## 1lsoea2022001

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---

### Mission purpose and scope
- A GFS technical assistance (TA) mission was held remotely with the Lesotho Ministry of Finance (MOF) during April 5–16, 2021 under the Data for Decisions (D4D) funded project submodule for Fiscal and Debt reporting.
- Mission objectives:
  - Develop capacity and assist MOF staff to improve fiscal statistics compilation with respect to coverage and scope of GFS and source data to include all significant general government units, including non-market SOEs and parastatals.
  - Provide training on the use of SOEs and parastatals’ financial statements to derive GFS.
  - Introduce an IMF STA tool to support compilation of GFS from accounting financial statements.
- Practical demonstration:
  - Using publicly available financial statements for FY2017/18, the mission illustrated data compilation using the tool for six SOEs and parastatals (five non-market entities and one public corporation) and illustrated consolidation of BCG, local governments, and those non-market entities to obtain consolidated general government GFS.

### Key findings on data collection, compilation, and consolidation
- Data collection and availability:
  - No structured mechanisms exist for collecting data from SOEs and parastatals, other than data collected by the Private Sector Development Department (PSD) at the MOF for entities with government shareholding.
  - Annual reports with financial statements were available on individual entity websites for a dozen or so entities for periods spanning FY2010/11 to FY2018/19; PSD collects some financial statements; Office of the Auditor General (OAG) holds paper forms.
  - A shared cloud folder (temporary repository) contained more than 90 reports for various publicly controlled entities for various years as of April 2021, with some reports dating back to 2003.
  - Preliminary sectorization exists in a public sector institutional table developed by a technical working group (MOF, CBL, BOS) comprising 88 general government entities and 13 public corporations.
  - Local government GFS have been compiled but are not yet disseminated; preliminary aggregated revenue and total expenditure of local governments (10 district councils and Maseru City Council) were less than 1 percent of GDP in FY 2017/18.
- Processing and resource issues:
  - Manual processing of source data (PDF and paper financial statements) into Excel for GFS compilation is time consuming and resource intensive and currently unsustainable given lack of allocated staff time.
  - Distinguishing market from non-market entities remains to be confirmed; mission recommended using the “market test” applied to accounting financial statements (sales vs production costs over a sustained multi-year period) to inform sectorization.

### Operational constraints and risks
- Absence of formal institutional arrangements and a central data repository for SOEs and parastatals increases the risk to progress toward broadening GFS coverage.
- Manual conversion of PDF financial statements to Excel is error prone and unsustainable without formal arrangements and resource allocation.
- Different MOF departments hold partial responsibilities (AGO, PSD) but no single department has a mandate to collect and compile data for all SOEs and parastatals.

### Recommended operational actions
- Establish formal institutional arrangements for collecting and compiling SOEs and parastatals data.
- Collect remaining financial statements for at least the last five years, and annually going forward, for the most significant (measured by the relative size of their income and balance sheet) SOEs and parastatals.
- Extract and convert into an Excel data repository information from PDF financial statements of SOEs and parastatals on balance sheets, income statements, cashflow statements, and notes where available.
- Regularly update the Excel data repository as new financial statements become available.
- Perform the market test using data available from accounting financial statements of SOEs and parastatals to update sectorization of public sector units.
- Compile GFS from accounting financial statements using the IMF STA tool and consolidate within and across sub-sectors to produce consolidated general government GFS, prioritizing the most significant entities by income and balance sheet size.
- Review and address any material source data issues in SOEs and parastatals financial statements in consultation with the respective entities.

### Priority recommendations and target dates
- September 2021: Establish formal institutional arrangements for collecting and compiling SOEs and parastatals data. — Responsible: MOF
- October 2021: Collect remaining financial statements for at least the last five years, and annually going forward, for the most significant (measured by the relative size of their income and balance sheet) SOEs and parastatals. — Responsible: MOF
- March 2022: Expand compilation of consolidated GFS for the general government, when data becomes available for a representative sample of EBUs, the local governments, and BCG for at least the last five years, and annually going forward. — Responsible: MOF
- June 2022: Disseminate compiled annual consolidated GFS for the general government to STA’s GFS database for the last five years and annually going forward. — Responsible: MOF

### Near-term outlook
- The MOF has acquired capacity to replicate compilation of SOEs and parastatals GFS using available financial statements for other entities that produce financial statements, at least for the last few years.
- Immediate priority is to input available financial statements from various sources into Excel and derive GFS for those entities using the SOEs Excel-based tool, while continuing to collect additional financial statements and focusing first on the most significant entities.

### Excel-based GFS compilation tool (STA): purpose, inputs, outputs
- Purpose: compile integrated GFS statements using accounting data from financial statements.
- Inputs required: financial statements with at a minimum detailed balance sheet and income statement.
- Outputs:
  - Statement of operations.
  - Balance sheet.
  - Detailed tables on transactions in revenue and expense; transactions in assets and liabilities; total other economic flows (OEF) in assets and liabilities.
- Coverage: supports compilation for a single year for multiple entities, market or non-market.

### Conceptual linkages between accounting financial statements and GFS
- Balancing relationships (from GFS analytical framework):
  - Balancing item from transactions in revenue, expense and transactions in nonfinancial assets (net lending (GFS surplus) or net borrowing (GFS deficit)) is equal to transactions in financial assets and liabilities (financing).
  - Change in stock positions in assets and liabilities provides flows that distinguish transactions from OEF.
- Consistency requirements:
  - Vertical consistency: nonfinancial transactions (transactions in revenue, expense, and nonfinancial assets) equal financial transactions (transactions in financial assets and liabilities).
  - Horizontal consistency: change between closing and opening stock positions in assets and liabilities results from transactions and OEF.
- Note: Adjustments are necessary when using accounting data from financial statements to distinguish (i) transactions and (ii) OEF from flows derived from financial statements.

