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FINANCIAL MANAGEMENT FRAMEWORK

HANDBOOK

Authorised by: The Treasurer

Issue date: 25 June 1998

Chapter 1: About this handbook

Chapter 2: Revenue Cycle

Chapter 3: Expenditure Cycle

Chapter 4: Asset and liabilities cycle - property, plant and equipment

Chapter 5: Asset and liabilities cycle - inventory

Chapter 6: Asset and liabilities cycle - cash

Chapter 7: Asset and liabilities cycle - other assets

Chapter 8: Asset and liabilities cycle - liabilities

Chapter 9: Financial reporting

Chapter 10: Planning and analysis

Chapter 11: Human resources

Chapter 12: Control Checklist Appendix

Chapter 13: Glossary of terms

Chapter 1: About this handbook

Introduction

The Financial Management Handbook has been developed by the Department of Treasury and Finance to assist the staff of agencies with the implementation of the principles set out in the Financial Management Framework. The Financial Management Framework has been issued by the Treasurer as a contribution towards financial management improvement across the public sector. The Financial Management Framework sets out broad principles which are central to good financial management in any organisation and this handbook is intended to provide examples of the controls and procedures which can be employed by agency managers and staff who may have responsibility for ensuring that the principles set out in the framework are adhered to. The procedures set out in the handbook are not mandatory, nor are they exhaustive. They are intended to provide a reference which can be used when developing internal policies or when assessing the adequacy of existing controls and practices. Each agency will need to assess the applicability of the suggested procedures or controls given its own unique environment, and to adapt and supplement the material in the handbook to ensure its relevance. Structure of the chapters

The structure of this document is based on the functions of financial management as per the Financial Management Framework (FMF) and includes a typical agency's accounting cycles:

• Revenue Cycle; • Expenditure Cycle; • Asset and Liability Cycle;

o property, plant and equipment o inventory o cash o other assets o liabilities

• Financial Reporting; • Planning and Analysis; • Human Resources; and • Control Checklists

http://www.treasury.sa.gov.au/fmt/pdf/fmf/fin_man_frame.pdf


Structure of the procedures

The procedures are generally control based, however the accounting cycles (ie Revenue, Expenditure and Asset and Liability Cycles) include both accounting and period and year end procedures. The procedures have been prepared in accordance with fundamental principles in financial management and suggested best practices referred to in the Financial Management Framework. The procedures are not exhaustive, nor will they be applicable to all agencies. However they will assist Chief Executives in developing systems, processes and procedures in their agencies. As discussed previously the development of agency procedures will need to be tailored to reflect the special characteristics of each agency. As the focus of this handbook is largely on generic type procedures, further emphasis is required by agencies in addressing many of the requirements which are unique to each agency's own environment. To best achieve this, agencies will need to refer to the FMF, which clearly sets out the fundamental principles and key performance objectives of all the related finance functions. These principles are extremely useful in ensuring that all procedures are developed in the most efficient and effective manner. Included in this document are examples of accounting entries, including a flowchart and a commentary on each entry, as well as a checklist for Chief Executives to assess the adequacy of the establishment and maintenance of control procedures. The checklist is not exhaustive and is merely intended to provide agencies with guidance in assessing internal controls. Chief Executives may choose to apply other processes to assess the adequacy of internal control, however those that choose to adopt the approach in this document will need to tailor its contents to reflect the circumstances of their operation.


Chapter 2: Revenue Cycle

Overview of revenue cycle

The revenue generated by an agency must be effectively managed, accurately recorded and the transactions efficiently processed to ensure revenue is maximised and non collections minimised. The following procedures which support the prescribed elements in the Financial Management Framework represent some effective management practices that, if properly implemented, will assist in minimising the risk of error or fraud. Further procedures on Cash Management are covered in Chapter 6: Asset and liabilities cycle - cash. Accounting based procedures for revenue cycle

The following accounting based procedures will ensure revenue transactions are accurately recorded and processed on a timely basis. See examples of accounting entries, flowcharts and commentary provided for each type of revenue in the section Accounting entries for revenue. A checklist is available in Chapter 12: Control Checklist Appendix.

Revenues from goods and services

1. Revenue arising from the provision of goods and services should be recognised when:

o an agreement exists with one or more external entities supporting the provision of goods; and

o all acts of performance necessary to establish a valid claim against the external parties have been completed.

2. Revenue from the sale of goods and services should be recorded at the time the goods and services are provided to the customer. In the case of a cash sale, the revenue should be recognised immediately.

3. Revenue is to be recognised at the time the amounts are earned ( gains control), not when the amounts are received. However, due to the uncertainty of amounts to be received, some revenue items will be recorded on a cash basis. These include amounts received for items such as licence and accreditation fees, fines and penalties.

4. At the time the goods and services are provided any cash received should be recorded in the cashbook (or equivalent) and in the general ledger as revenue.


At the same time an invoice should be raised and any amounts owing to the agency should be recorded in the debtor's sub-ledger and the general ledger as revenue. The subsequent cash receipt should be recorded against accounts receivable in the cashbook and the debtor's sub-ledger.

Revenue from licence and accreditation fees

Revenue received for licence and accreditation fees, where the period of accreditation is greater than 1 reporting period, should be recognised in their entirety in the reporting period when the agency gains control of the revenue. Revenue from appropriations

All revenue received from Recurrent and Capital Appropriations should be accounted for when agencies gain control of the amounts appropriated for its use. This usually occurs when amounts have been received. Revenue from doubtful debts

A provision for doubtful debts should be raised against a receivable as soon as the agency becomes aware that its recovery is doubtful. This should be done after careful analysis of the aged debtor listing, or upon information received (for example, details from an accounting firm advising that a debtor is in liquidation). Accounting entries for revenue

Accounting entries for sale of goods and materials

Primary entries for sale of goods and materials

Entry and description Account category

Movement

PAE1 DR—Bank Deposit Account Asset Increase CR—Revenue - Sale of Goods (To record any cash received at the time of sale.)

Revenue Increase

PAE2 DR—Accounts Receivable - General Asset Increase CR—Revenue - Sale of Goods (To record amount owing to the Agency for

Revenue Increase

the goods provided.)

Secondary entries for sale of goods and materials


Movement

SAE1 DR—Bank - Deposit Account Asset Increase CR—Accounts Receivable - General (To record subsequent receipts.)

Asset Decrease

Commentary on sale of goods and materials As noted in the procedures, revenue should be recognised, accounts receivable recognised and customers billed (ie. invoices) as soon as practicable after goods and services have been provided. Where services are provided over a period of time it is recommended that progress bills are raised to reflect that portion of revenue earned to date, rather than billing upon completion. This amounts to good debtor management and an overall better control over the agency's Cash Management Practice. For more information refer to the flowchart Revenues - Sales of Goods and Materials. Fees for service income

Primary entries for fees for service income


Movement

PAE1 DR—Accounts receivable - General Asset Increase CR—Revenue - Fees for service (To recognise revenue once the services have been provided, normally upon invoice.)

Revenue Increase

PAE2 DR—Bank - Deposit Account Asset Increase CR—Deferred Revenue (To recognise moneys received in advance for services which have not yet been provided.)

Liability Increase

Secondary entries for fees for service income


Movement


Asset Decrease

SAE2 DR—Deferred Revenue Liability Decrease CR—Revenue - Fees for Service (To recognise revenue which has been received in advance, over the period to which revenue relates.)

Revenue Increase

Commentary on fees for service income As previously stated, revenues are recognised at the time the amounts are earned (gains control) not when the amounts are received. However due to the uncertainty of amounts to be received, some revenues may be recorded on a cash basis. For more information refer to the flowchart Revenues - Fees for service income. Accounting entries for administered revenues

Where the amount is administered through the agency's deposit account: Primary entries for administered revenues - agency's deposit account


Movement

PAE1 DR—Bank - Deposit Account Asset Increase CR—Administrative Item Payable (To record any cash received and the related liability in the General Ledger.)

Liability Increase

PAE2 DR—Administered Item Receivable Asset Increase CR—Revenue (To record the revenue in the Administered Items Account.)

Revenue Increase

Where the amount is paid directly into the Consolidated Account: Primary entries for administered revenues - Consolidated Account


Movement

PAE1 DR—Consolidated Account Revenue Offset Revenue Decrease CR—Revenue (To record any cash received and the negative revenue offset in the Administered Items Account.)

Revenue Increase

Where the amount is paid into a specific administered deposit account: Primary entries for administered revenues - specific administered deposit account


Movement

PAE1 DR—Cash Asset Increase CR—Revenue (To record any cash received and the related revenue in the Administered Items Account.)

Revenue Increase

Commentary on administered revenues Administered revenue arises from responsibilities or activities undertaken by agencies which are not attributable to the agency. This revenue may be credited direct to a separate Treasury line (eg. revenue for the sale of Crown Land and property, fines and penalties and private plated vehicle contributions) or credited to the agencies' own Deposit Account for eventual payment to the relevant party/parties. Agencies do not have control over administered revenue and merely act as a collection agency for Treasury or as an intermediary between recipients and the relevant government appropriators/agencies. Information about administered items is relevant to an assessment of each agency's performance. Normally administered expenses will be separated in the general ledger by the use of unique objects and/or the use of separate business/cost centres. This separation enables easier reporting of administered activities both on a monthly and yearly basis.

Accounting entries for appropriations

Primary entries for appropriations


Movement

PAE1 DR—Bank - Deposit Account Asset Increase CR—Capital Appropriations (To record Treasury funding relating to capital items.)

Revenue Increase

PAE2 DR—Bank - Deposit Account Asset Increase CR—Recurrent Appropriations (To record Treasury funding relating to recurrent items.)

Revenue Increase

Commentary on appropriations Recurrent and capital appropriations will be recorded on a cash basis only as this is when agencies gain control of the funds. The differentiation between Capital and Recurrent Appropriations is based on the source of funding and does not necessarily indicate how the funds will be recorded by each agency. For instance Capital Appropriations may include an amount in respect of maintenance on capital items, which would in fact be expensed and included in the Operating Statement. Capital Appropriations that are used to purchase Capital items (eg Land and Buildings, Plant and Equipment) would be included in the Statement of Financial Position as an asset. Accounting entries for donations and grants

Primary entries for donations and grants


Movement

PAE1 DR—Bank - Deposit Account Asset Increase CR—Revenue - Donations & Industry Contributions (To record the contribution of monetary resources.)

Revenue Increase

PAE2 DR—Property, Plant & Equipment Asset Increase

CR—Revenue - Donations & Industry Contributions (To record the contribution of non monetary resources such as property, plant and equipment, for instance.)

Revenue Increase

PAE3 DR—Operating Expenses Expense Increase CR—Revenue - Donations & Industry Contributions (To record the contribution of non monetary resources such as donated goods and services, for instance.)

Revenue Increase

Commentary on donations and grants Donations and grants are non reciprocal in the sense that the transferor and transferee do not directly sacrifice and receive approximately equal value. Donors may impose restrictions in respect of the manner or timing of the agency to use the contributed assets effectively, however this restriction does not of itself create a present obligation to make a reciprocal transfer of economic benefits. Grants can also be received with restrictions on the purpose for which it may be used. This is particularly evident with the many grants received from the Commonwealth Government. It could be argued that whilst the purpose for which it was received remains undischarged, a liability exists. The grant is not classified as a liability as it does not give the grantor a right to directly receive benefits from the grantee and hence does not have a present obligation to make future sacrifice of economic benefits to the grantor. Donations, industry contributions and grants from other agencies include grants in the form of donations, prize funds, bequests, gifts and the provisions of free services (only recognised if the agency would have purchased the service if it had not been donated). Donations may include non-monetary items such as property , plant and equipment. Non-monetary contributions are to be recorded at their 'fair value'. Fair Value is to be interpreted as the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length exchange. In practice, the non monetary contributions would be valued based on current market rates ie. what the agency would have to pay had the donation not been made. Further details on grants and donations are contained in Accounting Policy Statement No. 11, Contributions. This policy statement also details the required disclosure requirements

Accounting entries for accounts receivable doubtful debt provisions

Primary entries for accounts receivable doubtful debt provisions


Movement

PAE1 DR—Doubtful Debts Expense Expense Increase CR—provision for Doubtful Debts (To recognise amounts against receivables to reflect the portion which the agency may not recover.)

Asset Offset Increase

PAE2 DR—provision for Doubtful Debts Asset Offset Decrease CR—Accounts Receivable - General (To write off amount recorded as owing to the agency for goods provided.)

Asset Decrease

PAE3 DR—Doubtful Debts Expense Expense Increase CR—Provision for Doubtful Debts (To revise the provision for doubtful debts to reflect the portion which the agency may not recover following the write off of a debt which was previously included in the provision.)


Secondary entries for accounts receivable doubtful debt provisions


Movement

SAE1 DR—Accounts Receivable - General Asset Increase CR—Revenue (To recognise revenue once the services have been provided, normally upon invoice)

Revenue Increase

Commentary on accounts receivable doubtful debt provisions A provision for doubtful debts should be raised against a receivable as soon as the agency becomes aware that its recovery is doubtful. This occurs after the lapse of time, careful analysis of the aged debtors listing, or upon information received (for example details from an accounting firm advising a debtor is in liquidation).

Once a debt which had earlier been provided against becomes clearly irrecoverable, it is written off against the statement of financial position provision and not recorded as an expense in the operating statement. The doubtful debt provision may then require adjustment to reflect the portion of receivables which agencies estimate may not be recovered. Agency specific procedures need to be established to ensure debts are written off with appropriate approval by management. There is a degree of judgment required to determine when a provision should be raised against a receivable and later, when that receivable should be written off. When calculating a provision, agencies should take account of all the available evidence about the condition of its receivables. Some examples are:

• historical trend of debt write-offs; • aged profile of receivables at the end of the accounting period; • the repayment history of the individual borrowers; • the borrowers' financial position; • information which is available in the public domain eg. media stories/reports,

analyst reports, etc; • analysis of the geographical location; • analysis of the class of customers; and • analysis of the specific cost centres which originally raised the invoice.

The monitoring of debtors in determining which are likely to be classified as doubtful needs to be performed continuously throughout the financial year and not only considered as an end of financial year activity. Effective credit control over debtors by management ensures that debtors pay their accounts in full and on time. If effective credit control exists, then the likelihood of bad debts diminishes. For more information refer to the flowchart Revenues - Fees for service income. Control based procedures for revenue

The control based procedures minimise the risk of error or fraud and therefore ensure the effective management of revenue. See the checklist in Chapter 12: Control Checklist Appendix. Accounts Receivable

Only orders for accounts receivable that qualify for goods and services under policy guidelines should be processed. The accounts receivable authorisation systems should therefore provide accurate and timely information regarding approved credit limits, current balances due, and aged balances of receivables. Purchase orders should be accurately and expeditiously processed by:

• Prenumbering order forms and periodically following up on those not processed within a reasonable timeframe.

• Accounts receivable order information being verified with appropriate customer service representatives.

To ensure all goods and services are accurately billed in the proper period:

• Standard contract terms should be used and non standard contract terms should be communicated to the accounts receivable section.

• Goods and services should be identified in the correct reporting period by means of a prenumbered and properly dated document.

• The date of the physical performance of services or delivery of goods should be checked against the invoice date.

To ensure invoices for all authorised supply of services are accurately recorded:

• Service or dispatch documents and sales invoices should be prenumbered and accounted for.

• Delivery information should be matched with invoice details. • Accounts receivable invoices or statements should be periodically mailed and

any disputes or inquiries investigated by individuals independent of the invoicing function.

• The number of debtor complaints regarding improper invoices or statements should be monitored.

To ensure proper control over moneys received:

• Ensure security over mail collection, cashiering, terminal access, handover arrangements and cash in transit.

• Two officers should be involved in the opening of mail, with all cash received being recorded in a cashbook in each person's presence.

• Ensure immediate stamping of all cheques received with "not negotiable". • Maintain a post dated cheque register. • Establish a policy against encashment of cheques or giving 'change' on

cheques received. • Bank moneys received promptly. • Reconcile banking amounts with agency records.

Authorisations

To ensure authorised credits and only such credits are accurately recorded:

• Credit memos should be authorised by individuals independent of the accounts receivable function.

• All correspondence authorising credits should be reviewed for proper authorisation and all credit memos prenumbered and accounted for.

Customers

In order to handle customer inquiries expeditiously and efficiently:

• Accurate and timely information should be provided to customers upon request.

• Staff should be provided with initial and periodic customer service training and training on agency services available.

• Customer service representatives should receive training and guidance to understand the agency's objectives, obligations to the community, and the requirements of individual customers.

All arrangements for the provision of credit (other than by way of credit cards) by agencies to purchasers of goods and services should be authorised and should only be provided to credit worthy customers. This can be done by:

• Establishing and maintaining adequate procedures for pursuing unpaid demands for payment.

