ACCOUNTING MANUAL

FOR DEPARTMENTS

CHAPTER 3
Financial
Statement
Presentation

Issued December 2019

 Chapter 3: Financial Statement Presentation

Chapter Content
1 Overview ....................................................................................................................................... 3
2 Key Learning Objectives ............................................................................................................... 3
3 Financial Statement Presentation ................................................................................................. 4
3.1 Components of financial statements .................................................................................. 4
3.2 Primary and secondary financial information ..................................................................... 5
3.2.1 Primary financial information .................................................................................... 5
3.2.2 Secondary financial information ............................................................................... 5
3.3 Other presentation requirements ........................................................................................ 6
3.3.1 Fair presentation ...................................................................................................... 6
3.3.2 Going concern .......................................................................................................... 7
3.3.3 Materiality and aggregation ...................................................................................... 8
3.3.4 Consistency of presentation ..................................................................................... 9
3.3.5 Offsetting .................................................................................................................. 9
3.3.6 Comparative information ........................................................................................ 10
3.3.7 Current vs. non-current distinction ......................................................................... 10
4 Private Public Partnerships ......................................................................................................... 11
5 Summary of Key Principles ......................................................................................................... 13
5.1 Components of the financial statements .......................................................................... 13
5.2 Primary and secondary financial information ................................................................... 13
5.3 Other presentation requirements ...................................................................................... 13
5.4 Private Public Partnership ................................................................................................ 13

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 Chapter 3: Financial Statement Presentation

1 Overview
The purpose of this Chapter is to provide guidance on the presentation and disclosure of information
in the financial statements.
The Office of the Accountant-General has compiled a Modified Cash Standard (MCS) and this manual
serves as an application guide to the MCS which should be used by departments in the preparation of
their financial statements.

Any reference to a “Chapter” in this document refers to the relevant chapter in the MCS and / or the
corresponding chapter of the Accounting Manual.

Explanation of images used in the manual:

Definition

Take note

Management process and decision making

Example

2 Key Learning Objectives

• Understanding the components of a complete set of financial statements

• Distinguish between primary and secondary financial information
• Understanding the presentation requirements that should be taken into account in preparing
financial statements

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3 Financial Statement Presentation

3.1 Components of financial statements

The financial results of a department consist of economic and service potential activities which are
measured in two ways:
✓ the financial performance for a particular period, i.e. 1 April to 31 March
✓ the financial position at a particular point in time, i.e. 31 March
both of which is supplemented with information disclosed in the notes
The above information is presented in different components of the financial statements, which are:
• Appropriation statement
The appropriation statement provides a summary of the financial performance of a department
against its approved budget at a programme and sub-programme level. The preparation of the
appropriation statement is discussed in detail in Chapter 5 on Appropriation Statement.
• Statement of financial performance
The statement of financial performance provides information of the inflow and outflow of funds
over a given period of time and whether the department has made a surplus (revenue exceeds
expenditure) or a deficit (expenditure exceeds revenue). Information presented in the statement
of financial performance is the revenue earned and the expenditure incurred.
• Statement of financial position
The statement of financial position provides a snapshot of the department’s recognised assets
and liabilities at a point in time. Information presented in the statement of financial position is the
nature of assets, liabilities and net assets.
• Statement of changes in net assets
The statement of changes in net assets provides a link between the statement of financial
performance and the statement of financial position and explains movements in opening and
closing balances.
• Cash flow statement
The cash flow statement as the name suggests shows a summary of cash receipts and cash
payments during the year. The preparation of a cash flow statement is discussed in detail in the
Chapter 6 on Cash Flow Statements.
• Notes to the primary financial statements, including accounting policies
The notes provide more detailed disclosure than is possible on the face of the financial
statements (as referred to above). The notes to the financial statements include accounting
policies which are fundamental to the understanding and interpretation of financial statements.
• Notes on secondary financial information
The notes are provided on secondary financial information, for example contingent liabilities,
commitments, accruals, movement in capital assets and provisions.
There is a close relationship between the abovementioned components of financial statements. Each
component reflects different aspects of the same transaction and/or event.

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3.2 Primary and secondary financial information

3.2.1 Primary financial information

Primary financial information consists of recognised revenue, expenses, assets

and liabilities presented in the financial statements.

Primary financial information relates to items of revenue, expenses, assets, and liabilities that have
been recognised in accordance with the recognition criteria established by the MCS and
supplemented by guidance in the Accounting Manual.
Financial statements presents primary financial information in the statement of financial position,
statement of financial performance, statement of changes in net assets and other primary financial
statements such as the appropriation statement, cash flow statement, and notes thereto.
Examples of primary financial information include:
• Cash and cash equivalents
• Prepayments and advances
• Receivables
• Loans
• Compensation of employees
• Goods and services
• Interest and rent on land

3.2.2 Secondary financial information

Secondary financial information provides additional information about items of

revenue, expenditure, assets and liabilities that have been recorded, but did not
qualify for recognition in the primary financial statements.