### Procedures and key adjustments to convert financial statements to GFS
- Recommended steps:
  - Verify consistency of source data from financial statements.
  - Estimate net flows and separate transactions from OEF.
  - Ensure GFS consistency.
- Outcome if adhered to: derivation of three GFS statements for each unit:
  - Statement of operations.
  - Statement of OEF.
  - Balance sheet.
- Recommended action:
  - Populate the SOEs compilation tool with data extracted and converted into the Excel data repository information from PDF financial statements of SOEs and parastatals for at least the last five years, and annually going forward.
  - Perform required adjustments, as relevant, to data in the SOEs compilation tool and produce a statement of operations and balance sheet for SOEs and parastatals for at least the last five years, and annually going forward.

### Data compilation example: six SOEs and parastatals (FY2017/18)
- Entities populated into tool (one public corporation, five EBUs):
  - Lesotho Water and Sewerage Corporation (public corporation).
  - Lesotho Water and Electricity Authority (EBU).
  - Lesotho Highlands Development Authority (LHDA) (EBU).
  - Lesotho Communications Authority (LCA) (EBU).
  - Road Fund (EBU).
  - Lesotho Revenue Authority (LRA) (EBU).
- Data source: publicly available financial statements for FY2017/18.
- Outputs produced: GFS statement of operations (Table 3) and balance sheet (Table 4) for the six SOEs and parastatals.
- Source data quality: generally good with sufficient detail for compilation.
- Noted inconsistencies:
  - Summation errors in source data (examples: sum of components does not equal totals on total funds and liabilities for LCA; total income for LRA).
  - These inconsistencies create statistical discrepancies in the statement of operations.
- Assessment: inconsistencies are relatively small; material verification may not be warranted if resources better used to expand coverage.

### Preliminary aggregate results for EBUs (FY2017/18) — selected exact figures (percent of GDP)
- Aggregate revenue and expenditure: about 4.1 percent of GDP.
- Net lending (surplus): about 0.1 percent of GDP.
- Net financial worth: about 0.3 percent of GDP (with debt liabilities of about 2 percent of GDP).
- Net worth: 31.4 percent of GDP (explained mainly by LHDA’s holding of nonfinancial assets).

### Consolidation: rationale, challenges, and recommended actions
- Rationale:
  - Aggregated data double counts transactions and stock positions between entities within same sub-sector or across sub-sectors.
  - Consolidation eliminates reciprocal transactions to present the public sector as a single unit for analytical purposes.
- Challenges:
  - Financial statements of SOEs and parastatals may not provide sufficient detail to identify reciprocal transactions.
  - Rules of thumb and assumptions may be needed to guide consolidation.
- Recommended action:
  - Collect source data for all subsectors of general government, including non-market SOEs and parastatals including sufficient details to allow intra and intersectoral consolidation.

### Illustration: compilation of consolidated GFS for the general government (FY2017/18) — selected exact figures
- Method: consolidated between BCG and EBUs, then between consolidated central government and local governments.
- Preliminary consolidated differences vs BCG only:
  - Revenue: higher by LSL 947.5 million (3 percent of GDP).
  - Expenditure: higher by LSL 862.1 million (2.7 percent of GDP).
  - Net borrowing (deficit): lower by LSL 85.4 million (0.3 percent of GDP).
- Dissemination recommendation:
  - Initiate data dissemination when consolidated data compiled for the general government.
  - Preliminary consolidated GFS, even with limited EBUs coverage, can be disseminated to STA’s GFS database with metadata indicating extent of coverage.
  - Debt liabilities of EBUs and public corporations can be disseminated to the World Bank’s QPSDS using balance sheet data compiled from the SOEs tool.
- Recommended actions:
  - Expand compilation of consolidated GFS for the general government when data becomes available for a representative sample of EBUs, the local governments, and BCG for at least the last five years, and annually going forward.
  - Disseminate compiled annual consolidated GFS for the general government to STA’s GFS database for the last five years and annually going forward.

### Key tables and selected exact fiscal figures (FY2017/18, percent of GDP)
- Table 3 (Statement of Operations for Six Parastatals and SOEs) — selected lines:
  - Revenue (Total Extrabudgetary Units): 4.1
  - Taxes (Total Extrabudgetary Units): 0.8
  - Other revenue (Total Extrabudgetary Units): 2.2
  - Expense (Total Extrabudgetary Units): 4.2
  - Net operating balance (1-2) (Total Extrabudgetary Units): -0.1
  - Net lending (+)/Net borrowing (-) (Total Extrabudgetary Units): 0.1
  - Net acquisition of financial assets (Total Extrabudgetary Units): 0.4
  - Net incurrence of liabilities (Total Extrabudgetary Units): 0.3
- Table 4 (Balance Sheet for Six Parastatals and SOEs) — selected lines:
  - Net worth (Total Extrabudgetary Units): 31.4
  - Nonfinancial assets (Total Extrabudgetary Units): 31.1
  - Net financial worth (Total Extrabudgetary Units): 0.3
  - Financial assets (Total Extrabudgetary Units): 2.9
  - Liabilities (Total Extrabudgetary Units): 2.7
- Table 5 (Illustrative Consolidated GFS for the General Government) — selected consolidated percent of GDP figures:
  - Central Government revenue: 47.8
  - Central Government expense: 38.2
  - Gross operating balance: 9.5
  - Net lending (+)/Net borrowing (-): -1.9
  - Net/gross investment in nonfinancial assets: 11.4
  - Net acquisition of financial assets: 1.1
  - Net incurrence of liabilities: 2.9

### Action Plan highlights for broadening institutional coverage — selected priorities and dates
- Establish formal institutional arrangements for collecting and compiling SOEs and parastatals data — Target Completion Date: September 2021.
- Collect remaining financial statements for at least the last five years, and annually going forward, for the most significant SOEs and parastatals — Target Completion Date: October 2021.
- Extract and convert into an Excel data repository information from PDF financial statements (balance sheets, income statements, cashflow statements, notes) — Target Completion Date: October 2021.
- Populate the SOEs compilation tool with data extracted and converted into the Excel data repository for at least the last five years, and annually going forward — Target Completion Date: December 2021.
- Perform required adjustments and produce statement of operations and balance sheet for SOEs and parastatals for at least the last five years, and annually going forward — Target Completion Date: December 2021.
- Expand compilation of consolidated GFS for the general government for at least the last five years, and annually going forward — Target Completion Date: March 2022.
- Disseminate compiled annual consolidated GFS for the general government to STA’s GFS database for the last five years and annually going forward — Target Completion Date: June 2022.

### Appendix I — Linkages between financial statements: key equations and implications
- Financial-statements identities (notation preserved from source):
  - [P/L] = [R] − [E]
  - [A] = [L]
  - ∆[A] = ∆[L]
  - ∆[A] = [P/L] + ∆[OL]
  - ∆[A] = [R] − [E] + ∆[OL]
  - ∆[NFA] + ∆[NFA?] = [R] − [E] + ∆[OL]    (i)
- GFSM/GFS statement of operations identity:
  - [NLB] = [1] − [2] − [31] = [32] − [33]    (ii)
  - Codes: [1] Revenue; [2] Expense; [31] Transactions in nonfinancial assets; [32] Transactions in financial assets; [33] Transactions in liabilities
- Direct mapping (before OEF and other adjustments):
  - [R] = [1]
  - [E] = [2]
  - ∆[NFA] = [31]
  - ∆[FA] = [32]
  - ∆[OL] = [33]
- Implications:
  - Adjustments are typically required to distinguish OEF from transactions, reclassify income/expense not GFS revenue/expense, eliminate provisions, and preserve initial GFS consistency.
  - Final rearranged identity emphasizing transactions and financing:
    - [31] + [32] = [1] − [2] + [33]  (iii)
    - Rearranged to obtain (ii): [1] − [2] − [31] = [32] − [33] = [NLB]

### Suggested compilation procedure for converting financial statements to GFS (Appendix II) — steps preserved
- Step [A]:
  - Verify that profit/loss from the income statement matches the entry under shareholders’ equity (e.g., "profit/loss for the year") on the balance sheet.
  - Check that profit/loss can be traced to the balance sheet and to net lending/net borrowing (NLB) linkage to financing.
- Step [B]:
  - Estimate net flows by computing differences between closing and opening balances for each balance-sheet item.
- Step [C]:
  - Separate net flows into transactions and Other Economic Flows (OEF).
  - Identify revaluations, holding gains and losses, asset write-downs.
  - Eliminate provisions (provisions do not exist in GFS).
- Step [D]:
  - Classify all flows and stocks according to the GFS classification to present data in the GFSM 2014 analytical framework.
- Step [E]:
  - Calculate NLB and check GFS consistency: NLB = [1] − [2] − [31]; FIN = [32] − [33].
  - If inconsistency remains, investigate statistical discrepancies and possible source-data inconsistencies.
- Practical notes:
  - Use notes to the financial statements to obtain detailed classification and economic interpretation.
  - Where detailed information is unavailable, make and document assumptions based on the unit’s economic activity/objectives; evidence-based classification is preferred for larger units.
  - Financial statements prepared under national business accounting standards generally follow accrual recording and fair-value valuation of financial assets and liabilities, which can align with GFSM 2014 and Public Sector Debt Statistics Guide valuations; additional valuation methods may be considered case-by-case for significant items.

### Illustration of typical required adjustments (Appendix III) — selected categories and treatments
- Change in equity from reported profit or loss:
  - Reported profit/loss is not a transaction in equity; it must be recorded as an Other Economic Flow (OEF) in equity in GFS.
- Capital withdrawals:
  - If a withdrawal aligns with the operating surplus, record as dividend expense (2811).
  - If disproportionally large ("super-dividend"), record as an equity liability financial transaction (3315).
  - Partition into dividend and transaction in equity as relevant.
- Capital injections:
  - If increase in equity exceeds reported profit (or decrease is smaller than reported loss), classify as:
    - capital transfer received (1442) if to cover past losses or without reasonable expectation of return for a public corporation, or capital grant received (1332) if government unit; or
    - transaction in equity (3315) below the line if there is a reasonable expectation of a realistic rate of return.
- Revaluation reserves:
  - Revaluations recorded in “revaluation reserves” are holding gains/losses (OEF) in GFS and not transactions.
- Bad debt expense:
  - Recorded as expense in income statement but in GFS treated as an OEF affecting the corresponding asset (writing off the debt instrument).
- Foreign exchange gains and losses:
  - These are OEF and should be recorded against the relevant asset or liability in the balance sheet rather than as GFS revenue/expense; compilers often assume they apply to cash or other liquid assets if those holdings exceed the holding gains/losses to be applied.
- Investment grants:
  - In-kind or conditional capital grants that are recognized in financial statements over asset depreciation should be recorded in GFS as a capital transfer at the time of asset transfer.
  - The capital transfer equals the change in the deferred-grant liability plus the corresponding grant income in the income statement; capital transfers cannot be negative.

