;

• It is an aid to financial control. A commitment is regarded as a charge, which has been made on a budget provision;

• It takes a realistic view of financial transactions;

• It reveals an accurate picture of the state of financial affairs at the end of the period;

• It is used for both economic and investment decision-making, as all parameters for performance appraisals are available;

• It aligns with the matching concept; and

• It makes allowance for the diminution in the value of assets employed to generate the revenue of the enterprise.

Examiner’s report Part (a) of the question requires candidates to explain the term “Debt Sustainability Analysis”, including its objectives and benefits, while part (b) requires candidates to explain the differences between accrual and cash accounting, justifications for adopting IPSAS accrual accounting in the public sector and commitment accounting including in which ways it could be used to strengthen public financial management. Few candidates attempted the question and performance was below average. The commonest pitfalls were the inability of the candidates to differentiate between the objectives and benefits of “Debt Sustainability Analysis (DSA)” They also lacked the knowledge of accounting bases and justification for the adoption of IPSAS accrual accounting in the public sector. Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in future examinations.

Marking guide Marks Total a Explanation of Debt Sustainability Analysis 2 Identification of three objectives 3 Identification of five benefits 5 10 b.i. Three differences between accrual accounting and cash accounting 3 Three justifications for adopting IPSAS and Accrual accounting in the public sector 3 ii. Explanation of commitment accounting 1 Three ways of how it could strengthen public financial management 3 10 Total 20 104

a. Strategies initiated to enhance cash management control

i. Allocation of Ministries, Departments and Agencies (MDAs) indicative envelopes. ii. All costs for proposals for inclusion in the budget prepared by MDAs are required to be examined by the Ministry of Finance (MoF) before admission into the annual budget. iii. All disbursements from the Consolidated Revenue Fund (CRF) must be in line with the provisions of the Constitution and the Appropriation Act. iv. The authority to disburse funds is conveyed by the Honourable Minister of Finance after the budget has been approved, through Financial Warrants, as well as, through instrument of Authority to incur Expenditure (AIE), where the need arises. v. Recurrent warrants are issued monthly for personnel costs and quarterly for overheads and capital warrants. vi. Lump sum releases (100%) are not allowed, however where such provision is admitted for exceptional reasons, proposals, which are intended to be financed from the lump sum provision, are examined and disposed of by BoF. vii. The automation of budget data capture and computation templates enhance operational efficiency for expenditure control. viii. Application of embargo on releases to Ministries, Departments and Agencies (MDAs) where necessary, enhances cash management discipline. ix. Introduction of electronic movement of funds and information to provide more ease and accessibility to government services for citizens and taxpayers. x. Introduction of Integrated Payroll and Personnel Information System (IPPIS). The initiatives were to identify ghost employees, ghost pensioners and implement a computer-based IPPIS geared to ensuring efficient management of the wage bill. xi. Introduction of Treasury Single Account (TSA) is an accounting system under which all government revenue receipts and income are collected into one single account maintained by Central Bank of Nigeria (CBN). xii. Introduction of the Medium Term Expenditure Framework (MTEF) is an integrated top-down and bottom-up system of public expenditure management. 105 Factors militating against effective cash management and other public sector financial management reforms

i. There has been total disregard for accountability on the part of many public enterprises over the years. ii. A lot of public enterprises do not bother to produce promptly their annual reports and audited financial statements due to inefficiency, negligence and mal-administration. iii. Funds are allocated yearly without getting the accountability reports of previous years. Accountant General should begin to request for submission of audited financial statements before subventions are released by the end of specified month of the year. iv. One of the root causes of the ineffective management of the public sector finances is the poor quality of leadership provided by the management of government agencies and inadequate staffing. v. Lack of effective Management Information Systems (MIS) powered by Information and Communication Technology (ICT) infrastructure is a militating factor on effective financial management in the public sector. vi. Public sector practitioners or operators seem to be more interested in expenditure/outflows, believing that there will always be substantial revenue/inflow, losing sight of revenue generation from various sources.