• The use of credit limits and credit reference checks. • The maintenance of a bad debtors' database. • The effective management of the use of progress payments.

Segregation of duties for revenue

Where practicable the following functions within the revenue cycle should be segregated:

• provision of goods and services; • invoicing; and • cash processing, debtors and general ledger.

Where practicable the following tasks should be segregated:

• cash collection and deposit preparation; • recording of cash receipts; • general ledger inquiries; and • bank reconciliation approval.

Access restrictions

Managers should ensure that there are adequate physical controls over access to computer equipment, such as by locking terminal room doors, and also controls within programs, such as user passwords which require a specified level of user authorisation for each application. Document controls

Where applicable the following documents should be received, approved and processed with controls to ensure that the revenue details are consistent throughout:

• orders; • shipping dockets/notifications of services provided; • invoices; • remittances; and • cheques received.

Data entry and processing

Processing controls such as batch totals, programmed balancing controls, data transmission controls, and cut-off controls should be in place. Controls over the operation of the system, for instance proper period end cut-off procedures, must be communicated throughout all levels of the agency. Edit and validation checks should be incorporated into systems programs to facilitate the identification and correction of data entered which does not meet pre-determined criteria. Management review

The various components of the Revenue Cycle should be reviewed by management to substantiate the receipt of all revenue. This can be achieved by:

• Comparing actual results on revenue and debtor balances to budgeted amounts and investigating any significant variance.

• Analysing reports on such areas as revenues and associated costs by division, outstanding debtors, credit notes issued, as well as any individually significant revenues or debtor balances.

• Investigating any unusual reconciling items between the debtor's subledger and the general ledger control account.

• Ensuring that the determination of the revenue amounts were adequately authorised by an appropriate person.

Period and year end requirements for revenue

• This covers the period and year end requirements for debtors, any adjustments and reports.

Debtors sub-ledger for revenue

The sub-ledger should be reconciled to the general ledger at period end. Any reconciling amounts should be investigated and corrected.

Debtors accrual for revenue

Where an accounting department cannot process all the revenue amounts for a certain financial period an accrual should be recorded in the debtors control account and the appropriate revenue account. This entry should then be reversed in the following financial period. Period end adjustments for revenue

Any adjustments that are necessary should be made at the end of a financial period in respect of revenue and debtors. These may include:

• Recording any revenues identified during the reconciliation of the bank, including any adjustment for dishonoured cheques.

• Adjusting the provision for doubtful debts to reflect current debtor balances and collection trends.

Period and end year reporting for revenue

Reports generated by the Revenue Cycle should include:

• financial and non financial reports; • sales-related and cash related reports; and • daily, weekly and monthly reports.

Specifically some of these key reports include:

• Monthly statement of outstanding sales invoices for a customer. • Open order reports listing those sales orders that are not completely shipped

and billed. • Accounts receivable ageing schedule identifying overdue amounts by time

period and those accounts that are urgently in need of collection.

A detailed analysis of the age and size of current debtor balances should be performed at the end of each financial year. Overdue balances should be reviewed to determine its probability of collection.

Chapter 3: Expenditure Cycle

Overview of expenditure cycle

The expenditure incurred by an agency must be effectively managed, accurately recorded and the transactions efficiently processed. The agency's Chief Executive must ensure this occurs through the appropriate delegation of responsibility for expenditure transactions to accountable officers. The following procedures which support the prescribed elements in the Financial Management Framework, represent some effective management practices that if properly implemented will assist in the minimisation of risk of error or fraud. Accounting based procedures for expenditure

The following procedures will ensure that purchases of goods and services are accurately accounted for. See examples of accounting entries, flowcharts and commentary provided for each type of expenditure in the section Accounting entries for expenditure. A checklist is available in Chapter 12: Control Checklist Appendix.

Non employee expenses and creditors, and goods and services

Upon receipt of an invoice for goods which have been received or services which have been provided, an expense should be recorded in the general ledger and a liability in the creditors sub-ledger. Expenses should be recognised at the time goods are delivered or when services are provided. All goods purchased below the value of an agencies capitalisation threshold should be expensed at the time of purchase. (Agencies should refer to the Accounting Policy Statements for details on the current capitalisation threshold used for whole of Government reporting). Administered expenses

Administered expenses should be recorded separately. These expenses should not be shown in the Operating Statement, but instead disclosed in a Statement of Administered Items and should be maintained separately on the general ledger.


Trust expenses

Trusts (including statutory funds or other entities) controlled by agencies should be included with other controlled expenses. Trusts administered by agencies which it does not control but are controlled by the SA Government are to be included with other administered items. Trusts administered by agencies which are not controlled by either the agency or the SA Government must only be disclosed as a note to the financial statements. Trust expenses should be recognised at the time when goods or services are provided. However some trust expenses may take the form of a court judgment or claim for payment. In this instance the expense will be recognised in the financial period in which the payment is made. Operating lease expenditure

Expenses associated with operating leases should be recorded as they fall due. Employee expenses

To ensure employee expenses are properly recorded employee expenses should be recorded in the period in which they accrue. To properly record employee entitlements all employee entitlements should be recorded in the period in which the employees have earned them. Leave and other employee entitlements

Accurate provisions for employee entitlements should be recognised as liabilities in the Statement of Financial Position.

Accounting entries for expenditure

Accounting entries for non employee expenses and creditors, and goods and services

Primary entries for non employee expenses and creditors, and goods and services


Movement

PAE1 DR—Operating Expenses Expense Increase CR—Creditors - General (To record the acquisition of goods and/or services.)

Liability Increase

Secondary entries for non employee expenses and creditors, and goods and services


Movement

SAE1 DR— Liability Decrease CR—Bank - Deposit Account (To record subsequent payments made.)

Asset Decrease

SAE2 DR—Operating Expenses Expense Increase CR—Creditors - Accrual (To accrue for goods and/or services provided in the accounting period but which have not been recorded.)

Liability Increase

SAE3 DR—Creditors - Accrual Liability Decrease CR—Operating Expenses (To reverse the accrual of goods and/or services provided in the previous accounting period.)

Expense Decrease

Accounting entries PAE1 and SAE1 are processed when the actual invoice is processed for the goods and/or services previously accrued. The net result is an expense being recorded in the period in which the goods and/or services were

provided to the agency. The credit to Operating Expenses from SAE3 nets off with the debit to Operating Expenses from PAE1. Commentary on non employee expenses and creditors, and goods and services The purchase of goods includes for example computer related items, supplies of plant equipment, furniture and fittings. All purchased goods below each agency's capitalisation threshold should be expensed. Further details on capitalisation thresholds, including aggregate and network assets is contained in the Asset and Liability Cycle of this Handbook. The acquisition of services includes for example, travel, transportation, property leasing, utilities and many general operating expenses such as advertising. The acquisition of services differs from that of goods because a purchase order is often not prepared for services, nor is there a delivery docket. Alternative documentation is often required. It is important that correct objects are used in classifying the operating expenses. This will assist in managers receiving meaningful reports accurately detailing account code allocations. For more information refer to the flowchart Non Employee Expenses - Purchase Goods and/or Services. Accounting entries for operating lease expenditure

Primary entries for operating lease expenditure


Movement

PAE1 DR—Operating Lease Expenditure Expense Increase CR—Creditors - General (To record periodic operating lease expenditure incurred.)

Liability Increase

Secondary entries for operating lease expenditure


Movement

SAE1 DR—Creditors - General Liability Decrease CR—Bank - Deposit Account Asset Decrease

Commentary on operating lease expenditure Where the effect of the lease is not to gain effective ownership control of an asset but merely to obtain the use of an asset for less than its life, an operating lease exists. A finance lease on the other hand is based on the understanding that the lessee will make periodic lease payments with the aim of controlling the asset for a substantial majority of the assets useful life. This changes the substance of the lease from a rental agreement to a purchase. In these cases the appropriate accounting treatment would be to capitalise the entire cost of the lease as an asset and the capital amount repayable as a liability in accordance with the provisions of AAS 17, Accounting for Leases. The treatment of finance leases is dealt with specifically in Finance leases in Chapter 7: Asset and liabilities cycle - other assets. For more information refer to the flowchart Non Employee Expenses - Operating Lease Expenditure. Accounting entries for administered expenses

Primary entries for administered expenses paid through the agency's deposit account


Movement

PAE1 DR—Administered Item payable Liability Decrease CR—Bank - Deposit Account (To record any cash paid and the related reduction in liabilities in the General Ledger.)

Asset Decrease

PAE2 DR—Expense Expense Increase CR—Administered Item Receivable (To record an expense in the Administered Items Account.)

Asset Decrease

Primary entries for administered expenses paid from the Consolidated Account for Special Acts or Ministerial Other payments


Movement

PAE1 DR—Expense Expense Increase

CR—Appropriation (To record appropriation received and an expense in the Administered Items Account.)

Revenue Increase

Primary entries for administered expenses paid from a specific administered deposit account


Movement

PAE1 DR—Expense Revenue Increase CR—Cash (To record cash paid and the related expense in the Administered Items Account.)

Asset Decrease

Commentary on administered expenses Administered expenses arise from responsibilities or activities undertaken by agencies which are not attributable to the agency. These expenses may be paid via a separate Treasury line (eg. certain salaries and expenses) or from the agency's Deposit Account. In certain circumstances, agencies initially receive the funds (administered revenue) prior to the eventual payment to the relevant party/parties. Administered expenses may also include refunds of amounts which were previously recorded as administered revenue. Information about administered items is relevant to an assessment of the agency's performance. Normally administered expenses will be separated in the general ledger by the use of unique objects and/or the use of separate business/cost centres. This separation enables easier reporting of administered activities both on a monthly and yearly basis. Where administered items include amounts paid from Consolidated Account for Special Acts or Ministerial Other payments, the payment timing will exactly match the timing of appropriation for that payment and both should be recorded simultaneously. Accounting entries for trust expenses

The accounting entries are identical to that of other non-employee expenses except the trust expense accounts used will probably be a unique object pertaining to the trust activity of the agency. Commentary on trust expenses Trust expenses arise from funds which agencies hold in the capacity as trustee.

Depending on who controls the funds governs where the expenses will be recorded. Beneficiaries of trusts include other government agencies, Treasury and Finance, individuals who may have suffered pecuniary loss, and other individuals who have a valid claim against the Trust. Normally trust expenses will be separated in the general ledger by the use of unique objects and/or the use of separate business/cost centres. This separation allows for easier reporting of trust activities both on a monthly and yearly basis. For more information refer to the flowchart Payments - On Account. Accounting entries for Employee related expenses - salaries and wages

Primary entries for employee related expenses - salaries and wages


Movement

PAE1 DR—Salaries and Wages Expense Expense Increase CR—Creditors - Government Entities & Other

Liability Increase

CR—Bank - Deposit Account (To record the salary and wages expense corresponding to a pay period. The creditor amount includes withholding for employee contributed superannuation, tax and other miscellaneous deductions which are to be remitted at a later date.) NB. Some Agencies may use employee related clearing accounts instead of the Creditors account.

Asset Decrease

PAE2 DR—Payroll Tax Expense Expense Increase DR—Employer Contributed Superannuation Expense Increase DR—Other Employee On-Costs Expense Increase CR—Creditors - Government Entities & Other

Liability Increase

CR—Bank - Deposit Account (To record employee on-costs and employer contributed superannuation corresponding to a pay period. The creditor amounts are to be remitted at a later date.)

Asset Decrease

Secondary entries for employee related expenses - salaries and wages


Movement

SAE1 DR—Creditors - Government Entities & Other

Liability Decrease

CR—Bank - Deposit Account (To record subsequent remittances for deductions withheld at the end of the pay period, for instance employee contributed superannuation.)

Asset Decrease

If an agency uses employee related clearing accounts instead of the Creditors account, then the debit as shown in SAE1 will clear the balance owing in the clearing account to the creditor.


Movement

SAE2 DR—Salaries and Wages Expense Expense Increase CR—Accrued Salaries and Wages (To accrue for salaries and wages unpaid at the end of a financial period.)

Liability Increase

SAE3 DR—Accrued Salaries and Wages Liability Decrease CR—Salaries and Wages Expense (To reverse the accrual of wages and salaries from the previous accounting period.)

Expense Decrease

Accounting entry PAE1 is processed from the relevant payroll system (eg. Concept) which will then overlap the period in which the accrued entry was made for wages and salaries. The net result is an expense being recorded in the period in which the employee provided service to the agency. The credit to Salaries and Wages from SAE3 will not totally net off with the debit to Salaries and Wages from PAE1. Commentary on employee related expenses - salaries and wages Salaries and wages may also include for example commissions, performance bonuses, living away from home allowances, overtime, penalties, termination pay, and accrued salaries and wages. For more information refer to the flowchart Employee Related Expenses - Salaries and Wages.

Accounting entries for annual leave

Primary entries for annual leave


Movement

PAE1 DR—Salaries and Wages Expense Expense Increase CR—Bank - Deposit Account (To record annual leave taken during service and paid that period.)

Asset Decrease

In some agency's owing to the quality of their payroll system, an entry may be made directly to annual leave expense account based on their pro rata entitlement and then paid out of employee provisions once it is taken.


Movement

PAE2 DR—Annual Leave Expense Expense Increase CR—Salaries and Wages Expense (To record at the end of each financial period, the transfer from payroll system to the general ledger, the amount of annual leave paid during service.)

Expense Decrease

PAE3 DR—Annual Leave Expense Expense Increase CR—Bank - Deposit Account (To record the payment of annual leave on termination.)

Asset Decrease

PAE4 DR—Annual Leave Expense Expense Increase CR—Annual Leave Provision (To adjust the accrual for annual leave owing at the end of the financial year (this provision should not be reversed in the following financial year.)

Liability Increase

Commentary on annual leave For most agency's, annual leave is initially charged to salaries and wages expense because it is paid through the normal payroll system and is not separately identifiable due to the quality of existing ledger systems. When an employee takes leave, Entry

PAE1 would be included in the normal salaries and wages entry Employee Related Expense - Salaries. Annual Leave paid on termination would be recorded separately from the normal payroll entries. Because the amount of annual leave paid in a financial year is required to be separately disclosed in the notes to the financial statements, it will be necessary to determine and reclassify the amount of annual paid leave entitlement which has been included in the year's salaries and wages expense. This reclassification should normally be done at the end of each financial period. Employment on-costs relating to the annual leave provision are also raised at the end of the reporting period. Further details relating to annual leave are contained in Accounting Policy Statement No. 9, Employee Entitlements and AAS 30, Accounting for Employee Entitlements. For more information refer to the flowchart Employee Related Expenses - Annual Leave. Accounting entries for sick leave

Non vesting sick leave is charged as part of the salaries and wages expense (refer Employee Related Expenses - salaries and wages) when it is paid. Provided that sick leave taken in future periods is not greater than the benefits accrued, no further accounting treatment or reclassification is required. Primary entries for sick leave – vesting


Movement

PAE1 DR—Salaries and Wages Expense Expense Increase CR—Bank - Deposit Account (To record sick leave taken during service and paid that period.)

Asset Decrease

PAE2 DR—Sick Leave Expense (Vesting) Expense Increase CR—Salaries and Wages Expense (To record at the end of each financial period, the transfer from payroll system to the general ledger, the amount of sick leave paid during service.)

Expense Decrease

PAE3 DR—Sick Leave Expense (Vesting) Expense Increase CR—Bank - Deposit Account (To record the payment of sick leave on termination.)

Asset Decrease

PAE4 DR—Sick Leave Expense (Vesting) Expense Increase CR—Sick Leave Expense (Vesting) (To adjust the accrual for vesting sick leave provision at the end of the financial year.)

Expense Increase

Commentary on sick leave The key consideration in determining the liability for sick leave at reporting date is whether the sick leave is vesting or non-vesting. Most SA Government employees are subject to non vesting sick leave entitlements. In simple terms, the accounting treatment is such that where, on average, non-vesting sick leave taken is less than total entitlement then there is no liability. In order to calculate this liability for non-vesting sick leave, Agencies should produce reports each financial year from the relevant human resources system detailing sick leave taken for the current financial year, together with sick leave accrued for the financial year. This report could also be used by management for agency best practice comparisons regarding the percentage of sick leave taken versus sick leave accrued. Further details relating to sick leave are contained Accounting Policy Statement No. 9, Employee Entitlements and AAS 30, Accounting for Employee Entitlements. Accounting entries for long service leave

Primary entries for long service leave


Movement

PAE1 DR—Salaries and Wages Expense Expense Increase CR—Bank - Deposit Account (To record long service leave (LSL) taken during service and paid in that period.)

Asset Decrease

Where the payroll systems permit, an entry shall be made directly to LSL expense account based on their pro rata entitlement, and a debit is raised against the provision once it is taken.


