## _wp08116 - 1. Summary of records kept by tax agencies

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### Major purpose, scope, and institutional context
- Purpose: record, analyze and report tax and non-tax transactions to improve fiscal and operational management and to manage the effective and prompt flow of revenues to meet public expenditure needs.
- Autonomy laws:
  - Grant varying degrees of operational independence from civil service rules to SARAs.
  - Require SARAs to prepare records that conform to public sector GAAPs while treasuries often continue to apply cash accounting rules.
  - Require presentation of audited financial statements to ministries, revenue boards or committees, legislatures and supreme audit institutions.
- Determinants of accounting quality:
  - maturity of a country’s financial and fiscal systems;
  - general acceptance and application of the GAAPs;
  - the self-accounting nature of tax agencies; and
  - differences in the capacity of tax and treasury offices.
- Typical SARA features:
  - legal and accounting entity with many characteristics similar to a public corporation (not a private entity or GBE);
  - executive management delegated for operations but tax policy remains with MOF;
  - reporting to a board of directors appointed by the MOF;
  - ability to sue/be sued, own assets, borrow with limitations, prepare accounting records for audit;
  - flexible budget rules, bulk and prompt cash releases, enhanced virement powers;
  - continuum position between core MDAs and public corporations.

### Benefits and risks of moving toward accrual accounting
- Risks of a quick switch while treasury remains on cash accounting or issues insufficient SARA guidance:
  - inconsistent and inaccurate recording, coding and reporting of SARA operating, investing and financing transactions;
  - worsening of existing bridging or mapping difficulties;
  - need for complex harmonization or reconciliation rules to explain divergences in reporting to the treasury.
- Potential benefits of improving SARA records under accrual rules:
  - transparent reporting of revenues and budget resources;
  - use of tax systems as models in executive agency programs;
  - improvements in control and performance measurement;
  - setting a good example for taxpayers.
- Legal and compliance rationale:
  - SARAs control substantial government, taxpayer and public assets and are often guaranteed more budget funds than most non-SARAs.
  - IFAC publishes detailed public sector standards relevant to SARA transactions; IPSAS 23 (Revenue from Non-Exchange Transactions—Taxes and Transfers) is noted as most relevant and due to come into effect in January 2008 (with a 5-year transition period from cash to accrual accounting).

### SARA records coverage and classification of transactions
- Records and statements must cover:
  - (a) revenues generated;
  - (b) budget funding for generating those revenues;
  - (c) material programs administered on behalf of other agencies.
- Transaction classification (common GAAPs and GFS terminology):
  - Operating activities: tax and non-tax revenues collected for government; operating incomes from budget allocations disbursed as operating expenses.
  - Investing activities: capital/stock items spanning multiple periods (e.g., fixed assets).
  - Financing activities: long-term funds supporting operations and investments; financing mainly from the budget.
- Distinction: tax revenues are not SARA operating income for treasury/economy purposes even if SARAs retain a ratio for expenses; operating incomes/expenses are subject to separate budget appropriation processes.

### Integration and record-keeping options between SARAs and treasuries
- Full Integration:
  - Treasury records allocations as operating or capital incomes and disbursements as expenses/investments; tax agency keeps detailed taxpayer records.
  - Example countries: Dominica, St. Vincent.
- Partial Integration / Interface:
  - Tax departments keep more detailed records under full treasury classification; treasury delegates substantial responsibilities for revenues and operating incomes.
  - Example countries: Jamaica, Trinidad.
- Self-accounting:
  - Tax agencies keep separate operating, investing, and financing records within broad treasury rules; autonomy laws grant operational powers in return for higher accounting/reporting standards.
  - Example countries: South Africa, Ghana, Kenya.
- Caution: these options do not automatically improve records; risks from Section B (e.g., poor recording culture) may impede benefits.