### Income from change in tax liabilities; provisions; gains/losses from asset sales — selected operational guidance
- Income from Change in Tax Liabilities:
  - When an income is recorded in the income statement because tax liabilities were reduced in the balance sheet (for example because of the revaluation of an asset giving rise to a tax deduction), this should be recorded as another volume change under Other Accounts Payables (3318).
- Provisions: accounting and GFS treatment:
  - Accounting practice: expense is accrued when probability is known; counter-transaction recorded in "provisions" liability; when event occurs, outflow recorded from "provisions".
  - GFS principle preserved verbatim:
    - GFS expense = outflows = -[provision liability in the closing balance sheet - provision liability in the opening balance sheet - provisions accrued in the income statement + provisions releases in the income statement].
  - In GFS, only record the expense when the actual event takes place.
- Gains or Losses from Asset Sales:
  - When an asset is sold at a higher or lower value than its book value, a gain or loss on disposal is recorded in the income statement.
  - In GFS, this is treated as another economic flow (holding gain or loss); if sale not at market price, a transfer component must also be recorded.
  - Example mechanics preserved verbatim:
    - Expense to be recorded in GFS = outflows = -[105 - 125 - 15 + 8] = 27

### Appendix IV — GFS Consolidation: principles and priorities
- Consolidation purpose and principle:
  - Consolidation presents statistics for a group of entities as if they constituted a single unit by eliminating all significant flows and stock positions (debtor-creditor relationships) among consolidated entities.
  - Consolidated statistics present only flows and stocks that involve interactions between the consolidated group and all other institutional units in the domestic economy and the rest of the world.
- Types of consolidation:
  - Intra-sectoral consolidation: within a subsector (performed before intersectoral consolidation).
  - Intersectoral consolidation: between subsectors (e.g., consolidated general government).
- Consolidation approaches:
  - If detailed data available and analytical need exists: consolidate appropriate revenues and expenses, net/gross operating balances, net acquisitions of nonfinancial assets, net lending/net borrowing balances, net acquisitions of financial assets and net incurrence of liabilities.
  - If detailed data not available: consolidate simply net/gross operating balances, net acquisition of nonfinancial assets, net lending/net borrowing balances, net acquisition of financial assets and net incurrence of liabilities.
- Priorities for public nonfinancial corporations subsector:
  - Revenue and expense transactions priority:
    - (i) dividends receivable/payable and withdrawals of income from quasi corporations;
    - (ii) subsidies receivable/payable;
    - (iii) current and capital transfers receivable and/or payable.
  - Assets and liabilities priority:
    - (a) Nonfinancial assets: gross acquisitions and disposals of nonfinancial assets.
    - (b) Financial assets and liabilities: (i) equity and investment fund shares; (ii) loans; (iii) debt securities.
    - Other accounts payable may be a priority but source data may be difficult to obtain.

*Source: IMF mission report chapter on SOEs and parastatals GFS compilation and consolidation (FY2017/18 illustrations and action plan).*

### 1.     Priority Recommendations ______________________________________________________________________ 5

### 1.     Priority Recommendations

### Mission purpose and scope
- A GFS technical assistance (TA) mission was held remotely with the Lesotho Ministry of Finance (MOF) during April 5–16, 2021 under the Data for Decisions (D4D) funded project submodule for Fiscal and Debt reporting.
- The mission aimed to develop capacity and assist MOF staff to improve fiscal statistics compilation with respect to coverage and scope of GFS and source data to include all significant general government units, including non-market SOEs and parastatals.
- The mission provided training on the use of SOEs and parastatals’ financial statements to derive GFS and introduced an IMF STA tool to support compilation of GFS from accounting financial statements.
- Using publicly available financial statements for FY2017/18, the mission illustrated data compilation using the tool for six SOEs and parastatals (five non-market entities and one public corporation) and illustrated consolidation of BCG, local governments, and those non-market entities to obtain consolidated general government GFS.

### Key findings on data collection, compilation, and consolidation
- No structured mechanisms exist for collecting data from SOEs and parastatals, other than data collected by the Private Sector Development Department (PSD) at the MOF for entities with government shareholding.
- Manual processing of source data (PDF and paper financial statements) into Excel for GFS compilation is time consuming and resource intensive and currently unsustainable given lack of allocated staff time.
- Annual reports with financial statements were available on individual entity websites for a dozen or so entities for periods spanning FY2010/11 to FY2018/19; PSD collects some financial statements; Office of the Auditor General (OAG) holds paper forms.
- A shared cloud folder (temporary repository) contained more than 90 reports for various publicly controlled entities for various years as of April 2021, with some reports dating back to 2003.
- Preliminary sectorization exists in a public sector institutional table developed by a technical working group (MOF, CBL, BOS) comprising 88 general government entities and 13 public corporations.
- Local government GFS have been compiled but are not yet disseminated; preliminary aggregated revenue and total expenditure of local governments (10 district councils and Maseru City Council) were less than 1 percent of GDP in FY 2017/18.
- Distinguishing market from non-market entities remains to be confirmed; the mission recommended using the “market test” applied to accounting financial statements (sales vs production costs over a sustained multi-year period) to inform sectorization.