b. Calculation of Net Present Value (NPV) Year D/F Project A Project B Project C 12 % Cash flow PV Cash flow PV Cash flow PV N N N N N N 0 1 20,000,000 -20,000,000 20,000,000 -20,000,000 20,000,000 -20,000,000 1 0.8929 21,800.00 19,465,220 14,000,000 12,500,600 0.8929 1,500,000 1,339,350 2 0.7972 24,000,000 19,134,800 10,000,000 7,972,000 0.7972 500,000 398,600 NPV 804,570 -468,600 472,600 Project A - The positive NPV of N804,570 indicates that the project will earn more than the required rate of returned of 12%. Project B - The negative NPV of N468,600 indicates that the project would fail to make the expected return of 12%. 106 Project C - The positive NPV of N472,600 indicates that the project will earn more than the required rate of return of 12%. Conclusion: Project A has positive NPV of N804,570 while project C has positive NPV of N472,600. Project A should be undertaken because it has a higher positive NPV. It should be noted that investing in risk free security that will earn maximum interest of 12% p.a. will not be necessary because projects A and C gave positive NPV.

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the strategies to enhance cash management control and factors militating against effective cash management, while part (b) tests the candidates’ decision making skills on project evaluation under mutually exclusive scenario. Majority of the candidates attempted the question and performance was above average. The commonest pitfalls were the inability of the candidates to identify the strategies to enhance cash management control and factors militating against effective cash management. Candidates are advised to cover all sections of the syllabus for better performance in future examinations.

Marking guide Marks Marks a. Five strategies initiated to enhance cash management control 5 Five factors militating against effective cash management 5 10 b. Calculation of Net Present Value (NPV) Title ¼ Calculation of discount factors ¾ Calculation of present values and net present values 6 Decision on project’s A, B and C 1½ Conclusion 1½ 10 Total 20 107

a. i. MTEF is a medium term high level strategic plan of the government, usually three years in Nigeria and which forms the basis of annual budgeting taking into consideration the legal requirement that spending should not exceed revenue by more than 3% of GDP. It shifts the psychology of budgeting from “needs” to an “availability of resources” In line with the Part II, Sections 11-17 of the Fiscal Responsibility Act (FRA), 2007, the MTEF shall contain the following for the next three financial years:

• Macro-economic framework;

• Fiscal strategy paper;

• Expenditure and revenue framework;

• Consolidated debt statement; and

• Statement on contingent liabilities. Objectives of MTEF

• To improve macroeconomic balance, including fiscal discipline through good estimates of the available resource envelope, which are then used to make budgets that fit squarely within the envelope.

• To improve inter and intra sectoral resource allocation by effectively prioritising all expenditure (on the basis of the government’s socio- economic programme) and dedicating resources only to the most important ones.

• To increase greater budget predictability as a result of commitment to more credible sectoral budget ceilings.

• To increase greater political accountability for expenditure outcomes through legitimate decision-making.

• To make public expenditure more efficient and effective, essentially by allowing line ministries greater flexibility in managing their budgets in the context of hard budget constraints and agreed policies and programmes.

ii. Budget Call Circular is also known as the Budget Circular. It is a budget manual aimed at providing guidance to Ministries, Departments and Agencies (MDAs) in preparing the Medium Term Expenditure Framework (MTEF) and annual budget estimates of revenue and expenditure.

iii. Difference between MTEF and budget call circular The difference is that the MTEF is a 3-year projection, while the call circular is an annual estimation, which forms part of the MTEF. 108

b. Feasibility of Primary Health Centres PPP project PPP guiding principles.

i. Value for money It states that the project should be cheaper when executed by PPP than when executed by the public entity. In this case, the private sector will provide all the financing for the project and therefore the Ministry would not spend any money on the project. Thus, value for money is ensured in the proposal.

ii. Risk allocation The risk associated with PPP project should be shared by both the public and the private entities or at best, the public entity should transfer the risk to the private sector. In case the Ministry proposes to immune the private sector of risk associated with the project of PPP. This will be contrary to the guiding principles of PPP. The risk identified should be shared or transferred to the private sector.

iii. Ability to pay Affordability of the service is paramount in PPP considerations. Existing primary health services are free throughout the country and introducing PPP will mean paying for the services by the users. This is likely to make the services unaffordable. On account of ability to pay, the project is likely to fail.

iv. Local content and technology transfer The project proposes the use of local materials and skills, which meets the requirement of the PPP guiding policy.

v. Environment, climate and social safeguards The project is environmentally friendly and therefore it meets this requirement of the guiding policy.