Movement

PAE2 DR—Long Service Leave Expense Expense Increase CR—Salaries and Wages Expense (To record at the end of each financial period, the transfer from payroll system to

Expense Decrease

the general ledger, the amount of LSL paid during service.) PAE3 DR—Long Service Leave Expense Expense Increase CR—Bank - Deposit Account (To record the payment of LSL on termination.)

Asset Decrease

PAE4 DR—Long Service Leave Expense Expense Increase CR—Long Service Leave Provision (To adjust the accrual for long service leave owing at the end of the financial year (this provision should not be reversed in the following financial year.)

Liability Increase

Commentary on long service leave Employees accrue long service leave on an annual basis after the completion of ten years effective service by the Government, however pro-rata leave can be taken after seven years. This long service leave may either be taken during service, or paid out on termination. Any leave taken is to be taken into account. Each agency will recognise an expense for the financial year equal to the movement in the liability for long service leave throughout the period, adjusted for leave taken/paid, and transfers of employees to/from the agency. To simplify the estimation of long service leave liability for each agency, each agency should take into account, as a benchmark, an actuarial assessment prepared by the Department of Treasury and Finance based on a significant sample of employees throughout the South Australian public sector. This benchmark is the number of years of service which produces a value equal to the actuarially calculated net present value. The liability for long service leave is calculated by multiplying the pro-rata entitlement for each employee whose service years exceed the benchmark by the remuneration rate current at the reporting date. Each agency should review the benchmark annually to ensure an adequate reflection of its long service leave liability is maintained. It should also have the Auditor General confirm its appropriateness prior to adoption. Employment on-costs relating to the long service leave provision are also raised at the end of the reporting period. Further details relating to long service leave are contained in Accounting Policy Statement No. 9, Employee Entitlements and AAS 30, Accounting for Employee Entitlements. For more information refer to the flowchart Employee Related Expenses - Long Service Leave.

Accounting entries for superannuation

Primary entries for superannuation


Movement

PAE1 DR—Superannuation Expense Expense Increase CR—Unfunded Super Revenue (Treasury to record the amount of expense and unfunded revenue relating to superannuation. This entry is a Treasury responsibility and is not to be undertaken by the Agency.)

Liability Increase

PAE2 DR—Salaries and Wages Expense Expense Increase DR—Superannuation Expense Expense Increase CR—Superannuation Clearing Liability Increase CR—Bank - Deposit Account (To record salary and wages and the employer contributed superannuation corresponding to a pay period.)

Asset Decrease

Secondary entries for superannuation


Movement

SAE1 DR—Superannuation Clearing Liability Decrease CR—Bank - Deposit Account (To record subsequent employer contributed superannuation remittances.)

Asset Decrease

Commentary on superannuation All SA Government employees are covered by some forms of superannuation scheme operated by the Government, statutory authorities or other public sector organisations. These schemes include member and employer contributions to voluntary schemes and employer contributions to the State Superannuation Benefits Scheme, in lieu of Commonwealth mandated Superannuation Guarantee arrangement, for employees who are not members of the voluntary schemes. For more information refer to the flowchart Employee Related Expenses - Superannuation.

Accounting entries for employee related liabilities, salaries and wages

Primary entries for employee related liabilities, salaries and wages


Movement

PAE1 DR—Salaries and Wages Expense Expense Increase CR—Accrued Salaries and Wages (To accrue for salaries and wages unpaid at the end of the financial period. This entry should be reversed in the following period.)

Liability Increase

Secondary entries for employee related liabilities, salaries and wages


Movement

SAE1 DR—Salaries and Wages Expense Expense Increase CR—Creditors Liability Increase CR—Bank - Deposit Account (To record salary and wages corresponding to a pay period. The creditor amount includes withholding for superannuation, tax and other miscellaneous deductions which are to be remitted at a later date.)

Asset Decrease

SAE2 DR—Salaries and Wages Expense Expense Increase CR—Creditors - Government Entities (To record as on-costs an agency's contributions owing in respect of its employees.)

Liability Increase

SAE3 DR—Creditors - Government Entities Liability Decrease CR—Bank - Deposit Account (To record subsequent remittances of amounts withheld and/or on-costs.)

Asset Decrease

For more information refer to the flowchart Employee Related Liabilities - Salaries and Wages.

Accounting entries for long service leave

Primary entries for long service leave


Movement

PAE1 DR—Long Service Leave Expense Expense Increase CR—Long Service Leave Provision (To accrue for long service leave unpaid at the end of the financial period. This entry would not be reversed in the following period - see reasons below.)

Liability Increase

Secondary entries for long service leave


Movement

SAE1 DR—Long Service Leave Expense Expense Increase CR—Bank - Deposit Account (To record the payment of long service leave during service or on termination. Note that the long service leave taken during service may initially be charged to salary and wages expense and then reclassified.)

Asset Decrease

SAE2 DR—Long Service Leave Expense Expense Increase CR—Creditors - Government Entities (To record as on-costs an Agency's contributions owing in respect of its employees for the long service leave provision.)

Liability Increase

Commentary on long service leave

Long service leave entitlements are earned through employees' service and may be taken by employees after a qualifying period. Under existing legislation, employee entitlements for long service leave are as follows:

• service up to and including 15 years - 9 calendar days/year; • service greater than 15 years - 15 calendar days/year.

Employees accrue long service leave on an annual basis after the completion of ten years effective service by the Government, however pro-rata leave can be taken after seven years. This long service leave may either be taken during service, or paid out on termination. Any leave taken is to be taken into account. At the end of the financial year it is necessary to record the accurate provision for long service leave entitlements owing to all employees and related on-costs. The recording of this provision will also serve to correct the amount of the year's long service leave expense and on-costs so that it represents entitlement earned during the years and not entitlement paid. The provision for long service leave from the previous year should be left in the records until the current financial year end. This provides the following benefits:

• maintaining a liability in the statement of financial position which approximates the amount of long service leave owing at any point during the financial year; and

• prevents drastic fluctuations in the long service leave expense that would result from a full provision being put through in the last financial period of the year and then reversed in the first period of the following financial year.

The provision must take into account employees' service year dates, including part completed years to ensure that the correct liability is taken into account. If the actuarial assessment calculated benchmark changes, additional entries will be required to reflect the change (either upward or downward movement) in the long service leave provision as shown in accounting entry PAE1. In applying the benchmark, agencies should consider whether its experience of employee retention is sufficiently different to that of most other agencies to render use of the benchmark and short-cut method unreliable in estimating its long service leave liability. Agencies should ensure that the leave liability calculated using the short-cut benchmark method is not materially different from an estimate determined by using the present value basis of measurement and detailed group-based estimates (long hand method). Further details relating to the measurement of long service leave liabilities are contained in AAS 30, Accounting for Employee Entitlements. For more information refer to the flowchart Employee Related Liabilities - Long Service Leave. Control based procedures for expenditure

This outlines the key internal controls recommended for the Expenditure Cycle. The procedures provide a guide to the types of controls that are necessary to ensure effective control in a standard organisation. In some situations the controls listed will not be able to be implemented in a cost effective manner or more stringent controls may be required. In these cases alternate action should be taken. To ensure purchases are completely and accurately recorded, before recording purchases, the invoice should be matched to the appropriate control documentation (eg purchase order and goods received note) and ensure that all documents have been

duly authorised. Expenses should be recorded when the acquitted invoice is received, and unrecorded liabilities at period end should be accrued. Controls should include:

• Prenumbering and accounting for purchase orders, receiving reports and other similar documentation.

• Matching invoice, receiving order and purchase order information and following through on missing or inconsistent information.

To ensure appropriate payment of invoices:

• Reductions in liabilities should be recorded as soon as payments are made. • Before payments are released, ensure sufficient authorisation has been

attained. • All payments should be made in accordance with the due date of payment.

To ensure proper control over cheque runs:

• Ensure cancellation of all incorrect cheques. • Ensure authorised signatures on all cheques. • Cheques should be posted immediately after they are produced. • Reconcile each cheque run with system report.

Use of credit cards

The use of credit cards should be restricted to authorised cardholders. The following controls should also be established:

• Regular reviews should be made of cardholders to ensure that a card is still necessary and that transaction and monthly spending limits are appropriate.

• Complete prohibition of the use of cards for private expenditure. • Ensure each card account is reconciled monthly and appropriate supporting

documentation is received for each transaction. • Discrepancies should be followed up immediately. • Cards should be kept securely at all times.

Appropriate authorisations

Appropriate delegations authorities for expenditure should be established and documented within the department. These should be reviewed, updated and distributed regularly and approved by the Chief Executive.

Segregation of duties for expenditure

The following functions should be performed by separate sections within each accounting department:

• purchasing; • receiving; and • invoice processing, creditor, and general ledger maintenance.

The following functions should be performed by separate sections within the payroll function:

• timekeeping; and • personnel, payroll processing, payments and general ledger maintenance.

Within the section performing the invoice processing, creditor, and general ledger maintenance, the following tasks should be performed by different officers where practicable:

• disbursement preparation; • disbursement approval; • recording of cash disbursements; and • general ledger entries.

Vendor controls To monitor vendors:

• Investigate and periodically update records regarding vendor capabilities in service delivery, quality, capacity, price, leadtime requirements, customer satisfaction, and financial and management stability.

• Monitor frequency of credit claims and returns. • Monitor problems relating to materials out of stock or incorrectly supplied. • Develop data on alternate vendors and periodically evaluate vendor selection

decisions. • When calling for tenders, except where the estimated amount of a purchase is

$5,000 or less, all offers should be received in writing. At least three representative offers should be sought wherever possible.

• Specify procedures for vendors to notify of potential problems in supplying in line with contracted terms.

Accurately record receipt of goods

To accurately record receipt of goods:

• Maintain procedures for promptly updating payables and stores records.

• Periodically verify that prenumbered receiving documents have been entered in the information system.

• Maintain purchase order information so that unfulfilled orders can be identified to determine orders that are overdue.

• Compare goods or services received with those ordered and investigate those not properly ordered.

• Ensure transfer documentation accompanies all transfers of materials.

Security and access restrictions

Controls should exist to restrict access to computer programs and computer data records. These will include:

• Controls built into the software such as password access controls, which will restrict staff access to programs and data appropriate for their position and function.

• Physical controls over access of staff and the public to computer terminals, including locking doors with access to computer terminals and requiring identification to be displayed by staff while in an area with computer access.

• Similar physical controls should be applied regarding access to all non computerised financial and personnel records, such as purchase orders and accounts payable files.

Document controls

The following reports should be prepared and analysed:

• purchases by supplier; • outstanding creditors • cash discounts taken; • individual significant purchases; and • creditor balances.

Data entry and processing

To ensure control over data entry the computer system should have validation checks incorporated into its application programs to identify and/or correct any data entered which does not meet pre-determined criteria. To ensure control over data processing, controls need to be in place to ensure entries are completed in the proper financial period. To assist in this process computer application programs should include the use of batch totals, programmed balancing controls, data transmission controls, and cut-off controls. Computer applications should be set up to distinguish certain transactions as inaccurate or unacceptable, based on pre determined criteria. For example, an account

coding for a cash disbursement may be identified as inappropriate. These may be the result of:

• A numerical entry utilising a check digit being inappropriate. • An account or creditor code being used that does not exist on the system. • Amounts outside specified criteria for that account being entered.

Computer applications can be set up to treat the transaction in three possible ways:

• Accept the transaction but note it as an exception. • Transfer the transaction to a suspense account. • Reject the transaction entirely.

Computer applications should automatically produce reports detailing any transaction dealt with in any of the three ways described above. These transactions should be promptly addressed and corrected. Payroll controls

To ensure proper control over the payroll cycle:

• Review and approve initial pay and any subsequent additions and changes. • Periodically verify payroll database information eg bone fide reports. • Review and approve initial deductions/benefits elections. • Use standard forms for making adjustments to payroll records.

Regular management reviews

In order to maintain effective control the following reviews should be regularly performed:

• Reports should be developed to compare actual results (on expenses and creditor levels) to budgeted amounts. Any significant variances should be investigated.

• Any significant or unusual reconciling items between the creditors subledger and the general ledger should be investigated.

• Adequate supporting documentation should be provided with cheques and payroll authorisation for review by the authorised cheques signatories.

• Comparing actual employee related expenses to budgeted amounts and investigating any significant variances.

• Analysing reports on such areas as average employee costs by department, new hires and terminations, sick and annual leave taken, overtime payments, and individually significant compensation and benefit payments.

• Any significant or unusual reconciling items between the payroll system and the general ledger control account should be investigated.

Period and year end requirements for expenditure

Period end adjustments for expenditure

To ensure appropriate reconciliations are conducted.

• All bank accounts should be reconciled. • The creditor's subledger should be reconciled with the general ledger at the

end of each month. All reconciling amounts should be investigated and corrected.

To ensure control over void (or stale) cheques, those written that have remained unpresented for longer than 15 months should be removed from the unpresented cheques listing and credited back to the account from which the payment was allocated. Accurate records should be maintained to allow claims of such funds by creditors to be verified at a later date.

Chapter 4: Asset and liabilities cycle - property, plant and equipment

Accounting based procedures for property, plant and equipment

• Chief Executives must ensure that assets are effectively and efficiently managed by developing and implementing policies to identify, acquire, accurately value, manage and dispose of assets. The following procedures which support the prescribed elements within the Assets and Liability section of the Financial Management Framework, represent some effective management practices that if properly implemented will assist in the minimisation of risk of error or fraud. See examples of accounting entries, flowcharts and commentary provided for each type of asset and liability in the section Accounting entries for property, plant and equipment. A checklist is available in Chapter 12: Control Checklist Appendix. Acquisitions

Assets should be recognised in accordance with Accounting Policy Statement No. 2, which suggests an asset threshold of $10,000. A capitalisation threshold lower than this amount can be adopted by agencies if the total value of the assets below this threshold represents a significant percentage of the total value of the agency's assets. At the time the purchase requisition or other initial documentation is processed for an asset, it should be determined whether the expenditure relates to acquisition, an enhancement, or maintenance. When the goods or services have been received the asset should be recorded in the asset register and the liability in the creditors subledger. Construction

If the asset is in the process of being constructed, the asset value should be transferred to the fixed asset register from the general ledger's work-in-progress at the completion of the construction project. During construction the project costs may be recorded in the work-in-progress ledger until the project is completed.



Disposals

The disposal of an asset should be recorded at the time of disposal (that is, at the time the asset is no longer used in operations). If cash proceeds are received for the disposal of the asset, the cash is recorded in the cashbook and in the general ledger. The balance of accumulated depreciation as well as the item of plant and equipment should be removed in the fixed asset register. The gain/loss on disposal should be recorded in the general ledger. For further details refer Fast Help, Fixed Assets, Asset Administration, Asset Retirements. Revaluations

Assets should be revalued in accordance with Accounting Policy Statement No. 3, Revaluation of Non Current Assets. All physical non-current assets should be revalued at intervals not exceeding three years. Classes of assets may be progressively revalued on a systematic basis provided that all assets within a class are revalued at least every three years. Prior to performing the revaluation in either Masterpiece or Accpac, the depreciation run process should be up to date. This will ensure that where the amount relating to accumulated depreciation is to be cleared, it is done so in full for that asset. Further details are contained in the Fast Help, Fixed Assets, Asset Administration, Revaluations. Transfers

Transfers of property, plant and equipment should be recorded as soon as practicable after the transfer has occurred. Transferred assets which have been received should be recorded in the Asset Register with a corresponding credit to the revenue account. Depreciation should be calculated for the newly transferred asset. Depreciation

The depreciable amount of a depreciable asset should be progressively recognised in the Operating Statement by means of depreciation charges calculated using the method which most accurately reflects the pattern of consumption of the asset over its useful life. Depreciation should be charged commencing in the financial period a depreciable asset is first put to use or held ready for use.

A depreciation expense which has been calculated and accumulated in the fixed asset register should be recorded in the general ledger Accounting entries for property, plant and equipment Accounting entries for additions and acquisitions

Primary entries for additions and acquisitions


Movement

PAE1 DR—Property, Plant and Equipment Asset Increase CR—Creditors - General (To record a good or service received in respect of a Property, Plant and Equipment acquisition.)

Liability Increase

NB. Some agencies may use a fixed asset clearing account to assist in the recording and reconciliation of property, plant and equipment. The end result of the transfer to the general ledger from the fixed asset system (which clears any fixed asset clearing accounts) is the above accounting entry. Secondary entries for additions and acquisitions


Movement

SAE1 DR—Creditors - General Liability Decrease CR—Bank - Deposit Account (To record subsequent payments made.)

