EXPERIENCE ON PREPARING m SCOA FINANCIAL STATEMENTS BACKGROUND

EXPERIENCE ON PREPARING m. SCOA FINANCIAL STATEMENTS

BACKGROUND • MFMA requires municipalities to prepare annual financial statements using Generally Recognised Accounting Practice (GRAP), which is the Reporting Framework. • In preparing these annual financial statements, the municipality imports the m. SCOA compliant trial balance onto the AFS preparation software. • m. SCOA does not change the reporting framework, but instead aligns transactions by nature as per the requirements of GRAP. m. SCOA ensures that transactions are correctly classified and disclosed on the annual financial statements.

MSCOA COMPLIANCE BENEFITS • • Improved data quality and credibility Deeper analysis of sector comparison Uniform recording of transactions Uniform data sets Standardised key business processes Standardisation and alignment of government accountability cycle Standardisation of account classification Simplified process of uploading the m. SCOA Trial Balance onto the AFS preparation software

CHALLENGES EXPERIENCED CHANGE MANAGEMENT • Managing change in business processes. Users don’t understand that m. SCOA is not only a change in the chart of accounts but in business processes as well. • Resistance due to concurrent migration from multiple financial reporting systems previously used to one

CHALLENGES EXPERIENCED (CONT…) CHANGE MANAGEMENT (cont…) • A Change management process still continues to address these gaps. • The users had to familiarise themselves with the new account numbers, which resulted in large volume of errors (e. g. lease accounts incorrectly used for shortterm hire of marques). Re-allocation entries had to be prepared for these errors.

CHALLENGES EXPERIENCED (CONT…) IMPACT ON BUSINESS PROCESSES • Increase in the volume of accruals as payments module had to close early • Accruals had to be reversed manually due to the change in account numbers

CHALLENGES EXPERIENCED (CONT…) IMPACT OF RECLASSIFICATION OF OPENING BALANCES • Differences in classifications were noted between the balances previously reported, and those migrated in terms of m. SCOA (i. e. new categories of property, plant and equipment) • Additional disclosures had to be done in financial statements in line with GRAP 3 for differences as a result of m. SCOA. • The following slides provide extracts of the note on reclassifications due to MSCOA implementation on the 30 June 2017 financial statements.

CHALLENGES EXPERIENCED (CONT…) RECLASSIFICATION OF OPENING BALANCES

CHALLENGES EXPERIENCED (CONT…) LINKING OF ACCOUNTS • The finalisation of financial statements took long because user departments were submitting journal entries with accounts that were not linked. An example is when a new account was created for short-term hire of equipment and facilities (e. g. sound systems and venues for conferences). The accounts had to be linked for all departments before the entries were captured on the system.

CHALLENGES EXPERIENCED (CONT…) SEPARATELY DISCLOSABLE ITEMS WITH NO MSCOA ACCOUNT • In some cases individual amounts that required to be separately disclosed did not have a separate m. SCOA account and a unique account outside of the m. SCOA range had to be created and mapped on the financial statements software system. An example of this was the Provision for Bad Debts: Department of Human Settlements.

CHALLENGES EXPERIENCED (CONT…) PRIOR YEAR ADJUSTMENTS • There was a lot of duplication of effort required as all prior year adjustments processed needed to be done against the “old” ledger accounts database and then migrated / rolled forward into the new m. SCOA opening balances of the current year. • If there any revenue or expenditure items that need re-stating they will need to be adjusted and then closing entries processed to the Accumulated Surplus account as only the Balance Sheet items were migrated in our case (i. e. depreciation adjustment relating to the prior year).

BEST PRACTICES • Allocating sufficient time for review • Preparation of detailed working papers (explanation of movements where restatement occurred due to incorrect application of GRAP) • Training of staff on the chart • Breakdown and reconciliation of opening balances to prior year audited AFS • Sub ledgers and the general ledger (billing, payroll) be reconciled to each other • Audit working paper files supporting AFS prepared • Supporting documents for all movement processed to be in place (i. e. journals, delivery notes, invoices, resolutions)

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