cdlr2004\LR-FL\1re runion\LR-FL(2004)1E

Strasbourg, 24 May 2004

LR-FL (2004) 1 Item 4 of the agenda

STEERING COMMITTEE ON LOCAL AND REGIONAL DEMOCRACY (CDLR)

COMMITTEE OF EXPERTS ON FINANCE AND PUBLIC SERVICES AT LOCAL AND REGIONAL LEVEL (LR-FL)

DRAFT REPORT ON LOCAL ACCOUNTING PRACTICES

2 Secretariat Memorandum prepared by the Directorate General I - Legal Affairs Directorate of Co-operation for Local and Regional Democracy Foreword According to the decision of the CDLR, the LR-FL Committee adopted a questionnaire which had been prepared with the contribution of a consultant, Professor Faska Khrouz, and invited the CDLR members to reply by 31 December 2003. On the basis of the replies received from 23 countries, the consultant has prepared the preliminary report which appears in this document. The translation of the different tables and diagrams (which appear in French in the report) is presented in Appendix I. It will be integrated in the document in the revised version of the report. After revision of the document by the LR-FL, the draft report could be sent to the CDLR either for a first reading or for revision and adoption. Action required The LR-FL Committee members are invited to examine and revise the preliminary report and decide on the follow-up to the activity.

The new approach to local-government accounting

Accounting rules and practice at local level

Report Summary of survey results

Council of Europe

Strasbourg
May 2004

Contents Introduction I. Implementing a new approach to local-government accounting

1. 2. 3. 4. Legal framework Entities concerned General accounting Cash accounting
4.1. 4.2. 4.3. 4.4. 4.5. 4.6. Expenditure Revenue Distinction between ordinary and extraordinary revenue and expenditure Responsibility for different steps in the revenue and expenditure processes Structure of the budget and budget account Link to other accounting systems

5. Accrual accounting
5.1. 5.2. 5.3. 5.4. 5.5. 5.6. Valuation rules Assets, inventory and closure Accounting statements Subsidiary accounts Chart of accounts Asset valuation rules a. Depreciation b. Recording of provisions for liabilities and charges 5.7. Accounting statements

6. 7. 8. 9.

Harmonisation Publication Users of the information Auditing

II. Ranking the development of local-government accounting systems III. A comprehensive and effective accounting model IV. Recommendations to the Council of Europe countries V. The French and Belgian experiences

VI. Appendix: Summary of survey results

Introduction
In 2003 Professor Faska Khrouz, of the University of Brussels' Solvay Business School, compiled a questionnaire based on more than a decade of experience in designing localgovernment accounting systems in Belgium and training municipal and provincial tax officers [collectors]. The questionnaire was submitted to and discussed by local-government representatives from the Council of Europe member countries, meeting in Strasbourg. It was subsequently amended in the light of their comments before being sent in autumn 2003 to representatives of the authorities responsible for local government in the Council of Europe countries. During the first quarter of 2004, 23 countries returned the questionnaire, completed either partially or in full, adding a wide range of qualitative comments. Some countries did not answer all the questions while others did not reply at all or submitted their responses very late (the questionnaires from Austria and Estonia were returned in May 2004). In some cases, moreover, the nature of the replies makes one wonder whether the questions were properly understood and whether the officials tasked with responding had a thorough knowledge of public-sector accounting. The completed questionnaires were sorted and processed by an assistant1 at the university, applying mainly quantitative but also certain qualitative criteria. All the replies are shown in the summary tables which set out the questions asked, the responses from each country and a summary of those responses in both absolute and relative terms. In the case of Belgium, each of the country's three regions sent a separate reply because there are differences (in some cases significant) between their respective laws. Each region replied to questions on the areas which concerned it, and the responses from Wallonia (Belgium-W), Flanders (Belgium-N), and the Brussels Capital region (Belgium-BXL) therefore had to be treated separately. The replies from Austria and Estonia although surprising in some cases were incorporated into the final tables. A large Excel table appended to the report summarises the full picture gleaned from the questionnaires returned. The report aims to summarise the main trends that emerged while at the same time reflecting factors specific to each country. Readers who are interested in these detailed aspects should refer to the accompanying summary table.

I am grateful to Olivier Mortehan for his help in sifting through the data collected.

I. Implementing a new approach to local-government accounting

1. Legal framework Virtually all the countries that replied (22 out of 23) have a legal framework regulating accounting practice at local level. In 86% of cases this regulation stems from the ministry responsible for local government, which is often the Ministry of the Interior. In three countries the Ministry of Finance is the designated authority. In some countries the task is split with bodies or authorities at other levels: in three cases (France, Portugal and Turkey) the Auditor General's Department; in the UK, chartered accountants; and in Russia, local authorities themselves. There is no clear pattern with regard to responsibility for a municipality's accounting system. In nine countries it lies with chief financial officers; in seven others, accounting officers are in charge; and in four others, the collector is directly responsible. Local-government accounting differs from that of commercial companies in 18 of the 23 countries although in 91% of cases recognised associations of chartered accountants had some involvement (albeit generally described as "moderate") in defining the regulatory framework. In the majority of countries (almost 85%), information from local government is included in the national accounts. In 12 countries there is no committee in charge of local-government accounting, while nine countries have such a body. In most of the countries that have a committee its tasks are to lay down rules for accounting practice and to provide opinions and advice to the local and national authorities. Where this type of accounting standards committee exists it generally reflects a desire for professionalism in local-government accounting.

Figure 1: Existence of a committee in charge of local-government accounting

Y a-t-il une com m

7 2. Entities concerned All the countries that responded have accounting systems for local government (municipalities or communes). In almost half of them these are new systems that emerged in the early 1990s. The size of the entities concerned ranges very widely although few have a population of more than 100 000. The higher the tier of government, the fewer countries to have a specific accounting system for it. Fourteen countries have systems for intermediate-level (provincial or county) authorities, but only five have systems for regional authorities, and as a rule these have been introduced only recently.

Figure 2: Entities concerned by local-government accounting

In a majority of countries (15) there is a specific accounting system in some cases based on private-sector practice for inter-municipal cooperation bodies. 3. General accounting

Municipalits ou co

Most countries have a cash accounting system that enables them to prepare an annual budget and final account. In most cases, too, a cash accounting system and an accrual accounting system exist in parallel but are distinct. Apart from Sweden and the Netherlands, all the respondent countries indicated that they have cash accounting systems. The quasi-ubiquity of cash accounting reflects the fact that the management of public money has always been strictly regulated with regard to authorisation of expenditure and collection of revenue.

8 Some countries, including France, have tighter constraints and there are actually two systems of cash accounting, one the responsibility of the expenditure-authorising officer and the other of the accounting officer. Accrual accounting is practised in an even larger number of countries, reflecting the importance that local authorities attach to knowing the value of their property and reviewing performance in each financial year. Cost accounting systems somewhat curiously are present in almost half the respondent countries, sometimes in simplified form based on the calculation of net costs using the full-costing method (direct and indirect costs) or direct costing (fixed and variable costs). Activity-based costing (the principle here being that services provided by the local authority consume activities, traced by activity drivers; and these activities in turn consume resources, traced by resource drivers) is so far used in only five countries.
Fdration de Russie

Belgique -N

Belgique-W

Azerbadjan

Danemark

Angleterre

Roumanie

Comptabilit gnrale Comptabilit analytique

o o

o
n

o
n

o o

o o n

o o

o o

o o

o o

o o

o o

o n o

o o

o o

o o

Figure 3: Accounting systems in place

Only one-third of the respondent countries use medium-term planning and in most of the countries concerned there is also a management control system (using management charts). Consolidation of accounts is rare, which means that in most countries it is not actually possible to obtain a reasonably precise view of the estate situation or of the overall management of the bodies belonging to a local authority and responsible, for example, for municipal housing, awarding job-seeker's allowances etc. In rather fewer than half the countries, financial analysis of the annual accounts is practised. A full range of reasons is given for such analysis: to assess the financial equilibrium of local-government institutions, as well as their liquidity, solvency and efficiency.

Pays-Bas

Comptabilit budgtaire

Rp. Slovaque

Rp. Tchque

Belgique-BXL

Rp. Slovne

Espagne

Finlande

Norvge

Moldova

Portugal

Lituanie

Turquie

Albanie

France

Suede

Italie

Figure 4: Consolidation of accounts and financial analysis

Accrual accounting produces balance sheets and income statements, and these are the types of financial report used in the rendering of accounts in virtually all the respondent countries. Depreciation is included in final accounts in 17 countries, and in the budget in only eight countries. Most countries recognise all the standard accounting principles although the ways in which they are used in the rendering of accounts differ significantly.