vi. Safeguard of public interest and consumer rights The project seeks to benefit the entire citizens. Risk associated with the Primary Health Centre projects

i. Exchange, default and interest rate risks This may give rise to exchange rate risk, default risk and interest rate risk and all these risks should be appropriately allocated in the PPP contract, if the project is to be embarked upon.

ii. Demand risk. The risk that the project will be executed and the patronage will be lower than anticipated, leading to revenue fall to the private sector. Allocation of demand risk is necessary. 109

iii. Availability risk. The risk associated with the inability of the private sector to deliver the project at the agreed time.

iv. Construction risk. The risk associated with strikes, physical collapse of structure, accidents on the project, etc.

Examiner’s report Part (a) of the question tests candidates’ knowledge of Medium Term Expenditure Framework (MTEF), Budget Call Circular” and the main difference between the two, while part (b) tests the principles and associated risks of the feasibility of the proposed primary health centres under Public-Private Partnership (PPP). Majority of the candidates attempted the question and performance was above average. The commonest pitfalls were the inability of the candidates to have in-depth knowledge of Medium Term Expenditure Framework (MTEF) and Public- Private Partnership (PPP). Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a.i. Explanation of Medium Term Expenditure Framework(MTEF) 2 Four objectives 4 ii. Explanation of Budget Call Circular 2 iii. Difference between MTEF and Budget Call Circular 2 10 b.i. Public-Private Partnership policy: Identification of three principles 3 Explanation of three principles identified 3 ii. Associated risks of the feasibility of the proposed primary health centres Identification of two risks 2 Explanation of two risks identified 2 10 Total 20 110

a. Costs excluded from costs of inventories The following costs are excluded from the cost of inventories and recognised as expenses in the period in which they are incurred:

i. Abnormal amounts of wasted materials, labour or other production costs; ii. Storage costs, unless those costs are necessary in the production process prior to a further production stage; iii. Administrative overheads that do not contribute to bringing inventories to their present location and conditions; and iv. Selling costs. IPSAS 12 disclosure The standard stipulates that the financial statements should disclose the following:

i. The accounting policies adopted in measuring inventories, including the cost formula used; ii. The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; iii. The carrying amount of inventories carried at fair value less cost to sell; iv. The amount of any reversal of any written-down that is recognized in the statement of financial performance in the period; v. The circumstances or events that led to the reversal of a written- down of inventories; vi. The carrying amount of inventories pledged as security for liabilities; and vii. The cost of inventories recognised as an expense during the period or the operating costs applicable to revenues, recognised as an expense during the period, classified by their nature.

b. Ratios commonly used to analyse the degree of indebtedness of a country There are four major ratios or indicators commonly used to determine the extent of indebtedness of any country. These ratios are explained briefly below:

i. External debt service to export ratio. This relates total external debt service to export of goods and services. It reflects the level of export earnings committed to servicing external debts. Since external debts are denominated in foreign currency, then servicing and repayment must be in foreign currency which can only be procured through export earnings.

ii. External debt stock to export ratio. The ratio relates to the availability of foreign exchange earnings in the economy. It is an important indicator since foreign exchange is needed to pay off foreign debts. It reflects the extent to which total exports of goods 111 and services can be used to liquidate external debt outstanding. The movement in this ratio is an indicator of the nation’s debt service capacity.

iii. External debt stock to nominal gross domestic product ratio. This ratio measures the extent to which total domestic output can be deployed to defray total outstanding external debt obligations. The higher this ratio, the greater the degree of external debt burden.

iv. External debt service to nominal gross domestic product ratio This ratio relates to the proportion of total domestic output set aside for servicing external debt. The ratio will be rising while total domestic output is falling. Sources of external debt Nigeria has contracted a number of debt obligations from various sources, some of which are discussed briefly below:

i. Paris club of creditors. The club came into existence in 1956 as a result of outstanding balances in the books of Argentina and some European countries. Since then, it has become a common forum where debtor nations and creditor countries meet to discuss debt repayment problems. The club actually represents only government guaranteed creditors. Membership of the club includes United States of America, United Kingdom, Federal Republic of Germany, France and Canada which guaranteed the export activities of their nations through their official export credit guarantee agencies. When the recipient nation’s government is unable to pay the foreign exchange equivalent of the domestic currency cover paid by the importer, it then becomes government owed debt to creditor nations.

