Government Accounting and Financial Reporting in Latin America

Government Accounting and Financial Reporting in Latin America: The State of Public Finance Victoria Renée Narváez Alonso, General Secretary, CGR, Chile Svetlana Klimenko, Lead Financial Management Specialist, The World Bank Group Paris, OECD, February 26 -27, 2015

Evolution of Reforms in Latin America: Fiscal Discipline and Management of Government Finances Initial reforms focused on macro-fiscal stabilization. • Macroeconomic reforms of the mid-80 s to early 2000 s • Tackled structural and macro-fiscal issues and helped to: Fiscal Stability Fiscal Position Subsequent reforms shifted towards management of public resources and delivery of services. • • • Reduce inflation Control budget deficits Attract foreign direct investments • Higher growth rates since 2003 (with some interruptions) contributed to: • Lower poverty rates • Expanding middle class • Greater demands for improvements in the quality of public services • Increased calls for transparency and accountability This evolution of reforms in Latin America reflects the interdisciplinary approach needed for a well-functioning state and underscores the importance of government credibility. The World Bank Group Fiscal Sustainability 2

Evolution of Reforms in Latin America: Fiscal Discipline and Management of Government Finances Focus of PFM Reforms in Latin America The budget: • Is a strategic link between POLICIES and IMPLEMENTATION. • Allocates resources among competing priorities. “The budget is the single most important policy document of governments, where policy objectives are reconciled and implemented in concrete terms. ” Source: OECD Best Practices for Budget Transparency. • 6 countries have MTBFs but others have practices that are consistent with MTBFs in place. • 10 countries use PB at the central govt. level; 4 countries use it in line ministries. Performance Budgeting (PB) and Management Initiatives Medium-Term Budget Frameworks (MTBF) Integrated Financial Management Information Systems (IFMIS) Fiscal Rules and Fiscal Responsibility Laws (FRLs) • All countries have made changes but reform in this area remains incomplete. The World Bank Group Centrality of the Budget • 9 countries currently have fiscal rules or FRLs. Historically, reforms focused on the budgeting process given its importance. However, the 2008 global financial crisis highlighted a missing (neglected) piece in PFM reforms. 3

Evolution of Reforms in Latin America: Missing (neglected) Piece: Accounting and Financial Reporting “Information contained in financial statements helps in compliance with fiscal rules. ” Source: Cangiano et al. 2013. Budget Accounting and Financial Reporting Financial Statistics Accounting and financial reporting are the foundations of proper budgeting and fiscal projections. • Adherence to fiscal rules is largely nugatory without accurate information. • Unsustainable increases in expenditure likely in absence of proper understanding of available revenue. • Unbudgeted liabilities could lead to fiscal crisis unless contingent liabilities are accounted for properly. The World Bank Group Key Pieces of Fiscal Information • Unrealistic economic projections arise with incomplete information. GFS Manual 2014 “recognizes the close relationship between guidelines for reporting GFS and accruals based public sector accounting standards. ” As was illustrated by the recent global financial crisis, often the importance of an item is highlighted by the consequence of its omission. 4

Global Trends: Harmonization of Standards AND Processes Relevance to Latin American Reforms Different Standards, Practices, and Staff Budgeting (OECD*) Statistics (GFS/SNA) Accounting (IPSAS) TO…. Convergence attempts at international and regional (EU) level • Ongoing convergence of standards to improve fiscal transparency and minimize risks (e. g. , GFS/IPSAS). • In the EU, the focus is on harmonization of standards (EPSAS) AND processes (EU Directive 2011/85 EU – Budgetary Framework, “Sixpack” regulation). The World Bank Group FROM… Lack of harmonization in preparing government information GFSM 2014 & Current Reforms in Latin America Statistics & Accounting Standards ACCRUAL BASIS RISKS to Policy – and Decision Making (e. g. , debt, cost of capital, revenue) * No international standards; OECD Best Practices. Budgeting CASH BASIS Practices Diverse and Inconsistent 5