### Automated accounting systems and IFMIS interactions
- IFMIS models:
  - centralized/integrated treasury systems; decentralized platforms linking inter-agency systems.
  - Non-core IFMIS systems (revenue subsystems) often set up as separate Accounting System modules; interfaces between full tax and treasury systems are usually weak.
- Integration failures: many legacy or OTS tax systems (e.g., TRIPS and ASYCUDA) were not coordinated with IFMIS in countries such as Ghana and Guyana.
- Typical operational features and issues:
  - weak or no linkage between tax/customs software and treasury fiscal needs;
  - standalone cash management modules used ad hoc to bridge systems;
  - some IFMIS aim for full or partial integration (e.g., SIGTAS and SIGFIS in the Caribbean).
- Practical result: SARAs often install separate finance systems for incomes and expenses while revenue modules cater for assessments, penalties and interest; many finance systems are adapted from OTS private software and are not compatible with revenue and treasury systems.

### Revenue recognition, arrears, refunds, penalties and prudence
- Tax assessments and accruals:
  - Individual tax liabilities accrue when taxpayers self-assess or when official assessments are issued.
  - Under strict accrual rules control accounts should reflect amounts due, including arrears and receivables for a period, excluding advance payments for other periods.
  - Prudence: IPSAS and GFS require recognition only of revenues with a realistic chance of being realized; irrecoverable arrears excluded.
- Bad debts and provisions:
  - Recoverable taxes reported in the year they fell due; irrecoverable arrears written off immediately against taxpayer accounts and control accounts.
  - Provisions for bad debts offset against total arrears in the balance sheet; contingencies disclosed for doubtful cases.
  - Effective recovery, write-off and installment powers are needed to make bad debt policies meaningful.
- Refunds and tax credits:
  - Refunds are cash payments of negative balances on individual taxpayer accounts; GFS and IPSAS classify refunds as negative revenue to offset amounts due to the treasury.
  - Prudence: recognize refunds and credits due to taxpayers as a liability, provision or contingency.
- Penalties and interest:
  - Generally non-tax revenues to be kept in separate accounts, though GFS allows interest and penalties associated with a tax to be recorded with that tax.
  - Anticipate on accrual basis but adopt prudent write-off and provision policies.
- Non-netting guidance:
  - Do not net composite transactions; record separate entries for revenues, operating income, expenses, refunds, offsets and Treasury Credit Notes (TCN) to improve analysis and avoid misstated balances.

### Cash management, trust funds, and TSA practices
- SARAs collect and hold tax revenues in “trust” for governments and must transfer them promptly to the central bank.
- Operational risks and controls:
  - cashiering risks from large cash handling in tax offices;
  - cut-off and reconciliation risks: need clear rules for reporting and reconciling receipts, payments and transfers among taxpayers, tax offices, commercial banks and central banks;
  - retention and investment policies: tax offices should not invest trust funds; use of operating funds for investment should be regulated.
- Operational guidance:
  - Treasuries should impose strict time limits (e.g., 24-48 hours) for tax offices and banks to transfer tax revenues to the central bank.
  - Some countries designate SARA bank accounts as TSAs to minimize risks; TSAs facilitate forecasting, liquidity and debt management and typically require frequent “sweeps” to maintain zero balances.

### Operating income and expense rules, budget issues, and retention policies
- Operating income sources:
  - Bulk of operating income comes from the budget; SARAs generally do not automatically finance operations from revenues.
- Budget allocations and controls:
  - SARAs often receive periodical bulk allocations (e.g., quarterly instead of monthly), quick cash disbursements, and less stringent line-item rules.
- Retention policies:
  - Some autonomy laws (e.g., Ghana and Peru) allow SARAs to retain a portion (e.g., 2–3 percent) of total or part of the revenues to finance operating expenses and refunds.
  - Some retentions are limited to specific revenue types or expenses; retained amounts are part of consolidated funds and should be regulated (e.g., Ghana requires retained amounts to be held in a TSA account).
- Project/donor funds, investment incomes and fees:
  - Donor funds should go through the budget at least as contra entries; in-kind donations (e.g., vehicles, equipment) should be recorded at market value as capital under accrual accounting.
  - SARAs generally cannot invest trust funds; guidelines on investment incomes and incomes from staff activities are needed.
  - Fees, commissions and other incomes may be retained directly from revenues where authorized.