ii. London club of creditors. These are mainly uninsured and unguaranteed debts extended by commercial banks to nationals of debtor countries. Members of the club are commercial banks mainly of industrialised nations. The first meeting of the London club was convened in 1976. Such meetings are held to discuss repayment problems and conclude restructuring agreements.

iii. Multilateral creditors. These are international institutions funded by member nations. They include the World Bank and its affiliates such as International Monetary Fund (IMF), African Development Bank (AfDB), European Investment Bank (EIB), International Development Assistance (IDA), International Fund for Agricultural Development (IFAD), that provide credit for development purposes, balance of payment support, as well as private ventures. 112

iv. Promissory note creditors. These are providers of uninsured trade credits, arising mainly from trade arrears accumulated between 1982 and 1983. The debts were refinanced by the issuance of promissory notes to the creditors.

v. Bilateral creditors Bilateral credit is provided by a government to another government. Such credits are intended for development purposes in the recipient countries. Examples are Official Development Assistance (ODA), sometimes provided on bilateral basis with a minimum grant element of 25 per cent and export credits guaranteed by export credit agencies of exporting countries.

vi. Private sector creditors These are usually short-term credits extended by commercial banks, institutional investors and individual foreign suppliers in form of suppliers ’or buyers’ credits.

Examiner’s report Part (a) of the question tests candidates’ knowledge on the provisions of IPSAS 12 as it relates to costs that are excluded from the cost of inventories and disclosure requirements in the financial statements. Part (b) tests candidates’ knowledge on ratios commonly used to analyse the degree of indebtedness of a country and the sources of external debts. Few candidates attempted the question and performance was below average. The commonest pitfalls were the inability of the candidates to mention the costs that are excluded from the cost of inventories and disclosure requirements of IPSAS 12 on inventories. Also they were unable to identify ratios commonly used to analyse the degree of indebtedness in a country. Majority of the candidates used investment ratios for the analysis. Candidates are advised to have adequate knowledge of relevant provisions of IPSAS and make use of the Pathfinder and Study text of the Institute for better performance.

Marking guide Marks Marks a. Four exceptions to the costs of inventories 4 Four requirements to be disclosed in the financial statements 6 10 b. Ratios commonly used to analyse the degree of indebtedness of a country: 113 Identification of three ratios used Explanation of three ratios identified 3 3 Sources of external debt: Identification of two sources Explanation of two sources identified 2 2 10 Total 20

(a) Basic principles guiding expenditure assignment The basic principles that should guide expenditure assignment as suggested by Anwar Shah are discussed briefly below:

i. Efficient provision of public services Public services are provided most efficiently by the jurisdiction having control over the minimum geographic area that would internalise benefits and costs of such provision. In this case, local governments are better placed to meet the need of the local residents being the closest to the grassroots.

ii. National equity or fairness It is commonly argued that effective redistribution is possible only through national programmes, that is, progressive income taxes and transfers to the poor. Allowing local subnational governments to carry out redistributive policies are likely to drive out the rich.

iii. Provision of quasi-private goods Modern governments provide many services that, by nature, are essentially private goods, for example, health, education and social insurance. The national government’s involvement is nevertheless justified to ensure horizontal equity and minimum standards of service in all jurisdictions.

iv. Preservation of the internal common market Preservation of an internal common market is an important area of concern to most nations undertaking decentralisation. Sub- national governments, in their pursuit of labour and capital, may indulge in beggar-thy-neighbour policies and, in the process, erect barriers to goods and factor mobility. Decentralisation of government regulatory functions may create the potential for disharmonious economic relations among sub- national units. In order to prevent misuse of power, the Constitution guarantees free domestic flow of goods and services that may be the best alternative to assigning regulatory responsibilities solely to the national government. 114

v. Economic stabilisation It is customary to argue that the federal government should be responsible for stabilisation policies, because such policies cannot be carried out effectively by local jurisdictions. Monetary policy has little scope for being carried out by local governments. Drawbacks of expenditure assignment i. Lack of formal assignment The absence of a formal assignment of responsibilities among the multi-levels of government is a common problem with expenditure assignment. A formal assignment of responsibilities contributes to the stability of the system of intergovernmental finances. From a fiscal management perspective, a formal expenditure assignment also introduces an important element of certainty for budget planning at all levels of government.