Current State of Accounting and Financial Reporting Reforms The World Bank Group The Survey 6

Part 1 Part 2 Implementation Progress of Reforms Current Reporting and Accounting Practices • Accountants General of 18 selected countries (83% response rate). • Argentina did not respond; Bolivia and Venezuela responded only to Part 2. • Self-assessment. • Open and Close-ended questions. • International Public Sector Accounting Standards (IPSAS) as reference. The World Bank Group Method 7

Survey Results Part 1 Implementation Progress of Reforms Accounting and Reporting Reform All have plans to modernize their government accounting and financial reporting systems, including: The World Bank Group • Adoption of IPSAS • FMIS Updates Basis of Accounting Nicaragua Cash to modified accrual basis Mexico Panama Uruguay Cash to accrual basis IPSAS Brazil Chile Costa Rica Dom. Rep. Honduras Paraguay Peru Colombia Ecuador El Salvador Modified accrual basis to IPSAS Different accrual bases to IPSAS 8

Survey Results Part 1 Implementation Progress of Reforms Perceived Benefits and Advantages of IPSAS Adoption Improve transparency and accountability of governments 14 Improve perceptions in the market 12 Harmonize accounting standards 8 Effective and efficient use of resource 6 Improve the quality of decisionmaking 4 2 0 Provide reliable basis for audits and financial control Facilitate comparison at the international level Reflect the economic reality of public bodies more reliably and consistently The World Bank Group 10 Strengthen fiscal sustainability Provide complete information on assets and liabilities Standardize the information 9

Survey Results Part 1 Implementation Progress of Reforms Legal Framework and Adoption of IPSAS Based on national law, which complies with the requirements of IPSAS Need to modify legal framework, but relatively simple Implications for: • Harmonization of accounting standards in the public sector • Comparability of financial statements • Delays • Approximately equal divide between phased and “Big Bang” implementation approach The World Bank Group Strong preference for “indirect adoption” of IPSAS 10

Survey Results Part 1 Country Progress Expected Year of First IPSAS Financial Statements Costa Rica 54% - 59% 2016 Dominican Republic Analysis Stage 2016 Peru 75% 2016 Honduras 35% 2017 Colombia 70% 2017 El Salvador 30% 2018 Uruguay Moderate 2018 Chile To begin in 2016 2019 Ecuador 10% 2019 Brazil Fair 2020 Mexico 10% 2020 Panama 20% 2021 Paraguay Analysis Stage Not stated The World Bank Group Implementation Progress of Reforms: Are the Dates Realistic? 11

Survey Results Part 1 Implementation Progress of Reforms Perceived Obstacles and Disadvantages of IPSAS Adoption Associated costs The World Bank Group Time and investment requirement Shortage of local experts Prevalence of budget information Resistance to change Ignorance of the importance of government accounting Need for change in the regulations (laws) 12 Lack of trained personnel as agents of change 0 1 2 3 4 5 6 7 8 9 10

Survey Results Part 1 Implementation Progress of Reforms Priority Technical Areas for Implementation of IPSAS The World Bank Group Fixed and intangible assets Fixed asset management Transition to accrual accounting Contingencies and provisions Tax revenue recognition Update or acquisition of computing platform 13 Employee benefits 0 1 2 3 4 5 6 7 8 9

Survey Results Part 1 Implementation Progress of Reforms Modalities and Critical Areas of Support Preferred Support Modalities 12 The World Bank Group 10 8 6 4 2 0 Peer review Training Opportunities to interact with peers or experts Exchange of expertise Technical Assistance In addition to technical areas, support is needed in: budget and accounting integration, organizational restructuring, IFMIS, electronic consolidation tools… 14

Main Messages Part 1 Implementation Progress of Reforms Countries are motivated by the benefits of adopting IPSAS but aware of the obstacles to successful implementation. Further integration of fiscal statistics, budgeting information, and financial accounting is important. Accrual accounting standards minimize tendencies to work in silos to reduce time and costs. The World Bank Group There are incentives and strong pressure to adopt accrual accounting standards. 15