20 NOMBRE DE PAYS 15 10 5 0

Consolidation
Principe d'universalit Principe d'annualit Principe de limitation du crdit des dpenses Principe d'unit Principe d'quilibre budgtaire Principe de spcialit des articles Principe de sincrit budgtaire

Figure 5: The most frequently encountered accounting principles

The respondent countries also use numerous other accounting principles, notably in a reflection of private-sector practice. Those listed include: - the principle of established methodology, - the historical cost principle, - the principle of prudence,

Analyse fi

10 - the principle that expenditure authorisation and accounting are separate functions, - the "going concern" principle, - the principle of essentiality. A distinction is drawn in virtually all the respondent countries between mandatory expenditure (that which cannot be reduced, eg wages and salaries and debt servicing) and optional expenditure (which it is possible to reduce, eg expenditure on receptions and grants to associations). Reforms are ongoing in numerous countries, often with the aims of making accounting systems more transparent, and particularly in order to standardise practice among different local authorities (thus facilitating comparison), or to align local-government practice with that of the private sector. 4. Cash accounting 4.1 Expenditure With regard to expenditure, the stages in the cash-accounting process are: a) appropriation budgeting mainly done by item (in 16 countries) but also by appropriation (in eight countries) or cost centre (in six countries). Clearly, in the countries using a "by item" system, detailed expenditure and revenue forecasting is required in order to facilitate supervision and control; in the countries that work by appropriation the concept of detailed forecasting is eclipsed by a need for realistic management; appropriation budgeting is done by cost centre in those countries where cost accounting has become the norm and there is a need to determine net costs by centre; b) commitment of expenditure (reserving a sum of money for a precise purpose), which takes place mainly upon order (in 13 countries), although also upon receipt of invoice (in eight countries) or, rarely, upon payment (in three countries). It is more logical to commit expenditure upon order than upon payment; c) charging of expenditure, which takes place upon receipt of invoice in 14 countries, upon order in four countries, and upon payment in six countries. It is similarly logical to charge expenditure (ie to register the invoice) when the invoice is received rather than when it is paid (otherwise the essence of the system will essentially be one of cash rather than accrual accounting);

11

Figure 6: Charging of expenditure

d) the final stage before payment is either authorisation (where the authority issues an order to make payment) the practice in 14 countries or invoice checking, which is the practice in 12 countries. 4.2. Revenue

Revenue entitlements (certain revenue) and established entitlements (revenue entitlements recorded in the accounts) are most commonly registered on receipt, although other approaches (registration upon notification or upon realisation) also exist.

Imputation des d

Figure 7: Established entitlements

It is logical that established entitlements should be registered as soon as they are notified rather than when they are collected. 4.3. Distinction between ordinary and extraordinary revenue and expenditure

As a rule, local authorities observe a relatively clear distinction between ordinary revenue and expenditure (ie that which is current, recurring and occasioned by operational requirements, such as staff costs, loan interest and charges) and extraordinary revenue and expenditure (ie one-off expenses or items of revenue that significantly alter property value, such as investments or loans). The distinction is made both in budgeting and in the rendering of accounts. With regard to expenditure, 16 respondent countries (a large majority) regard staff and operational costs as ordinary expenditure, whereas fewer countries put transfers, investments and debt in this category. Typically, "ordinary" expenditure covers procurement, wages and

A la commande Recettes: droits co A la rception de la factur Au paiement

12 salaries, interest on loans, and grant payments, whereas early debt retirement and lending to other public authorities are generally classed as "extraordinary" expenditure. Likewise with revenue, while operating revenue and transfers are classed as "ordinary", income from loans and investments is registered as "extraordinary". Items of revenue regarded as "ordinary" fall under the headings of operating revenue and operating subsidies, financial revenue and tax revenue. Capital subsidies, on the other hand, as well as income from the sale of fixed assets and loan recovery are classed as extraordinary.

Figure 8: Distinction between ordinary and extraordinary revenue and expenditure

4.4. Responsibility for different steps in the revenue and expenditure processes

Service ordina extraordina

Responsibility for the different categories of ordinary and extraordinary revenue and expenditure is shared in most countries between the elected municipal council (the local assembly) and the executive (the management body), with collectors playing a very minor role.

1. Dpenses ordinaires 1. Personnel

13

Responsabilit des et dpense

Figure 9: Responsibility for different types of revenue and expenditure

If we break the process down into its different steps we find that in most countries the municipal council makes budget appropriations, with the executive (board or senior management) taking charge of the following stages: commitment and charging of expenditure, authorisation and invoice checking prior to payment. Actual payment is made either by the executive (in 10 countries) or by the collector (in eight countries).

1. Dpenses du service or Le conseil municipal Responsabilit pa Le collge ou la dire Le receveur

Figure 10: Responsibility for the different steps

14 4.5. Structure of the budget and budget account In most of the respondent countries the number of budget positions [headings] is fixed. Only in Finland, Sweden, the Netherlands and Norway do local authorities have discretion in this regard. In the majority of countries this indicates two things: that each budget heading has a specific purpose and that there is either a desire to make inter-municipal comparisons or a need to link specific items in the budget account to a separate system of accrual or cost accounting. 4.6. Link to other accounting systems As a rule, where cash accounting is a component of the system, it involves production of an actual budget (ie a forecast) and a budget account (showing expenditure incurred and revenue earned). This form of accounting is linked to accrual and cost accounting via economic codes in 16 of the respondent countries (including Azerbaijan, France, Belgium (all three regions), Romania, Albania, Lithuania, Moldova, the Russian Federation, Denmark and Turkey) and via either functional or economic codes in seven countries (including Slovenia, Portugal, Norway and Spain). 5. Accrual accounting Most of the respondent countries use virtually all of the accounting principles listed in the questionnaire, namely the "going concern", "entity", "historical cost", "true and fair view" and "comparative information principles". Only some ten countries, however, recognise the "accrual basis of accounting" principle. Many countries see similarities between local-government accounting and private-sector accounting systems in terms of how transactions are recorded, the valuation rules used, annual accounts and auditing. The types of accounting records produced are the journal, general ledger and balance of general accounts. In several countries a system of subsidiary accounts is used, producing more detailed and longer-term accounts in respect of individual liabilities and assets. This system is not necessarily useful for recording expenditure and revenue over a single financial year but, as we shall see, some countries use it in this way. In half the respondent countries the budget and accounts chart is general (with maximum specifications); in the other half it is based on minimum specifications. In most cases it contains several classes: net worth and borrowing; fixed assets; inventory; current receivables and liabilities; financial accounts; expense accounts; revenue accounts; and off-balance sheet commitments. The number of positions in the accrual account is fixed. It is never left up to the local authority.

15 In 13 countries there is a budget/account link via an economic code. In nine countries the link is via a functional code. 5.1. Valuation rules 1. Capital is determined by the difference between assets and liabilities in the initial balance sheet. 2. Preliminary expenses are recorded at the top of the assets column and not capitalised in many countries. 3. Only in a minority of countries are research and development expenses capitalised at cost. In many cases, moreover, they are not capitalised. 4. Heritage assets are capitalised under a separate heading. 5. Saleable fixed assets are included with other assets. 6. Leased fixed assets are listed under a separate heading in some countries, but in others are included with other assets. 7. In those countries where the inventory is capitalised, a separate heading is used for this. 8. Virtually all the respondent countries use accrual accounts and, in particular, suspense accounts. 9. Reserves are constituted in some cases on the basis of the accrual accounting income, and in others on the basis of the cash accounts. 10. Investment subsidies are recorded particularly if they are in the form of capital grants and in some cases if they are in the form of gifts and bequests. 11. In two countries out of three, provisions for liabilities and charges cover provisions for major repairs and maintenance and in half of the respondent countries they cover provisions for pensions. 5.2. Assets, inventory and closure Methods used to value assets vary widely. They may be valued on the basis of historic cost (the practice in 78% of cases), market value (50%) or depreciation plans (63%). In most countries, assets are depreciated according to rates and over periods set by regulation. Assets subject to depreciation include buildings (in 80% of cases), infrastructure (in 70% of cases) and cultural property (in 56% of cases). Valuation allowances (notably reductions in the level of receivables and subsidies) are made in half the respondent countries and provisions for liabilities and charges are recorded in 90% of them. Fixed assets are written up or down either annually or occasionally. The types of asset concerned are normally land or buildings. In the countries that follow this practice, assets are written up in order to reflect their market value and written down to record their depreciation, notably over time.