### Fixed assets (FA), current assets/liabilities, and working capital
- Current assets (examples):
  - cash (office, bank, in-transit) representing operating, trust and program funds;
  - tax arrears and receivables (net of bad debts);
  - inventories or stocks to be used within a year;
  - taxpayers’ properties (seizures, liens) maturing within one year.
- Current liabilities (examples):
  - creditors and loans (e.g., suppliers, bridging loans);
  - arrears of tax refunds/credits, interest and penalties;
  - unremitted funds on control accounts;
  - taxpayers’ liabilities (contra items).
- Fixed assets:
  - tangible FAs: land, buildings, equipment, furniture, vehicles;
  - intangible FAs: software and licenses capitalized when substantial;
  - taxpayers’ property held for more than a year.
- Valuation and depreciation:
  - FAs are shown at historical cost; SARAs may revalue assets; IPSAS favors historical or replacement cost with periodical revaluations and recognition of realized capital gains, shown net of accumulated depreciation over the EUL.
- Financing classifications:
  - equity (net worth or capital/general funds), reserves, long-term liabilities (often limited for SARAs).
- Working capital:
  - WC = CA minus CL; a rule of thumb: a SARA may view a 2.1 or more working capital ratio as evidence of sufficient annual budget allocation for its operations.

### Program, consolidated and financial statement types
- Simple cash statements:
  - For less-developed fiscal systems; cash reports for revenue and operating activities supported by memoranda records for fixed assets, debtors, cash and creditors.
  - Cash statements must conform to IPSAS cash accounting rules.
- Complex financial statements:
  - Based on full or modified accrual records: operating statement, balance sheet, cash flow statement (usually one year); must conform to IPSAS 3, 22, 24 and 18.
  - Operating statement: matches incomes and expenses; prepared by “closing” flow items after accruals and prepayments.
  - Balance sheet: investing, financing and working capital items; expresses equity = assets less liabilities.
  - Cash flow statement: net increase/decrease in cash/near-cash; main elements are net operating income adjusted for non-cash items and changes in investing/financing.
- Program statements:
  - Separate complex program statements conforming to IPSAS 22 and 23 and GFS: revenue statements for fees/interest/penalties; operating statements for budget allocations/commissions and disbursements; program balance sheets may be consolidated into a single SARA balance sheet.
- Consolidated financial statements:
  - Consolidation groups revenue, program and mainstream statements for SARA responsibilities; treasury may consolidate SARA reports with other MDAs.
  - Consolidation must avoid duplication and internal offsets; follow group account rules (IPSAS 6, 18 and 22).

### Key conclusions, implementation issues and success factors
- Success factors:
  - Proper guidelines and effective interaction between tax and treasury offices are essential.
  - Independence does not eliminate the need for fiscal reporting; integration procedures should not prevent SARAs from exercising executive control.
- Implementation difficulties:
  - Inadequate guidelines and agreements, weak coordination of reform efforts, and non-compatible automated systems hinder implementation of autonomy laws and switching to accrual accounting.
- Coordination imperative:
  - SARAs and treasuries must improve coordination to avoid complex and expensive bridging or reconciliation of records.
  - Minimize divergence between SARA and treasury systems, especially as SARAs increasingly adopt IPSAS under autonomy laws.

_Italic: Source: _wp08116 — IMF working paper content (sections summarized from the provided PDF chapter/section)._

### 1. Summary of records kept by tax agencies .............................................................................

### _wp08116 - 1. Summary of records kept by tax agencies

### Major purpose and scope
- The paper discusses improvements which semi-autonomous revenue agencies (SARAs) must make to meet fiscal and financial accounting responsibilities more efficiently under autonomy laws.
- Autonomy laws grant varying degrees of operational independence from civil service rules to SARAs; in return these laws require SARAs to prepare records that conform to public sector generally-accepted accounting principles (GAAPs), often as the treasury continues to apply cash accounting rules.
- Purpose of tax office accounting: to record, analyze and report tax and non-tax transactions to improve fiscal and operational management and to manage the effective and prompt flow of revenues to meet public expenditure needs.
- Autonomy laws require SARAs to present audited financial statements to ministries, revenue boards or committees, legislatures and supreme audit institutions.

