THE DEVELOPMENT OF GENERALLY RECOGNISED ACCOUNTING PRACTICES (GRAP) * Read more about GENERALLY ACCEPTED MUSICIPALACCOUNTING PRACTICE (GAMAP) What is GRAP? GRAP and the link to the Public Finance Management Act (PFMA) What is accrual accounting? The role of the International Federation of Accountants (IFAC) International position in standard setting South Africa's Accounting Standards Board (ASB) The work plan of the ASB The process of developing GRAP The fundamental principles followed when developing GRAP Statements of GRAP Training Opportunities for GRAP SAIGA provides unique training opportunities to those entrusted with the responsibility to implement GRAP. Refer to the section “training courses” on this website or follow these links: Preparing Annual Financial Statements for national and provincial departments - GRAP (year ended 31 March 2004) Preparing Annual Financial Statements for local authorities - GAMAP (year ended 30 June 2004) Mastering GAMAP in 5 days Generally Accepted Municipal Accounting Practices. GRAP Statements: Group 1 Preface, framework, first time application, net surplus or deficits, fundamental errors, changes in accounting policies & cash flow statements. GRAP Statements: Group 2 Property, plant and equipment, impairment of assets, inventory, leases, et al. GRAP Statements: Group 3 Consolidated financial statements, accounting for controlled entities & investments in associates, financial reporting of interests in joint ventures. GRAP Statements: Group 4 Accounting for intangibles, employee benefits, heritage assets & investment property, business combinations. [ BACK TO THE TOP ] What is GRAP? Section 216 in the Constitution requires that national legislation must prescribe measures to ensure transparency by introducing Generally Recognised Accounting Practice (GRAP) to the three spheres of government The PFMA addresses this requirement, by requiring public sector entities to comply with generally recognised accounting practices (GRAP), to be prescribed by an Accounting Standards Board (ASB). GRAP would be applicable to: All levels of government (national, provincial and local). All public entities, and Parliament and provincial legislatures The PFMA defines GRAP as “An Accounting practice complying in material respects with standards issued by the “Accounting Standards Board” GRAP and the link to the Public Finance Management Act (PFMA) The Public Finance Management Act. Act 1 of 1999 (as amended) aims to improve the components of financial management and financial administration in government reforms since 1994, giving recognition to the need to improve the value for money that the public sectors provides to the citizens of South Africa. Government is increasing its interest in measuring and reporting on programme performance. The ability to obtain maximum benefit from increasingly limited resources can be enhanced by an understanding of the results of the programmes for which budget resources have been expended. The objective to government is to provide services, in contrast to the objective of private sector organisations, which is to earn profits and enhance return on investment, both of which are monetary objectives. The report on programme performance measures is not only an appropriate reporting statement, but likely to be the most important statement for those persons interested in how the Government entity is using the recourses. The introduction of such reports is considered as an urgent priority to serve accountability. The “appropriation accounts” that were previously prepared on the cash basis of accounting (whereby expenditure are measured by the payments that are made up by public sectors entities against budgets during the fiscal year) focused on the “inputs” side only. It did not measure the resource consumed during the period under review, thus the actual cost of programs are not measured, controlled or reported. In the absence of accurate cost information, performance measures of efficiency and cost- effectiveness cannot be readily determined other that by performing expensive ad-hoc studies. In contrast, the accrual basis of accounting more readily provides the true cost of resources consumed. The introduction of GRAP on an accrual basis of accounting is therefore also an urgent priority [ BACK TO THE TOP ] What is accrual accounting? Under the accrual basis of accounting: Transaction and events are recognised when they occur rather than when cash is paid or received; Assets, liabilities, net assets, revenues and expenses are recognised; All assets and liabilities are measured on the historical cost basis, sometimes with the re- measurement to the fair value of certain assets and liabilities, particular non-current assets; The measurement focus is on economic resources controlled by the entity, the cost of operations or of providing services, the financial position, and changes in the financial position or operational efficiency. The accrual basis provides information about such matters as the resources controlled by the entity and the actual cost of its operations. The use of the accrual basis is essential if financial reporting is to provide information useful in evaluating the government’s performance in terms of performance in terms of service costs, efficiency and accomplishments. It can assist users by providing better information for decision making and accountability and by changing the way which managers think and operate. The benefits of accrual accounting include: An assessment can be made of the stewardship or accountability of management The true cost of goods and services rendered can be determined; An assessment can be made of the levels of borrowings and other liabilities, as well as an extent of guarantees provide by the government The role of IFAC in the development on public sector accrual accounting standards The International Federation of Accountants (IFAC) is the global organisation for the accountancy profession. Having 155 member organisations in 113 countries IFAC protects the public’s interests by promoting the best practices of the worlds accountants. IFAC members represent 2,4 million accountants in public practice, industry, commerce, government