16 5.3. Accounting statements In many (15) countries the balance sheet and income statement are the only accounting statements published on the basis of accrual accounting. In most cases they follow a general statutory layout and they are rarely laid out by function. Only in half the respondent countries do balance sheets follow the traditional layout of fixed assets, current assets, current liabilities and invested capital. In the great majority of cases the income statement classification is based on nature of income (operating items, financial items and unusual items). Classification by purpose is rare. This is another respect in which we see certain countries aiming for standardisation in order to facilitate comparison and control. Less common tools are notes (produced in 54% of the respondent countries) as a third accrual accounting document designed to explain the balance sheet and income statement and funds-flow statements (present in 41% of countries), explaining where annual resources originate and how they are used. Where notes are produced they follow a statutory layout.

Figure 11: Use of the three most common accounting documents

5.4. Subsidiary accounts

Several countries (including Azerbaijan, Moldova, Italy, the Netherlands and the Russian Federation) use systems of subsidiary accounts allowing for individual monitoring of assets and liabilities as well as expenses and revenue. Specifically, 12 or 13 countries use such a system for asset and liability accounts, and rather fewer (eight or nine) for expense and revenue accounts.

Nombre de livres com utiliss (Livre journal, g balance des comptes

Figure 12: Systems of subsidiary accounts

17 5.5. Chart of accounts The respondent countries fall into three groups: those that use a general chart with maximum specifications (Azerbaijan, Romania, Belgium N, W and BXL, Moldova, Italy and Denmark); those that use a chart based on minimum specifications (Finland, Slovenia, the UK, Norway and the Russian Federation); those which report that they use both types of chart (France, Albania and Portugal).

5.6. Asset valuation rules Methods of valuing assets vary greatly from country to country: in seven countries valuation is based on historic cost, in four it is based on market value, and in five depreciation rules and plans provide the basis.

Figure 13: Asset valuation rules a. Depreciation

The questions here concerned depreciation of assets over time or through use, and not debt retirement. Virtually all the respondent countries use depreciation. As a rule it is linear rather than graded, and depreciation rates are based on asset-life guidelines laid down in general regulations (the guideline period being divided into 100). Only in Lithuania is depreciation not used. Buildings are the category of asset most frequently depreciated.

Mode d'valuation

18

Figure 14: Depreciation of different categories of asset b. Recording of provisions for liabilities and charges

This entails providing for likely or certain future liabilities the nature of which is closely defined but the extent of which is unknown. In other words, it involves forecasting future expenditure although it is not always possible, under the principle of annual cash accounting, to set aside a sum of money in a given year in order to cover a future liability. Only 11 countries record provisions in this way, even though it is essential to do so if the accounting system is to reflect the actual situation.

Amortissement des types d'actifs imm

Figure 15: Recording of provisions for liabilities and charges

5.7. Accounting statements

The types of financial statement produced by accrual accounting in most countries are the balance sheet and income statement, accompanied in many cases by notes. In fewer countries, funds-flow statements are also produced. Balance sheets, like income statements and notes, follow a statutory layout.

Enregistrement Btiments Infrastructure (voirie, rse provisions pour risq d'assainissement) charges Patrimoine culturel Autres

19

6. Harmonisation

Municipal accounting systems are similar to national systems in many cases. IFAC standards [international public sector accounting standards] are known in 15 countries but only five of these apply them. Fourteen countries have plans to introduce them in the near future. Eighteen countries aim to harmonise their local-government accounting in accordance with EU directives. By contrast, only a few countries express interest in harmonising public and private-sector practice.

Etats financiers la de la reddition des

Figure 16: Financial statements produced for the rendering of accounts

1. Le bilan, d'aprs un sch Gnral Par fonction Harmonisati 2. Le compte de rsultats, schma lgal
Figure 17: Efforts at harmonisation

20 7. Publication Somewhat surprisingly, while annual financial statements based on cash accounting (budgets and budget accounts) and on accrual accounting (balance sheets, income statements and notes) are produced in many of the respondent countries, they are published in only half of them. In 15 countries the accounts may be consulted by any interested party who contacts the public administration.

Figure 18: Publication of year-end accounts

8. Users of the information

The information contained in municipal accounts is used by the Auditor General's Department in 12 countries; by the Ministry of the Interior or other ministry in charge of local government in 18 countries; by higher-level (provincial, county or regional) authorities in 10 countries; by banks in 13 countries; by suppliers in 11 countries; and by the general public in 18 countries.

Publication des c

1. Le compte/budget est p Destination de l'inf 2. Le bilan, le compte de r

Figure 19: Users of the information

comptable

21 The main users of the information in order of frequency are thus: Ministries of the Interior and the general public, Auditor General's Departments and banks, and higher level authorities and suppliers. 9. Auditing No clear pattern emerged with regard to auditing authorities, the task of auditing being shared between Auditor General's Departments, Ministries of the Interior, provincial authorities and statutory auditors. The main reported purpose of auditing is to ensure legality. Areas audited include cash accounts and to a lesser extent accrual accounts and cash position. It is interesting to note that in the Netherlands and Finland responsibility for auditing does not lie with any of the institutions listed in the questionnaire and that in the Czech Republic local-government accounts are audited by statutory auditors.

Figure 20: Auditing authorities

Contrle

22

II.

Ranking the development of local-government accounting systems

In order to determine how well the respondent countries have succeeded in introducing advanced new accounting systems suited to their national context and involving, as a rule, both a cash accounting and an accrual accounting component (and probably a cost accounting component as well), it is useful to summarise the replies to certain key questions. It should be pointed out here that the intention is not, of course, to assess the state of advancement of the various countries' accounting systems with reference to the systems in use in France, the Netherlands or Norway; rather, the reference model is one based on international public accounting principles. The replies to the most important questions were thus noted and scores were attributed to them in order to achieve a ranking of the countries concerned.2 Where a country's total score is less than 20, it is likely that there are shortcomings in its system.

The disadvantage of awarding a country a score of 1 for a positive reply and 0 for a negative reply is that countries which do not reply to certain questions are penalised.

23

Fdration de Russie

Rp. Slovaque

Rp. Tchque

Belgique-BXL

Rp. Slovne

Belgique -N

Belgique-W

Azerbadjan

S C O R E F IN AL

4 3 40 39 3 8 37 3 7 36 3 6 3 5 34 3 4 32 3 1 3 0 2 9 28 28 2 6 25 2 4 23 1 8 1 7 16 1 4

1 . C AD R E L E G A L Y a -t-il u ne rg le m e nta tiop a rticu li re n relative la co m p tab ilit 1 d e s p o u vo irs lo ca u x? Y a -t-ilu n eco m m iss ion n ch a rg ed e la c om p ta b ilites p ouvo irs e d 0 loc aux ? 2 . E N T IT ES C O N C E R N E E S - L es p ro vinc es o u d p arte m e n ts ? 0 - D e s s tru cture s in te rcom m una le s ? 0 3 . C O N S T IT U AN T S D U S Y S T E M E C O M P T AB L E ? - La c om ptab ilit b u dg ta ire (c ash ac c ou n tin g) - La c om ptab ilit g n ra le (a ccru al ac co unting ) - La c om ptab ilit a n alytiqu e (c o st ac c ou n ting ) - La c on so lid a tio n d e s co m p te s - L'a n alyse fin a n ci re 4 . D O C U M E N T S F IN AN C IE R S Il ex iste un b ila n - dan s le bu d get - d a n s le c om pte d'e x c u tion Il ex iste un c om pte de r su lta ts - dan s le bu d get - d a n s le c om pte d'e x c u tion L es a m o rtisse m e nts s ont inc lu s - dan s le bu d get - d a n s le c om pte d'e x c u tion 5 . D E PE N S E S 1 1 1 1 0