Survey Results Part 2 Current Reporting and Accounting Practices Scope of Financial Statements The World Bank Group Compares the scope of currently prepared financial reports with the requirements included in IPSAS 1 “Presentation of Financial Statements” 16

Survey Results Part 2 Current Reporting and Accounting Practices Coverage of the Financial Statements Statement of Financial Performance Statement of Financial Position 8 7 6 1 (i) Whole of Government 1 (ii) General (iii) Central (iv) limited Government entities within (central, state the Central and local) Government 6 1 (i) Whole of Government The World Bank Group Government entities included in the prepared financial statements (Classification aligned with the GFSM 2001) (ii) General Government (central, state and local) 1 (iii) Central Government (iv) limited entities within the Central Government 17

Survey Results Part 2 Current Reporting and Accounting Practices Coverage of the Financial Statements (continued) Government entities included in the prepared financial statements (Classification aligned with the GFSM 2001) 6 4 1 (i) Whole of Government (ii) General Government (central, state and local) 1 (iii) Central Government The World Bank Group Statement of Cash Flow (iv) limited entities within the Central Government • Costa Rica reports at the level of general government; Mexico reports at the level of limited entities. • No consistency of what should comprise government-controlled entities. 18

Survey Results Part 2 Current Reporting and Accounting Practices Comprehensiveness and Classification of Information Presented on the Face of Financial Statements i) Fixed and intangible assets, deferred and other assets and liabilities, financial instruments, pensions, and other post-employment liabilities (Statement of Financial Position). “Other” categories are used as a “parking space. ” ii) Transfers, own revenues, non-budgetary transactions, and grants paid (Statement of Financial Performance). The World Bank Group Respondents overall follow the recommendations of IPSAS 1. Areas requiring attention: iii) Payments made by third parties on behalf of the government and classification of cash flows by operating, investing, and financing activities (Cash Flow Statement). iv) Segregation of amounts related to property revaluation, foreign exchange differences, and investment revaluations (Statement of Changes in Net Assets). 19

. R . o f fo r ic bl Lo s al 9 ci s je ct s ss e 12 O ffi t rs rr ea ro l. P ita ap Pu C A al ci an ue eb D s on isi lic Pu b en ev -F in on ef Be n g un tin . & cc o al . S . A N nd 9. ov Pr nt s ou cc A ts 12 13 12 nd la ia en ta m nd se en st m ve cy 13 nc na Fi ay . P sa tie ab ili Li pe n Su s In en ur r s 12 10 nt ed ar le lic Pu b C 11 ge on tin C nc 6. n fe r ns rs s 15 11 8. U ig re Fo Er ro l. T ra of nt le va s ie lic 11 7. of n io ct Po ui Eq en ta nm er ov en t tm ea Tr ag In tr h as C g nt in ou cc or re C d an 3. as h C A 16 5. 4. 2. 16 11 6 3 The World Bank Group Survey Results Part 2 Current Reporting and Accounting Practices Notes to the Financial Statements Notes to Financial Statements 20

Survey Results Part 2 Current Reporting and Accounting Practices Accountability and Transparency Existing disclosure practices with respect to financial information and external audits 15 The World Bank Group 12 9 6 13 10 6 3 0 Published Financial Statements SAI Issued Opinion FS Include SAI Opionion Of nine issued opinions, two are unqualified; five are qualified; one is a disclaimer; and one is a negative opinion. 21

Survey Results Part 2 Current Reporting and Accounting Practices 16 9 Cost at Acq. 8 8 6 7 4 The World Bank Group Recognition and Measurement of PPE Fair Value at Both Meas. At Cost at Post- Fair Value at Both Meas. At Neither at Post Acq Post-Acq • Simultaneous use of the fair value and cost as measurement method poses a question about the underlying policy. • Only 9 countries systemically recognize depreciation. 22