### Operational constraints and risks
- Absence of formal institutional arrangements and a central data repository for SOEs and parastatals increases the risk to progress toward broadening GFS coverage.
- Manual conversion of PDF financial statements to Excel is error prone and unsustainable without formal arrangements and resource allocation.
- Different MOF departments hold partial responsibilities (AGO, PSD) but no single department has a mandate to collect and compile data for all SOEs and parastatals.

### Recommended actions (operational)
- Establish formal institutional arrangements for collecting and compiling SOEs and parastatals data.
- Collect remaining financial statements for at least the last five years, and annually going forward, for the most significant (measured by the relative size of their income and balance sheet) SOEs and parastatals.
- Extract and convert into an Excel data repository information from PDF financial statements of SOEs and parastatals on balance sheets, income statements, cashflow statements, and notes where available.
- Regularly update the Excel data repository as new financial statements become available.
- Perform the market test using data available from accounting financial statements of SOEs and parastatals to update sectorization of public sector units.
- Compile GFS from accounting financial statements using the IMF STA tool and consolidate within and across sub-sectors to produce consolidated general government GFS, prioritizing the most significant entities by income and balance sheet size.

### Priority recommendations and target dates
- September 2021: Establish formal institutional arrangements for collecting and compiling SOEs and parastatals data. — Responsible: MOF
- October 2021: Collect remaining financial statements for at least the last five years, and annually going forward, for the most significant (measured by the relative size of their income and balance sheet) SOEs and parastatals. — Responsible: MOF
- March 2022: Expand compilation of consolidated GFS for the general government, when data becomes available for a representative sample of EBUs, the local governments, and BCG for at least the last five years, and annually going forward. — Responsible: MOF
- June 2022: Disseminate compiled annual consolidated GFS for the general government to STA’s GFS database for the last five years and annually going forward. — Responsible: MOF

### Near-term outlook
- The MOF has acquired capacity to replicate compilation of SOEs and parastatals GFS using available financial statements for other entities that produce financial statements, at least for the last few years.
- Immediate priority is to input available financial statements from various sources into Excel and derive GFS for those entities using the SOEs Excel-based tool, while continuing to collect additional financial statements and focusing first on the most significant entities.

_Italic: Source: 1lsoea2022001 - 1.     Priority Recommendations (PDF chapter)_.

### 16. The mission introduced and trained staff from the MOF on an Excel tool developed

### 16. The mission introduced and trained staff from the MOF on an Excel tool developed

### Excel-based GFS compilation tool (STA)
- Purpose: compile integrated GFS statements using accounting data from financial statements.
- Inputs required: financial statements with at a minimum detailed balance sheet and income statement.
- Outputs:
  - Statement of operations.
  - Balance sheet.
  - Detailed tables on transactions in revenue and expense; transactions in assets and liabilities; total other economic flows (OEF) in assets and liabilities.
- Coverage: supports compilation for a single year for multiple entities, market or non-market.

### Conceptual linkages between accounting financial statements and GFS
- Balancing relationships (from GFS analytical framework):
  - Balancing item from transactions in revenue, expense and transactions in nonfinancial assets (net lending (GFS surplus) or net borrowing (GFS deficit)) is equal to transactions in financial assets and liabilities (financing).
  - Change in stock positions in assets and liabilities provides flows that distinguish transactions from OEF.
- Consistency requirements:
  - Vertical consistency: nonfinancial transactions (transactions in revenue, expense, and nonfinancial assets) equal financial transactions (transactions in financial assets and liabilities).
  - Horizontal consistency: change between closing and opening stock positions in assets and liabilities results from transactions and OEF.
- Note: Adjustments are necessary when using accounting data from financial statements to distinguish (i) transactions and (ii) OEF from flows derived from financial statements.

### Procedures and key adjustments to convert financial statements to GFS
- Recommended steps:
  - Verify consistency of source data from financial statements.
  - Estimate net flows and separate transactions from OEF.
  - Ensure GFS consistency.
- Outcome if adhered to: derivation of three GFS statements for each unit:
  - Statement of operations.
  - Statement of OEF.
  - Balance sheet.
- Recommended Action:
  - Populate the SOEs compilation tool with data extracted and converted into the Excel data repository information from PDF financial statements of SOEs and parastatals for at least the last five years, and annually going forward.
  - Perform required adjustments, as relevant, to data in the SOEs compilation tool and produce a statement of operations and balance sheet for SOEs and parastatals for at least the last five years, and annually going forward.

### Data compilation example: six SOEs and parastatals (FY2017/18)
- Entities populated into tool (one public corporation, five EBUs):
  - Lesotho Water and Sewerage Corporation (public corporation).
  - Lesotho Water and Electricity Authority (EBU).
  - Lesotho Highlands Development Authority (LHDA) (EBU).
  - Lesotho Communications Authority (LCA) (EBU).
  - Road Fund (EBU).
  - Lesotho Revenue Authority (LRA) (EBU).
- Data source: publicly available financial statements for FY2017/18.
- Outputs produced: GFS statement of operations (Table 3) and balance sheet (Table 4) for the six SOEs and parastatals.