1 1

1 0 1 1 1 1 1 1 1

1 0 0 1 1 1 1

1 1

0 0

1 0

1 0 1

1 1 0

1 0 0 1 1

1 0

1 0 1 1 1 1 0

1 1

1 1

1 0

1 0 1 1 1 1 1 1 1

1 0 1 0 1 0 0 0 0

1 1

1 0 0 1 1 0

1 1 1 1 1

1 0 1 0 1 1 1 1 1

1 1 1 1 1 1 1

1 1
0 1 1 0

1 1
1 1 1 0 1

0 0
1 0 1 0 0 1

1 1 1 1 1 1 0 1 0 1

0 1
1 1 1 1 1

1 0
1 1 0 0 1 1 1 1 1 1

1 1
1 1 0 0 1

1 1 1 0 1

1 1 0 1 1

0 1 1 1 0 1

0 1 1 1 1 1

0 1 0 1 0 1 1 1 1 1 1 1 1

0 1 0 1 1 1 1 1 1 1 0 0 0 0 1 1

0 1 1 1 0 1

1 1 1 1 0 1 1

1 1 1 0 1 1 1 1 1

1 1 1 1 1 1 1 1 1 1 1

0 1 0 1 0 1 1 1 1 1 1 1 0 0

0 1 1 1 0 1 1 1 1 1 1 0

1 1 1 1 0 1 1 1 1 0 1 1 1 1 1

0 1 1 1 1 1 1 0 1 1

0 1 0 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1

0 0 0 0 0 0 1 1 1

0 1 0 1 1 1 1

0 1 0 1 0 1 1 1 1 1 1 1 0 0 1 0

0 1 1 1 1 1 1 1 0 0 1 1 1 1

1 1 1 1 0 0 1 1 1 0

Y a-t-il d e s d pen s es o b lig ato ire s e t d e s d p en s es fac u ltative s1 ? 1 6 . L IV R E S C O M P T AB L E S - Livre jou rna l 1 1 1 - G rand livre 1 1 1 - La ba lan c e d es co m p te s g nrau x 1 0 1 7 . C O M P T E S P AR T IC U L IE R S AS S O C IE S AU X : - co m p te s d 'a ctif 1 1 1 - co m p te s d e p a ss if 1 1 1 - co m p te s d e c h arg e s 1 0 1 - co m p te s d e p ro d uits 1 0 1 8 . IN VE N T A IR E E T T R AV AU X D E C L O T U R E - P ratiq ue d e s a m ortiss em e n ts 1 1 - P rov ision s p o u r risq u es e t c harge s 1 1 1 9 . E T AT S F IN AN C IE R S L e b ila n , d'a p r s u n sc hm a lg a l - G n ral 1 1 1 - P ar fo nc tio n 0 1 0 L e co m p te de rs ultats , d 'ap rs u n sc hm a l ga l - G n ral 1 1 1 - P ar fo nc tio n 1 1 0 L 'a n nex e , d'a p r s e n sc h m a lg a l - G n ral 1 1 1 - P ar fo nc tio n 0 0 0 L e table au de finan c em e nt, d'ap r s u n s c h m a lg a l - G n ral 1 1 1 - P ar fo nc tio n 0 1 0 les co m p te s de l'au to rit lo ca le so n t co nso lid s ave c c e ux de s a u tres e ntit s as s oc i es (c en tres d 'aide s oc ia le, rg ie s, e tc.) s elo n u n sc h m a lg a l. 1 0 1 1 0 . H A R M O N IS AT IO N L e syst m e c om ptab le d e s m un ic ipa lits es t sim ila ire au s yst m e c om ptab le u tilis a u n ivea u n a tio n al 1 0 1 - Les no rm e s IF A C - IPS A S s o nt a p n n ues es a u x co pliq u 1 0 1 -IP S AS m u nicipalits 1 0 1 - Il ex iste de s r form e s e n co u rs o u en vis ag e s p o u r ha rm o nis er la c om ptab ilit de s a u to rits lo ca le s co nfo rm m en t a ux n orm es IFA C 0 1

1 1 1 1 0 0 1

1 1 0 1 1 1 1 1 0 1 1 1 1 1 0

0 0 0 0 0 1

1 1

1 1

1 1

1 1

1 1

0 1

1 1

1 1

1 0 1 0 0 0 0 0

1 0 1 0 1 0 1 0

1 1 1 0

1 1 1 1 1 1

1 0 1 0 1 0 0 0

1 1 1 1 1 1 0 1 0 1 0 1 0 0 0 0 0

1 0 1 0 1 0 1 0

1 0 0 0 0 0 0 0

1 1 1 0 0 0

1 0 0

0 0

0 0

1 1 1

0 0 0

1 1 0

1 1 0

1 0 0

0 1

0 1 1

1 1 0

0 1 0

0 0 0

1 1

0 0 0

1 1 1

0 1 0

0 1 0

1 1 1

1 0 0

1 1

1 1

Figure 21: How the different countries score on the introduction of a new accounting system (extrapolation based on key aspects)

Angleterre 1 1

Roumanie

Danemark

Pays-Bas

Espagne

Finlande

Moldova

Autriche

Portugal

Norvge

Lituanie

Turquie

Estonie

Albanie

France

Suede

Italie

1 1
0 1 1 0 1

0 1 1 1 1 1 0 0 0 0

1 1

0 0 0 0 0 0 0 0

24

The ranking shown in the graph below, based on replies to certain of the survey questions, is not intended to "sort the sheep from the goats". Like any such exercise it cannot be entirely objective and it merely demonstrates that there are currently significant differences in progress with the implementation of local-government accounting systems.

Indice de dveloppement de la comptabilit des pouvoirs locaux

50 45 40 35 30 25 20 15 10 5 0
Es Fi toni nl e an Al d e ba Po ni rt e R F uga p. ra l Sl nce Ro ov um ne Li ani tu e an Be S ie R lgiq ued p. ue e S -B Az lova XL er qu ba e F d No d ja ra Be rv n t io lg n iqu ge de e Ru -W Au ssi tri e ch Be I e lg ta l i i Da que e ne - N R Pa ma p. ys- r k Tc B a h s q Tu u e rq Es u pa i e M gne An old gl ova et er re

Figure 22: Development of local-government accounting systems: a ranking

25 As shown in the table (Figure 21) and the graph above (Figure 22), those countries that rank lowest in terms of implementation of a comprehensive accounting system are Turkey, Spain, Moldova and the UK. In the case of Turkey, Spain and Moldova, the low scores (less than 20 points) simply reflect the fact that they left a number of questions unanswered. In order to get a truer picture we narrowed the focus by concentrating on replies to the questions we regarded as crucial. These questions are shown in the table below, where the ranking arrived at is clearly not very different from that in Figure 21, which covers more questions. Generally speaking, all the countries that replied to the questionnaire have implemented the core aspects of local-government accounting. The countries that need to be singled out as having shortcomings in their systems (indicated by a red "0") are those which: with regard to their legal framework, do not use (or no longer use) cash accounting. Such has been the choice in Finland, the Netherlands and the UK and it is not uncommon for countries to go down this road. That is why we would propose a simplified approach to cash accounting that would enable it to be retained because it has a function that no other system of accounting can fulfil; do not yet use accrual, or property focused, accounting as means of providing assurance to the municipality's own authorities and, in particular, to third parties. The countries concerned here are Slovenia, Flemish-speaking Belgium (apparently), Denmark, the Czech Republic and, probably, Romania, Slovakia and Turkey (which did not reply to the relevant question); do not yet use cost accounting notably Belgium (all three regions) and, probably, Romania, Slovakia, Denmark, the Czech Republic and Turkey (which did not reply to the relevant question); do not consolidate the accounts of municipalities with those of their associated bodies. The countries concerned are Finland, France, Slovenia, Sweden, Norway, Belgium (all three regions), Austria, the UK and, probably, Portugal, Romania, Slovakia, the Netherlands, the Czech Republic, Turkey and Moldova (which did not reply to the relevant question); do not yet practise financial analysis of their accounts. The countries concerned here are Estonia, Slovenia, Flemish-speaking Belgium and, probably, Finland, Portugal, Romania, Slovakia, Norway, Denmark, the Netherlands, the Czech Republic, Turkey and Moldova (which did not reply to the relevant question);

26 with regard to expenditure, do not draw a distinction between optional and mandatory expenditure notably the UK and probably Slovenia, Spain and Moldova (which did not reply to the relevant question);

with regard to accounting records, do not produce the types of record most widely used in accrual accounting (journal and general ledger). The countries concerned here are Moldova, the UK and to a lesser extent Norway and the Netherlands as well as (probably) Romania, the Russian Federation, Italy, Denmark, the Czech Republic and Turkey, which did not reply to the relevant question;

with regard to subsidiary accounts which allow individual monitoring of items within the overall account, do not produce detailed asset and liability accounts. The countries concerned here are France, Lithuania, Slovakia and, probably, Italy, Denmark, the Czech Republic, Turkey, Spain, Moldova and the UK, which did not reply to the relevant question;

with regard to inventory and closure, do not practise depreciation of fixed assets as part of accrual accounting notably Lithuania and Austria;

with regard to harmonisation of local-government accounting with international IFAC-IPSAS standards or EU directives, do not apply IPSAS standards to municipal accounting: Finland, France, Slovenia, Romania, Lithuania, Slovakia, Norway, Belgium, Austria, the Netherlands and Turkey, are not harmonising municipal accounting with EU directives: Norway and the Netherlands;

with regard to publication of annual accounts, produce accounts but do not publish them: Lithuania, Azerbaijan, Norway, Belgium, the Netherlands and, probably, Romania, Italy, the Czech Republic, Spain, Moldova and the UK (which did not reply to the relevant question); do not allow members of the public to consult annual accounts: Azerbaijan, the Russian Federation and the Netherlands;

with regard to users of the information contained in local-government accounts,

27 do not forward the information contained in municipal accounts to the Ministry of the Interior, the Auditor General's Department or other higher authorities. The countries concerned here are the Netherlands, Turkey and the UK the only countries not to have answered yes or no to the questions in this section; do not provide for the public to use the information contained in municipal accounts. The countries concerned here are Flemish-speaking Belgium and, probably, Norway, the Netherlands and Turkey (which did not reply to the relevant question).