### Key structural outline of the paper
- Part II: summarizes the SARA regulatory and institutional framework.
- Part III: discusses the nature of tax or revenue accounting.
- Parts IV and V: discuss specific recording and reporting rules.
- Part VI: concludes the paper.

### Benefits and risks of moving to accrual accounting for SARAs
- Risks of a quick switch to accrual accounting while a treasury remains on cash accounting (or fails to issue sufficient SARA guidelines):
  - inconsistent and inaccurate recording, coding and reporting of SARA operating (including revenue), investing and financing transactions;
  - worsening of existing bridging or mapping difficulties;
  - need for complex harmonization or reconciliation rules to explain divergences in reporting to the treasury.
- Potential benefits of improving SARA records under accrual rules:
  - transparent reporting of revenues and budget resources;
  - use of tax systems as models in executive agency programs;
  - improvements in control and performance measurement;
  - setting a good example for taxpayers.

### SARA records and reporting coverage
- SARA records and financial statements cover:
  - (a) revenues generated;
  - (b) budget funding for generating those revenues;
  - (c) material programs which a SARA may administer on behalf of other agencies.
- As fiscal institutions, SARAs’ obligation to apply public sector GAAPs adds to obligations under budget and financial administration laws (BFALs).
- SARA records enable a treasury to comply with statistical or fiscal reporting standards such as the IMF’s Government Finance Statistics (GFS 2001).

### Institutional and regulatory framework — determinants of accounting quality
- The quality and effectiveness of a tax agency’s accounting methods depends on:
  - maturity of a country’s financial and fiscal systems;
  - general acceptance and application of the GAAPs;
  - the self-accounting nature of tax agencies; and
  - differences in the capacity of tax and treasury offices.

### Nature of semi-autonomy — typical SARA features
- Institutional status: a SARA is a legal and accounting entity with many characteristics similar to a public corporation but it is not a private entity or a government business enterprise (GBE) in a public sector accounting context.
- Executive management and control: while the formulation of tax policy remains with the Ministry of Finance (MOF), operations are delegated to a SARA chief executive and management who are directly accountable for their implementation.
- Supervision: most SARAs require the executive management team to report to a board of directors—sometimes with representatives from the private and public sectors (including the MOF)—appointed by the MOF.
- Accountability: as a legal entity and going concern, a SARA can sue and be sued, own assets and borrow (with some limitations), prepare accounting records for auditing, and report to a supervisory board (as well as the MOF and legislature).
- Budget flexibility: SARAs enjoy flexible budget rules in terms of allocation (including retention policies), bulk and prompt cash releases, and enhanced virement powers.
- SARAs fall on a continuum between core civil service MDAs and public corporations; many are provided extra budget funds and often recruit qualified staff to prepare GAAP-based records.

### Accounting requirements and transition issues
- Accounting requirements may be specified in a SARA law or in other laws such as the Public Finance Management Act (PFMA), 1999 which the South African Revenue Service (SARS) uses to prepare the current mix of cash and accrual records and statements.
- These requirements are viewed as a transition to full accrual accounting.
- Footnote on audit: accounts must be audited in line with the generally accepted auditing standards (GAAS) by the Auditor General—directly or indirectly by an audit firm appointed the Auditor General. The paper does not discuss external/internal audits or linking accounting records to budget and management accounting systems.

*Source: _wp08116 - 1. Summary of records kept by tax agencies*

### Section 54 of the PFMA requires that an accounting authority (i.e., the Chief Executive) for a public entity

### Section 54 of the PFMA requires that an accounting authority (i.e., the Chief Executive) for a public entity

### Legal and reporting requirements (Section 54)
- The accounting authority must:
  - (a) keep full and proper records of the financial affairs of the public entity;
  - (b) prepare audited financial statements, defined in Section 1 as:
    - a balance sheet, an income statement, and a cash flow statement; and
    - any other statements that may be prescribed and any notes to these statements;
    - in accordance with generally accepted accounting practice or GAAP (unless the Accounting Standards Board approves the use of generally recognized accounting practice or GRAP);
  - (c) submit those financial statements within two months after the end of the financial year to the auditors and the treasury.
- The financial statements must fairly represent the state of affairs of the public entity and financial results for the financial year.
- The annual report and statements must be tabled in Parliament.