Asset Decrease

Commentary on additions and acquisitions There are many classifications relating to expenditure on Property, Plant and Equipment which must be understood before it may be properly recorded. Firstly, the nature of expenditure is either capital (acquisitions and enhancements), or an expense (maintenance). Secondly, capital expenditure may be classified as either an acquisition or an enhancement and may be for either purchased or constructed assets. The original estimated useful life of an asset assumes that there will be periodic maintenance performed to maintain its service potential. Although most expenditure immediately improves the condition of the related asset, it should only be capitalised if it significantly increases the service potential from that of the original estimate.

Expenditure which forms part of the normal, routine maintenance so that it merely enables the asset to see out its expected useful life is considered to be an expense. Further details on the distinction between maintenance and capital expenditure is contained in Accounting Policy Statement No. 10, Maintenance, Repairs and Overhauls. Capital expenditure, both for constructed and purchased assets, may be either acquisitions or enhancements. Acquisitions relate to separately identifiable assets, ie the purchase of new assets or additional distinct components for existing assets. A component is distinct to an existing asset if it has a significantly different useful life, or if it may be used or transferred independently of the existing asset. For more information refer to the flowchart Additions - Acquisitions. Accounting entries for enhancements

Primary entries for enhancements


Movement

PAE1 DR—Property, Plant and Equipment Asset Increase CR—Creditors - General (To record a good or service received in respect of a Property, Plant and Equipment enhancement.)

Liability Increase

NB. Some agencies may use a fixed asset clearing account to assist in the recording and reconciliation of property, plant and equipment. The end result of the interface to the general ledger from the fixed asset system (which clears any fixed asset clearing accounts) is the above accounting entry. Secondary entries for enhancements


Movement


Asset Decrease

Commentary on enhancements Again, the nature of expenditure for assets is split between acquisitions (including construction asset projects), enhancements and expenses (maintenance). In outlining the difference between capital expenditure and maintenance, the original estimated useful life of an asset assumes that there will be periodic maintenance performed to maintain its service potential. Although most expenditure immediately improves the condition of the related asset, it should only be capitalised if it significantly increases the service potential from the original estimate. Expenditure which forms part of the normal, routine maintenance so that it merely enables the asset to see out its expected useful life is considered to be an expense. Further details on the distinction between maintenance and capital expenditure is contained in Accounting Policy Statement No. 10, Maintenance, Repairs and Overhauls. Capital expenditure, both for constructed and purchased assets, may be either acquisitions or enhancements. Acquisitions relate to separately identifiable assets, ie the purchase of new assets or additional distinct components for existing assets. A component is distinct to an existing asset if it has a significantly different useful life, or if it may be used or transferred independently of the existing asset. An enhancement on the other hand would increase the existing asset's cost (and therefore its carrying amount) in the fixed asset register, and would be amortised over its remaining useful life. Note that if the remaining useful life was significantly different from the original asset then the expenditure would be an acquisition, and not an enhancement. Enhancements to existing assets could include the following:

• resurfacing of a road; • memory upgrade to a computer system; • engine overhaul to a plane; • additional office work stations built; and • building extensions.

For more information refer to the flowchart Additions - Enhancements. Accounting entries for construction

Primary entries for construction


Movement

PAE1 DR—Work in Progress Asset Increase

CR—Creditors - General (To record a good or service received in respect of a capital work in progress project.)

Liability Increase

PAE2 DR—Property, Plant and Equipment Asset Increase CR—Work in Progress (To transfer the value of the construction project to the Property, Plant and Equipment accounts upon completion.)

Asset Decrease

NB. Some agencies may charge work in progress to individual objects such as consultancies, contractors, consumables, etc. Upon completion of the capital work in progress project, balances are transferred to the general ledger from the fixed asset system as per PAE2 above, except that the credit goes to the relevant individual object. At the end of each reporting period, these agencies need to determine the value of work in progress accumulated and make the necessary general ledger entries. Secondary entries for construction


Movement


Asset Decrease

Commentary on construction Again, the nature of expenditure for assets is split between acquisitions (including construction asset projects), enhancements and expenses (maintenance). In outlining the difference between asset acquisitions and construction acquisitions (work in progress), the key question to ask is "Is the asset complete and ready and able for use by the agency?" If the answer is no, then the asset is not a completed asset and hence should be recorded as work in progress in both the general ledger and the fixed asset register until ready for use. The cost to be recorded is the purchase consideration and includes costs incidental to the construction project (eg. freight, installation, design costs, duties, project management costs, etc.). Essentially, only costs which are necessary and directly attributable to a specific item within construction activity may be capitalised. Some start up costs such as training would not be capitalised as they were not necessarily incurred in preparing the item for its intended use. The CA Masterpiece Fixed Assets module has a capability to record construction in progress assets, including the facility to capture budget, commitment and actual amounts against capital projects. Further details are contained in FAST Help - Fixed Assets, Periodic Processing, Summary Assets Roll-up. Construction assets (work in progress) could include the following:

• construction of a new road; • construction of a boardwalk; and • construction of new premises.

For more information refer to the flowchart Additions - Construction. Accounting entries for disposals

Primary entries for disposals


Movement

PAE1 DR—Bank - Deposit Account Asset Increase CR—Asset Disposal Clearing Account (To record the proceeds upon sale of the item of property, plant and equipment—where cash proceeds received.)

Clearing Account

Increase

PAE2 DR—Accumulated Depreciation Asset Offset Decrease CR—Asset Disposal Clearing Account (To eliminate the balance of accumulated depreciation for the item of property, plant and equipment disposed by transferring it to the Disposal account.)

Clearing Account

Increase

PAE3 DR—Asset Disposal Clearing Account Clearing

Account Decrease

CR—Property, Plant and Equipment (To eliminate the balance of the item of property, plant and equipment disposed by transferring it to the Disposal account.)

Asset Decrease

PAE4 DR—Asset Disposal Clearing Account Clearing

Account Decrease

CR—Gain/(Loss) on Disposal (To account for the gain/loss on disposal of the item of Property, Plant and Equipment.)

Revenue Increase

Commentary on disposals The gain/loss on the disposal of the asset is normally calculated automatically by either the ACCPAC or Masterpiece fixed asset module upon processing of the asset disposal. Further details are contained in FAST Help - Fixed Assets, Asset Administration, Asset Retirements. If the item of Property, Plant and Equipment has no sale proceeds (ie. scrapped,

stolen, lost, retired, used for spare parts), then no gain will be recorded. The loss on disposal in these circumstances will in fact equal the item's net written down value.It is important to process disposal details into the relevant fixed asset system in a timely manner to ensure that the correct gain/loss is calculated. Depreciation is normally run on a monthly basis and assets could be "over depreciated" if advice is not received in a timely manner. One method used by some agencies to obtain prompt disposal details is to include a question on an asset acquisition form (or the agency copy of the Purchase Order) such as "Is this asset replacing an existing asset? If yes, please indicate the Asset ID and detail how the asset was disposed". This forces the purchaser of the new asset to indicate what has happened to the former asset (if applicable). Another alternative is for the agency to have a central point of contact where all disposals must go via this source. This will be of particular relevance when disposing of assets via auction or by the tender process. If an item of Property, Plant and Equipment is withdrawn from operations and held surplus to the agencies' requirements, then the value recorded in the fixed asset register should be the net market (selling) value. This value is consistent with the deprival value framework prescribed in Accounting Policy Statement No. 3, Revaluation of Non-Current Assets. For more information refer to the flowchart Disposals. Accounting entries for revaluations and impairments

Primary entries for revaluations and impairments


Movement

PAE1 DR—Accumulated Depreciation Asset Offset Decrease CR—Property, Plant and Equipment (To reduce a class of depreciable assets to its carrying amount, prior to a revaluation being recorded.)

Asset Decrease

Primary entries for revaluations and impairments if Deprival value exceeds the Carrying Amount


Movement

PAE2 DR—Property, Plant and Equipment Asset Increase CR—Gain on Revaluation (To record the revaluation increment on a

Income Increase

class of assets to the extent a revaluation decrement has previously been recorded in the Operating Statement.) PAE3 DR—Property, Plant and Equipment Asset Increase CR—Asset Revaluation Reserve (To record the remaining portion (if applicable) of the revaluation increment on a class of assets as a reserve.)

Equity Increase

PAE4 DR—Asset Revaluation Reserve Equity Decrease DR—Gain on Revaluation Income Decrease CR—Accumulated Depreciation (To restate the asset's related accumulated depreciation to reflect the expired portion of the asset's useful life.)


Primary entries for revaluations and impairments if Deprival value is below the Carrying Amount


Movement

PAE4 DR—Asset Revaluation Reserve Equity Decrease CR—Property, Plant and Equipment (To record the revaluation decrement on a class of assets to the extent a revaluation increment has previously been credited to, and is still included in the balance of, the asset revaluation reserve.)

Asset Decrease

PAE5 DR—Loss on Revaluation Expense Increase CR—Property, Plant and Equipment (To record the remaining portion (if applicable) of the revaluation decrement on a class of assets as an expense.)

Asset Decrease

PAE6 DR—Asset Revaluation Reserve Equity Decrease DR—Loss on Revaluation Expense Increase CR—Accumulated Depreciation (To restate the asset's related accumulated depreciation to reflect the expired portion of the asset's useful life.)


Further accounting entries are contained in the Guidance to Accounting Policy Statement No. 3, Revaluation of Non-Current Assets. Commentary on revaluations and impairments All Property, Plant and Equipment must be revalued by agencies at least every three years. Accounting for revaluations can be complicated and AAS 10, Accounting for the Revaluation of Non-Current Assets and APS No. 3, Revaluation of Non-Current Assets sets out the principles to be adopted. The determination of deprival value can also be a complicated task. In broad terms, the deprival value for an asset held for continued use which would be replaced if deprived of the asset and a similar asset can be purchased is current market buying price of the similar asset. If the asset is surplus, then the deprival value of the asset is the net market selling price. There are various permutations that exist in determining the deprival value of an asset. Full details are contained in Accounting Policy Statement No. 3. Agencies may require the assistance of professional valuers to assist them in the revaluation process. In determining a systematic basis to revalue classes of assets at least every three years, agencies should adopt a practical and commonsense approach. Agencies may split their asset classes and revalue all assets within that category in a particular year. Another alternative is to revalue all asset classes within a specific geographic location. In both these scenarios, all assets must be revalued at least every three years. Prior to performing revaluations, agencies should perform physical stocktakes in order to verify existence of the item of Property, Plant and Equipment. The approach that agencies take in performing revaluation should be discussed with the Auditor-General's Department prior to commencement. Prior to performing the revaluation in either Masterpiece or ACCPAC, the depreciation run process should be up-to-date. This will then ensure that the amount cleared from the accumulated depreciation (accounting entry PAE1) is the full amount pertaining to the asset. The GL interface entered in the Masterpiece Fixed Assets module should contain similar entries to the ones detailed above. Further details are contained in FAST Help - Fixed Assets, Asset Administration, Revaluations. The Asset Revaluation Reserve is used to accumulate revaluation increments as a reserve against potential future decrements. If a particular asset with a revaluation decrement has previously been recorded as a revaluation increment to the reserve, then the amount should first be reversed out of (debited to) the reserve. Any remaining revaluation decrement should then be expensed in the Operating Statement. For more information refer to the flowchart Revaluations. Accounting entries for transfers

The accounting entries for transfers will depend upon whether the asset has transferred within an agency, or transferred external to the agency. The accounting entries detailed below are for a transfer to an agency from another agency for no cost (ie. transferee agencies' records).

Primary entries for transfers


Movement

PAE1 DR—Property, Plant and Equipment Asset Increase CR—Contributed Assets (To record the transfer of an item of Property, Plant and Equipment from another agency.)

Revenue Increase

Secondary entries for transfers


Movement

SAE1 DR—Contributed Assets Revenue Decrease CR—Accumulated Depreciation (To record the total accumulated depreciation for the transferred item of Property, Plant and Equipment.)


Commentary on transfers All items of Property, Plant and Equipment which are either transferring within their agency, transferring from another agency or transferring to another agency, should be recorded correctly and in a timely manner. For items transferred within an agency which records its assets at a corporate business/cost centre, the only recording may be the new location details of the asset and the new custodian of the asset. For agencies which have assets recorded at business/cost centre level, journals will be required to transfer both the asset and the accumulated depreciation amounts from the old business centre to the new business centre. If the transfer was not performed in a timely manner, current year's depreciation expense may also need to be journalised. Further details are contained in FAST Help - Fixed Assets, Asset Administration, Asset Transfers - Single and Mass. For assets transferred to an agency, due to circumstances such as a restructuring of administrative arrangements or a gift, the amount to be recorded by the acquiring agency can be either the fair value of the asset or the amount at which the asset was recognised immediately prior to the transfer. The asset should be processed into Masterpiece or ACCPAC as per a "normal" asset acquisition. The only difference is that money may not change hands (or a nominal consideration may be negotiated) for the transfer. Masterpiece Fixed Assets has the capability of recording different "acquisition codes" whereby one could be reserved for transfers (in) which in turn can have the acquisition side of the transaction interfaced automatically to the general

ledger. Depreciation would need to be run immediately after the processing of the transfer to ensure that the correct accumulated depreciation is calculated and journalised accordingly. For assets transferring from an agency, the asset would need to be processed as a disposal. If no cash proceeds are received for the transfer, a large loss on disposal will be calculated by the relevant fixed asset system which may require a note to the financial report. For more information refer to the flowchart Transfers of Property, Plant and Equipment. Accounting entries for depreciation

Primary entries for depreciation


Movement

PAE1 DR—Depreciation Expense Expense Increase CR—Accumulated Depreciation (To record the depreciation charge of a depreciable asset.)


Secondary entries for depreciation


Movement

SAE1 DR—Accumulated Depreciation Asset Offset Decrease CR—Asset Disposal Clearing Account Clearing

Account Increase

CR—Property, Plant and Equipment (To remove the carrying amount of Property, Plant and Equipment disposed of from the accounting records.)

Asset Decrease

Commentary on depreciation Depreciation is a method of allocating the cost of an asset over its period of benefit. The relevant "cost" of an asset is its depreciable amount. The "period of benefit" is an asset's estimated useful life. The "allocation" is achieved through regular depreciation charges. The depreciable amount is calculated as the historical cost (or revalued amount) of an asset less the net amount expected to be recovered on disposal of the asset at the end

of its estimated useful life (salvage value). In most instances, the depreciable amount of an asset will equal its historical cost as the expected recovery is normally nil. The estimated useful life is the estimated period of time over which the asset expected to be able to be used. Similar assets may have different useful lives, depending on the intended use by the respective agency. The depreciation charge is included as a non cash expense item in the Operating Statement each financial period. The straight-line method is the most commonly used method to calculate depreciation due to its simplicity. Its use is recommended provided that it will not result in any material misstatement of the timing of asset consumption. Depreciation is not a valuation technique nor does it provide cash to replace an asset. Replacement is a separate issue to be considered in the context of each agency's cash resources. Where an asset is a complex structure made up of many parts, stages, etc, it should be considered as being held ready for use only after installation has been completed to the point where service can be provided. If the asset is commissioned in stages over a period of greater than one year, that portion of the recorded value of assets commissioned at each stage, should be depreciated from the date of commissioning. The remainder of incomplete construction/work in progress assets should not be depreciated. The useful lives and anticipated net disposal value of depreciable assets, or classes of depreciable assets, shall be reviewed annually and, if necessary, depreciation rates adjusted so they reflect the most recent assessment of the useful life and salvage value of the depreciable asset. The depreciation expense for the reporting period in which useful life is reassessed should include a correction for any overstatement or understatement of the balance in the accumulated depreciation account. Masterpiece and ACCPAC fixed assets modules should automatically perform these corrections. Further details on depreciation are contained in FAST Help - Fixed Assets, Periodic Processing, Depreciation and Accounting Policy Statement No. 7, Depreciation of Non-Current Assets For more information refer to the flowchart Depreciation. Control based procedures for property, plant and equipment Authorise capital expenditure

To ensure all capital expenditure is undertaken in accordance with strategic and budget plans all capital expenditure should be approved and capital expenditure monitored against budget.

Record transfers, acquisitions, disposals and depreciation

To ensure all transfers, acquisitions disposals and depreciation are completely and accurately recorded:

• All capital expenditure authorisations should be prenumbered and missing documents investigated.

• Purchase orders should be provided for capital expenditure to personnel who process property plant and equipment.

• Purchase orders not matched with receiving documentation after anticipated receipt date should be investigated.

• Additions should be reconciled with capital expenditure authorisations. Clear definitions of asset categories should be established.

• All authorisation forms, should be provided to appropriate personnel. • Disposal and transfer authorisation forms should be prenumbered and missing

documents investigated. • Asset stocktakes should be undertaken periodically and reconciled with asset

records. • Policies regarding depreciation rates and methods should be communicated to

appropriate personnel and periodically reviewed to ensure continued appropriateness.