ii. Inefficient assignments Another common problem in the assignment of expenditure responsibilities is the inefficiency of the assignments. First is the issue of capital expenditure responsibilities. The problem has been the assignment of all capital expenditure responsibilities at the central level, independently of the level of government responsible for the provision of the services associated with the capital infrastructure. This assignment is guided either by the capacity to finance large projects or by the belief that only central government officials are qualified to make capital investment decisions. However, the full assignment of capital expenditure responsibilities is inappropriate.

iii. Ambiguity in certain assignments Despite the ambiguity in assignments, there are few open conflicts or disputes that have taken place between the central and sub-national governments in terms of assignment of expenditure responsibilities. For example, there are arguments on whose responsibility it is to maintain internal security in Nigeria when the police force is under the control of the central government while the governors have little or no control over the police.

iv. Co-sharing of responsibilities The co-sharing of responsibilities within a particular public service is likely to cause confusion leading to inefficiencies. In the case of education, it would appear to be, for the most part, a local (or state) activity. Many key decisions in educational policies are carried out at the central level in many countries, for example, the Federal Ministry of Education may be responsible for the construction of school buildings, curriculum design, teacher training and production of textbooks. Activities that are reserved for the local level may be the recruitment and hiring of teachers, however, 115 even in these cases, local authority is limited because of the dual subordination of school officials to both the Federal Ministry of Education and to the sub-national government. Similar issues to those in the education sector arise in other sectors, such as health. The co-sharing or fragmentation of responsibilities within a particular public service has the disadvantage that it is likely to cause confusion, leading to inefficiencies.

b. Uses of budget Budgets are used for the following:

i. Planning Budgets are plans in which monetary values are assigned to what are to be achieved in a determinable future time, for example, a year.

ii. Communication Budgets assist in communicating horizontally and vertically. When budgets are being prepared, individuals, groups, communities and associations will inform government about their areas of interests. This is upward communication. When the budget is approved, government reads it to members of the public and publishes it in newspapers. This is communicating downwards.

iii. Motivation Government motivates its staff through promotions and improved conditions of service, for assisting in the full and successful implementation of the budget.

iv. Standard for measurement of performance Since a budget is a target, it is a measure of performance. What is achieved is recorded and compared with the targeted of performance. The process of implementation draws management attention to problematic areas.

v. Evaluation of economic and social policy Budgets are used to solve social problems of inflation and unemployment.

vi. Cost reduction technique project appraisal Evaluation of operations and procedures may result in cost savings. Steps to be followed to ensure completeness of using National Chart of Accounts (NCOA) for budgeting The following steps should be taken to ensure completeness of using the National Chart of Accounts (NCOA) for budgeting. This involves identifying: 116

i. The government institutions (cost and revenue centre) from the hierarchy of administrative list and codes provided in the chart of accounts; ii. The economic items that would be executed during the fiscal year; iii. The functions intended to be performed by government institutions (revenue and cost centre); iv. The programmes intended to be carried out by government institutions; v. The sources of financing the budgeted amount for each budget line; and vi. The planned location for the economic transactions or government institutions.

Examiner’s report Part (a) of the question tests candidates’ knowledge of the principles guiding expenditure assignment and its drawbacks, while part (b) requires the candidates to discuss uses of budget and steps to be followed to ensure completeness of using the National Chart of Accounts (NCOA) for budgeting. Few candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to identify principles guiding expenditure assignment and their drawbacks. Also, candidates could not discuss the steps to be followed to ensure completeness of using the National Chart of Accounts (NCOA) for budgeting. Candidates are advised to have adequate knowledge of relevant provisions of National Chart of Accounts (NCOA) and other regulations relating to public sector account for better performance in future examinations.

Marking guide Marks Marks a. Basic principles guiding expenditure assignment: Identification of four principles 2 Explanation of four principles identified 4 Drawbacks: Identification of two drawbacks 2 Explanation of two drawbacks identified 2 10 b. Budgets: Identification of four uses of budget 2 Explanation of four uses of budget identified 4 Four steps of National Chart of Accounts for budgeting 4 10 Total 20 117 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA