## 2. Step [A]—Verifying Net Income ## Source details **Canonical URL:** [2. Step [A]—Verifying Net Income](https://www.imf.org/-/media/files/publications/cr/2019/cr1936.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1936.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1936.pdf.json) --- ### Mission summary and timeline - TA mission conducted by Mr. Deon Tanzer for South East Europe during May 28–June 1, 2018. - Follow-up to the February 2018 GFS TA mission; builds on work from August 2017 and February 2018 missions. - Objective: improve GFS for decision making in the Republic of Srpska (RS), focusing on reconciliation processes, compilation process for nonbudgetary public sector units, and classification per ESA 2010 and GFSM 2014. ### Priority recommendations - Publish the list of general government and public sector units, with a note that the subsector classification is pending. — Target Date: TBD — Responsible: BHAS, RZS RS. - Finalize procedure to compile annual budgetary units compilation, in parallel with fiscal surveillance reporting to the EUR. — Target Date: October 2018 — Responsible: MOF RS. - Implement the bridge from the real sector COA to ESA 2010 and GFSM 2014 on an experimental basis, starting with the fiscal year 2017. — Target Date: June 2018 — Responsible: RZS RS, MOF RS. ### Reconciliation processes — objectives and status - Two reconciliation processes established: - [A] Verify link between revenue and expense flows and the reciprocal balance sheet flows to ensure net lending (+)/net borrowing (–) (NLB) links with financing and minimize the statistical discrepancy. - [B] Link recorded transactions to recorded stock values for distinct balance sheet items to explain changes in assets and liabilities via transactions and other economic flows (OEFs). - RS uses accrual accounting; financial result from the income statement is reconciled against the balance sheet account ‘Own Sources and Funds’. - Progress: difference between the Financial Result in the Income Statement and flows from the Source of Funds account was reduced to below KM1 million after unravelling some items. ### Unravelling financial statements — rationale and illustration - Annual financial statements must be unravelled into components (budget and other components) to: - Improve identification of where additional data is required (e.g., extrabudgetary units lacking revenue/expense detail). - Identify opening balances of units consolidated for the first time as Other Volume Changes. - Illustration: step-by-step unravelling into entity components (Budget, Extrabudgetary unit 1, Extrabudgetary unit 2, Consolidated financial statement) and the mapping of Opening balance (OB), Transactions (TR), Other economic flows (OEF), Closing balance (CB). ### Adopted compilation/reconciliation procedure (steps) - Procedure aligns GFS compilation with financial statements and includes: a. Unwind balance sheets for entities consolidated with only a balance sheet (example units: Investment-Development Bank of the Republic of Srpska (IRB RS); Roads, Highways, and Forests). Verification: total assets should equal total liabilities for each unit after unwinding. b. Reconcile net result with relevant balance sheet items per reconciliation process [A]. c. Determine opening balances of assets and liabilities for newly consolidated units (e.g., National Parks in 2015; Pension Fund in 2016) — treat appearance of assets/liabilities as other volume changes in the first consolidation year. d. Adjust remaining items from reconciliation. e. Identify all other price changes, other volume changes, and time-of-recording items in the income statement and unwind per double accounting with requisite balance items. f. Identify remaining flows from the Source of Funds account to complete reconciliation process [A], leading to adjustments in income statement or balance sheet items. - Rationale: standardizing this procedure across budgetary and nonbudgetary units yields efficiency once compilers understand concepts and approach. ### Implementation progress and data prepared - MOF prepared data to unwind balance sheets for IRB and Roads, Highways, and Forests for 2014-2016 (note: these units also require unwinding depreciation from the Income Statement). - MOF prepared data of new units consolidated into financial statements: National Parks (2015), Pension Fund (2016), Fund for Professional Rehabilitation (2016), Innovation Center Banja Luka (2016). Treatment: appearance of assets/liabilities recorded as other volume changes in the year of first consolidation. ### Adjustments: COA mapping and treatment of specific items - RS budget COA records some accrual concepts under COA items 47 and 77 that are not aligned with ESA 2010 and GFSM 2014 methodology (examples: provisions, amortization, gains/losses, financial revenue/expense related to valuation changes). - The mission allocated COA items 47 and 77 to GFS transactions or other economic flows codes (per GFSM 2014) as presented in Table 2. - Specific guidance and implications: - Some items currently excluded from revenue and expense in fiscal surveillance tables to EUR; some items (denoted *) are recommended to be included in revenue and expense. - Items excluded from revenue and expenditure lead to adjustments where other price changes are recorded with the requisite asset or liability classification. - Inclusion of Consumption of fixed capital [23] or Amortization expenses [4712] does not impact NLB because a counter transaction determining Net acquisition of nonfinancial assets [31.3] nullifies the impact on expenditure. ### Provisions — treatment and adjustment steps - Financial accounting records provisions following the continuity principle: provisions recorded as current obligations with probable future outflows; timing and amounts are uncertain and estimated in the current fiscal year’s expense. - ESA 2010 and GFSM 2014 record transactions at the actual time of the economic event (when value is created, transformed, extinguished; or when claims/obligations arise, transfer, cancel). - Required translation of provisions from financial accounting to GFSM 2014 methodology: - a. Accrued provision expenses (4713) are excluded from GFS expense. - b. Outflows from the provision account in the balance sheet (liability) are recorded as expense in the fiscal year when the outflow occurs. - c. Releases of provisions (7713) are excluded from GFS revenue. - The mission provided a fictive example (Table 3) illustrating adjustments from RS economic codes to GFSM 2014 treatment, and noted that provisions require custom adjustments to reflect the time of recording. ### Reconciliation outcomes and statistical discrepancy - Preliminary data compiled for 2014–2016 using the adjusted procedure and revised adjustments. - Outcomes led to improvements in the combined reconciliation processes [A] and [B]. - Further research is required to resolve the derived statistical discrepancy; full reconciliation has not yet been achieved. - 2014 and 2016 show relatively low statistical discrepancies (less than 1 percent of total revenue), while 2015 shows a substantial discrepancy (almost 5 percent of total revenue). - Financing data do not compare well between the ‘new’ GFSM 2014 framework and the ‘old’ Harmonized Reporting Template (HRT); additional unwinding of the balance sheet may be required, most ostensibly for 2015. ### Comparison: ‘New’ GFSM 2014 framework data vs ‘Old’ HRT data (key figures) - 1 Revenue: 2,635.0 | 2,619.4 | 15.6 - 11 Taxes: 1,568.1 | 1,568.1 | 0.0 - 12 Social contributions: 779.6 | 779.4 | 0.2 - 13 Grants: 5.8 | 15.0 | -9.2 - 14 Other revenue: 281.6 | 257.0 | 24.6 - 2 Expense: 2,638.7 | 2,511.7 | 127.0 - 21 Compensation of employees: 742.0 | 746.8 | -4.8 - 22 Use of goods and services: 218.5 | 148.3 | 70.2 - 23 Consumption of fixed capital: 65.7 | 65.7 | (no difference shown) - 24 Interest: 73.8 | 94.5 | -20.7 - 25 Subsidies: 98.9 | 98.9 | 0.0 - 26 Grants: 153.5 | 156.6 | -3.1 - 27 Social benefits: 1,208.8 | 1,227.6 | -18.8 - 28 Other expense: 77.5 | 39.0 | 38.5 - GOB Gross operating balance (1-2+23): 62.0 | 107.7 | -45.7 - NOB Net operating balance (1-2): -3.7 | 107.7 | -111.4 - 31 Net/gross investment in nonfinancial assets: 79.6 | 137.8 | -58.3 - 2M Expenditure (sic): 2,718.3 | 2,649.6 | 68.7 - NLB Net lending (+) / Net borrowing (-) (1-2-31): -83.3 | -30.2 | -53.1 - FIN Financing (32-33): -86.4 | -29.0 | -57.3 - 32 Net acquisition of financial assets: 13.6 | 89.7 | -76.1 - 33 Net incurrence of liabilities: 99.9 | 118.7 | -18.8 - NLBz Overall statistical discrepancy (NLB-FIN): 3.0 | -1.2 | 4.2 ### Additional recommendations from reconciliation work - Target Date: October 2018 - Recommendation: Further refine the GFS compilation and reconciliation process to eliminate the statistical discrepancy - Responsible Institutions: MOF RS ### Compilation of nonbudgetary public sector (extrabudgetary) units - Extrabudgetary units forming part of general government must be compiled as part of GFS from financial statements reported to the Agency for Intermediation, Informatics and Finance (APIF). - Procedure presented at the March 2018 SECO-funded GFS workshop: - Unravel audited financial statements and translate line-by-line income statement and balance sheet items into ESA 2010 and GFSM 2014. - Adjust for provisions, exchange rate gains, and impairments treated differently in accounting and GFS. - Use a bridge from the real sector COA to ESA 2010 and GFSM 2014 at the four-digit level; six-digit detail may be needed for large units. - Republic of Srpska specifics: - COA covers real sector corporations for extrabudgetary units, allowing a generic translation with case-by-case adjustments. - RZS receives annual financial statements between t+4 and t+6 months; approximately 1% of units report after the required date; the most important units report on time. - Reported standardized financial statements align with audited statements