• Depreciation calculations should be reviewed for accuracy and compliance with policies and procedures.

Safeguard assets

To safeguard property plant and equipment from loss through theft, access to property plant and equipment during non-working hours should be restricted and adequate physical safeguards should be in place to prevent unauthorised removal of assets. Assets which are relatively low in value but are portable and attractive are more susceptible to loss or theft and should therefore be recorded for control purposes. (One option that many agencies are currently using is to record these assets in either the Masterpiece or Accpac fixed asset modules. The difference with these assets is that financial details are not interfaced to the general ledger as the recording is for control purposes only). Segregation of duties for asset management

Where practicable the following functions should be performed by separate sections within each agency:

• approval for asset additions, disposals and revaluations; • custody of assets; • recording of property, plant and equipment; and • general ledger.

Access restrictions

Controls should exist which restrict access to computer programs and computer data records. This includes physical controls over access to computer equipment (such as locking a terminal room door) and also controls within programs such as passwords which require a specified level of user authorisation for each application. Passwords should be required to be changed on a regular basis. Management should ensure that there are adequate controls over recorded asset costs and depreciation calculations. Document controls

Where applicable the following documents should be prepared or received, approved and processed with controls to ensure that the purchase details are consistent throughout:

• capital project authorisation; • purchase orders; • delivery dockets; • supplier invoices; • cheque requests; and • cheques.

Data entry and processing controls

Processing controls such as programmed balancing controls, data transmission controls, and cut-off controls should be in place to ensure that transactions and related information are completely and accurately processed in the proper financial period. Edit and validation checks should be incorporated into systems to facilitate the identification and correction of data entered which does not meet pre-determined criteria. Data rejection analysis

All exceptions, whether identified by the computer system or system user should be isolated and analysed and corrected. All balances in accounts such as the acquisition clearing account, disposal clearing account and fixed error suspense accounts should be reconciled and cleared on a monthly basis. Any outstanding balances should be fully investigated and documented accordingly.

Management review

Senior staff should review the various components of the Property, Plant and Equipment to ensure that they are satisfied with the efficiency of processing results. This can be achieved by:

• Comparing actual capital expenditure with asset acquisition budgets and investigating any significant variances.

• Analysing reports on such areas as expenditure by project, repair and maintenance costs, capitalised leases, changes in depreciation rates, disposals by departments and fully depreciated assets.

• Determining the reasonableness of the current depreciation rates based on average estimated lives of each asset class.

• Subjecting property, plant and equipment balances to periodic physical counts. • Investigating the balances of asset clearing, disposal and error suspense

accounts and work in progress accounts, ensuring amounts have been adequately followed up and documented.

• Ensuring that adequate supporting documentation is provided with cheques for review by the authorised cheque signatories.

Period and year end requirements for property, plant and equipment Ledger reconciliation for property, plant and equipment

At the end of each accounting period the fixed asset register should be reconciled with the control account in the general ledger to ensure all transfers, disposals, additions and enhancements are recorded. For further details regarding depreciation refer Fast Help, Fixed Assets. Any reconciling amounts should be investigated and corrected. These discrepancies may for instance arise from unallocated supplier invoices. Period end adjustments for property, plant and equipment

The following adjustments and verifications may be necessary at the end of the financial period in respect of property, plant and equipment:

• Transferring any completed construction projects from the works-in-progress account to the fixed asset register.

• Ensuring the fixed asset register's depreciation calculation is correctly recorded in the general ledger expense account.

• Performing on-line enquiries in accounts payable for known asset suppliers ensuring that correct account codes have been used and assets have not been missed in both the general ledger and fixed asset register.

• Requesting listings from the fixed asset register indicating incomplete asset details (eg. serial numbers, specific locations, asset custodian). This will reduce future effort when performing asset stocktakes.

• Reconciling error and suspense accounts.

Reports for property, plant and equipment

Management should ensure that appropriate reports from the fixed asset register are provided to the relevant agency users. These could include reports such as Asset Acquisitions, Asset Retirements/Disposals, Asset Transfers, Depreciation, and an Asset Summary Reconciliation Report. Further details are contained in the Fast Help, Fixed Assets, Periodic Processing, Running Reports and standard Reports Setup. Agencies should also report asset details to Treasury's State Asset Register (SAR) every six months. FAST have developed an interface which will transfer required details every six months. Year end adjustments for property, plant and equipment

Agencies should ensure that all financial period end adjustments are made for year end processing and reporting (in addition to the above period adjustments). These include:

• Identifying if any property, plant and equipment items have suffered a permanent impairment to their value and which should be written down accordingly.

• Reviewing the current depreciation rates to ensure they are reasonable with regard to current average estimated useful lives.

• Performing a physical stocktake of all assets recorded in the fixed asset register.

• Updating the fixed asset register with up-to-date asset information obtained from external systems which do not directly interface and update automatically. In particular this may affect asset categories such as land and buildings.

• Archiving retired assets to a history file. • Performing revaluations, in accordance with agencies' revaluation program. • Reviewing the fixed asset register and ensuring any surplus assets are

identified and correctly valued in accordance with deprival value concepts (ie net market selling price).

Chapter 5: Asset and liabilities cycle - inventory

Accounting based procedures for inventories

Chief Executives must ensure that assets are effectively and efficiently managed by developing and implementing policies to identify, acquire, accurately value, manage and dispose of assets. The following procedures which support the prescribed elements within the Assets and Liability section of the Financial Management Framework, represent some effective management practices that if properly implemented will assist in the minimisation of risk of error or fraud. The following procedures cover raw materials, work-in-progress, finished goods and provisions for inventory. See examples of accounting entries, flowcharts and commentary provided for inventories in the section For more information see Accounting entries for inventories. A checklist is available in Chapter 12: Control Checklist Appendix.

Raw materials

Raw materials and stores which are held or produced for sale are required to be measured at the lower of cost and net realisable value. Net realisable value means the estimated proceeds of sale less cost of selling to customers. The cost of inventory purchases should include direct costs of acquisition (freight, agent fees and customs clearance charges, duty and all other costs incidental to shipping and receiving of goods into stock) less discounts and rebates. Raw materials and stores should be recognised at the time the goods are delivered. This can be achieved by recording these items as inventory when the acquitted invoice is received and then accruing for unrecorded liabilities (ie accruals) at the end of the accounting period. Upon receipt of the raw materials the inventory should be recorded in the relevant inventory system and a liability in the creditor's subledger. The subsequent cash payment of the credit amount should be recorded in the creditors subledger and the cashbook. The issue of inventory from the store should be recorded in both the relevant inventory system and the general ledger.



Agencies should establish appropriate policies and procedures to determine when an item has been consumed in operations. For example an agency may consider an item is consumed and therefore expensed in the Operating Statement at the time it is issued from a stores area. Other agencies on the other hand may not expense such items until physical inventory has been used up. Work-in-progress

Work- in- progress should be recognised when raw materials have been placed into production/and or services have commenced operations. Work-in-progress should be measured at the lower of cost and net realisable value. Net realisable value means the estimated proceeds of sale less costs of selling to customers. Work-in-progress should include all costs associated with transforming raw materials into partially completed products. Finished goods

Finished goods should be recognised at the time when manufactured goods are complete and ready for sale. Finished goods should be measured at the lower of cost and net realisable value. Net realisable value means the estimated proceeds of sale less costs of selling to customers. Entries for finished goods should be made in the relevant inventory system and the general ledger. Sale of inventory

Revenue arising from the sale of inventory is recognised and recorded as per the procedures in the Revenue Cycle. A provision for loss on realisation of inventory should be established to reflect the inventories' estimated net future realisable value. The loss may be due to factors such as falls in selling price, physical deterioration or obsolescence.

Accounting entries for inventories

Accounting entries for inventories, raw materials and store

Primary entries for inventories, raw materials and store


Movement

PAE1 DR—Raw Materials and Stores Asset Increase CR—Creditors - General (To record the acquisition of raw materials and/or stores.)

Liability Increase

Secondary entries for inventories, raw materials and store


Movement

SAE1 DR—Creditors - General Liability Decrease CR—Bank - Deposit Account (To record the payment of the account issued by the creditor.)

Asset Decrease

SAE2 DR—Supplies and Services Expense Expense Increase CR—Raw Materials and Stores (To record inventory issued from a stores area which is to be consumed by the Agency.)

Asset Decrease

SAE3 DR—Raw Materials and Stores Asset Increase CR—Creditors - Accrual (To accrue for raw materials and/or stores in the accounting period but which have not been recorded.)

Liability Increase

SAE4 DR—Creditors - Accrual Liability Decrease CR—Raw Materials and Stores (To reverse the accrual of raw materials and/or stores received in the previous

Asset Decrease

accounting period.) SAE5 DR—Raw Materials and Stores Asset Increase CR—Supplies and Services Expense (To record raw materials and/or stores on hand at the end of the reporting period, following a physical count.)

Expense Decrease

Accounting entries PAE1 and SAE1 are processed when the actual invoice is processed for the raw materials and/or stores previously accrued. The net result is an amount recorded as inventory in the period in which the raw materials and/or stores were provided to the agency. The credit to Raw Materials and Stores from SAE4 nets off with the debit to Raw Materials and Stores from PAE1. Commentary on inventories, raw materials and store The net realisable test applies to inventory held or produced for sale. If inventory is held or produced for consumption in their own agency rather than for sale to outside parties, then the net realisable test does not apply. If agencies acquire inventory for sale to other agencies in order to benefit from purchase discounts, then the net realisable test also does not apply and the sale price of the material is equivalent to the cost. The determination of net realisable value for raw materials and stores includes an adjustment necessary to reflect stock obsolescence. Agencies need to establish appropriate policy and procedures to determine when an item has been consumed in operations. For example an agency may consider an item is consumed, and therefore expensed in the Operating Statement, at the time it is issued from a stores area. Other agencies on the other hand, may not expense such items until the physical inventory has been used. In practice this decision will depend upon the unique requirements of each agency, its materiality and the sophistication of each agencies' inventory system. Some agencies due to their small size of inventory stores may operate a periodic inventory system. In these instances, accounting entry PAE1 will have a debit against an expense account (eg. Supplies and Services) instead of the raw materials and stores asset account. Thus when the item of inventory is issued into agency operations, accounting entry SAE2 is not required as the expense has previously been recorded when the goods were received by the agency. At the end of the reporting period, a full physical count of inventory on hand must occur and the inventory amount recorded in the general ledger adjusted accordingly (accounting entry SAE5). A requirement of the Data Collection System is to categorise inventory by purpose. Agencies will need to split raw materials from stores and separately disclose inventory held for consumption. Further details are contained in the User Guide. For more information refer to the flowchart Inventories - Raw Materials and Stores.

Accounting entries for work in progress

Primary entries for work in progress


Movement

PAE1 DR—Work in Progress Asset Increase CR—Raw Materials and Stores (To record the placement of raw materials into production.)

Asset Decrease

PAE2 DR—Work in Progress Asset Increase CR—Direct Labour Expense Decrease CR—Other Production Costs (inc. Manufacturing Overhead) (To record the labour and other production costs attributable to the work in progress inventory.)

Expense Decrease

Secondary entries for work in progress


Movement

SAE1 DR—Work in Progress Asset Increase CR—Raw Materials and Stores and/or Supplies and Services (To record Work In Progress on hand at the end of the reporting period, following a physical count and/or analysis of work in progress.)

Asset/ Expense

both Decrease

SAE2 DR—Work in Progress Asset Increase CR—Direct Labour Expense Decrease CR—Other Production Costs (inc. Manufacturing Overhead) (To record the labour and other production costs attributable to the work in progress inventory on hand at the end of the reporting period, following a physical count and/or analysis of work in progress.)

Expense Decrease

Commentary on work in progress Work in progress should include all costs associated with transforming raw materials into partially completed products. These costs are commonly referred to as "cost of conversion". These costs include the cost of direct labour and of sub-contracted work and other production costs (including manufacturing overheads), excluding costs which relate to general administration, finance, marketing, selling and distribution to customers. Agencies, depending upon their size and number of inventory items held in the form of work in progress, may operate a periodic inventory system. In these instances, work in progress will be determined by conducting full physical counts of work in progress inventory at year end and then adjusting accordingly. The credit as shown above in accounting entry SAE1 will vary depending upon whether raw materials and/or stores are recorded in an asset account or whether they are recorded against an expense account being Supplies and Services. Agencies may have work in progress recorded in both of these accounts prior to the end of the reporting period which require the appropriate adjustment. In addition, costs associated with transforming the raw materials into partially completed products should be calculated and included in the work in progress inventory, as shown in accounting entry SAE2. For more information refer to the flowchart Inventories - Work in Progress. Accounting entries for finished goods

Primary entries for finished goods


Movement

PAE1 DR—Finished Goods Asset Increase CR—Work in Progress (To record the transfer of inventory from Work in Progress to Finished Goods, upon completion of manufacture.)

Asset Decrease

Secondary entries for finished goods


Movement

SAE1 DR—Finished Goods Asset Increase CR—Raw Materials and Stores and/or Supplies and Services (To record work in Finished Goods on hand at the end of the reporting period, following

Asset/ Expense

both Decrease

a physical count and/or analysis of finished goods.) SAE2 DR—Finished Goods Asset Increase CR—Direct Labour Expense Decrease CR—Other Production Costs (inc. Manufacturing Overhead) (To record the labour and other production costs attributable to the finished goods inventory on hand at the end of the reporting period, following a physical count and/or analysis of finished goods.)

Expense Decrease

Commentary on finished goods The amount to be recorded as Finished Goods will depend upon what (if any) has been recorded as Work in Progress in the agency's general ledger. If the agency does not progressively record work in progress, then it will need to calculate all costs involved in the item(s) of finished goods. These costs should include all costs associated with transforming raw materials into the completed product/good. These costs are commonly referred to as "cost of conversion". These costs include the cost of direct labour and of sub-contracted work and other production costs (including manufacturing overheads), excluding costs which relate to general administration, finance, marketing, selling and distribution to customers. Agencies, depending upon their size and number of inventory items held in the form of finished goods, may operate a periodic inventory system. In these instances, final goods will be determined by conducting full physical counts of finished goods at year end and then adjusting accordingly. The credit as shown above in accounting entry SAE1 will vary depending upon whether raw materials and/or stores are recorded in an asset account or whether they are recorded against an expense account being Supplies and Services. Agencies may have finished goods recorded in both of these accounts prior to the end of the reporting period which require the appropriate adjustment. In addition, costs associated with transforming the raw materials into finished goods should be calculated (if not previously recorded as work in progress) and included in the finished goods inventory, as shown in accounting entry SAE2. A requirement of the Data Collection System is to categorise inventory by purpose. Agencies will need to separately disclose inventory held for consumption, inventory held for sale to non-SA Government entities and inventory held for sale to Government entities. Further details are contained in the User Guide. For more information refer to the flowchart Inventories - Finished Goods.

Accounting entries for sale of inventory

Primary entries for sale of inventory


Movement

PAE1 DR—Bank - Deposit Account Asset Increase CR—Revenue - Sale of Inventory (To record any cash received at the time of sale of inventory—selling price.)

Revenue Increase

PAE2 DR—Accounts Receivable - General Asset Increase CR—Revenue - Sale of Inventory (To record amount owing to the Agency for inventory provided—selling price)

Revenue Increase

PAE3 DR—Cost of Goods Sold Expense Increase CR—Finished Goods Inventory (To record the expense incurred on the sale of inventory—cost price)

Asset Decrease

Secondary entries for sale of inventory


Movement


Asset Decrease

Commentary on sale of inventory As noted in the procedures, revenue should be recognised, accounts receivable recognised and customers billed (ie. invoices) as soon as practicable after goods and services have been provided. If a periodic inventory system is used by agencies, the cost of inventory sold is not directly recorded but is calculated by working back from the opening inventory, purchases and the end of period inventory, determined by a full physical count,

ie, cost of goods sold =

opening inventory + purchases for the period - purchase returns for the period - closing inventory

For more information refer to the flowchart Sale of Inventory. Accounting entries for provisions

Primary entries for provisions


Movement

PAE1 DR—Inventory Loss on Realisation Expense Expense Increase CR—Provision for Loss on Realisation of Inventory—refer note 1 (To record the provision for loss on realisation of Inventory.)


Note 1—Raw Materials and Stores, Work in Progress or Finished Goods accounts Secondary entries for provisions


Movement

SAE1 DR—Provision for Loss on Realisation of Inventory

Asset Offset Decrease

CR—Relevant Inventory Account—refer note 2 (To record the permanent inventory write down.)