Survey Results Part 2 Current Reporting and Accounting Practices Definition of a taxable event for three key taxes: • Income Tax: 14 countries - “earning of assessable income during the taxation period by the taxpayer” • Value Added Tax: 15 countries - “the undertaking of taxable activity during the taxation period by the taxpayer” • Property Tax: 12 countries - “passing of the date on which the tax is levied, or the period for which the tax is levied” However, at the moment, tax revenue is measured and recognized in: • 8 countries at the time of actual cash collection (Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Paraguay, and Venezuela). • 4 countries in the tax returns presented by the taxpayers (Chile, Colombia, Nicaragua, and Peru). • 8 countries disclose their policies for the recognition and measurement of tax revenue in the Notes, and 6 countries recognize the advance payment of taxes as an asset with the respective liability. The World Bank Group Recognition and Measurement of Tax Revenue 23

Survey Results Part 2 Current Reporting and Accounting Practices 16 16 7 4 Wages, Salaries, Annual and Sick Leave Social Security 6 Defined Benefit Post-employm. Contribution Plan Ins. & Med. Care 5 The World Bank Group Types of Employee Benefits Included in Financial Statements and Approach Used to Measure the Value of the Defined Benefit Pension Plans Termination Benefits • 4 countries use both Defined Contribution and Defined Benefit Plan. • 3 countries (Colombia, Costa Rica, and Peru) determine the present value of Defined Benefit obligations and fair value of assets, using actuarial assumptions. 24

Conclusions Analysis of the survey results shows: • Universal need to better-understand, document, and optimize links connecting financial reporting, budgeting, and fiscal reporting processes. Solutions will require engagements at both the country and regional levels: • Country level: To harmonize laws, regulations, policies, and procedures to enable implementation across different levels of government. • Regional level: To facilitate knowledge sharing and dissemination, and deepen collaborations to identify common, cost-effective solutions. The World Bank Group • Similarities in the challenges faced, from application and compliance with technical standards to adapting and integrating systems and processes. 25

In tandem with the reforms taking place in countries, a few areas merit further attention: • How does the introduction of accrual accounting impact the budgeting process and the preparation of GFS? • What role can government internal and external auditors play in the reform process? • While anecdotal evidence points to linkages between greater transparency and accountability and improved service delivery, how can this correlation be better understood and documented? A starting point would be systematic documentation and dissemination of: • Individual country approaches to adoption and implementation of accrual accounting or IPSAS • Analysis and use of applicable international experiences and practices • Coordination of the on-going and planned accounting and financial reporting reforms at the regional level. The World Bank Group Conclusions 26

División de Análisis Contable Área o Unidad IPSAS ADOPTION IN CHILE

Local context today v The General Comptroller Office (Contraloría General de la República or “CGR”) is in charge of setting the national accounting standards. v Public sector entities register their accounting information according to a national standard, but they do not present financial statements. v CGR adds the information in a report where it is presented in four separate sectors: Central Government; Municipal Sector, State Higher Education Institutions; and Government Business Enterprises.

Benefits v There will be more complete information about assets and liabilities of public entities. v The adoption of IPSAS will increases the transparency and the accountability of the financial administration. v IPSAS delivers new and more accurate information for the decision making process.

Strategic decisions for IPSAS adoption 9. Use of a transitional period for the first-time adoption of IPSAS in accordance with IPSAS 33 8. Partnership with the Ministry of Finance 7. Modify the existing information systems 6. Dissemination and training programs lead by CGR, universities and audit firms 5. Collaboration from universities and audit firms as revision groups 4. Codesign of the new standard with public sector entities between the years 2011 an 2014 3. Indirect adoption of IPSAS through the issue of a new national standard 2. Adopt all IPSAS simultaneously 1. Gradual implementation by sectors

Implementation chronogram in the Central Government CGR issued resolution with the national standard for the indirect adoption of IPSAS 2015 Begins the application of the new standard 2016 Presentation of non comparative transitional financial statements. Presentation of comparative transitional financial statements 2017 2018 Presentation of the first IPSAS financial statements 2019