and academe. IFAC serves the public interest and contributes to the strengthening of the international economy by developing the global accountancy profession, establishing high quality standards, and promoting international convergence of standards. IFAC strives to serve the public interest through the development of standards in the areas of auditing, education, ethics and public sector financial reporting; by advocating transparency and convergence in financial reporting; by providing best practice guidance for professional accountants employed in business and by implementing a membership compliance program. The IFAC Public Sector Committee (PSC) focuses on the accounting, auditing and financial reporting needs of national, regional and local governments, related governmental agencies and the constituencies they serve. It addresses these needs by issuing and promoting benchmark guidance, conducting educational and research programs, and facilitating the exchange of information among accountants and those who work in the public sector or rely on its work. The IFAC PSC has issued a number of International Public Sector Accounting Standards (IPSAS) in recent times. The IFACS comprise a set of recommended accounting standards for the public sector. The main objective of issuing IPSAS was to promote the significant benefits of achieving consistent and comparable financial information across jurisdictions. IFAC believes that the IPSAS will play a key role in enabling these benefits to be realized. The adoption of IPSAS by governments will improve both the quality and comparability of financial information reported by public sector entities around the world. The IFAC PSC encourages the adoption of IPSAS and the harmonisation of national requirements under IPSAS. The objective of the current phase of the IFAC PSC’s work plan is to develop IPSAS based on the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Some accounting issues in the public sector are not fully addressed in the IFRS. Similarly, accounting for a number of complex issues will be addressed in IFRS currently under development. Although these issues are not included in the brief of the current phase of the IFAC PSC’s work plan, these issues will be addressed once the initial set of IPSAS has been issued. [ BACK TO THE TOP ] International position in standard setting Private Sector IASC – International Accounting Standards Committee The IASC was established in 1973 to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards to help participants in the world’s capital markets and other users to make economic decisions. In May 2000 the strategic management of the IASC was altered with the establishment of a fulltime independent board responsible for the development of standards (IASB), overseen by a Board of Trustees that ensures worldwide geographical representation. The International Accounting Standards (IAS) issued by the IASC have been accredited by the International Organization of Securities Commissions (IOSCO) the regulator of stock exchanges, for use by multi-nationals in cross-border listings of securities. Given the widespread acceptance of IAS, the Public Sector Committee of the International Federation of Accountants (IFAC PSC) (see below) is using the standards issued by IASC up until August 1997, including subsequent revisions, as the basis for the development of a core set of Public Sector standards. The project commenced during August 1997. Public Sector IFAC PSC – International Public Sector Committee IFAC represents 153 member bodies in more than 113 countries. To illustrate IFAC’s scope, it should be noted that these member bodies represent more than two million accountants and auditors. IFAC established a Public Sector Committee (PSC) to develop international standards for the public sector, and South Africa is represented on the IFAC PSC. The IFAC PSC issues a range of publications, including Standards, Guidelines, Studies and Occasional Papers on financial reporting in the Public Sector. Standards are the authoritative requirements established by the PSC to improve the quality of financial reporting in the public sector around the world. However, the IFAC PSC recognizes the right governments and national standards setters to establish guidelines and accounting standards for financial reporting in their own jurisdictions. Amongst other initiatives, the PSC has already done considerable work in developing International Public Sector Accounting Standards (IPSAS) and published a core set of standards by November 2001. As the ASB chose IPSASs (based on IAS) as the starting point for the development of Standards of GRAP, significant benefits can be realized, given that the private sector is using Statements of GAAP that are also harmonised with IASs. The work programme of the IFAC PSC includes the following: The development of a single, comprehensive IPSAS for the cash basis of accounting. A series of IPSAS that apply to the accrual basis only. The drafting of guidelines to assist entities in making the transition from cash accounting to accrual accounting, recognising that there will be a wide range of intermediate steps, depending on the circumstances of each individual jurisdiction. The introduction of transitional provisions in accrual accounting standards as a means of providing entities with additional time to fully implement the accrual standards. The transitional provisions would address areas likely to cause difficulties for public sector entities such as property, plant and equipment, provisions and contingencies, and pension liabilities. Other Reporting Standards System of National Accounts and Government Finance Statistics Some governments also produce financial information in accordance with two other accounting frameworks: the System of National Accounts (SNA) and the International Monetary Fund’s (IMF) Government Finance Statistics (GFS). Although these frameworks are largely based on the same principles, they have quite different purposes and have evolved over time to meet the needs of particular groups of users. SNA is an accrual-based system, and the GFS is currently cash-based but the revised GFS is designed for fiscal analysis of the general nation as a whole, while GFS will be on an accrual basis. SNA looks at the economy of the nation as a whole, while GFS is designed for fiscal analysis of the general government sector, rather than the nation. Consolidated government financial reports prepared in respect of a particular reporting entity will usually have an even wider focus on GFS statements prepared for the general government sector, because GFS statistics would exclude corporations and quasi-corporations.   [ BACK TO THE TOP ] South Africa’s Accounting Standards Board (ASB) The South African public sector enthusiastically anticipated the developments at the IFAC PSC. The Accounting Standards Board was established by section 91 of the Public Finance Management Act, (Act 1 of 1999) (PFMA) as amended. The ASB set standards and guidelines for financial statements as required by section 216 (a) of the constitution of South Africa. The PFMA gave effect to this requirement by providing for the establishment of the Accounting Standards Board and requiring it to: Set standards of generally recognized accounting practice (GRAP) for the annual financial statements of departments, public entities, constitutional institutions, municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality, and parliament and the provincial legislatures (entities). Prepare and publish directives and guidelines concerning the standards Recommend to the Minister effective dates of implementation of these standards for the different categories of institutions to which these standards apply Perform any other function incidental to advancing financial reporting in the public sector Section 55 (1) (b) of the PFMA requires public entities to prepare financial statements in accordance with GAAP, unless the ASB approves the application of GRAP for that public entity. The Minister, in consultation with the Auditor-General, appointed the Board comprising ten members, for a term of three years. The board is an independent entity and members are appointed in their individual capacity and not as representatives of organisations. Board members are remunerated for their services to the Board as determined by the Minister in consultation with the Auditor-General. The Board elects from its members a Chairperson and deputy chairperson. The ASB aims to: Develop high quality standards and guidance taking into account best practices both nationally and internationally Adopt a consultative approach with key stakeholders Follow a rigorous due process to ensure that it takes into account the views of those affected by its pronouncements before they are issued. [ BACK TO THE TOP ] The work plan of the ASB The ASB will: Issue GRAP standards based on all currently published IPSAS that are relevant to the National Treasury implementation timetable; Issue a framework based on the IFRS framework for Generally Recognized Accounting Practices (GAAP) but incorporating those public sector-specific issues already identified during the development of IPSAS; Issue guidance notes based on the framework - where required in terms of the National Treasury implementation timetable and where no IPSAS have yet been published; Monitor the needs and capacity of preparers for exemptions from application of a standard granted in appropriate circumstances; and Issue generally accepted municipal accounting practices (GAMAP) for use by local authorities, including the implementation of the new standards issued by the ASB together with the replacement of those GAMAP standards currently in effect. The ASB plans to have South African public sector statements in line with IPSAS by 2006. [ BACK TO THE TOP ] The process of developing GRAP Statements of GRAP are developed through a structured process that involves accountants, auditors, preparers, regulators, legal authorities and users of financial statements in the public sector. The ASB consults with key stakeholders about its work program and discusses technical matters in meetings that are open to the public. ASB staff work to identify and review all the issues associated with the topic, including other national accounting requirements and practices and Standards issued by other national or international standard setters. A project group, representative of all stakeholders, is formed to give advice on the project and where no existing IPSAS exist, to prepare a discussion document. The ASB approves the discussion document for publication. The discussion document is then published on the ASB’s web site and notice of its publication given in the Government Gazette. ASB staff consider all comments received and a draft Exposure Draft is prepared for discussion with the project group. The ASB issues Exposure Drafts of all proposed Standards for comment by interested parties. The Exposure Drafts are published on the ASB’s web site and notice of its publication is given in the Government Gazette. The ASB usually exposes a proposed Standard for at least four months to allow the ASB’s constituents to consider and comment on its proposals. This provides an opportunity for those affected by the ASB’s pronouncements to present their views before the pronouncements are finalised and approved by the ASB. The ASB considers all comments received on Exposure Drafts and makes such modifications as it considers appropriate. Reasons for accepting or rejecting comments are then published. The draft of a Standard, duly revised after the exposure period, is submitted to the ASB for approval. If approved by the ASB, it is issued as a Standard and becomes effective from the date specified in the Standard. On occasion, where there are significant unresolved issues associated with an Exposure Draft, the ASB may decide to re-expose a proposed Standard. If a Standard is approved by at least three quarters of the total voting rights present at an ASB meeting, the pronouncement is published and released. Exposure Drafts are approved by at least a majority of the total voting rights present at a meeting. [ BACK TO THE TOP ] The fundamental principles followed when developing GRAP To ensure that the ASB applies consistent criteria in its assessment of IPSAS when drafting exposure drafts, the following principles