The criteria for recording and disclosing secondary financial information in the notes to the
financial statements are established in the relevant Chapters of the MCS and supplemented by
guidance in the Accounting Manual.
Examples of secondary financial information include:
• Accruals
• Contingent liabilities
• Provisions
• Leases (both finance and operating)
• Employee benefits such as leave entitlement, service bonus
• Receivables for departmental revenue
• Capital assets
The principles explained in the Chapters to the Accounting Manual, apply equally to the primary and
secondary financial information included in the financial statements.

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The diagram below depicts the link between primary and secondary financial information

Annual Financial Statements

Primary Financial Information Secondary Financial Information

Statements

POS PER APP CFS CNA

Notes supporting information Notes supporting information

recognised in the statements recognised in the statements

Where:-
POS: Statement of Position
PER: Statement of Financial Performance
APP: Appropriation Statement
CFS: Cash Flow Statement
CNA: Statement of Changes in Net Assets

3.3 Other presentation requirements

3.3.1 Fair presentation

For financial statements to be fairly presented, the effects of transactions, other events and conditions
should be truthfully and accurately represented in accordance with the and recognition, measurement,
presentation and disclosure criteria for assets, liabilities, revenue and expenses as contained in the
MCS. A department whose financial statements comply with the MCS must make an explicit and
unreserved statement of such compliance in the notes to the financial statements.

Financial statements should not be described as complying with the MCS, unless they
comply with all the requirements of each applicable Chapter of the MCS.
Inappropriate accounting policies are not rectified by disclosure of the accounting
policies used, nor by the notes or explanatory material presented.

Departments are encouraged, or may be required by legislation or regulations to

disclose information about compliance with legislation and regulations in the annual
financial statements.
Where information regarding compliance is not disclosed, it may be useful to refer in a
note to any document that includes such information.

The application of the modified cash basis of accounting, combined with sufficient disclosure of
secondary financial information prescribed by the MCS, is presumed to achieve fair presentation for
the purposes of the users of departmental financial statements; however the extent of any departures
or exemptions therefrom may impact this assessment. Refer to Chapter 2 on Concepts and
Principles for a discussion on exemptions and departures from the MCS.

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3.3.2 Going concern

Financial statements are normally prepared on the assumption that the department is a going concern
and will continue in operation and meet its statutory and financial obligations for the foreseeable
future.
When preparing financial statements an assessment of a department’s ability to continue as a going
concern must be made. This assessment is made by management.

Management should take all information regarding the future (from the reporting date)
into consideration when going concern is assessed (e.g. current and expected
performance, expected short and medium term economic environment for the
department, estimated revenue, etc.).

When management is aware, in making this assessment, of material uncertainties related to events or
conditions which may cause significant doubt upon the department’s ability to continue as a going
concern or to meet its obligations as they fall due, those uncertainties must be disclosed.
When preparing financial statements an assessment of a department‘s ability to continue as a going
concern shall be made. This assessment shall be made by management. When management is
aware, in making this assessment, of material uncertainties related to events or conditions which may
cause significant doubt upon the department‘s ability to continue as a going concern or to meet its
obligations as they fall due, those uncertainties shall be disclosed.
In assessing whether the going concern basis is appropriate, management may need to consider a
wide range of factors surrounding current and expected performance, expected short and medium
term economic environment in which the department operates, potential and announced
restructurings of functions, estimates of revenue or the likelihood of continued government funding,
before it is appropriate to conclude that the going concern assumption is appropriate.
Some liabilities that are ordinarily reported in the statement of financial position in the accrual
environment are not reported as such in the modified cash environment. Although this is in line with
the MCS, the going concern appropriateness is not as apparent as in an accrual environment. The
following is an example of one of the indicators that management can use to assess going concern
appropriateness using information disclosed in the financial statements:

Example: Assessing going concern

Current Assets xx
Unauthorised expenditure x
Cash and cash equivalents x
Other financial assets x
Prepayments and advances x
Receivables x
Loans x
Aid assistance prepayments x
Aid assistance receivable x

Add: Current Assets in Notes xx

……… x
……… x

Current Liabilities xx
Voted funds to be surrendered to the Revenue Fund x

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Departmental revenue and NRF Receipts to be

surrendered to the Revenue Fund x
Bank overdraft x
Payables x
Aid assistance repayable x
Aid assistance unutilised x

Add: Current Liabilities in Notes xx

Provisions x
Employee Benefits x
Accruals and payables not recognised x
……… x

Net Current Assets / (Liabilities) xxx

3.3.3 Materiality and aggregation

Each material class of similar items should be presented separately in the financial statements.
Consideration should also be given to items that might not be sufficiently material to warrant separate
disclosure on the face of the statements, but that may nevertheless be sufficiently material to be
presented separately in the notes.
Items of a dissimilar nature or function should be presented separately, except when they are
immaterial.