and include income statements, balance sheets, and additional line items required for national accounts. - Pilot compilation: - High-level compilation initiated for four extrabudgetary units: Radio Television Republic of Srpska, Institute of Dentistry, Health Center Celinac, and the Investment-Development Bank of the Republic of Srpska; covering 2016 and 2017. - Each unit reconciled following reconciliation processes [A] and [B] and the Appendix I procedure; requisite assets and liabilities allocated to record other economic flows and provision adjustments. - Financial statements translated into the GFS Yearbook presentation and ESA 2010 Transmission Programme Table 0200. - Additional work required to refine compilation and investigate incorporating these compilation files into wider GFS and macroeconomic statistics; follow-up missions will investigate quarterly data compilation procedures. ### Additional recommendations for extrabudgetary compilation - Target Date: October 2018 - Recommendation: Compile five extrabudgetary units conforming with the developed procedure - Responsible Institutions: RZS RS ### Classification issues and COFOG - Bridge from real sector COA to ESA 2010 and GFSM 2014 researched at three-digit level and supplemented with four-digit items; bridge ready for experimental implementation for fiscal year 2017. - COFOG classification work: - Advisor and authorities reviewed COFOG classification for 18 extrabudgetary units; most units can be assigned a single COFOG classification due to narrowly defined activities. - Eurostat’s ‘Manual on sources and methods for the compilation of COFOG Statistics’ was consulted; expert judgment is often required and classifications may be reviewed as new insights emerge. - COFOG tables (ETP Table 1100) compiled in matrix form, breaking down functional expenditure by economic transactions; integration of COFOG into wider GFS compilation is recommended. - For budgetary units with multiple functions, classify COFOG at program or project level rather than department level; assign allocation of COFOG codes to a GFS compiler or ensure GFS review. ### Health care institutions and COFOG classification (example flows and values) - Two issues affect classification: (i) distinction between provision of health care insurance via a social security fund and provision of health care itself; (ii) future integration of health care institutions into the budget. - Mapped flows between budget, health fund, health institutions, and patients (example values): - Contributions: +80 (Health Fund) and -80 (Patient) - Grants: -15 (Budget) and +15 (Health Fund) - Co-pay treatment: +10 (Health institution) and -10 (Patient) - Treatment—social benefit received: -30 (Health Fund) and +30 (Health institution) - Treatment—pay from social benefit: +30 (Health institution) and -30 (Patient) - Treatment—expense: -35 (Health institution) - Total revenue minus expense: -15 (Budget), +65 (Health Fund), +5 (Health institution), -90 (Patient) - Classification guidance: - Distinguish purpose of expenditure: administering hospital care or providing medication versus developing general health policy or R&D. - Individual vs collective services: collective services include formulation and administration of policy, regulation, applied research (COFOG Division 07 Health); social protection covering sickness (loss of income compensation) falls under COFOG Division 10 Social Benefits. ### Appendix I — Proposed Compilation Process for Extrabudgetary Units (procedure steps) - Key steps: - Step [A]: Verify that ‘net income’ or ‘net profit’ in the Financial Statement links with ‘retained earnings’ or ‘profit of the year’ in the balance sheet (capital/own funds account). - Step [B]: Estimate net flows by calculating differences between closing and opening balances of each balance sheet item. - Step [C]: Identify other economic flows—(1) revaluations; (2) foreign exchange gains and losses; (3) impairments and write-offs; and (4) provisions—and adjust revenue and expenditure recording accordingly. - Step [D]: Allocate all flows and stocks to GFSM 2014 and ESA 2010 classifications. - Step [E]: Present data in the frameworks and calculate balancing items NLB and Financing; further scrutinize financial statements for adjustments to reduce the statistical discrepancy to zero if feasible. - Practical points: - The translation process is iterative and requires research into notes of financial statements for detailed classification. - When supporting information is missing, compilers make documented assumptions based on the economic activity/objectives of the unit; assumptions should be evidenced and referenced to GFSM 2014 and ESA 2010 where possible. - For more material units, an evidence-based approach is required rather than reliance on assumptions. ### Compilation outcomes and use - Once the process is complete, a complete list of transactions, OEFs, and closing balances will be available for each unit, including