28

Figure 23: Scores for implementation of the new approach to accounting (based solely on key aspects)

29

III. A comprehensive and effective accounting model

1. Observations As indicated above, the aim of this report is not to advocate any particular system that has been observed to work well in any particular country. We are well aware that each country has its own history, is subject to its own particular economic, social and political constraints and needs to develop its accounting system in a manner tailored to its own context. Nonetheless, past and present experience are capable of informing the future and, on the basis of the practices observed and analysed in this survey, as well as generally accepted best practices in accounting, we can conclude that any accounting system ought to embrace a certain number of principles. As a rule, older systems of accounting present the same set of failings: they are essentially cash based and concerned only with revenue and expenditure, or more precisely cash inflows and outflows; they therefore fail to address property valuation and to monitor property values; in some cases, in order to facilitate ongoing supervision, several different types of cash accounting are actually practised within a single municipality ie estimatebased accounting and accounting that records the management of monies; not infrequently, even where there is a budget (forecasting revenue and expenditure) and a budget account (recording actual revenue and expenditure), the two documents are not compared with a view to examining discrepancies.

The practices suggested below could be applied in a general way at all levels of local government (municipal, provincial, etc) for they constitute an essential framework for any accounting system and represent what is effectively a basic threshold. 2. New system In addition to cash accounting, which should be retained unmodified or else in simplified form, at each country's discretion, and which remains a useful tool for forecasting and elucidating policy, local authorities need: - accrual accounting to record the changing value of property and reflect how the municipality is being managed both internally and externally. In order to function as a simple source of information, local-government accounts should be published by an official body such as a central bank (as is done in the case of most private companies);

30

cost accounting, which allows the cost of specific services or activities to be calculated; consolidation of accounts, bringing together the accounts of bodies that gravitate around the municipality (housing authorities, social welfare agencies etc); financial analysis of accounts in order to furnish the authorities with information about various aspects of the way the municipality is managed; a cohesive system under which each type of accounting can pursue its specific aim and produce its own annual accounting documents while, at the same time, cash accounting, accrual accounting and subsidiary accounts are linked via a system of coding budgetary items in each set of accounts.

Features of the new accounting system thus introduced will be, on the one hand, significantly improved effectiveness and, on the other, integration of property and borrowing-related aspects, providing those who manage the municipality's resources with precise information about the value of its assets and any changes in that value. In those cases where accrual accounting has to be introduced, it will be modelled on practice in the private sector. The new approach to municipal accounting should thus be based on: - a chart of accounts for cash accounting, which will function as a tool for forecasting and monitoring the use of resources; at the end of the financial year it will be used to produce a budget account; - a chart of accounts for accrual accounting, recording property values and changes in those values; at the end of the financial year it will be used to produce a balance sheet, an income statement and notes; - a chart of accounts for cost accounting, enabling items of expenditure and revenue to be identified by their purpose rather than their nature, in order to facilitate calculation of the net cost of certain services provided by the public authority the aim being not to achieve profitability but to identify and control costs. This complete accounting structure, which will have its own software, can usefully be reinforced by a system of financial analysis of the accounts with a view to keeping both the municipal authorities and the public informed about the institution's financial equilibrium, its liquidity and solvency and the yield on municipal taxes etc. 3.1 Cash accounting Cash accounting systems must be retained insofar as possible although they ought to be simplified, for in most cases they are relatively complex. If they are not simplified there is a risk that they will be squeezed out by accrual accounting or cost accounting systems. In practice we find that where there are no accrual accounting or cost accounting systems, other ways of monitoring changes in property value or the costs of certain activities have been developed.

31 Cash accounting remains necessary, however, because: - running a municipality is a political task and - cash accounting can play a key role in the management of public money, usefully facilitating expenditure forecasting by item or more broadly by appropriation, - and, at the same time, there is a need to ensure that expenditure is authorised and revenue is collected in order to meet the criterion of legality. It should be ensured: that cash accounting performs its function and only that function of facilitating forecasting and authorisation in respect of both ordinary (operational) activities and extraordinary (investment) activities; that it is used to produce a budget (ie a forecast) or a budget account (ie a record) and that there is no attempt to make it the basis for production of a balance sheet or income statement aspects which should be taken care of by a separate accounting system (accrual accounting); that revenue and expenditure are no longer registered in the cash accounts; registering movements of funds will be the function of the accrual accounting system; that the budget also becomes a genuine management tool (rather than merely an exercise in demonstrating a financial and policy balance). This will be the case if the forecast is regularly compared with the actual financial trajectory and any discrepancies are critically analysed; that there is a maximum of transparency and that accounts are published as widely as possible; that cash accounting forms part of a cohesive overall system and, in order to achieve this, that there is a link by budget item to other forms of accounting, without necessarily having to record every transaction in more than one accounting system. 3.2. Accrual accounting The function of accrual accounting will be to provide as much additional information as possible on the municipality's property situation, notably: the value of its fixed and movable assets; the value of its participations; the level of receivables; the level of liquid assets; the level of liabilities; the municipality's net worth. It will involve recording transactions in centrally maintained or subsidiary registers such as a journal or general ledger. These will then be summarised, producing a set of balances, from which the annual balance sheet will be drawn up (showing the municipality's property situation on 31 December each year), as well as the income statement (recording the year's performance) and notes (with detail on certain headings in the balance sheet and income statement and other relevant information).

32 Accrual accounting must also be seen to be transparent and the accounting statements that it produces must be publicly available. The balance sheet, income statement and notes should thus be published by an official body. 3.3. Subsidiary accounts Alongside accrual accounting, the use of subsidiary (ie individual) accounting should be an accepted component of the overall system. This type of accounting needs to be used for most transactions involving balance-sheet accounts (those which record changes in property value). 3.4. Financial analysis There is a need to monitor the quality of information provided by the annual accounts to outside users. While a municipality is obviously an administrative structure, it should also be remembered that it is an economic entity, just as a private company is, although it is distinct in several respects. The following examples illustrate how this approach can be useful, while pointing up the differences between municipalities and companies: - just like private companies, local authorities have to render accounts and manage resources; - just as private companies have their tools of production, local authorities have a range of movable assets (ie trucks, office equipment etc) and fixed assets (municipal buildings, schools, roadways, drainage systems etc) which they use in their operational activities, make available to local residents or manage to generate various types of revenue (from timber sales, property rentals etc); - while companies derive their resources chiefly from the input of private capital and from revenue earned on their commercial or industrial activities, the financial structure of local authorities is different, with the emphasis on transfers both from individuals (ie tax revenue), and from regional or federal institutions (in the form of local-authority funding and grants of various types). We should also note that local authorities regularly borrow in order to finance nonsubsidised investment. Municipalities are major employers. In many areas the local authority is the largest employer, and staff levels in big city authorities (some of which employ thousands of people) are comparable to those of large companies. Required as they are to provide a growing range of services on an ever tighter budget, local administrators need to prioritise their objectives.