An item is material when it can individually or collectively influence the decisions or

assessments of users of the financial statements.

If an item is material by nature it should be disclosed separately and not aggregated

with other expenses, regardless of its monetary value. For example, if an expense of
R5 000 for the write off of irrecoverable stolen cash was included in the immaterial
line item “other expenses”, then the R5 000 has to be disclosed separately, because
the nature of the write-off is material.

Example: Items of dissimilar nature should be presented separately unless

they are immaterial
Departments often group dissimilar items together in the notes to the financial
statements and no detail is disclosed, e.g. shown as “other”. Often the total of these
items exceeds materiality. Dissimilar items should be presented separately, unless
they are immaterial.

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3.3.4 Consistency of presentation

Consistency requires departments to handle affairs a certain way to avoid possible misinterpretations
of financial reporting and to enhance comparability from one period to the next.
The financial statements of departments should thus be presented consistently to the previous
financial years in order to ensure comparability of financial information, unless a change is required in
terms of the MCS.
Comparative information should be reclassified when the presentation or reclassification of current
period items are amended. Departments should disclose the nature, amount and reason for the
reclassification.

3.3.5 Offsetting
Assets and liabilities, revenue and expenses should not be offset; these items should be reported
separately. Offsetting is permitted only if it is required or permitted by the MCS or Legislation or
where offsetting reflects the substance of the transaction or the event.

Example: Offsetting permitted

Department ABC has a policy whereby all personal telephone calls made by members
of staff are deducted from their salaries in the month following the receipt of the
telephone bill. In this instance, when the salary deduction is offset against the related
expense, this reflects the substance of the transaction - the department’s actual
telephone expense is the amount net of the expenses incurred by and recoverable
from the staff members.

Note that Chapter 9 on General Departmental Assets and Liabilities in the MCS
specifically prohibits offsetting of financial assets and financial liabilities. Offsetting is
only allowed if the department has the intention to settle on a net basis or a legal
enforceable right to set off the amounts exists. Refer to the specific chapter of the
Accounting Manual for more detail.

Example: Offsetting not permitted

One of the department’s major suppliers leases a property from the department. At
the end of 20x1 the supplier has not yet paid the last month’s rental of R15 500 and
the department had an outstanding balance with the supplier of R35 600 for
consumables purchased.
The department would record in the notes to the financial statements the following:
R
Receivables for departmental revenue 15 500
Accruals 35 600
As illustrated above, offsetting is not allowed unless permitted by the MCS or if it
reflects the substance of the transaction or event, i.e. the department and supplier
have the intention of settling both transactions simultaneously. In this example, there
are two different transactions and the intention is not to settle them simultaneously,
i.e. the department will not set off the amount due from the supplier against the
amount payable to the supplier.

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3.3.6 Comparative information

Comparative information must be disclosed in respect of the previous period for all amounts reported
in the financial statements, unless the MCS requires or permits otherwise.
Comparative information should also be included for narrative and descriptive information when it is
relevant to understand the current period’s financial statements.

3.3.7 Current vs. non-current distinction

An asset is classified as current when it satisfies any of the following criteria:
• the asset is expected to be realised in, or is held for sale or consumption in the department’s
normal operating cycle, which may be shorter or longer than 12 months (when the normal
operating cycle is not clearly identifiable, it is assumed to be 12 months);
• the asset is primarily held for trading purposes;
• the asset is expected to be realised within 12 months after reporting date; or
• it is a cash or cash equivalent asset, unless it is restricted from being exchanged or used to settle
a liability for at least 12 months after the reporting date.

Example: Current vs. non-current distinction - assets

Department ABC has an outstanding debtor that was supposed to repay within 30
days, however the debtor’s account is now long outstanding since they dispute the
amount owed by them. At year end the debtor’s account is outstanding for 120 days.
Should the department classify the debtor as current or non-current.
Is the debtor’s account expected to be realised within 12 months after the reporting
date?
If yes, then classify as current.
If no, then classify as non-current.

Example: Current vs. non-current distinction - assets

If a debtor owes R 40 000 at year end and agreed with the department to pay
instalments of R 1000 as from 1 April of the ensuing financial, then R12 000 will be
classified as current asset and R 28 000 will be classified as non-current assets as
the latter will only be settled after 12 months.

All other assets which do not satisfy any of the above listed criteria should be classified as non-
current assets.
A liability is classified as current when it satisfies any of the following criteria:
• the liability is expected to be settled in the department’s normal operating cycle (when the normal
operating cycle is not clearly identifiable, it is assumed to be 12 months);
• the liability is primarily held for trading purposes; or
• the liability is expected to be settled within 12 months after the reporting date.