all balancing items and a reconciliation between NLB and financing. - These data can be used to compile a broad set of GFS and related macroeconomic statistics tables. - Financial statements compiled per national business accounting standards will: - follow accrual accounting and balance sheet valuations aligned with fair value. - serve as a best possible proxy for market, nominal and face value in the ESA 2010, GFSM 2014, and PSDS CG frameworks, including revenue, functional expenditure, and financial balance sheet data. - If units have a significantly material impact on select balance sheet items, additional valuation methods may be considered on a case-by-case basis. ### Stepwise verification and mapping (process figures and formulae) - Key process figures described: - Figure 2. Step [A]—Verifying Net Income: Crosswalk between Income Statement and Balance Sheet (Revenue, Expense, NFin Assets, Fin Assets, Liabilities, Capital a/c, Net income, CB, OB). - Figure 3. Step [B]—Estimating Net Flows: Differences between closing and opening balances across accounts. - Figure 4. Step [C]—Determine ‘Other Economic Flows’ and Unravelling Provisions: Identification of Revalue, Provision, Impair, FX loss adjustments. - Figure 5. Step [D]—Allocating GFS Transactions, OEFs and Stocks: Mapping Original flow, Other economic flows, Adjustments, and Transaction after adjustments within GFSM 2014. - Figure 6. Step [E]—Finalizing GFS Framework, and Calculating NLB and Financing: Final mapping of Fin Assets, Liabilities, NFin Assets, OEFs and impair/FX loss adjustments. - Key formulae: - NLB = [1] – [2] – [31] - FIN = [32] – [33] ### Accounting treatment differences (generic comparisons) - Provisions: - Accounting: expense is accrued when outflow is highly likely and reliably estimated; a counter-transaction recorded in the ‘provisions’ line item of the ‘Capital Account’; releases recorded as income when provision is no longer likely to be spent. - GFSM 2014/ESA 2010: expense recorded only when the actual economic event takes place; no provision item on the balance sheet; releases are not recorded as income. - Revaluations: - Accounting: recorded as income or expense, impacting net income; asset value changes accordingly. - GFSM 2014/ESA 2010: recorded as an ‘other economic flow’ (not revenue/expense). - Foreign exchange gains/losses: - Accounting: recorded as income or expense, impacting net income. - GFSM 2014/ESA 2010: recorded as an ‘other economic flow’ (not revenue/expense). - Impairments/write-offs: - Accounting: recorded as an expense, impacting net income; financial asset value falls. - GFSM 2014/ESA 2010: recorded as an ‘other economic flow’; if agreement with debtor, write-off recorded as a ‘capital transfer’ expense. ### Key implementation notes and adjustments - The process explicitly separates Transactions (GFSM 2014 recording), Other economic flows (OEFs), and Stocks (closing balances). - Adjustments are required to convert national business accounting treatments (which often book revaluations, FX, provisions, and impairments through net income) into GFSM 2014/ESA 2010 consistent recording (which treats many of these items as OEFs or balance sheet-only events). - Reconciliation between NLB and FIN requires identification and mapping of the numbered components [1], [2], [31], [32], and [33] as per the stepwise figures. *Source: cr1936 - 2. Step [A]—Verifying Net Income* ### 2. Step [A]—Verifying Net Income ____________________________________________________________ 19 ### 2. Step [A]—Verifying Net Income ### Mission summary and timeline - TA mission conducted by Mr. Deon Tanzer for South East Europe during May 28–June 1, 2018. - Follow-up to the February 2018 GFS TA mission; builds on work from August 2017 and February 2018 missions. - Objective: improve GFS for decision making in the Republic of Srpska (RS), focusing on reconciliation processes, compilation process for nonbudgetary public sector units, and classification per ESA 2010 and GFSM 2014. ### Priority recommendations (as presented) - Publish the list of general government and public sector units, with a note that the subsector classification is pending. — Target Date: TBD — Responsible: BHAS, RZS RS. - Finalize procedure to compile annual budgetary units compilation, in parallel with fiscal surveillance reporting to the EUR. — Target Date: October 2018 — Responsible: MOF RS. - Implement the bridge from the real sector COA to ESA 2010 and GFSM 2014 on an experimental basis, starting with the fiscal year 2017. — Target Date: June 2018 — Responsible: RZS RS, MOF RS. ### Reconciliation Processes — objectives and status - Two reconciliation processes established: - [A] Verify link between revenue and expense flows and the reciprocal balance sheet flows to ensure net lending (+)/net borrowing (–) (NLB) links with financing and minimize the statistical discrepancy. - [B] Link recorded transactions to recorded stock values for distinct balance sheet items to