Asset Decrease

Note 2—Raw Materials and Stores, Work in Progress or Finished Goods accounts Commentary on provisions It is important that inventories are recorded at cost in accordance with prescribed Australian Accounting Standards. In the case of inventories, this is AAS 2 Measurement and Presentation of Inventories in the Context of the Historical Cost System. This standard applies to all inventories, regardless of the type of inventory system used by agencies. Normally provisions for loss on realisation of inventory accounts are adjusted at financial year end after the year end full stock count has occurred. However, if it is

known that a write down should occur during the year, due to say diminished market demand, then the write down should occur at this time. If it is known that the inventory item will obtain $0.00 sale price, then the item should not be provided for, but instead be completely written off against the inventory amount recorded in the general ledger and (if applicable) the appropriate inventory system. For more information refer to the flowchart Provisions. Control based procedures for inventories

Segregation of duties for inventory management


• provision of goods and services; • invoicing; and • cash processing, debtors and general ledger.

The following tasks within the cash processing, debtors and general ledger functions should be segregated where practicable:

• cash collection and deposit preparation; • recording of cash receipts; • general ledger entries; and • bank reconciliation approval.

Stocktakes

Stocktakes should be performed regularly to ensure slow moving, obsolete and surplus stock is identified and to reconcile records to the actual level of physical inventory. Document controls

Where applicable the following documents should be prepared or received, approved and processed with controls to ensure that the details are consistent throughout:

• orders; • issued inventory records; • shipping dockets/notifications of services provided; • supplier invoices; • job cards;

• remittance advices; • inventory write down forms; • agency produced invoices; and • cheques received.

(To reduce the volume of paperwork and handling and to reduce the overall processing cost, each agency should review best practice techniques as outlined in the Financial Management Framework which may reduce the need for all documentation as outlined above.) Data processing controls

Sufficient processing controls such as batch totals, programmed balancing controls data transmission controls, and cut-off controls should be in place. Access controls

Controls should exist which restrict access to computer programs and computer data records. This includes physical controls such as locking a terminal door and also controls within programs such as user passwords. Adequate controls should be in place over recorded quantities and costs for inventories. Physical access to inventory should be restricted and adequate safeguards should be in place to prevent the unauthorised removal of inventory. Stocktake methods

Agencies need to determine appropriate methods to establish quantities on hand at the end of the reporting period. Full physical counts of inventory should occur regularly supporting amounts recorded in the Statement of Financial Position. Management review

Senior staff should review inventory processing results by:

• Comparing actual results (on sales/revenues and debtor balance) to budgeted amounts and investigating any significant variances.

• Analysing reports on such areas as revenues and associated costs by division, outstanding debtors, credit notes issued and individual significant revenues or debtor balances.

• Ensuring that adequate supporting documentation is provided with cheques for review by the authorised cheque signatories.


• Ensuring that appropriate costs are recorded against inventory items and that items are measured at the lower of cost and net realisable value.

• Minimising inventory costs by ensuring that optimal levels of inventory are carried.

• Ensuring that constant vigilance is exercised to ensure that inventories are examined for obsolescence, poor storage and deterioration.

• Ensure that obsolete, slow moving or unusable/unsaleable inventory items have been identified and appropriately accounted for.

• Investigating discrepancies between perpetual inventory stock records and actual physical stock counts.

• Ensuring inventory is written off in accordance with specific inventory write down procedures.

• Ensuring production costs are properly matched with related revenue. • Ensuring that the cost of goods sold (including cost of goods destroyed or lost)

are correctly calculated based on appropriate transactions.

Ledger controls

The relevant inventory system (if applicable) should be closed at the same time as the creditors and debtors subledger. Once the relevant system has been closed, it should be reconciled to the inventory accounts recorded in the general ledger ie raw materials and/or stores, work-in-progress and finished goods A control checklist is available in Chapter 12: Control Checklist Appendix. Period and end of year requirements for inventories

Period end stocktakes

A period end stocktake should occur confirming that quantities on hand equal the quantities recorded in the relevant inventory system. Any reconciling amounts and discrepancies should be investigated and corrected. These may arise from missing stock and misallocated inventory. Period end adjustments

Other adjustments and verifications should be considered at the end of the financial period in respect of inventory such as:

• Adjusting the provision for loss on realisation of inventory to reflect the likely diminution in value.

• Recording any revenues identified during reconciliation of the bank including any adjustment for dishonoured cheques.

Management should ensure that all financial period adjustments are made by:

• Completely reviewing inventory on hand to determine which are either slow moving or obsolete.

• Identifying if any inventory have suffered a permanent write-down in value and which should be written down accordingly.

• Performing a rate of inventories calculation by dividing cost of goods sold by the average inventories held. This will indicate the volume of activity and assist in detecting any overstocking weaknesses that the agency may have.

• Updating the relevant inventory system with up-to-date asset information obtained from external systems which do not directly interface and update automatically.

Reports

Reports generated by the inventory cycle should include:

• listings of when inventory was last sold/issued, indicating slow moving or even obsolete items;

• reports subsequent to full physical stock counts indicating discrepancies; • monthly statement of outstanding sales invoices for a customer; • open order reports listing those sales orders that are not completely shipped

and billed; and • accounts receivable ageing schedule identifying overdue amounts by time

period and which flags those accounts that are urgently in need of collection.

Chapter 6: Asset and liabilities cycle - cash

Accounting based procedures for cash

Chief Executives must ensure that assets are effectively and efficiently managed by developing and implementing policies to identify, acquire, accurately value, manage and dispose of assets. The following procedures which support the prescribed elements within the Assets and Liability section of the Financial Management Framework, represent some effective management practices that if properly implemented will assist in the minimisation of risk of error or fraud. Refer to Chapter 2: Revenue Cycle and Chapter 3: Expenditure Cycle for further cash related accounting based procedures. Accounting entries for cash

All accounting entries involving cash receipts and/or payments are covered by the procedures in the Revenue and Expenditure Cycle. Control based procedures for cash

Segregation of duties

Where practicable the following functions should be performed by separate section within each agency:

• cash collection and deposit preparation; • recording receipts and disbursements; • general ledger; and • bank reconciliation approval.

Access restrictions

Management should ensure that controls exist which restrict access to computer programs and computer program records. Document controls

Where applicable the following documents should be prepared or received, approved and processed with controls to ensure that the cash details are consistent throughout:



• invoices, remittance advices and cheques received; • supplier invoices, cheque requests, cheques received; and • bank statements.

Data entry and processing controls

To facilitate the identification and correction of data entered which does not meet pre-determined criteria, edit and validation checks should be in place. To ensure that transactions and related information are completely and accurately processed in the proper financial period the following processing controls should be in place:

• batch totals; • programmed controls; • data transmission controls; and • cut-off controls.

Proper period end controls should be communicated throughout the organisation. Management review

Senior staff should review the effectiveness of the various components of the cash accounting cycle by:

• Comparing actual results (on revenues, expenses) to budgeted amounts and investigating any significant variances.

• Comparing weekly cash flow results to the estimates submitted to Treasury and Finance.

• Review cash flow forecasts to ensure surplus funds are appropriately invested and that deficits are adequately planned for.

• Comparing forecast to actual results, important variances can be identified and analysed to identify potential problem areas needing remedial action. Some problems identified could include overspending of budgets and slow cash collections or advance payments.

• Ensuring all bank reconciliations are performed on a regular basis and reconciling items are investigated and appropriately cleared.

• Ensuring receipting and subsequent banking is performed on a regular basis (at least weekly, preferably daily).

• Ensuring appropriate cash disbursement approval limits are adhered to (if applicable).

Accurately forecasting cash to maximise investments

To accurately forecast cash balances and maximise short-term investment income and avoid shortfalls, information systems should:

• Identify all sources of cash and dates cash is due (such sources include budget allocations, debtors collections, sale of assets, loan proceeds and other cash sources).

• Identify all cash requirements and dates cash is needed (such requirements include accounts payable, loan payments, payrolls or other cash requirements). Information used to prepare cash forecasts should be compared with supporting records or underlying documents to verify that it is internally consistent.

Returns on temporary cash investments should be optimised by ensuring finance managers are aware of investment policy guidelines. Cash collections

(Refer Chapter 2: Revenue Cycle for further procedures). To ensure cash collections are accelerated the following procedures should be considered:

• Arrangements whereby payments are made over the counter at banks and other agents.

• Discounts for timely remittance. • Timely collection procedures for overdue balances. • A credit policy that reflects an appropriate balance between risk of credit loss

and community service obligations.

To ensure cash receipts are recorded completely agencies should consider the ability to have debtors funds electronically transferred to agencies' bank accounts. Payment can be notified through Electronic Data Exchange (EDI) or through the use of phone services. Opening of mail should be assigned to an individual with no responsibility for access to files or documents pertaining to debtors or cash accounts. Debtors should be contacted to determine reasons for non payments or payment different than amounts invoiced. Cash disbursements

Timing of cash disbursements should be managed through systems which identify all cash requirements and dates cash is needed. To ensure cash is disbursed for authorised purchases only payments should be approved by authorised individuals independent of procurement receiving and accounts payable. To ensure cash disbursements are recorded completely and accurately bank statements should be reconciled to cash accounts and long outstanding cheques should be

investigated by individuals independent of accounts payable and cash disbursement functions. Safeguarding cash

To ensure cash and related accounting records are safeguarded:

• Cash should be protected by strong physical safeguards, especially when stored overnight for amounts not banked on a daily basis. Appropriate safeguarding of cheque stationery should also occur to prevent possible thefts.

• Access to debtor files and files used in processing cash receipts should be restricted.

• Cheques should be mailed by individuals independent of recording accounts payable.

• All receipts should be deposited daily. • Authorised cheque signers should be independent of cash receipts functions.

Period and year end requirements for cash

Ledger control

The last receipts and payments made in the subledgers of debtors and creditors (respectively) should be recorded prior to the financial period end. Receipts and payments after the period end relate to the subsequent period's activity and should not be reflected in the first period's accounts. The general ledger balance should be reconciled to the bank account balance and any additional bank charges should be recorded. Any non reversing reconciling amounts should be investigated and corrected. These discrepancies may arise from cheques which cleared the bank at incorrect amount. As part of every agency's cash management procedures, period end cash forecasts should be prepared. As discussed in the Financial Management Framework all agency's should prepare three types of cash flow forecasts as follows:

• long term strategic forecasts which are prepared based on the annual budget estimates and which are used as a high level measures to plan for all contingencies;

• monthly forecasts which provide detailed estimates for managing cash forecasts; and

• weekly operational forecasts which allow the immediate needs of the Agency to be met in terms of cash flow requirements.

Reports

Reports generated by the Cash Accounting Cycle should include various operational reports which will assist management in ensuring the effectiveness of the cycle's processing results These include:

• cash flow forecasts as described above; • a comparison of forecast to actual results which may include potential problem

areas requiring remedial action; • regular reports of account payment performance related to due date for

payment; and • reports on funds held, including interest earned compared with benchmark

rates.

Chapter 7: Asset and liabilities cycle - other assets

Accounting based procedures for other assets

Chief Executives must ensure that assets are effectively and efficiently managed by developing and implementing policies to identify, acquire, accurately value, manage and dispose of assets. The following procedures which support the prescribed elements within the Assets and Liability section of the Financial Management Framework, represent some effective management practices that if properly implemented will assist in the minimisation of risk of error or fraud. Other assets covered in this section include investments, prepaid expenses, deferred income and finance leases. See examples of accounting entries, flowcharts and commentary provided for other assets in the section Accounting entries for other assets. A checklist is available in Chapter 12: Control Checklist Appendix.

Investments

Investments should be recognised as assets at cost at the time the investments are received. This will normally occur upon payment of the investment. Investments should be initially recorded in the period in which they are acquired. Investments should be revalued annually at the financial year end. The sale of investments, and any remitting gain or loss, should be recorded in the period of disposal. Agencies should note that the requirements of the Australian Accounting Standards relating to investments varies for entities working in different industries. Prepaid expenses

A payment made in the current period for goods or services that will benefit a future period (ie. a prepaid expense) should be capitalised as an asset at the time of payment where the item is considered material. The amount should be amortised over the period of benefit. The prepaid asset account will be reduced as expenditure is recorded to the future periods in which it is used. Where relevant a list of known expenditures that are paid in advance should be



maintained and a standard journal set up in the general ledger to reflect the prepaid asset and the charge to the operating statement. A prepaid expense should be recorded in the general ledger. The subsequent cash payment of the creditor amount should be recorded in the creditors subledger and the cashbook (or equivalent). Finance leases

Finance leases should be recorded in the period in which the lease commences. Periodic payments of the finance lease should be allocated between expenses in the operating statement and a reduction of the lease liability in the statement of financial position when lease payments fall due. Amortisation of leased assets should be charged every financial period over either the life of the property or the lease term, whichever is the lesser. Accounting entries for other assets

Accounting entries for investments

Primary entries for investments


Movement

PAE1 DR—Investments Asset Increase CR—Bank - Deposit Account (To record the acquisition of an investment.)

Asset Decrease

PAE2 DR—Investments - Marketable Securities Asset Increase CR—Unrealised Gain/Loss on Investments (To increase at the financial year end, the recorded value of marketable securities to their market value—if there is a decrease in the investment value, the entry would be the reverse of the one shown.)

Revenue Increase

Primary entries for investments


Movement

SAE1

DR—Bank - Deposit Account Asset Increase CR—Revenue - Interest Earned (To record income from investments.)

Revenue Increase

SAE2 DR—Accounts Receivable - General Asset Increase CR—Revenue - Sale of Assets (To record the proceeds on the sale of investments.)

Revenue Increase

Commentary on investments Investments are comprised of marketable securities and investment properties. Marketable securities include shares, convertible notes, foreign currency term deposits, Australian dollar term deposits and government bonds. These are disclosed as either current or non-current assets, depending upon whether they will be consumed or converted into cash within twelve months of the reporting period. The necessary information for revaluing marketable securities to their net market value should be provided by the agent managing the investment portfolio. Note if the sale proceeds exceed the cost then the resulting gain is treated as a revenue item. If proceeds are less than the costs then the loss is an expense item. Also note that the Accounting Standards impose different requirements relating to accounting for investments for particular industries. Accounting entries for prepaid expenses

Primary entries for prepaid expenses identified prior to input into Accounts Payable


Movement

PAE1 DR—Prepaid Expense Asset Increase CR—Creditors - General (To directly recognise the portion of prepaid expenses which relate to the current period.)

Liability Increase

Secondary entries for prepaid expenses identified prior to input into Accounts Payable


Movement

SAE1 DR—Expense Expense Increase CR—Prepaid Expense (To recognise the portion of prepaid expenses which relate to the current period.)

Asset Decrease

SAE2 DR—Creditors General Liability Decrease CR—Bank - Deposit Account (To record subsequent payments made.)

Asset Decrease

Primary entries for expenses initially recorded in Accounts Payable and prepaid expenses subsequently recorded


Movement

PAE1 DR—Expense Expense Increase CR—Creditors - General (To record the total initial purchase of goods)

Liability Increase

For more information see Non employee expenses and creditors, and goods and services in Chapter 3: Expenditure Cycle.

Secondary entries for expenses initially recorded in Accounts Payable and prepaid expenses subsequently recorded


Movement

SAE1 DR—Prepaid Expense Asset Increase CR—Expense (To record the prepaid portion of an expense incurred.)

Expense Decrease

SAE2 DR—Expense Expense Increase CR—Prepaid Expense (To recognise the portion of prepaid expenses which relate to the current period.)

Asset Decrease

SAE3 DR—Creditors - General Liability Decrease CR—Bank - Deposit Account (To record subsequent payments made—Payments - On Account.)

Asset Decrease

Refer to the flowchart Payments - On Account. Commentary on prepaid expenses For practical purpose most agencies need not record prepaid expenses where the benefits are expected to expire within the next month. For example with lease rental, many agreements are such that rentals are payable one month in advance. In this situation no prepayment will need to be recorded as the prepayment benefits the current period only. Common examples of items which are prepaid for only one month in advance are utilities and some rental. Expenditure such as advertising for which the period (or extent) of benefits is indeterminable should not be recorded as prepaid, but expensed in the period incurred. Some expenses will clearly relate to a future financial period (or part thereof) and should be debited direct to the prepaid expense account. This will be particularly evident close to the end of financial year close off. Instances here may include telephone rentals, membership subscriptions, course registrations, deposits for conferences, deposits for accommodation and airfares when the flight may not have been taken but the terms for payment fall within the current financial period. Accounting entry PAE3, as shown above, debits the prepaid expense direct, with the corresponding relevant reversal in the appropriate accounting period as shown in PAE2. For more information refer to the flowchart Expenditure Carried Forward - Prepaid Expenses. Accounting entries for finance leases

Primary entries for finance leases


Movement

PAE1 DR—Plant and Equipment Under Lease Asset Increase CR—Lease Liability (To record the lease asset and liability upon commencement of the lease.)