### Preliminary estimates and data quality observations
- Source data quality: generally good with sufficient detail for compilation.
- Noted inconsistencies:
  - Summation errors in source data (examples: sum of components does not equal totals on total funds and liabilities for LCA; total income for LRA).
  - These inconsistencies create statistical discrepancies in the statement of operations.
- Assessment: inconsistencies are relatively small; material verification may not be warranted if resources better used to expand coverage.

### Preliminary aggregate results for EBUs (FY2017/18)
- Aggregate measures (preliminary, five EBUs):
  - Aggregate revenue and expenditure: about 4.1 percent of GDP.
  - Net lending (surplus): about 0.1 percent of GDP.
  - Net financial worth: about 0.3 percent of GDP (with debt liabilities of about 2 percent of GDP).
  - Net worth: 31.4 percent of GDP (explained mainly by LHDA’s holding of nonfinancial assets).
- Recommended Action:
  - Review and address any material source data issues in SOEs and parastatals financial statements in consultation with the respective entities.

### Consolidation: rationale and challenges
- Need for consolidation:
  - Aggregated data double counts transactions and stock positions between entities within same sub-sector or across sub-sectors.
  - Consolidation eliminates reciprocal transactions to present the public sector as a single unit for analytical purposes.
- Practical constraints:
  - Financial statements of SOEs and parastatals may not provide sufficient detail to identify reciprocal transactions.
  - Rules of thumb and assumptions may be needed to guide consolidation.
- Recommended Action:
  - Collect source data for all subsectors of general government, including non-market SOEs and parastatals including sufficient details to allow intra and intersectoral consolidation.

### Illustration: compilation of consolidated GFS for the general government (FY2017/18)
- Method: consolidated between BCG and EBUs, then between consolidated central government and local governments.
- Preliminary consolidated differences vs BCG only:
  - Revenue: higher by LSL 947.5 million (3 percent of GDP).
  - Expenditure: higher by LSL 862.1 million (2.7 percent of GDP).
  - Net borrowing (deficit): lower by LSL 85.4 million (0.3 percent of GDP).
- Dissemination recommendation:
  - Initiate data dissemination when consolidated data compiled for the general government.
  - Preliminary consolidated GFS, even with limited EBUs coverage, can be disseminated to STA’s GFS database with metadata indicating extent of coverage.
  - Debt liabilities of EBUs and public corporations can be disseminated to the World Bank’s QPSDS using balance sheet data compiled from the SOEs tool.
- Recommended Actions:
  - Expand compilation of consolidated GFS for the general government when data becomes available for a representative sample of EBUs, the local governments, and BCG for at least the last five years, and annually going forward.
  - Disseminate compiled annual consolidated GFS for the general government to STA’s GFS database for the last five years and annually going forward.

### Key tables and selected exact fiscal figures (FY2017/18, percent of GDP)
- Table 3 (Statement of Operations for Six Parastatals and SOEs) — selected lines:
  - Revenue (Total Extrabudgetary Units): 4.1
  - Taxes (Total Extrabudgetary Units): 0.8
  - Other revenue (Total Extrabudgetary Units): 2.2
  - Expense (Total Extrabudgetary Units): 4.2
  - Net operating balance (1-2) (Total Extrabudgetary Units): -0.1
  - Net lending (+)/Net borrowing (-) (Total Extrabudgetary Units): 0.1
  - Net acquisition of financial assets (Total Extrabudgetary Units): 0.4
  - Net incurrence of liabilities (Total Extrabudgetary Units): 0.3
- Table 4 (Balance Sheet for Six Parastatals and SOEs) — selected lines:
  - Net worth (Total Extrabudgetary Units): 31.4
  - Nonfinancial assets (Total Extrabudgetary Units): 31.1
  - Net financial worth (Total Extrabudgetary Units): 0.3
  - Financial assets (Total Extrabudgetary Units): 2.9
  - Liabilities (Total Extrabudgetary Units): 2.7
- Table 5 (Illustrative Consolidated GFS for the General Government) — selected consolidated percent of GDP figures:
  - Central Government revenue: 47.8
  - Central Government expense: 38.2
  - Gross operating balance: 9.5
  - Net lending (+)/Net borrowing (-): -1.9
  - Net/gross investment in nonfinancial assets: 11.4
  - Net acquisition of financial assets: 1.1
  - Net incurrence of liabilities: 2.9

### Action Plan highlights for broadening institutional coverage (selected priorities and dates)
- Establish formal institutional arrangements for collecting and compiling SOEs and parastatals data — Target Completion Date: September 2021.
- Collect remaining financial statements for at least the last five years, and annually going forward, for the most significant SOEs and parastatals — Target Completion Date: October 2021.
- Extract and convert into an Excel data repository information from PDF financial statements (balance sheets, income statements, cashflow statements, notes) — Target Completion Date: October 2021.
- Populate the SOEs compilation tool with data extracted and converted into the Excel data repository for at least the last five years, and annually going forward — Target Completion Date: December 2021.
- Perform required adjustments and produce statement of operations and balance sheet for SOEs and parastatals for at least the last five years, and annually going forward — Target Completion Date: December 2021.
- Expand compilation of consolidated GFS for the general government for at least the last five years, and annually going forward — Target Completion Date: March 2022.
- Disseminate compiled annual consolidated GFS for the general government to STA’s GFS database for the last five years and annually going forward — Target Completion Date: June 2022.