explain changes in assets and liabilities via transactions and other economic flows (OEFs). - Republic of Srpska uses accrual accounting; financial result from the income statement is reconciled against the balance sheet account ‘Own Sources and Funds’. - Progress: difference between the Financial Result in the Income Statement and flows from the Source of Funds account was reduced to below KM1 million after unravelling some items. ### Unravelling financial statements — rationale and illustration - Annual financial statements must be unravelled into components (budget and other components) to: - Improve identification of where additional data is required (e.g., extrabudgetary units lacking revenue/expense detail). - Identify opening balances of units consolidated for the first time as Other Volume Changes. - Figure 1 (illustrative) shows step-by-step unravelling into entity components (Budget, Extrabudgetary unit 1, Extrabudgetary unit 2, Consolidated financial statement) and the mapping of Opening balance (OB), Transactions (TR), Other economic flows (OEF), Closing balance (CB). ### Adopted compilation/reconciliation procedure (steps) - Procedure aligns GFS compilation with financial statements and includes: a. Unwind balance sheets for entities consolidated with only a balance sheet (example units: Investment-Development Bank of the Republic of Srpska (IRB RS); Roads, Highways, and Forests). Verification: total assets should equal total liabilities for each unit after unwinding. b. Reconcile net result with relevant balance sheet items per reconciliation process [A]. c. Determine opening balances of assets and liabilities for newly consolidated units (e.g., National Parks in 2015; Pension Fund in 2016) — treat appearance of assets/liabilities as other volume changes in the first consolidation year. d. Adjust remaining items from reconciliation. e. Identify all other price changes, other volume changes, and time-of-recording items in the income statement and unwind per double accounting with requisite balance items. f. Identify remaining flows from the Source of Funds account to complete reconciliation process [A], leading to adjustments in income statement or balance sheet items. - Rationale: standardizing this procedure across budgetary and nonbudgetary units yields efficiency once compilers understand concepts and approach. ### Implementation progress and data prepared - MOF prepared data to unwind balance sheets for IRB and Roads, Highways, and Forests for 2014-2016 (note: these units also require unwinding depreciation from the Income Statement). - MOF prepared data of new units consolidated into financial statements: National Parks (2015), Pension Fund (2016), Fund for Professional Rehabilitation (2016), Innovation Center Banja Luka (2016). Treatment: appearance of assets/liabilities recorded as other volume changes in the year of first consolidation. ### Adjustments: COA mapping and treatment of specific items - RS budget COA records some accrual concepts under COA items 47 and 77 that are not aligned with ESA 2010 and GFSM 2014 methodology (examples: provisions, amortization, gains/losses, financial revenue/expense related to valuation changes). - The mission allocated COA items 47 and 77 to GFS transactions or other economic flows codes (per GFSM 2014) as presented in Table 2. - Specific guidance and implications: - Some items currently excluded from revenue and expense in fiscal surveillance tables to EUR; some items (denoted *) are recommended to be included in revenue and expense. - Items excluded from revenue and expenditure lead to adjustments where other price changes are recorded with the requisite asset or liability classification. - Inclusion of Consumption of fixed capital [23] or Amortization expenses [4712] does not impact NLB because a counter transaction determining Net acquisition of nonfinancial assets [31.3] nullifies the impact on expenditure. ### Provisions — treatment and adjustment steps - Financial accounting records provisions following the continuity principle: provisions recorded as current obligations with probable future outflows; timing and amounts are uncertain and estimated in the current fiscal year’s expense. - ESA 2010 and GFSM 2014 record transactions at the actual time of the economic event (when value is created, transformed, extinguished; or when claims/obligations arise, transfer, cancel). - Required translation of provisions from financial accounting to GFSM 2014 methodology: - a. Accrued provision expenses (4713) are excluded from GFS expense. - b. Outflows from the provision account in the balance sheet (liability) are recorded as expense in the fiscal year when the outflow occurs. - c. Releases of provisions (7713) are excluded from GFS revenue. - The mission provided a fictive example (Table 3) illustrating adjustments from RS economic codes to GFSM 2014 treatment, and noted that provisions require custom adjustments to reflect the time of recording. *Source: cr1936 - 2. Step [A]—Verifying Net Income* ### 22. With the adjusted procedure and the revised adjustments, the mission compiled ### cr1936 - 22. With the adjusted procedure and the revised adjustments, the mission compiled ### Reconciliation outcomes and statistical discrepancy - Preliminary data were compiled for 2014–2016 using the adjusted procedure and revised adjustments. - Outcomes led to improvements in the combined reconciliation processes [A] and [B]. - Further research is required to resolve the derived statistical discrepancy; full reconciliation has not yet been achieved. - While 2014 and 2016 show relatively low statistical discrepancies (less than 1 percent of total revenue), 2015 still shows a substantial discrepancy (almost 5 percent of total revenue) (see DM 6482720). - Financing data do not compare well between the ‘new’ GFSM 2014 framework and the ‘old’ Harmonized Reporting Template (HRT); additional unwinding of the balance sheet may be required, most ostensibly for 2015. ### Comparison: ‘New’ GFSM 2014 framework data vs ‘Old’ HRT data (key figures from Table 5) - 1 Revenue: 2,635.0 | 2,619.4 | 15.6 (difference) - 11 Taxes: 1,568.1 | 1,568.1 | 0.0 - 12 Social contributions: 779.6 | 779.4 | 0.2 - 13 Grants: 5.8 | 15.0 | -9.2 - 14 Other revenue: 281.6 | 257.0 | 24.6 - 2 Expense: 2,638.7 | 2,511.7 | 127.0 - 21 Compensation of employees: 742.0 | 746.8 | -4.8 - 22 Use of goods and services: 218.5 | 148.3 | 70.2 - 23 Consumption of fixed capital: 65.7 | 65.7 | (no difference shown) - 24 Interest: 73.8 | 94.5 | -20.7 - 25 Subsidies: 98.9 | 98.9 | 0.0 - 26 Grants: 153.5 | 156.6 | -3.1 - 27 Social benefits: 1,208.8 | 1,227.6 | -18.8 - 28 Other expense: 77.5 | 39.0 | 38.5 - GOB Gross operating balance (1-2+23): 62.0 | 107.7 | -45.7 - NOB Net operating balance (1-2): -3.7 | 107.7 | -111.4 - 31 Net/gross investment in nonfinancial assets: 79.6 | 137.8 | -58.3 - 2M Expenditure (sic): 2,718.3 | 2,649.6 | 68.7 - NLB Net lending (+) / Net borrowing (-) (1-2-31) or (1- -83.3 | -30.2 | -53.1 - FIN Financing (32-33): -86.4 | -29.0 | -57.3 - 32 Net acquisition of financial assets: 13.6 | 89.7 | -76.1 - 33 Net incurrence of liabilities: 99.9 | 118.7 | -18.8 - NLBz Overall statistical discrepancy (NLB-FIN): 3.0 | -1.2 | 4.2 - HRT Difference: 2016 Financial statements (table context preserved as presented) ### Additional recommendations from reconciliation work (Table 4) - Target Date: October 2018 - Recommendation: Further refine the GFS compilation and reconciliation process to eliminate the statistical discrepancy - Responsible Institutions: MOF RS ### Compilation of nonbudgetary public sector (extrabudgetary) units - Several public sector units form part of general government but are not in the budget per ESA 2010 and GFSM 2014; these extrabudgetary units must be compiled as part of GFS from financial statements reported to the Agency for Intermediation, Informatics and Finance (APIF). - A procedure to translate accounting financial statements into ESA 2010 and GFSM 2014 was presented at the March 2018 SECO-funded GFS workshop (Ljubljana). The procedure: - Unravels audited financial statements and translates line-by-line income statement and balance sheet items into ESA 2010 and GFSM 2014. - Adjusts for provisions, exchange rate gains, and impairments treated differently in accounting and GFS. - Uses a bridge from the real sector COA to ESA 2010 and GFSM 2014 at the four-digit level; six-digit detail may be needed for large units. - Republic of Srpska specifics: - The Republic of Srpska has a COA covering all real sector corporations that applies to extrabudgetary units, allowing a generic translation with possible case-by-case adjustments. - RZS receives annual financial statements between t+4 and t+6 months; approximately 1% of units report after the required date; the most important units report on time. - Reported standardized financial statements align with audited statements and include income statements, balance sheets, and additional line items required for national accounts. - Pilot compilation: - A high-level compilation of four extrabudgetary units was initiated: Radio Television Republic of Srpska, Institute of Dentistry, Health Center Celinac, and the Investment-Development Bank of the Republic of Srpska; they cover 2016 and 2017. - Each unit was reconciled following reconciliation processes [A] and [B] and the Appendix I procedure; requisite assets and liabilities were allocated to record other economic flows and provision adjustments. - Financial statements were translated into the GFS Yearbook presentation and ESA 2010 Transmission Programme Table 0200. - Additional work is required to refine compilation and investigate incorporating these compilation files into wider GFS and macroeconomic statistics; follow-up missions will investigate quarterly data compilation procedures. ### Additional recommendations for extrabudgetary compilation (Table 6) - Target Date: October 2018 - Recommendation: Compile five extrabudgetary units conforming with the developed procedure - Responsible Institutions: RZS RS ### Classification issues and COFOG - Work continued on bridging from the real sector COA to ESA 2010 and GFSM 2014; RZS researched COA items at the three-digit level and supplemented some with four-digit items. The bridge is ready for experimental implementation for fiscal year 2017 and a time series (see DM6418692 for draft). - COFOG: - COFOG classifies government outlays by function; useful for analysis of health, education, social protection, environmental protection. - The advisor and authorities reviewed COFOG classification for 18 extrabudgetary units; each unit can generally be assigned a single COFOG classification due to narrowly defined activities. - Eurostat’s ‘Manual on sources and methods for the compilation of COFOG Statistics’ was consulted; expert judgment is often required and classifications may be reviewed as new insights emerge. - COFOG tables (ETP Table 1100) are compiled in matrix form, breaking down functional expenditure by economic transactions; integration of COFOG into wider GFS compilation is recommended. - For budgetary units that fulfill multiple functions, classify COFOG at program or project level rather than department level; assign allocation of COFOG codes to a GFS compiler or ensure GFS review. - Health care institutions and COFOG classification: - Two issues affect classification: (i) distinction between provision of health care insurance via a social security fund and provision of health care itself; (ii) future integration of health care institutions into the budget. - Mapping of flows between the budget, health fund, health institutions, and patients was conducted (August 2017 mission); Table 7 in the source illustrates flows with example values: - Contributions: +80 (Health Fund) and -80 (Patient) - Grants: -15 (Budget) and +15 (Health Fund) - Co-pay treatment: +10 (Health institution) and -10 (Patient) - Treatment—social benefit received: -30 (Health Fund) and +30 (Health institution) - Treatment—pay from social benefit: +30 (Health institution) and -30 (Patient) - Treatment—expense: -35 (Health institution) - Total revenue minus expense: -15 (Budget), +65 (Health Fund), +5 (Health institution), -90 (Patient) - Classification guidance: - Distinguish purpose of expenditure: administering hospital care or providing medication versus developing general health policy or R&D. - Individual vs collective services: collective services include formulation and administration of policy, regulation, applied research (COFOG Division 07 Health); social protection covering sickness (loss of income compensation) falls under COFOG Division 10 Social Benefits. ### Appendix I — Proposed Compilation Process for Extrabudgetary Units (procedure steps and practice) - The translation procedure presented aligns audited financial statements with GFSM 2014 and ESA 2010; key steps: - Step [A]: Verify that ‘net income’ or ‘net profit’ in the Financial Statement links with ‘retained earnings’ or ‘profit of the year’ in the balance sheet (capital/own funds account). - Step [B]: Estimate net flows by calculating differences between closing and opening balances of each balance sheet item. - Step [C]: Identify other economic flows—(1) revaluations; (2) foreign exchange gains and losses; (3) impairments and write-offs; and (4) provisions—and adjust revenue and expenditure recording accordingly. - Step [D]: Allocate all flows and stocks to GFSM 2014 and ESA 2010 classifications. - Step [E]: Present data in the frameworks and calculate balancing items NLB and Financing; further scrutinize financial statements for adjustments to reduce the statistical discrepancy to zero if feasible. - Practical points: - The translation process is iterative and requires research into notes of financial statements for detailed classification. - When supporting information is missing, compilers make documented assumptions based on the economic activity/objectives of the unit; assumptions should be evidenced and referenced to GFSM 2014 and ESA 2010 where possible. - For more material units, an evidence-based approach is required rather than reliance on assumptions. *International Monetary Fund — Bosnia and Herzegovina mission report (extracted content provided in this content unit).