Liability Increase

PAE2 DR—Lease Liability Liability Decrease

DR—Finance Lease Interest Expense Expense Increase CR—Bank - Deposit Account (To record the payment of the lease rental, reduction of lease liability and recognition of interest expense upon payment of the lease invoice.)

Asset Decrease

PAE3 DR—Amortisation Expense Expense Increase CR—Accumulated Amortisation of Lease Asset (To record amortisation of the lease asset.)


Commentary on finance leases Before processing any accounting entries into the general ledger for leased assets, agencies must firstly determine the classification of the lease ie. whether the lease is an operating or finance lease. Guidelines for lease classification are contained in AAS 17, Accounting for Leases. In addition, for those agencies using Masterpiece Fixed Assets, panel FA432 enables on-line lease determination. The treatment of operating leases is dealt with specifically in Section 3. The amount to record in accounting entry PAE1 is the "fair value" of the asset. This is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction. This value will normally be available from the supplier of the asset (eg. Canon, Toshiba, etc). In practice, accounting entry PAE2 may not be progressively performed as lease invoices are received by agencies. The actual payment of the lease payment would all be debited to the finance lease expense account, with adjustment made progressively via a standing journal to the Lease Liability account in the General Ledger, or alternatively adjustment performed at year end. A schedule of payments to be made under each finance lease should be provided by the lessor, or alternatively calculated by the lessee either by a spreadsheet or an external system eg. LeaseCat. Manual spreadsheets will need to include the "normal" lease payment amount, the interest rate implicit in the lease agreement, residual value, the interest expense, the liability reduction and balance of outstanding liability. For more information refer to the flowchart Finance Leases. Control based procedures for other assets

Segregation of duties

Where practicable the following functions should be performed separately within an agency:

• approval for asset acquisition; • custody of assets;

• recording of assets; and • general ledger.

Document controls

Where applicable the following documents should be prepared or received, approved and processed with controls to ensure that the other asset details are consistent throughout:

• purchase orders; • delivery dockets; • supplier invoices; • cheque requests; and • cheques.

Management review

Senior staff should review the various components of Other Assets to ensure that processing results are satisfactory. This should include:

• Comparing balances of prepaid expenses and deferred costs to those levels anticipated, and investigating any significant variances.

• Analysing reports on such areas as deferred costs by division, deferred costs compared to deferred income, and any significant transactions or balances.

• Investigating any unusual reconciling items between asset listings, such as for deferred costs by project and general ledger control account.

Refer other areas of the Asset and Liability Cycle for further control based procedures. Period and year end requirements for other assets

Ledger controls

Any records outside the general ledger which are used to keep track of other assets should be reconciled to the assets control account in the general ledger. Any reconciling amounts should be investigated and corrected. Adjustments for period and year end

Other period and year end adjustments in respects of Other Assets will include:

• Ensuring that the relevant amount from prepaid expenses has been recognised as an expense in the period.

• Ensuring that the relevant amount from deferred costs has been recognised as an expense in the period to the extent that the related revenue was recognised.

Refer other areas of the Asset and Liability Cycle for further period and year end procedures.

Chapter 8: Asset and liabilities cycle - liabilities

Accounting based procedures for liabilities

Chief Executives must ensure that assets are effectively and efficiently managed by developing and implementing policies to identify, acquire, accurately value, manage and dispose of assets. The following procedures which support the prescribed elements within the Assets and Liabilities section of the Financial Management Framework, represent some effective management practices that if properly implemented will assist in the minimisation of risk of error or fraud. All procedures for employee related liabilities have been covered within the Expenditure Cycle. This section covers non employee provisions such as legal claims and unearned revenue. Provisions should be made for items of expenditure for which an agency has an anticipated liability where the amount of the liability and the date of its realisation are not known. All major non employee provisions which may arise at the end of the financial year should be identified. Where a future obligation to pay a third party is likely to arise a provision for the non operating expense should be recorded in the general ledger. Cash received prior to the earning of revenue to which it relates should be recorded as unearned revenue. Subsequently the unearned revenue will be recognised as revenue in the period in which the good or service is provided. See examples of accounting entries, flowcharts and commentary provided for liabilities in the section Accounting entries for liabilities. A checklist is available in Chapter 12: Control Checklist Appendix. Accounting entries for liabilities

Accounting entries for non employee provisions

Primary entries for non employee provisions


Movement

PAE1 DR—Non Operating Expenses Expense Increase



CR—Non Employee Provision (inc accruals)(To provide for non employee provision, outstanding.)

Liability Increase

Secondary entries for non employee provisions


Movement

SAE1 DR—Non Employee Provision (inc accruals)

Liability Decrease

CR—Bank - Deposit Account (To record settlement of a non employee provision, eg. legal claim.)

Asset Decrease

SAE2 DR—Non Employee Provision (inc accruals)

Liability Decrease

CR—Non Operating Expenses (To reverse non employee provision which does not materialise.)

Expense Decrease

Commentary on non employee provisions Non Employee provisions cover for example, premises relocation, pending legal claims etc. These accounts do not include accruals which relate to anticipated liabilities where the precise amount of the liability may normally be expected to be known within one year from the balance date. For more information refer to the flowchart Non Employee Provisions. Accounting entries for employee provisions

The accounting procedure relating to employee provisions is contained in Employee Related Liabilities. Accounting entries for unearned revenue

Primary entries for unearned revenue


Movement

PAE1 DR—Bank - Deposit Account Asset Increase

CR—Unearned revenue (To recognise revenue received in advance.)

Liability Increase

Secondary entries for unearned revenue


Movement

SAE1 DR—Unearned Revenue Liability Decrease CR—Revenue (To recognise revenue which was previously received in advance, over the period to which revenue relates.)

Revenue Increase

Commentary on unearned revenue The most common examples of unearned revenue are as follows:

• Unearned tax revenue, being taxation revenue that has been received by the agency based on an assessment made, but that revenue has not been earned. Includes taxation such as land tax; and

• Unearned revenue from supply of goods and services but which have not been earned because the goods or services have not been supplied.

For more information refer to the flowchart Unearned Revenue. Control based procedures for liabilities

• Segregation of duties for liabilities


• approval for initiation of liabilities; • recording of liabilities; and • general ledger.

Access restriction

Controls should be in place to restrict access to computer programs and computer data records. This includes physical controls over access to computer equipment and also controls within the programs which require a specified level of user authorisation for each application. Edit and validation checks should be incorporated into systems programs to facilitate the identification and correction of data entered which does not meet pre-determined criteria. Document controls

Where applicable the following documents should be prepared or received approved and processed with controls to ensure that other liability details are consistent throughout:

• orders; • notifications of services being provided; • invoices; • remittance advices; • cheques received; • notification of litigation pending; and • notification of warranty claims pending.

Data processing controls

Processing controls such as batch totals, programmed batching controls, data transmission controls and cut-off controls should be in place to ensure that transactions are completely and accurately processed in the proper financial period. All exceptions should be isolated, analysed and corrected. Management review

Senior staff should review the various components of the liabilities cycle to substantiate the effectiveness of processing results. This includes:

• Comparing the balance of unearned revenue to the level anticipated, and investigating any significant variance.

• Analysing reports on such areas as unearned revenue by division, unearned revenue compared to deferred costs, and individually significant transactions or balances.

• Investigating any unusual reconciling items between liability listing, such as for unearned income by project, and the general ledger control account.

• Investigating the ageing of unearned revenue, ensuring revenue is correctly recorded to the proper period when earned.

Any records outside of the general ledger which are used to keep track of other liabilities should be reconciled to the liability's control account in the general ledger. These discrepancies may arise, for instance, from an omitted transaction.

Chapter 9: Financial reporting

Financial reporting

Chief Executives must ensure relevant and appropriate information is reported to enable management and other decision makers to assess performance and make effective decisions. The following control based procedures represent some effective management practices, that if properly implemented will assist in the minimisation of risk of error or fraud. Many of the procedures within the other cycles already cover reporting procedures, however the following procedures supplement those already covered by addressing the fundamental principles in the Financial Management Framework, and can be applied across all cycles. Procedures for reporting

In order to provide timely and accurate information needed by management:

• User information needs should be periodically identified and updated. • Information needs from users to preparers of management information should

be communicated. • Due dates should be determined for all management reports whether routine or

non-routine. • Relevant priorities for all management reports should be established. • Management report dates and priorities to report preparers and users should be

communicated. • Any information system that is incapable of generating necessary information

should be identified and necessary changes implemented.

Management should ensure personnel are aware of applicable legislation and regulations so that external financial reports can be prepared on a timely basis and in accordance with applicable legislation and regulations. Appropriate advice should be sought on interpretation of requirements where any uncertainty exists. In order to maintain confidentiality of financial information, report or information distribution should be restricted to authorised personnel and the distribution list periodically updated and reviewed. Information should cover the financial and non financial elements of input, output and outcome measures and recognise differing levels of detail in accordance with user's needs. The materiality of information being reported to users needs be considered. Information should identify the cost of delivering the agency's products and services (outputs) and the costs of key components or activities that are undertaken by the agency in delivering its products and services.



Chapter 10: Planning and analysis

• Planning and analysis

Planning and analysis within an agency must provide the tools and the financial management information that will assist management in making decisions to achieve the agency's objectives. The following procedures represent some effective management practices that if properly implemented will minimise the risk of error or fraud. Control based procedures for planning and analysis

To implement corporate planning systems that reflect agency strategic objectives:

• A strategic plan consistent with the Chief Executive's strategic objectives should be developed.

• The direction and priorities set by senior management should be periodically evaluated to ensure they are still valid.

• Communication down, up and across the agency should be established to allow prompt identification and resolution of problems that impede achievement of objectives.

• Critical success factors that are consistent with the agency's strategic objectives should be identified and analysed.

• Adequate human resources and other internal resources should be identified and maintained and the availability of relevant external resources should be ensured.

Short term plans and annual budgets in accordance with agency's corporate strategic plans should be developed and:

• Agency objectives should be communicated to personnel involved in the planning process.

• Agreement on agency objectives should be sought before specific plans are developed.

• A planning system common to all relevant administrative units and sections should be developed and maintained.

• Information for plans should be gathered in accordance with agency objectives.

• A timetable for gathering, analysing and consolidating planning information should be developed and followed.

• Appropriate staff should be involved in developing plans.

Longer term budgets in accordance with agency's corporate strategic plans should be developed and:

• Agency objectives should be communicated to personnel involved in the planning process.

• Agreements on agency objectives should be sought before specific plans are developed.

• Appropriate staff should be involved in developing plans. • Corrective action should be implemented where budgets are not being

achieved.

To develop a reporting mechanism in a format that allows management to manage the agency and measure progress on a timely basis:

• Information systems that present information consistent with historical information should be established.

• Performance indicators should be established to enable effective monitoring of the agency's outcomes.

• Performance indicators should be reported on and examined on at least a quarterly basis;

• The effectiveness of plans should be monitored and evaluated. • Reporting formats should be enhanced to emphasise critical success factors

and measure performance against objectives.

Management should maintain information systems which:

• provide accurate and timely internal and external information to relevant personnel for example, an executive management reporting system that focuses on key information for managing the business; and

• are regularly reviewed to ensure that they meet the changing needs of the agency systems.

Budget appropriations should be monitored against expenditure and effectively communicated to staff responsible for authorising expenditure. Regular formal meetings should be held between senior representatives from central agencies and the agency to discuss budget issues and to ensure a mutual understanding. Effective communication should be ensured between senior management of the agency and staff responsible for implementing and reporting on the budget. Agencies should develop an appropriate chart of accounts to ensure that suitable information used in the planning and analysis process is available to be obtained from the relevant information systems.

Chapter 11: Human resources

Introduction to human resources

Human resources are an integral part of the control environment. An agency's control is effected through the people and their behaviour and motivation is affected by the policies and practices of that agency. For this reason Chief Executives will benefit by implementing the following control procedures which support the development of effective human resource policies within the agency. The following procedures represent some effective management practices that if implemented will minimise the risk of error or fraud. This section should be read in conjunction with other circulars directives and publications in relation to human resource matters, issued by the Commissioner for Public Employment in the Department of Premier and Cabinet. Control based procedures for human resources

Awareness of requirements and policies

To ensure management or supervisory personnel are aware of statutory and regulatory requirements and agency policies:

• Training on industrial relations, regulations and agency personnel policies should be provided to relevant personnel.

• Policies and procedures should be periodically reviewed for compliance with applicable statutory requirements and agency policies.

• Personnel should be encouraged to report suspected violations of statutory and regulatory requirements or agency policies.

• Appropriate disciplinary action should be taken for violations of requirements or policies.

The requirements of the agency's Code of Conduct should be communicated to all new employees and periodically to employees to ensure agency personnel are aware of acceptable behaviour. Employees should be aware of their job responsibilities and reporting accountabilities. Recruitment and staffing levels

To ensure sufficient numbers of appropriately qualified personnel are recruited:

• Appropriate candidate identification screening and recruitment practices should be maintained.

• Adequate job descriptions and recruitment criteria that can be used to measure and compare candidates' qualifications with job requirements should be maintained.

• Systems to record employee qualifications and experience should be developed.

Employee turnover should be minimised to an acceptable level by reviewing and evaluating compensation and benefits on a regular basis. Exit interviews should be conducted with employees leaving the agency to determine reasons for leaving. Staff development

To ensure employees receive adequate training to discharge their responsibilities effectively:

• Training needs should be identified; • Breakdowns in the system of internal control should be monitored to indicate

training deficiencies.

To ensure staff receive adequate feedback regarding their performance and career development:

• Performance should be evaluated periodically and career counselling provided.

Job descriptions should be periodically reviewed with employees and signed off by the occupant. Career paths within agencies should be created, where possible, to ensure that career opportunities are broadened. Agencies should consider rotating certain jobs, particularly repetitive and routine tasks. Access to records

To maintain confidentiality of human resource information access to human resource records should be restricted to authorised personnel.

Chapter 12: Control Checklist Appendix

• Control checklists

The control checklists in this appendix are not exhaustive and are merely intended to provide agencies with guidance in assessing internal controls. Chief Executives may choose to apply other processes to assess the adequacy of internal control, however those that choose to adopt the approach in this document will need to tailor its contents to reflect the circumstances of their operation.

Employee related expenses checklist

The segment of the expenditure cycle relates to the proper payment of employees and maintenance of proper payroll records.

Tasks Satisfactory? Pay employees in accordance with wage enterprise agreement contracts, awards and other established policies.

Calculate and record payroll (including payroll deductions) accurately and completely and for all services actually performed and approved, and only for such services.

Restrict access to payroll data information to only those individuals who need such information to discharge duties.

Provide payroll information to relevant personnel to satisfy management and information needs.

Revenue cycle checklist

The revenue cycle relates to effectively processing and managing revenues and accounts receivable.

Tasks Satisfactory? Only process orders for accounts receivable for customers that qualify under policy guidelines.

Process orders accurately and expeditiously. Process only valid accounts receivable orders. All services or products provided are accurately billed in the proper period.

Accurately record invoices for all authorised supply of services or products and only for such items.

Accurately record all authorised credits and only such credits.

Ensure continued completeness and accuracy of accounts receivable.

Safeguard accounts receivable records. Expenditure cycle checklist

The expenditure cycle relates to effectively processing and managing procurement and accounts payable.

Tasks Satisfactory? Accurately record invoices on a timely basis for all accepted purchases and only for such purchases.

Take advantage of prompt payment or other discounts. Accurately record returns and allowances for all authorised credits, only for such credits.

Ensure completeness and accuracy of accounts payable. Safeguard accounts payable records. Interface with other key systems to draw information and generate data.

Update delegation handbook. Control cheque run procedures. Ensure that services and materials received and related information are processed and promptly made available to appropriate sections and stores.

Ensure purchase and service orders not filled on a timely basis are investigated.

Completely and accurately document goods received and goods returned.

Accept only items or services that were properly ordered. Accept only services and materials that meet purchase order specifications.

Ensure that all materials transferred from the receiving

activity to other activities are recorded. Safeguard goods received. Ensure that vendor, inventory and purchase order information is accurately updated to reflect receipts.

Notify service providers promptly of substandard performance or return rejected items promptly.

Completely and accurately document all transfers to and from storage.

Appropriately requisition all goods to be transferred. Maintain safe working conditions and storage of hazardous materials.

Identify and purchase from vendors capable of meeting the agencies needs.

Purchase items only from legally qualified vendors and in conformity with applicable laws, regulations and contracts.

Ensure adequate supply of materials and services. Order services and items that meet appropriate specifications or service requirements.

Pay appropriate prices Order appropriate quantities at appropriate times. Update vendor information completely and accurately to reflect open purchase orders.