### Potential benefits of keeping separate SARA accrual records (Section B)
- Key risks and challenges:
  - Likely divergence from a treasury’s cash accounting methods for all MDAs.
  - Perception that SARA accrual accounting perpetuates “enclave” policies (Taliercio 2005) and demanding expectations which a SARA may not meet (Crandall and Kidd, 2005).
  - Self-accounting can worsen a poor recording and reporting culture rather than improve it.
- Rationale and potential benefits:
  - Legal requirement: SARAs have a legal obligation to keep accrual records and need assistance to achieve this goal.
  - SARAs control substantial government, taxpayer and public assets and are guaranteed more budget funds than most non-SARAs for investment and operations.
  - Model for public finance reforms: SARAs can be used as model for executive agency (including automated) accrual accounting programs; they are semi-independent but not operationally distant from treasuries.
  - Improved work conditions can enable SARAs to recruit qualified staff and automate systems.
  - Improved fiscal reporting: cash statements by tax agencies do not reflect items such as tax and refund arrears, cash-in-transit, fixed assets, and liens except in memoranda form; transparent accrual reporting of non-cash items helps the treasury prepare better public records and allocate funds more efficiently for tax programs; it improves understanding of fiscal policies such as the tax gap due to non-compliance by taxpayers.
  - Improved accounting framework: IFAC now publishes detailed public sector standards for SARA-type transactions.
  - Example for taxpayers: SARAs are obliged to keep good records as both a fiscal responsibility and an example for taxpayers.
- Conclusion: These benefits present a strong case for SARAs to implement reform measures to enable them maintain more advanced and proper accounting systems, procedures and records, especially where the treasury is switching or expected to switch to accrual accounting.

### Regulatory framework (Section C)
- BFALs (Budget and financial accounting laws), such as South Africa’s PFMA, are the original basis for recording and reporting MDA transactions.
- Treasuries link BFAL procedures to fiscal or statistical standards such as the IMF’s GFS2001. Other classification standards include European System of Accounts (ESA) and the UN System of National Accounts (SNA).
- Autonomy laws require SARAs to comply with public sector GAAPs which, in principle, shift the basis of accounting from cash to accrual accounting.
- GAAPs were originally issued by professional accounting bodies for the private sector, creating potential for divergence between GAAP and BFAL records.
- IFAC’s International Public Sector Accounting Standards (IPSAS) are now available; IFAC and the international financial institutions (IFIs) have been harmonizing accounting and fiscal/statistical rules.
- Many developing countries are using IPSAS to formulate national accounting standards; SARAs using IPSAS to meet accrual requirements.
- IPSAS 23 (Revenue from Non-Exchange Transactions—Taxes and Transfers) is noted as the most relevant for SARAs; it is due to come into effect in January 2008 (with a 5-year transition period from cash to accrual accounting).
- Caution: Rapid adoption of full IPSAS, if they diverge significantly from treasury cash procedures, can make fiscal reporting difficult because different recording, classification, and IT methods would require complex bridging or mapping rules and programs to reconcile and consolidate tax and treasury records.
- Intermediate steps and gradual transition are discussed later in Part III.