* ### 45. Once following through the process, a complete list of transactions, OEFs, and ### cr1936 - 45. Once following through the process, a complete list of transactions, OEFs, and ### Compilation outcomes and use - Once following through the process, a complete list of transactions, OEFs, and closing balances will be available for each unit, including all balancing items in the systems of accounts and with a reconciliation between NLB and financing. - These data can be used for compiling a broad set of GFS and related macroeconomic statistics tables. - Financial statements are compiled per national business accounting standards; the compiled data will: - follow accrual accounting and follow balance sheet valuations aligned with fair value. - serve as a best possible proxy for market, nominal and face value in the ESA 2010, GFSM 2014, and PSDS CG frameworks, including revenue, functional expenditure, and financial balance sheet data. - If units have a significantly material impact on select balance sheet items, additional valuation methods may be considered to align better with reporting standards on a case-by-case basis. ### Stepwise verification and estimation (Figures and process) - Figure 2. Step [A]—Verifying Net Income - Crosswalk between Income Statement and Balance Sheet showing: Revenue, Expense, NFin Assets, Fin Assets, Liabilities, Capital a/c, Net income, CB, OB. - Figure 3. Step [B]—Estimating Net Flows - Estimation of Net flow movements across Revenue, Expense, NFin Assets, Fin Assets, Liabilities, Capital a/c, Net income, CB, OB. - Figure 4. Step [C]—Determine ‘Other Economic Flows’ and Unravelling Provisions - Identification of Revalue, Provision, Impair, FX loss adjustments and their impacts on Income Statement and Balance Sheet. - Figure 5. Step [D]—Allocating GFS Transactions, OEFs and Stocks - Allocation framework mapping: Original flow, Other economic flows, Adjustments, and Transaction after adjustments within GFSM 2014. - Notation for mapping items: [1], [2], [31], [32], [33], TR. - Figure 6. Step [E]—Finalizing GFS Framework, and Calculating NLB and Financing - Final mapping of Fin Assets, Liabilities, NFin Assets, OEFs and impair/FX loss adjustments. - Key formulae: - NLB = [1] – [2] – [31] - FIN = [32] – [33] ### Accounting treatment differences (Table 8: Generic Business Accounting Standards and GFS Recording Standards Compared) - (1) Provisions - Accounting: "Expenses is accrued in the period when it becomes highly likely an outflow of resources will be required to settle an obligation, and a reliable estimate can be made of the amount, even if the timing for when the obligation will be settled is unknown" - GFSM 2014/ESA 2010: "Expense is only recorded when the actual economic event takes place." - Additional comparisons: - Accounting: "A counter-transaction is recorded in the ‘provisions’ line item of the ‘Capital Account’." - GFSM 2014/ESA 2010: "No provision item on the balance sheet." - Accounting: "When actual expense event takes place—an outflow is recorded from the ‘provisions’ account—impacts only the balance sheet." - GFSM 2014/ESA 2010: "When actual expense event takes place—expense is recorded." - Accounting: "Income is accrued when provisions are ‘released’—i.e. it is no longer likely the ‘provisioned’ expense will be spent." - GFSM 2014/ESA 2010: "The release is not recorded as income." - (2) Revaluations - Accounting: "A revaluation of an asset is recorded as income or expense, thus, impacting the ‘net income’. The value of the requisite asset item increases or decreases accordingly." - GFSM 2014/ESA 2010: "A revaluation of an asset is not recorded as part of revenue or expense, it is recorded as an ‘other economic flow’ and thereby the value of the requisite asset item increases or decreases accordingly." - (3) Foreign exchange losses or gains - Accounting: "A foreign exchange loss or gain on an asset or liability is recorded as income or expense, thus, impacting the ‘net income’. The value of the requisite balance sheet item increases or decreases accordingly." - GFSM 2014/ESA 2010: "A foreign exchange loss or gain of an asset or liability is not recorded as part of revenue or expense, it is recorded as an ‘other economic flow’ and thereby the value of the requisite balance sheet item increases or decreases accordingly." - (4) Impairments or write-offs - Accounting: "An impairment and a write-off of debt receivable is recorded as an expense, thus, impacting the ‘net income’. The value of the requisite financial asset item decreases accordingly." - GFSM 2014/ESA 2010: "An impairment and a write-off of debt receivable is recorded as an ‘other economic flow,’ thus, impacting the ‘net income’. The value of the requisite financial asset item decreases accordingly. However, if an agreement is reached with the debtor, the write-off will be recorded as a ‘capital transfer’ expense." ### Key implementation notes and adjustments - The process explicitly separates: - Transactions (GFSM 2014 recording), Other economic flows (OEFs), and Stocks (closing balances). - Adjustments are required to convert national business accounting treatments (which often book revaluations, FX, provisions, and impairments through net income) into GFSM 2014/ESA 2010 consistent recording (which treats many of these items as OEFs or balance sheet-only events). - Reconciliation between NLB and FIN requires identification and mapping of the numbered components [1], [2], [31], [32], and [33] as per the stepwise figures. *Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1936.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1936.pdf_