*Source: IMF mission report chapter on SOEs and parastatals GFS compilation and consolidation (FY2017/18 illustrations and action plan).*

### Appendix I.  Linkages Between Financial Statements

### Appendix I.  Linkages Between Financial Statements

### Data and GFS: conceptual linkages and key equations
- Financial statements provide a closed and balanced framework: income statement (profit/loss) and balance sheet (assets = liabilities including equity).
- Key equations as presented:
  - [P/L] = [R] − [E]
  - [A] = [L]
- Because [A] = [L], changes between opening and closing balance sheet satisfy:
  - ∆[A] = ∆[L]
- Relationship combining profit/loss, other liabilities, revenues, expenses, and asset changes (as given in the source):
  - ∆[A] = [P/L] + ∆[OL]
  - ∆[A] = [R] − [E] + ∆[OL]
  - ∆[NFA] + ∆[NFA?] = [R] − [E] + ∆[OL]    (i)  [notation preserved from source]
- GFSM/GFS statement of operations identity (net lending/net borrowing, NLB):
  - [NLB] = [1] − [2] − [31] = [32] − [33]    (ii)
  - Codes from figures: [1] Revenue; [2] Expense; [31] Transactions in nonfinancial assets; [32] Transactions in financial assets; [33] Transactions in liabilities
- Direct mapping (before OEF and other adjustments) between financial-statement items and GFS codes:
  - [R] = [1]
  - [E] = [2]
  - ∆[NFA] = [31]
  - ∆[FA] = [32]
  - ∆[OL] = [33]

### Implications for GFS consistency and required adjustments
- If all changes in assets and liabilities are transactions and all income/expenses in the income statement are GFS revenue/expense, converting financial statements to GFS should yield consistency without adjustments.
- In practice, this rarely holds: adjustments must be made to
  - distinguish Other Economic Flows (OEF) from transactions,
  - reclassify income/expense that are not GFS revenue/expense (e.g., foreign exchange effects),
  - eliminate accounting provisions (which do not exist in GFS),
  - and preserve initial GFS consistency when making adjustments.
- Final rearranged identity emphasizing transactions and financing:
  - [31] + [32] = [1] − [2] + [33]  (iii)
  - Rearranged to obtain (ii): [1] − [2] − [31] = [32] − [33] = [NLB]

### Suggested compilation procedure for converting financial statements to GFS (Appendix II)
- Step [A]:
  - Verify that profit/loss from the income statement matches the entry under shareholders’ equity (e.g., "profit/loss for the year") on the balance sheet.
  - Check that profit/loss can be traced to the balance sheet and to net lending/net borrowing (NLB) linkage to financing.
- Step [B]:
  - Estimate net flows by computing differences between closing and opening balances for each balance-sheet item.
- Step [C]:
  - Separate net flows into transactions and Other Economic Flows (OEF).
  - Identify revaluations, holding gains and losses, asset write-downs.
  - Eliminate provisions (provisions do not exist in GFS).
- Step [D]:
  - Classify all flows and stocks according to the GFS classification to present data in the GFSM 2014 analytical framework.
- Step [E]:
  - Calculate NLB and check GFS consistency: NLB = [1] − [2] − [31]; FIN = [32] − [33].
  - If inconsistency remains, investigate statistical discrepancies and possible source-data inconsistencies.
- Practical notes:
  - Use notes to the financial statements to obtain detailed classification and economic interpretation.
  - Where detailed information is unavailable, make and document assumptions based on the unit’s economic activity/objectives; evidence-based classification is preferred for larger units.
  - Financial statements prepared under national business accounting standards generally follow accrual recording and fair-value valuation of financial assets and liabilities, which can align with GFSM 2014 and Public Sector Debt Statistics Guide valuations; additional valuation methods may be considered case-by-case for significant items.

### Illustration of typical required adjustments (Appendix III) — categories and treatment
- Change in equity from reported profit or loss:
  - Reported profit/loss is not a transaction in equity; it must be recorded as an Other Economic Flow (OEF) in equity in GFS.
- Capital withdrawals:
  - If a withdrawal aligns with the operating surplus, record as dividend expense (2811).
  - If disproportionally large ("super-dividend"), record as an equity liability financial transaction (3315).
  - Partition into dividend and transaction in equity as relevant.
- Capital injections:
  - If increase in equity exceeds reported profit (or decrease is smaller than reported loss), classify as:
    - capital transfer received (1442) if to cover past losses or without reasonable expectation of return for a public corporation, or capital grant received (1332) if government unit; or
    - transaction in equity (3315) below the line if there is a reasonable expectation of a realistic rate of return.
- Revaluation reserves:
  - Revaluations recorded in “revaluation reserves” are holding gains/losses (OEF) in GFS and not transactions.
- Bad debt expense:
  - Recorded as expense in income statement but in GFS treated as an OEF affecting the corresponding asset (writing off the debt instrument).
- Foreign exchange gains and losses:
  - These are OEF and should be recorded against the relevant asset or liability in the balance sheet rather than as GFS revenue/expense; compilers often assume they apply to cash or other liquid assets if those holdings exceed the holding gains/losses to be applied.
- Investment grants:
  - In-kind or conditional capital grants that are recognized in financial statements over asset depreciation should be recorded in GFS as a capital transfer at the time of asset transfer.
  - The capital transfer equals the change in the deferred-grant liability plus the corresponding grant income in the income statement; capital transfers cannot be negative.