serve as guidelines: Fundamental issues Where an accounting principle or a significant element of a supporting disclosure contained in an international/national standard is considered to be in conflict with the current and developing body of international/national accounting knowledge, this would be regarded as a fundamental issue and the accounting principle and related disclosure may be changed. It is anticipated that such changes would not be in conflict with the conceptual framework. Alternative treatments provided in international/national standards Alternative treatments would be retained, provided that they satisfy the overriding requirement of fair presentation and are not disqualified in terms of the preceding guideline. However, where there is an allowed alternative treatment in the international/national standard which has been included in the standard in order to accommodate regulatory or other restrictions in other countries and which is clearly not appropriate for application in South Africa, then such allowed alternative may be excluded from the South African statement. On the other hand, where no alternative is presented in the international/national standard but there is an alternative that should be considered due to the fundamental importance of such alternative in South Africa, then such alternative may be included. Statutory authority Where there is something in, or omitted from, an international standard which is in conflict with or explicitly required by the South African regulatory or legislative environment, then the international standard may be amended accordingly. Disclosure requirements Disclosure requirements may be amended where the amendments are regarded as being significant to improving fair presentation of the matter. Guidance and explanatory material Guidance and explanatory material may be added to the international standard where this would facilitate an understanding of a particular issue in the standard. Similarly where there is an issue in the standard that could be subject to varying interpretations, clarity on the issue would be necessary to ensure consistency of treatment. However, where the project group believes that changes not provided for in these guidelines are necessary; suggestions will be submitted to the ASB for consideration. Comparison with other standards or statements A comparison between IPSAS and South African GAAP will only be included in Exposure Drafts to facilitate comment. [ BACK TO THE TOP ] Statements of GRAP The Accounting Standards Board (ASB) is required in terms of the Public Finance Management Act (PFMA) to determine generally recognized accounting practice referred to as Statements of Generally Recognized Accounting Practice. The PFMA in section 55 (1) (b) requires public entities to prepare financial statements in accordance with Generally Accepted Accounting Practice, unless the Board approves the application of generally recognized accounting practice for that public entity. Accordingly, the Board has resolved that government business enterprises (as defined in the PFMA) and trading entities (as defined in the PFMA) and any other public entities whose ordinary shares, potential ordinary shares or debt are publicly traded should apply Statements of Generally Accepted Accounting Practice. All other public entities should apply Statements of Generally Recognized Accounting Practice unless the Board approves the application of Statements of Generally Accepted Accounting Practice for that entity. The Standards apply, therefore, too all: Departments Public entities (subject to the above) Constitutional institutions Municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality, and Parliament and provincial legislatures. Financial statements should be described as complying with Statements of Generally Recognized Accounting Practice only if they comply with all the requirements of each applicable Statements of Generally Recognised Accounting Practice. The objective of the ASB’s work plan is to develop a core set of financial reporting standards for the South African public sector. The Standards will be based on International Public Sector Accounting Standards where the International Federation of Accountants Public Sector Committee (IFAC PSC) has addressed the topic. The ASB envisages that these Standards will promote transparency in and effective management of revenue, expenditure, assets and liabilities of the institutions to which these Standards apply. The ASB envisages that these Standards will promote transparency in and effective management of revenue, expenditure, assets and liabilities of the institutions to which these Standards apply. [ BACK TO THE TOP ] Due Process and Timetable These Exposure Drafts are the first technical products of the Accounting Standards Board (ASB). The due process followed by the ASB in developing Statements of Generally Recognised Accounting Practice is for it (ASB) to receive comments on the proposals set out in this Exposure Draft from, preparers, users, auditors, standard setters and other parties with an interest in public sector financial reporting. Accordingly, all interested parties are invited to provide comments. Exposure Drafts will usually have a comment period of three (3) months, although shorter or longer periods may be used for certain Exposure Drafts depending on the urgency of the issue the final Statement. Upon the closure of the comment period, the ASB will consider the comments received on the Exposure Draft and may modify each proposed Statement of Generally Recognised Accounting Practice in the light of the comments received before proceeding to issue a final Statement. Comments will be classified in minor, major or generic categories and the Board will respond accordingly. The basis for accepting or rejecting significant comments will be published on the website. The on-going process of standard-setting by the ASB The process of standard-setting is continuous and on-going. New or revised statements (in the form of Exposure Drafts) are issued regularly. [ BACK TO THE TOP ] * Read more about GENERALLY ACCEPTED MUSICIPALACCOUNTING PRACTICE (GAMAP) 
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