Receive items ordered on a timely basis. Record authorised purchase orders completely and accurately.

Prevent unauthorised use of purchase orders. Fixed assets checklist

The asset management function relates to the effective management and safeguarding of the agency's fixed assets.

Tasks Satisfactory? Ensure capital expenditure only undertaken in accordance with strategic and capital budgets.

Completely and accurately record fixed asset transfers, acquisitions, disposals and depreciation.

Safeguard fixed assets from loss through theft.

Cash checklist

The cashflow management function relates to effectively managing the cashflows of the agency.

Tasks Satisfactory? Accurately forecast cash balances to maximise short-term investment income and avoid cash shortfalls.

Accelerate cash collections. Record cash receipts completely and accurately. Manage timing of cash disbursements. Disburse cash only for authorised purposes. Remit disbursements to vendors and others in a timely and accurate manner.

Record cash disbursements completely and accurately. Safeguard cash and related accounting records. Customer service checklist

The customer service function relates to how the agency directly deals with its customers.

Tasks Satisfactory? Handle customer enquiries expeditiously and efficiently. Satisfy customer service needs so as to meet community obligations, agency strategy and customer requirements.

Manage relationship with customers to educate them about the agency's business and capabilities, and to gain information on which to base continuous improvements.

Reporting checklist

The reporting function is responsible for the design and implementation of systems that will generate appropriate information for senior management in order for them to effectively manage their agency.

Tasks Satisfactory? Provide timely and accurate information needed by management, central agencies and others.

Prepare external financial reports on a timely basis and in compliance with applicable legislation and regulations, accounting standards and agency guidelines.

Maintain confidentiality of financial information. Planning and analysis checklist

The planing and analysis function is the higher level function of developing and implementing an effective plan based on the vision and mission statements identified by the agency's board and/or Chief Executive.

Tasks Satisfactory? Develop and implement corporate planning systems that reflect agency strategic directions.

Develop short term plans and annual budgets in accordance with the agency's corporate strategic plans.

Develop reporting mechanism in a format that allows management to manage the agency and measure progress on a timely basis.

Maintain systems that allow timely communication of accurate internal and external information to relevant personnel.

Ensure agency personnel are aware of acceptable actions and behaviour.

Ensure compliance with budget appropriations. Efficiently develop plans. Develop achievable plans. Human resources checklist

The human resources function deals with all activities relating to the overall management of employees in the agency.

Tasks Satisfactory? Comply with applicable laws, regulations and agency policies.

Maintain records that demonstrate compliance with applicable human resource statutory and regulatory requirements, agency policy and agreements with other parties.

Acquire a sufficient number of suitably qualified personnel.

Ensure employees receive adequate training to discharge their responsibilities effectively.

Ensure staff receive adequate feedback regarding their performance and career development.

Maintain confidentiality of human resource information. Ensure employee turnover is contained to an acceptable level.

Ensure communications with staff are adequate.

Chapter 13: Glossary of terms

Glossary

The following glossary has been compiled from:

1. Generally accepted accounting terms as used in modern accounting text books; 2. The definitions section of Australian Accounting Standards; 3. Definitions contained in Treasury Accounting Policy Statements; and 4. Definitions contained in the Financial Management Framework.

A

accounting cycle Means the specific like accounting transaction processes involved in particular tasks. accounting period Means the period of a reporting entity to which the financial reports relate. accounting policy Means the specific accounting principle, basis or method applied in preparing and presenting financial statements. Accounting Policy Statements Means statements issued by the Department of Treasury and Finance on selected accounting and reporting issues which are intended primarily to ensure consistent application of Treasurer's instructions, Australian Accounting Standards and Statements of Accounting Concepts by all SA Government controlled entities in the presentation of their general purpose financial reports. accrual basis Means the accounting basis where the assets, liabilities, equity, revenues and expenses are recognised in the reporting period to which they relate, regardless of when cash is received or paid.

accrued expenses Means expenses that have been incurred in earning revenue but are unrecorded at balance date. accrued revenue Means revenue that has been earned but is unrecorded at balance date. accumulated depreciation Means the aggregate, at a given point of time, of the depreciation charges made in respect of a particular depreciable asset or class of depreciable assets. acquisition In relation to assets, means undertaking the risks, and receiving the rights to future benefits, as would be conferred with ownership, in exchange for a "cost of acquisition". administered funds Means funds which are held by an entity that the entity does not control. assets Means future economic benefits controlled by the entity as a result of past transactions or other past events. Australian Accounting Standard Prescribe the acceptable method(s) of measuring and recording specific types of accounting transactions and the required level of disclosure for those transactions in an entity's financial statements. B

balance date Means the end of the reporting period to which the financial statements relate. beginning of the lease term Means the commencement date of the period during which the risks and benefits incident to ownership of the leased property are able to be transferred from the lessor to the lessee.

brought to account Means recognised in the financial statements, otherwise than by way of note. C

carrying amount Means:

1. in relation to an asset, the amount at which the asset is recorded in the accounting records as at a particular date. In application to a depreciable asset, "carrying amount" means the net amount after deducting accumulated depreciation or amortisation; and,

2. in relation to a class of asset, the sum of the carrying amounts of the assets in that class.

cash Means cash on hand and cash equivalents. cash accounting Means accounting based on the recognition of all cash receipts and payments from operations in the period in which cash transactions occur, without any recognition of non cash expenses or revenues. cash equivalents Means highly liquid investments which are readily convertible to cash on hand at the investor's option and which a company or an economic entity uses its cash management function on a day-to-day basis, and borrowings which are integral to the cash management function and which are not subject to a term facility. cash flows Means cash movements resulting from transactions with parties external to the company (or economic entity). cash on hand Means notes and coins held, and deposits held at call with a bank or financial institution. chart of accounts Means a systematic coding system for classification and arrangements within the accounting system.

class of non-current assets Means a category of non-current assets having a similar nature or function in the operations of the entity. For the purpose of disclosure in the financial report this category is shown as a single item without supplementary dissection. control Means the procedures in place which provide reasonable assurance that the operational and financial objectives of an agency are met. control of an asset Means the capacity of the entity to benefit from the asset in the pursuit of the entity's objectives and to deny or regulate the access of others to that benefit. cost of acquisition Means the "purchase consideration" plus any costs incidental to the acquisition. cost of purchase Means the purchase price plus duties and taxes, inwards transport costs and any other directly attributable costs of acquisition, less discounts (other than settlement discounts), rebates and subsidies whether immediate or deferred. current assets Means cash or other assets of the reporting entity that would in the ordinary course of operations of that reporting entity be consumed or converted into cash within 12 months after the end of the last reporting period of that reporting entity. D

Data Collection System (DCS) Means a PC based computer program distributed yearly by Treasury for completion by agencies which, when aggregated with the information recorded in other agencies' packs, will enable Treasury to prepare a year end Whole of Government Financial Report. date of acquisition Means the date on which the risks and rights to future benefits, as would be conferred with ownership, pass to the acquiring entity. (The term "pre-acquisition" is to be read as deriving from this definition).

depreciable amount Means the historical cost of a depreciable asset, or other revalued amount substituted for historical cost, in the financial report, less in either case the net amount expected to be recovered on disposal of the asset at the end of its useful life. depreciable asset Means a non-current asset having a limited useful life. depreciation expense Means an expense recognised systematically for the purpose of allocating the depreciable amount of a depreciable asset over its useful life. deprival value Means the loss, both direct and indirect, that might be expected to be incurred by an entity if that entity were deprived of an asset at reporting date. doubtful debts Means debts that may prove uncollectable. E

efficiency Means the extent to which the entity maximised the outputs produced from a given set of inputs or minimised the input cost of producing a given level and quality of outputs. effectiveness Means the extent to which the entity achieved the objectives established for its operations, activities and/or programs, whether those objectives were expressed in terms of outputs or outcomes. employee entitlements Means benefit entitlements which employees accumulate as a result of rendering of their services to an employer up to the reporting date, and include, but are not limited to, wages and salaries (including fringe benefits and non-monetary benefits), annual leave, sick leave, long service leave, superannuation and other post-employment benefits.

employment on-costs Means expenses which are consequential to the employment of employees, but which are not entitlements of employees. enhancements Means the recording of capital expenditure incurred which enhances an existing separately identifiable item as a non-current physical asset. entity Means any legal, administrative, or fiduciary arrangement, organisational structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives. equity Means the residual interest in the assets of the entity after deduction of its liabilities. event occurring after balance date Or "after balance date event" means:

1. a circumstance that has arisen; or, 2. information that has become available, after balance date, but prior to the time

of completion of the financial statements.

expenses Means consumption or losses of economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, which result in a decrease in equity during the reporting period. F

fair value Means the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction. FAST Help Means procedures developed by Treasury and Finance to assist agencies in processing tasks into Computer Associates Masterpiece 2000 software.

finance lease Means a lease which effectively transfers from the lessor to the lessee substantially all the risks and benefits incident to ownership of the leased property. Financial Management Framework Means a framework with objectives to:

• empower agencies to establish procedures, policies, systems and processes which best suit their needs;

• introduce best practice techniques in financial management for use by agencies;

• describe the key attributes of financial management activity; and • improve the efficiency of the overall management process in the General

Government Sector.

financial accounting period Means the accounting period of a reporting entity to which the financial statements relate. financial report Means accounts or consolidated accounts or both. financial statements Means general purpose financial statements in whatever form and under whatever name(s) prepared and issued voluntarily or pursuant to statutory requirements or to any regulations, rules, ordinances, directives or agreements binding upon the "reporting entity". G

general purpose financial report Means a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs. Government department Means a Government controlled entity, created pursuant to administrative arrangements or otherwise designated as a Government department by the Government which controls it.

I

inception of the lease Means the date of the lease agreement or, if earlier, the date of commitment by the parties to the principal provisions of the lease. independent valuation Means, in relation to non-current assets of the entity which are the subject of a valuation, a valuation made by a person:

1. who is an expert in relation to valuations of that class of non-current assets; and,

2. whose pecuniary or other interest could not reasonably be regarded as being capable of affecting the person's ability to give an unbiased opinion in relation to that valuation.

interest rate implicit in the lease Means the interest rate that causes the present value, at the beginning of the lease term, or:

1. the "minimum lease payments" and, 2. any "unguaranteed residual value" expected to accrue to the benefit of the

lessor at the end of the lease term;

to be equal to the fair value of the leased property at the inception of the lease. inventories Means goods, other property and services:

1. held for sale in the ordinary course of operations; 2. in the process of production for such sale; or 3. to be used up in the production of goods, other property or services for sale

including consumable stores and supplies, but does not include depreciable assets as defined in Australian Accounting Standard AAS 4 "Depreciation of Non-Current Assets".

investment Means an asset held by an entity for the accretion of wealth by way of revenues such as interest, royalties, dividends, rentals and capital appreciation, but does not include operating assets.

L

lease Means an agreement conveying the right from a lessor to a lessee to use property for a stated period of time in return for a series of payments by the lessee to the lessor. lease commitments Means the aggregate amount, at a specified date, of payment due under a lease over the remainder of the "lease term" by way of:

1. "minimum lease payments"; 2. any rentals relating to the reimbursement of executory costs to be met by the

lessor; and 3. those contingent rentals which, at that specific time, are known to be payable

over the remainder of the "lease term".

lease term Means the sum of:

1. the period of the lease; and, 2. any period of renewal of the lease flowing from an option, express or implied,

which allows the lessee to renew the lease for a rental which, in relation to the expected fair rental of the property at the date the option becomes exercisable, is low enough to make renewal of the lease appear, at the inception of the lease, to be reasonably assured.

liabilities Means the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events. M

materiality Means the concept that information likely to affect the decisions of users of financial statements should be separately disclosed. monetary assets Means cash or claims to fixed amounts of cash such as accounts receivable or loans advanced, in both domestic and foreign currency units.

N

net market value Means the amount which could be expected to be received from the disposal of an asset in an orderly market after deducting costs expected to be incurred in realising the proceeds of such a disposal. net realisable value Means the estimated proceeds of sale less, where applicable, all further costs to the stage of completion and less all costs to be incurred in marketing, selling and distribution to customers. non-cancellable lease Means a lease which:

1. can be cancelled only with the permission of the lessor or upon the occurrence of some remote contingency; or

2. the lessee, upon cancellation, would be committed to enter into a further lease for the same or equivalent property with the same lessor or a third party related to the lessor; or,

3. provides that the lessee, upon cancellation, would incur a penalty of a magnitude that, in normal circumstances, could be expected to discourage cancellation.

Non-current assets Means all assets other than current assets. non-reciprocal transfer Means a transaction in which the entity receives assets or services or has liabilities extinguished without directly giving value in exchange to the other party or parties to the transaction. O

obsolescence Means the process of ageing of an asset due to circumstances such as commercial or technical factors.

operating activities Means those activities which relate to the provision of goods and services. operating leases Means a lease under which the lessor effectively retains substantially all the risks and benefits incident to ownership of the leased property. operating revenue Means the amount of revenue, determined after deducting returns, allowances, duties, taxes and other amounts collected on behalf of third parties, and comprises:

1. sales revenue (or its equivalent); and, 2. other revenue,

entering into the determination of operating profit or loss. ordinary operations Means operations of a kind carried on regularly from reporting period to reporting period to achieve the objectives of the reporting entity. P

prepaid expenses Means payments for future economic benefits which are regarded as assets. When the benefits are used to produce revenues, the costs of the resources consumed are recorded as expenses. prescribed elements Means elements agencies must put in place to ensure the objectives of each of the components of the Financial Management Framework are met. primary accounting entry Means the originating entry in a particular task(s). provision Means a contra account in the balance sheet, either

1. to an asset account (eg. accumulated depreciation) for the amount written off or retained in order to provide for depreciation or diminution in value of assets; or

2. to a liability account (eg. provision for income tax) for the amount retained in order to provide for a liability of which its outcome is certain but the amount cannot accurately be determined..

purchase consideration Means the fair value of assets given or share capital issued, liabilities undertaken, and/or other securities given by the acquiring entity, in exchange for assets (net, where applicable) or shares of another entity. R

recognised Means reported on, or incorporated in amounts reported on, the face of the profit and loss or other operating statements or of the statement of financial position (whether or not further disclosure of the item is made in notes thereto). recognition Means the process of reporting an item on, or incorporating an item in amounts reported on, the face of the operating statement or statement of financial position (whether or not further disclosure of the item is made in notes thereto). recoverable amount In relation to an asset, means the net amount that is expected to be recovered:

1. from the total cash inflows less the relevant cash outflows arising from its continued use and through its subsequent disposal; or,

2. through its sale.

replacement cost Means the cost at which an identical inventory item could be purchased or manufactured at reporting date, having regard to normal purchasing or production quantities and conditions. reporting date Means the end of the reporting period to which the financial report relates. reporting entity Means an entity (including economic entity) in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources.

residual life Means the remaining useful life of an asset at a specified date. residual value Means the estimated fair value of the leased property at the end of the lease term, based on price levels and market conditions existing at the inception of the lease. revaluation Means the act of recognising a reassessment of values of non-current assets as at a particular date. revaluation decrement Means the amount by which the revalued carrying amount of a non-current asset as at the revaluation date is less than its previous carrying amount. revaluation increment Means the amount by which the revalued carrying amount of a non-current asset as at the revaluation date exceeds its previous carrying amount. revenues Means inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period. revenue received in advance Means a liability to supply goods or services arising from revenue being received by an entity for the supply of goods before the revenue is earned. S

secondary accounting entry Means the accounting entry which follows primary accounting entries. This is not the main focus of the activity but is still important in the overall accounting treatment of a particular transaction.

straight-line method of depreciation Means that which assumes equal amounts of the services of the fixed asset are consumed in each accounting period in which the asset is used. T

threshold Means the dollar amount above which an item is recognised in the register of non-current physical assets or other accounting records. transfer payments Means amounts transferred by a department to third parties consistent with departmental objectives and legislation or other authority. trust funds Means funds which are held in trust pending the outcome of a future event or settlement. U

useful life Means:

1. the estimated total period over which the future economic benefits embodied in a depreciable asset are expected to be consumed by the entity; or

2. the estimated total service, expressed in terms of production or similar units, that is expected to be obtained from the asset.

useful life of the leased property Means the estimated remaining period, from the beginning of the lease term without limitation by the lease term, over which:

1. the property is expected to be used; or 2. the remaining benefit represented by the right to use the property is expected

to be derived.

W

write-off Means, in relation to accounts receivable amounts owing, recognition that an amount so receivable is uncollectable.

Documents

FINANCIAL MANAGEMENT FRAMEWORK HANDBOOKportal.publicpolicy.utoronto.ca/en/ContentMap... · Chapter 2: Revenue Cycle ... Asset and liabilities cycle - cash Chapter 7: ... have control