*Source: Appendix I. Linkages Between Financial Statements.*

### 9.      Sometimes an income is recorded in the income statement when the tax liabilities

### 1lsoea2022001 - 9.      Sometimes an income is recorded in the income statement when the tax liabilities

### Income from Change in Tax Liabilities
- When an income is recorded in the income statement because tax liabilities were reduced in the balance sheet (for example because of the revaluation of an asset giving rise to a tax deduction), this should be recorded as another volume change under Other Accounts Payables (3318).
- Illustrated effects in the financial statements: examples show how grant receipts (or lack thereof) and revaluation-related tax liability changes affect reported profit or loss and balance sheet items.

### Provisions: accounting and GFS treatment
- Accounting practice (typical, may vary by country):
  - Expense is accrued in the year when probability that the expense will occur is known; timing and amount are unknown when provisions are made but an amount is estimated based on relevant information.
  - A counter-transaction is recorded in the "provisions" line item on the liability side of the balance sheet.
  - When the actual expense event takes place, an outflow is recorded from the "provisions" account in the balance sheet (impacts only the balance sheet).
  - Income is accrued when provisions are "released" – i.e., it is no longer likely the "provisioned" expense will be spent.
- GFS recording principle:
  - "In GFS, we only record the expense when the actual event takes place, which is the outflow described above."
  - Explicit formula preserved from source:
    - GFS expense = outflows = -[provision liability in the closing balance sheet - provision liability in the opening balance sheet - provisions accrued in the income statement + provisions releases in the income statement].
- Illustrative example (from Figure 17) demonstrates how changes in provisions and deferred taxes translate to zero or non-zero reported profit or loss and balance sheet adjustments.

### Gains or Losses from Asset Sales: recognition and GFS classification
- When an asset is sold at a higher or lower value than its book value, a gain or loss on disposal is recorded in the income statement.
- In GFS, this is treated as another economic flow (holding gain or loss) because the sale reveals market-price revaluation information (assuming sale at market price; otherwise, a transfer component must also be recorded).
- Reference to GFSM 2014 para. 10.20: sale-triggered revaluation is a holding gain or loss in GFS.
- Example mechanics:
  - Source illustration shows how asset disposal, accrued amounts, outflows and releases produce an expense to be recorded in GFS, preserved verbatim:
    - Expense to be recorded in GFS = outflows = -[105 - 125 - 15 + 8] = 27
  - Example also shows how a gain from asset sale of "10" affects reported profit or loss and balance sheet cash/equity entries.

### Appendix IV — GFS Consolidation: principles and priorities
- Consolidation purpose and principle:
  - Consolidation presents statistics for a group of entities as if they constituted a single unit by eliminating all significant flows and stock positions (debtor-creditor relationships) among consolidated entities.
  - Consolidated statistics present only flows and stocks that involve interactions between the consolidated group and all other institutional units in the domestic economy and the rest of the world.
  - In the GFS framework, data for all sectors and subsectors should be presented on a consolidated basis.
- Rationale:
  - Consolidation provides a more effective way of assessing the overall impact of government activity on the total economy by eliminating double counting and producing aggregates unaffected by internal interactions; it increases the analytical value of statistics.
- Types of consolidation:
  - Intra-sectoral consolidation: consolidation within a particular subsector (e.g., central government subsector or public nonfinancial corporations subsector). Intra-sectoral consolidation is always performed before intersectoral consolidation.
  - Intersectoral consolidation: consolidation between subsectors under a given sector to produce consolidated statistics for a grouping of public sector units (e.g., consolidated general government; consolidated nonfinancial public sector; overall consolidated public sector).
- Consolidation of transactions — two main approaches:
  - If detailed data are available and analytical need exists: consolidate appropriate revenues and expenses, net/gross operating balances, net acquisitions of nonfinancial assets, net lending/net borrowing balances, net acquisitions of financial assets and net incurrence of liabilities of the general government and public nonfinancial corporations.
  - If detailed data are not available or analytical needs do not require such aggregates: consolidate simply net/gross operating balances, net acquisition of nonfinancial assets, net lending/net borrowing balances, net acquisition of financial assets and the net incurrence of liabilities of the general government and public nonfinancial corporations.
- Priorities when compiling statistics for the public nonfinancial corporations subsector or nonfinancial public sector (identify potential items for intra- and intersectoral consolidation):
  - For revenue and expense transactions, prioritize:
    - (i) dividends receivable/payable and withdrawals of income from quasi corporations;
    - (ii) subsidies receivable/payable;
    - (iii) current and capital transfers receivable and/or payable.
    - Only when intra-sectoral and/or intersectoral current and capital transfers are known to be large should effort be made to identify and consolidate these transactions.
  - For assets and liabilities, prioritize:
    - (a) Flows and stocks of nonfinancial assets:
      - (i) gross acquisitions and disposals of nonfinancial assets. If only aggregate net acquisition of nonfinancial assets is compiled, there is no need for consolidation of this aggregate.
      - There is never any need for consolidation of OEF or stocks of nonfinancial assets because nonfinancial assets appear on the balance sheet of only one public sector unit.
    - (b) Flows and stocks of financial assets and liabilities:
      - (i) equity and investment fund shares;
      - (ii) loans;
      - (iii) debt securities.
    - Other accounts payable may also be a priority, but obtaining necessary source data may be difficult.

*Source: 1lsoea2022001 - chapter extract on income recognition, provisions, asset sale gains/losses, and GFS consolidation.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1lsoea2022001.pdf_