33 They must be able to appraise the changing financial position of the administration they serve and, most importantly, to assess the impact of their choices on the local finances. The wide range of information generated by accounting systems and annual accounting statements (budget accounts, balance sheets, income statements and notes) must be used to make the management of local administrations more reliable and rigorous. Financial analysis can be based on the calculation of various ratios: - structural ratios, enabling an administration to position itself in a chosen reference group; - debt/equity or financial capacity ratios, indicating the level of the administration's borrowings and its ability to service the debt; - liquidity ratios, measuring the administration's capacity to meet its short-term commitments; - profitability or efficiency ratios, which measure performance in relation to recurrent revenue, total assets or net worth; - financial ratios indicating specific relationships such as the rates of cover of staff costs, operational costs or transfer charges; - turnover ratios, indicating the rate of turnover of the inventory and current receivables and liabilities; - financial growth ratios, measuring the growth of commitments and established entitlements in relation to appropriations. There are two ways of analysing ratios: 1. by comparing two values of a given ratio for the same administration but at different times; 2. by comparing values of a given ratio at the same time for a group of administrations of the same size and type. The second type of analysis enables a municipality to position itself in relation to a reference group. Where the mean value is not satisfactory, the administration having recognised the discrepancy can then examine why its own performance does not match that of the reference group. Ratios thus function as management warning lights, drawing the attention of local administrators to certain situations. The values used to calculate the ratios may be drawn from the budget, budget account, balance sheet or income statement and may be grouped or aggregated.

34 3.5. Cost accounting The type of cost accounting proposed is based on the grouping of municipal functions. A breakdown by function would entail more precise charging of transactions and would introduce into municipal accounting the concepts of direct and indirect and fixed and variable costs. Similarly, the more active involvement of those in charge of different centres of activity will allow operational unit costs to be determined, eg: - the cost of a local policing operation; - the cost per square metre of roadway refurbishing.

35

IV. Recommendations to the Council of Europe countries

As shown in the table below (Figure 24), certain countries: no longer use cash accounting. This was a choice on the part of the countries concerned, most of which had used cash accounting in the past and abandoned in favour of using other accounting systems to generate the information that cash accounting had yielded. Such was the experience in Finland, the Netherlands and the UK. It is not feasible now to recommend that the countries concerned should re-adopt a form of accounting which they chose to discontinue; have not yet introduced accrual or property-based accounting. In the process of introducing a new overall accounting system, this is a very serious shortcoming. Accrual accounting must be the principal new component of any system designed to evaluate a municipality's property, monitor changes in property value systematically and provide information to third parties in a comprehensive and transparent manner. The countries to be singled out in this respect are Slovenia, Denmark, the Czech Republic and Turkey; do not yet use cost accounting to monitor the cost of their activities or the services they provide. The countries concerned here are Belgium (all three regions) and Austria. The recommendation to these countries must be that they introduce cost accounting as a genuine management tool. Apart from other considerations, it is the introduction of cost accounting that will facilitate simplification of the cash accounting system; do not consolidate the accounts of public bodies that gravitate around the municipality with those of the municipality itself. Virtually all the respondent countries are guilty of this failing, which makes it impossible to obtain a comprehensive and realistic view of the municipal property situation. The fact is that, in some cases, important municipal functions are assigned to bodies specially constituted and funded for that purpose. Failure to combine information about these bodies with information about the municipality itself means there cannot be a true picture of what the municipality owns and how its resources are managed; do not make public their annual accounts (the statements produced by cash accounting and cost accounting systems) and in some cases do not even allow interested parties in particular members of the public to consult them. The recommendation to these countries must be that in future they aim for maximum transparency, one of the objectives of accrual accounting being precisely to guarantee transparency and ensure that accounts are rendered publicly.

36

Figure 24: Scores for implementation of the new approach to accounting (based on a narrow range of key aspects)

37

V. The French and Belgian experiences

Municipal accounting in France

The "M 14" reform On 22 June 1994 a new law on local-authority budgeting and accounting came into force in France providing a basis for what became known as the "M 14" reform of municipal accounting. In fact, a number of directives had been issued prior to M 14, with the positive effect of bringing municipal accounting practice closer to that of private-sector companies as prescribed in the national "Plan Comptable Gnral" [General Accounting Plan]. M 14 was specifically conceived to give municipalities a form of accounting close to that of the subsidiary bodies functioning within their orbit. At the same time, decentralisation of government and the emergence of heavyweight local authorities had created a need for tools that would enable these institutions to monitor the value of their property, as well as the impact of borrowings and their ability to cover their costs. The French legislation succeeded in striking a delicate balance between the application of general accounting rules as laid down in the "Plan Comptable Gnral" and respecting the particular structure and character of the municipalities. The reform was to be introduced first in smaller municipalities, in 1993, then in those with more than 10 000 inhabitants, in 1994, and finally in the rest, in 1995. In reality it was fully implemented in 1997. Building on the example of the municipalities, the next step was to reform the accounting systems of France's dpartements [counties] and regions.
There were three main aspects to the French reform: 1. adaptation of the "Plan Comptable Gnral" in 1982, reconciling the accounting requirements of industrial and commercial businesses with the constraints applicable to public administrative bodies. The plan could thus be tailored to the need of municipalities in a way that reflected their specificities; 2. improvement of budgetary procedures, with a view to achieving more efficient management of resources. In effect, the law of March 1982 not only enhanced the ability of municipalities to manage an ever-growing range of major projects but also gave them selfadministrative freedom at a time when new responsibilities were being transferred to them, both from the state and from other public authorities (eg in the areas of education and transport), and they were developing new roles in the management of waterways and ports; 3. a drive to achieve transparency in municipal accounts and in the methods used for evaluating the financial position of municipalities.

38

The main features of the new system are described below. 1. The specificity of the public sector has been respected and cash accounting is retained. - The functions of expenditure authorisation and accounting, in respect of the commitment and charging of expenditure and the collection of revenue, have been kept separate. - The budget retains it dual function of forecasting and authorisation. 2. The 1982 adaptation of the "Plan Comptable Gnral", which lays down accounting rules for business, introduced the following concepts and requirements:

- that there should be a balance sheet providing information about the municipality's property
situation; - that an income statement should be produced showing how resources were managed in a given financial year; - that explanatory notes should be appended to the accounting statements; - that assets should be evaluated according to a specific set of rules; - that profit/loss should be allocated; - that transparency should be improved through the production of budget documents on the one hand, and accounting statements on the other. 3. The budgeting and accounting systems are linked. 4. Financial analysis has been introduced, involving:

- the calculation of operating performance and cash flow,

- the identification of certain ratios for: a) analysing the municipality's recurrent operations; b) assessing equipment costs; c) evaluating liabilities; d) measuring financial capacity; e) permitting compilation of a source and application of funds statement. 5. The consolidated property position of each municipality is identified, and this has entailed:

- determining the extent of consolidation

- selecting methods of consolidation suited to the public sector.

39

Municipal accounting in Belgium

The experience of municipalities in Belgium is extremely interesting because the previous municipal accounting system there had a number of fairly serious shortcomings, as detailed below. The Belgian example in this respect could therefore be useful to those countries currently finalising or fine-tuning reforms. In fact, it is an example that has already been used by other public authorities within Belgium, many of which operate at a local level eg social welfare centres, landmanagement agencies and provincial authorities.
Belgium has seen a series of public-sector accounting reforms. The first, in 1995, concerned the municipalities, the next, in 1997, the social welfare centres (centres publics d'action sociale or CPAS). The accounting systems of provincial authorities were reformed in 2003 and in the following year it was the turn of certain public land-management agencies as well as church councils. What follows is no more than a summary of the Belgian approach to municipal accounting: first we outline the previous system and highlight its shortcomings, then we describe the different aspects of the system ultimately adopted. 1. The former accounting system Regulation of municipal accounting was previously a matter for the standing committees of provincial councils, whose statutory task it was to fix the municipalities' budgets and approve their accounts. Rules on how budgets were to be drawn up, how accounting records were to be kept and how accounts were to be rendered at the end of the financial year or cycle were laid down in a series of official circulars. These provisions were normally directed solely at the offices of municipal collectors rather than all the departments of the municipal administration with financial responsibilities. A set of rules for municipal accounting as laid down in the Regent's Order of 10 February 1945 coordinated the various instructions and required the municipalities to maintain a system of cash accounting, with the main innovation that established entitlements and expenditure commitments were to be recorded in detail. This Regent's Order remained the defining text on municipal accounting in Belgium until 1 January 1995, its implementation being the responsibility of municipal executives. The system prescribed was essentially one of cash accounting, including: 1. a procedure for recording established entitlements and expenditure commitments. This involved registering intended rather than actual receipts and expenditure, and the records were kept by the municipal secretariat or finance office; 2. a procedure for recording the management of monies and producing final accounts, which was the responsibility of the municipal collector's office. 1) The collector, whose function it was to collect revenue and pay expenses, kept a centralised cash book recording the management of monies. Collecting municipal taxes and making payments were the collector's responsibilities.