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Example: Current vs. non-current distinction - liabilities

Department ABC entered into a loan agreement with DPSA on 31 March 20x2.
According to the agreement R1 million is repayable within one year and R6 million is
repayable after one year.
For the 20x2 financial year the department will classify the R1 million as current and
the R6 million as non-current.

All other liabilities which do not satisfy any of the above listed criteria’s should be classified as non-
current liabilities.

4 Private Public Partnerships

A public private partnership (PPP) is a commercial transaction between

department and a private party in terms of which the private party:
• performs an institutional function on behalf of the institution; and/or
• acquires the use of state property for its own commercial purposes;
and
• assumes substantial financial, technical and operational risks in
connection with the performance of the institutional function and/or
use of state property; and
• receives a benefit for performing the institutional function or from
utilising the state property, either by way of:
✓ consideration to be paid by the department which derives from a
Revenue Fund;
✓ charges fees to be collected by the private party from users or
customers of a service provided to them; or
✓ a combination of such consideration and such charges or fees.

Unitary fees are the charges payable to the Private Party in connection with the performance of its
obligations included in the project deliverables. The components of a unitary fee includes an amount
for retiring the debt incurred by the private party and an amount for the operations and maintenance
of the facility being operated by the private party. Often the amount for retiring debt is fixed, whereas
the amount paid to cover the operations and maintenance of the facility is increased annually
according to Consumer Price Index (CPI).
The phrase “indexed component” means that portion of the unitary fee which, by virtue of the PPP
agreement, is increased, usually on an annual basis, by a stated index such as the Consumer Price
Index (CPI).
Concession fees are fees payable by the private party for use of state land.
To the extent that a department is party to a PPP, it shall disclose, as part of the secondary financial
information, the following information to enable the users to determine the impact of the PPP on the
department:
• a description of the nature and amount of any unitary fees to be paid to the private party pursuant
to the PPP agreement, indicating the fixed and indexed components of the payments
• a description of the nature and amount of any concession fees received from the private party
pursuant to the PPP agreement;
• a general description of the significant terms of the PPP agreement, along with a description of
the parties to the agreement, and the date of commencement thereof;
• an analysis of the indexed component of the contract fees paid;
• the value of any rights, including tangible or intangible capital assets to be provided to the private
party in terms of the PPP agreement; and

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• the value of any other obligations the department might have in terms of the PPP agreement,
including prepayments and advances.

Departments must take care to provide information about all obligations they might have in terms of
PPP agreements. Where the line items provided do not make provision for items specific to a
department, details must be provided in the item “Other obligations” with a corresponding explanation.

All aspects of the PPP should be considered in determining the disclosure in the financial statements.

All revenue and expenditure specifically relating to PPPs is recognised in the

statement of financial performance (PER). The underlying capital asset or
liability in terms of a PPP is not shown on the statement of financial position
but in the PPP note. The amounts recognised in both the PER and the POS
must also be included in the PPP notes. For example, if a department has a
PPP involving private sector use of state land, the concession fee details will
be included in this note.
If the department has a PPP with a lease agreement, the lease details will be
included in the PPP note and not in the lease commitments note. Likewise, if
a department has a PPP with an underlying capital asset, the capital asset
details will be included in this note and not in the capital asset note/s.

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 Chapter 3: Financial Statement Presentation

5 Summary of Key Principles

This chapter provides guidance on the presentation and disclosure of information in the financial
statements.

5.1 Components of the financial statements

The components of financial statements are:
1. Appropriation statement
2. Notes to the appropriation statement
3. Statement of financial performance
4. Statement of financial position
5. Statement of changes in net assets
6. Cash flow statement
7. Notes to the financial statements, including accounting policies
8. Notes on secondary financial information

5.2 Primary and secondary financial information

Primary financial information consists of recognised revenue, expenses, assets and liabilities
presented in the financial statements.
Secondary financial information provides additional information about items of revenue,
expenditure, assets and liabilities that have been recorded, but did not qualify for recognition in the
primary financial statements.

5.3 Other presentation requirements

When preparing financial statements, consideration should be given to the following presentation
requirements:
• Fair presentation
• Going concern
• Materiality and aggregation
• Consistency of presentation
• Offsetting
• Comparative information
• Current vs. non-current distinction

5.4 Private Public Partnership

A description of the PPP arrangement, the unitary fees or concession fees and current and capital
expenditure relating to the PPP arrangement is included in the PPP note.
Where a PPP also meet the definition of a principal-agent arrangement, the department must provide
disclosure requirements in both notes as the disclosure requirements for PPP and principal-agent
arrangements are significantly different.

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