40

The management of monies was thus recorded (chronologically) in a journal and in general ledgers of revenue and expenditure (systematic book-keeping). The collector's accounting system enabled the cash balance of the municipality to be determined. 2) The system of accounting maintained by the secretariat was essentially different from that kept by the collector: the information it contained was drawn not from the collector's records but from the municipality's administrative documents. It enabled the municipality's financial position to be determined and also provided a basis for: - drawing up an annual account; - checking the collector's records and accounts. 3) The municipality's financial position was determined from the difference between the totals of net established entitlements (established entitlements less valueless securities) and expenditure commitments. Its cash position was determined from the difference between revenue collected and expenses paid. The cash accounting records were summarised in a single document, the annual account, which showed: a) under revenue, by budget item: - total established entitlements for the financial year; - the extent of any valueless securities or bad debts; - total amounts collected; - outstanding amounts, to be carried over to the following financial year; b) under expenditure, by budget item: - total commitments for the financial year; - total payments made; - available resources (unused appropriations, ie appropriations minus commitments); - the balance of unpaid commitments, to be carried over to the following financial year. 2. Shortcomings of the former system The old system was essentially one of cash accounting which, in some cases, left certain values un-entered and was capable of being misleading. a) It was concerned solely with entering transactions that resulted in monies being collected or disbursed. It therefore focused chiefly on revenue and expenditure, with the effect that any item of revenue was regarded favourably in that it led to a cash inflow even if the outcome of the transaction concerned actually represented a loss for the municipality. Items of expenditure were regarded unfavourably because they led to monies being disbursed, even if the outcome of the transaction concerned was profitable for the municipality. b) The cash accounting system left certain values un-entered.

41

If a municipality bought a building, the municipal accounts for the year in which the purchase was made would indicate the amount of the investment. By contrast, the investment would not feature in the following year's accounts. This was the practice in respect of both fixed and moveable assets, long-term investments, etc. Cash accounting did not record either property values or changes in those values. c) Two quite unconnected accounting systems were maintained. Accounts were kept in two separate places: in the secretariat or finance office and in the collector's office. This was a particularly cumbersome practice. The system also had numerous other failings: - it provided little information about property management; - it failed to integrate financial management and liabilities; - it provided little information about the ongoing management of monies (for example, the level of accounts outstanding with a particular supplier). d) Parallel accounting systems were developed without links to the cash accounting system. The cash accounting system failed to record property values and the extent of liabilities, and this shortcoming led to the development regulated or otherwise of a series of parallel accounting systems, for example: - a register of borrowings; - a register of grants. Because these registers were kept quite separately from one another, transactions has to be re-registered and there was thus a constant risk that information drawn from the different systems would not be coherent. e) Information yielded by the old system From the results produced by the old cash accounting approach it was possible: - to conclude that the municipality had budgeted accurately, - to check its cash position; - to determine the level of unpaid commitments and of entitlements to be collected. 3. The new system making a logical connection between cash accounting, accrual accounting and subsidiary accounts The shortcomings of the traditional municipal accounting system having been identified, in-depth reform was introduced in 1995.

42
3.1 Cash accounting The main features of the cash accounting system were retained but it was adapted along the following lines: revenue and expenditure no longer appear in the cash accounts; because revenue and expenditure no longer feature in these accounts, the service pour ordre has been eliminated; the three-month implementation period, from 1 January to 31 March of the year following a given budget year has also been eliminated; greater flexibility has been introduced in the calculation of available appropriations for ordinary mandatory expenditure concerning budget items with identical three-figure functional and economic codes; the financial result can be adjusted more readily than before by means of a vote authorising a budget amendment and thus adjusting the result when the annual account is approved; greater rigor has been introduced in the use of economic codes linking the charts of accounts for the cash accounting and accrual accounting systems. The budget account is produced at the end of the year. It summarises all the budget items appearing in the general ledger and shows totals itemised according to economic and functional codes. Examples:

under revenue
Budget Heading Budget appropriation 150 000 000 250 000 000 Established entitlements 152 000 000 215 000 000 item 040/371-01 Advance on income tax payable on immovable property 040/372-01 Poll tax supplement Valueless Net items and established bad debt entitlements 1 500 000 150 500 000 2 000 000 213 000 000

under expenditure
Budget item 104/123-02 Administrative supplies 104/123-06 External services Heading Budget appropriation 3 500 000 6 000 000 3 250 000 5 800 000 Commitments Amounts charged Commitments to be carried over 3 000 000 250 000 5 300 000 500 000

The budget account yields two results: 1 a financial result: established entitlements - valueless items - commitments 2 an accounting result: established entitlements - valueless items amounts charged 1) When the municipal council approves the result, the expected result indicated in the budget is replaced by the financial result, as shown in the accounts adopted, by means of a budget amendment.

43
If the amendment creates or aggravates a deficit, the municipal council will take all appropriate measures to balance the budget again. 2) The accounting result, where it is a profit, is registered as an established entitlement or, where it is a loss, as a commitment and a charge. Appended to the budget account will be: 1 an itemised list of budget appropriations and commitments to be carried over to the following year; 2 a list, broken down by subsidiary account and budget period, of outstanding entitlements to be collected, and including a separate list bad debtors. 3.2. Accrual accounting system The accrual accounting system provides a great deal of additional information about the property situation and forms the basis for production of the balance sheet, income statement and notes at the end of each budget period. a) Balance sheet The municipality's position on 31 December is shown on the balance sheet.
BALANCE SHEET ASSETS LIABILITIES I. Intangible fixed assets I. Capital II. Tangible fixed and moveable assets II. Capitalised profit/loss III. Investment subsidies III. Profit/loss IV. Credit and lending IV. Reserves V. Participations and securities V. Investment subsidies received VI. Inventory VI. Provisions for liabilities and charges VII. 3rd-party accounts, receivables <1yr VII. Liabilities > 1 yr VIII. 3rd-party transactions VIII. Liabilities < 1 yr IX. Financial accounts IX. 3rd-party transactions X. Accruals X. Accruals

The assets side of the balance sheet shows the municipality's total holdings and entitlements. The liabilities side shows not only its total liabilities but also its total net worth and net property, as the difference between total assets and total liabilities. b) Income statement The income statement compares and shows the difference between the municipality's revenue and its costs during the financial year. There are three types of revenue and costs: 1. recurrent revenue and costs which comprise established entitlements and costs charged to the budget as ordinary expenditure; 2. revenue and costs arising from normal variations in balance sheet entries or adjustments;

44
3. exceptional items of revenue and costs and recourse to reserves. There are thus three levels of profit/loss apart from the overall year-end result. - The difference between recurrent revenue and recurrent costs represents ordinary profit or loss. - The difference between recurrent revenue and recurrent costs after adjustments represents the operating result. - The difference between extraordinary revenue and drawings from reserves and extraordinary costs and allocations to reserves represents the extraordinary profit or loss. - The overall annual profit or loss equals operating profit or loss plus extraordinary profit or loss. At the end of the financial year the income statement is balanced and the operating profit or loss and extraordinary profit or loss are transferred to the profit/loss heading on the balance sheet. 3.3. The link between cash accounting and accrual accounting Under the system adopted, cash accounting entries are automatically reflected in the accrual accounts and as many transactions as possible are recorded in the cash accounts. This approach was made possible through the creation of a chain link between the cash and accrual accounting systems via the economic codes assigned to budget items. The chain link takes effect at specific points in the procedure: - in the case of revenue items when an established entitlement is registered; - in the case of expenditure items when the invoice is registered. The chain link works because each economic code is linked to both an accrual account and a subsidiary account. The computerised accounting system registers the expense or revenue in the cash accounts and thus, automatically, in the other accounting systems.

VI. Appendix: Summary of survey results

45 APPENDIX I [List of respondent countries] Albania Austria Azerbaijan Belgium-BXL Belgium-N Belgium-W Czech Republic Denmark Estonia Finland France Italy Lithuania Moldova Netherlands Norway Portugal Romania Russian Federation Slovakia Slovenia Spain Sweden Turkey UK Figure 1: Existence of a committee in charge of local-government accounting Is there a committee in charge of local-government accounting? Figure 2: Entities concerned by local-government accounting Municipalities (communes) Provinces/counties Regions Inter-municipal bodies

46 Figure 3: Accounting systems in place Cash (financial) accounting Accrual accounting Cost accounting Figure 4: Consolidation of accounts and financial analysis Consolidated accounts Financial analysis Figure 5: The most frequently encountered accounting principles NUMBER OF COUNTRIES Principle of annuality Principle of unity Principle of universality Principle of specification Principle of budget equilibrium Principle of integrity Principle of capping expenditure authorisations Figure 6: Charging of expenditure
Charging of expenditure

Upon order Upon receipt of invoice Upon payment Figure 7: Established entitlements
Revenue: established entitlements

On notification On realisation On receipt Figure 8: Distinction between ordinary and extraordinary revenue and expenditure
Ordinary and extraordinary revenue and expenditure

1. Ordinary expenditure 1. Staff 2. Operating 3. Transfers 4. Debt 2. Extraordinary expenditure

47 1. Transfers 2. Investments 3. Debt 3. Ordinary revenue 1. Services 2. Transfers 3. Debt 4. Extraordinary revenue 1. Transfers 2. Investments 3. Debt Figure 9: Responsibility for different types of revenue and expenditure
Responsibility for revenue and expenditure

1. Ordinary expenditure Elected municipal council or assembly Executive (board or management) Collector 2. Ordinary revenue Elected municipal council or assembly Executive (board or management) Collector 3. Extraordinary expenditure Elected municipal council or assembly Executive (board or management) Collector 4. Extraordinary revenue Elected municipal council or assembly Executive (board or management) Collector Figure 10: Responsibility for the different steps Responsibility by step 1. Budget appropriations Elected municipal council or assembly Executive (board or management) Collector 2. Commitment of expenditure Elected municipal council or assembly Executive (board or management) Collector 3. Charging of expenditure Elected municipal council or assembly Executive (board or management) Collector

48 Figure 11: Use of the three most common accounting documents

Number of accounting records used (journal, general ledger and trial balance of general accounts)

1. Journal 2. General ledger 3. Trial balance of general accounts Figure 12: Systems of subsidiary accounts
Subsidiary accounts

1. Asset accounts 2. Liability accounts 3. Expense accounts 4. Revenue accounts Figure 13: Asset valuation rules
Method of valuing assets

Historic cost Market value On the basis of depreciation rules and plans Figure 14: Depreciation of different categories of asset
Fixed assets subject to depreciation

Buildings Infrastructure (roads, sewerage etc) Cultural property Other Figure 15: Recording of provisions for liabilities and charges Provisions for liabilities and charges are recorded Figure 16: Financial statements produced for the rendering of accounts
Financial statements produced for the rendering of accounts

1. The balance sheet exists as a statutory layout General By function 2. The income statement exists as a statutory layout General By function 3. The notes exist as a statutory layout General By function

49 4. The funds-flow statement exists as a statutory layout General By function Figure 17: Efforts at harmonisation Harmonisation 1. Municipal accounting system is similar to the accounting system used at national level 2. IFAC standards (International Public Sector Accounting Standards IPSAS) IFAC standards are known IFAC standards apply to municipalities There are planned or ongoing reforms to harmonise local authorities' accounting with IFAC standards Figure 18: Publication of year-end accounts
Accounts published

1. The budget/account is published 2. The balance sheet, income statement and notes are published 3. Publication takes place through the central bank 4. The accounts may be consulted by any interested party who consults the public administration Figure 19: Users of the information
Users of the information contained in the accounts

1. Auditor General's Department 2. Ministry of the Interior or other ministry in charge of local government 3. Higher-level authorities (provinces, counties, regions) 4. Banks 5. Suppliers 6. General public Figure 20: Auditing authorities
Auditing

1. Auditor General's Department 2. Ministry of the Interior 3. Province 4. Statutory auditors 5. Other 6. This audit covers: 1. Financial accounting 2. Accrual accounting 3. Cash position 7. Type(s) of audit used 1. Legality audit

50 2. Opportunity audit 3. Logical audit Figure 21: How the different countries score on the introduction of a new accounting system (extrapolation based on key aspects)
FINAL SCORE

1. LEGAL FRAMEWORK Is there any specific regulation relating to local-government accounting? Is there a committee in charge of local-government accounting? 2. ENTITIES CONCERNED - Provinces or counties - Inter-municipal bodies 3. COMPONENTS OF GENERAL ACCOUNTING SYSTEM - Cash accounting - Accrual accounting - Cost accounting - Consolidated accounts - Financial analysis 4. FINANCIAL REPORTS There is a balance sheet - in the budget - in the final account There is an income statement - in the budget - in the final account Depreciation is included - in the budget - in the final account 5. EXPENDITURE Is there mandatory expenditure and optional expenditure? 6. ACCOUNTING RECORDS - Journal - General ledger - Trial balance of general accounts 7. SYSTEM OF SUBSIDIARY ACCOUNTS COVERING: - Asset accounts - Liability accounts - Expense accounts - Revenue accounts 8. INVENTORY AND CLOSURE - Assets are subject to depreciation - Provisions are made for liabilities and charges 9. ACCOUNTING STATEMENTS The balance sheet exists as a statutory layout General By function

51 The income statement exists as a statutory layout General By function The notes exist as a statutory layout General By function The funds-flow statement exists as a statutory layout General By function Local-authority accounts are consolidated with those of other associated entities (social welfare centres, public corporations, etc) using a statutory layout 10. HARMONISATION Municipal accounting system is similar to the accounting system used at national level - IFAC standards (IPSAS) are known - IFAC standards (IPSAS) apply to municipalities - There are planned or ongoing reforms to harmonise local authorities' accounting with IFAC standards Figure 22: Development of local-government accounting systems: a ranking Development of local-government accounting systems Figure 23: Scores for implementation of the new approach to accounting (based solely on key aspects)
FINAL SCORE

1. LEGAL FRAMEWORK Is there any specific regulation relating to local-government accounting? - Cash accounting - Accrual accounting - Cost accounting - Consolidated accounts - Financial analysis 5. EXPENDITURE Is there mandatory expenditure and optional expenditure? 6. ACCOUNTING RECORDS - Journal - General ledger - Trial balance of general accounts 7. SYSTEM OF SUBSIDIARY ACCOUNTS COVERING: - Asset accounts - Liability accounts - Expense accounts - Revenue accounts 8. INVENTORY AND CLOSURE - Assets are subject to depreciation - Provisions are made for liabilities and charges

52 9. ACCOUNTING STATEMENTS The balance sheet exists as a statutory layout General By function The income statement exists as a statutory layout General By function The notes exist as a statutory layout General By function The funds-flow statement exists as a statutory layout General By function Local-authority accounts are consolidated with those of other associated entities (social welfare centres, public corporations, etc) using a statutory layout 10. HARMONISATION Municipal accounting system is similar to the accounting system used at national level - IFAC standards (IPSAS) are known - IFAC standards (IPSAS) apply to municipalities - There are planned or ongoing reforms to harmonise local authorities' accounting with IFAC standards Does your country aim to harmonise its local-government accounting in accordance with EU directives 11. PUBLICATION - The budget/account is published - The balance sheet, income statement and notes are published - Publication takes place through the central bank - The accounts may be consulted by any interested party who consults the public administration 12. USERS OF THE INFORMATION - Auditor General's Department - Ministry of the Interior or other ministry in charge of local government - Higher-level authorities (provinces, counties, regions) - Banks - Suppliers - General public 13. AUDITING Who audits your institutions' annual accounts? - Auditor General's Department - Ministry of the Interior - Province - Statutory auditors - Other This audit covers: - Financial accounting - Accrual accounting

53 - Cash position Type(s) of audit used - Legality audit - Opportunity audit - Logical audit Figure 24: Scores for implementation of the new approach to accounting (based on a narrow range of key aspects)
FINAL SCORE

1. LEGAL FRAMEWORK Is there any specific regulation relating to local-government accounting? - Cash accounting - Accrual accounting - Cost accounting - Consolidated accounts - Financial analysis 6. ACCOUNTING RECORDS - Journal - General ledger - Trial balance of general accounts 8. INVENTORY AND CLOSURE - Assets are subject to depreciation - Provisions are made for liabilities and charges 9. ACCOUNTING STATEMENTS Local-authority accounts are consolidated with those of other associated entities (social welfare centres, public corporations, etc) using a statutory layout 10. HARMONISATION - IFAC standards (IPSAS) apply to municipalities Does your country aim to harmonise its local-government accounting in accordance with EU directives 11. PUBLICATION - The budget/account is published - The balance sheet, income statement and notes are published - The accounts may be consulted by any interested party who consults the public administration