### Nature of tax office accounting and integration options (Section D)
- SARAs alter the tax agency–treasury relationship across three main transaction categories:
  - Tax revenues—collected on behalf of the government (called administered and trust funds in South Africa and the UK respectively). SARAs should account separately for special material programs administered on behalf of other agencies.
  - Operating incomes and expenses—incomes allocated from the budget and other sources and disbursed as operating expenses (called resource or own records in the UK and South Africa respectively).
  - Financing and investment activities—capital and operating funds, mainly from the budget and other sources (e.g., donors), used to pay for current and fixed assets (elements of which may be attributed to taxpayers on account of measures such seizures and liens).
- Three partial and integrated record-keeping options (as summarized in Table 1):
  - Full Integration:
    - Treasury records the allocation of budget funds to the tax agency as operating or capital incomes and their disbursement as operating expenses and investments.
    - Tax agency keeps detailed individual taxpayer records to facilitate self-assessment and compliance.
    - Example countries: Dominica, St. Vincent.
  - Partial Integration / Interface:
    - Tax departments keep more detailed records under full treasury classification and recording rules.
    - Treasury delegates substantial responsibilities for revenues and operating incomes—but to a limited extent for investing and financing activities.
    - Tax agency records are integrated with treasury consolidated records for all MDAs.
    - Example countries: Jamaica, Trinidad.
  - Self-accounting:
    - Tax agencies keep separate operating (revenue, income and expense), investing, and financing records within broad treasury rules or guidelines.
    - Consistent with records for an accounting or government reporting entity (Section D).
    - Autonomy laws give more operational powers to a tax agency over budget resources in return for higher accounting and reporting standards, including the publication of audited financial statements.
    - Example countries with autonomy laws and GAAP requirements: South Africa, Ghana, Kenya.
- Note: These options, including automation, do not automatically improve a tax agency’s accounting records; risks discussed in Section B can make benefits difficult to realize.

### Automated accounting systems (Section E)
- Treasuries and tax offices pursue major automation programs to improve accounting and budget systems; accounting software can improve accrual accounting systems and integrate SARA and treasury records, but results can be mixed.
- Fiscal reforms often classify legacy and off-the-shelf (OTS) automated tax systems as modules of Integrated Financial Management Information Systems (IFMIS or FMIS).
- Two general IFMIS models:
  - Common, centralized or integrated treasury systems.
  - Standard decentralized platforms for linking inter-agency or interdependent systems.
- IFMIS configurations also described as core and ancillary non-core systems.
- Non-core IFMIS systems may cover revenue systems or modules generally set up as separate subsystems of the Accounting System, often referring to cash management modules; interface between full tax and treasury systems is usually weak.
- Many legacy or OTS tax systems (e.g., TRIPS and ASYCUDA) were not originally coordinated with IFMIS in countries such as Ghana and Guyana, leading to integration failures.
- Typical operational features of tax and treasury system interactions:
  - weak or no linkage: many tax and customs software process tax returns or customs entries, with limited or no capacity to support the treasury’s fiscal needs;
  - cash management: some countries use standalone ad hoc cash management and reporting modules to bridge the treasury and tax systems;
  - full or partial integration: some IFMIS aims to integrate tax systems (e.g., SIGTAS and SIGFIS {Standard Integrated Government Financial System} in the Caribbean).
- SARAs also face internal interface and compatibility problems because most tax systems have only revenue modules and do not support all operating, financing, and investing activities.
- As a result, SARAs tend to install separate finance systems for incomes and expenses while revenue modules cater for assessments, penalties and interest (including arrears and bad debts).
- Most finance systems are adapted from OTS private software and are not compatible with revenue and treasury systems.

*Italic: Content excerpted from the provided PDF chapter/section.*

### Part III summarizes the nature of tax office transactions and records as an introduction to Part

### _wp08116 - Part III summarizes the nature of tax office transactions and records as an introduction to Part

### A. Nature of Tax Transactions
- Common GAAPs and GFS terminology allow SARAs and treasuries to classify transactions as operating, investing and financing activities.
- Operating activities:
  - Main flows: (a) tax and non-tax revenues collected on behalf of the government paid directly into consolidated funds; and (b) operating incomes from a separate budget allocation process, disbursed as operating expenses in generating the revenues.
  - GFS classifies tax refunds as negative revenues; some treasuries classify refunds with interests and penalties as expenses.
- Investing activities:
  - Capital or stock items spanning multiple fiscal/financial periods (e.g., fixed assets such as equipment or premises).
  - SARAs may take over or acquire significant assets through direct transfers and budget allocations upon establishment or to improve operational efficiency.
- Financing activities:
  - Long-term funds supporting operating and investing activities.
  - Financing of SARAs is mainly from the budget since SARAs typically lack external shareholders and have limited powers to contract loans.
  - Operating activities may result in current assets financed from current liabilities and equity or other long-term sources.
- Distinction emphasized:
  - Capital/stock (investing and financing) items are distinct from current/flow (operating) items — important for preparing full accrual records and financial statements.
  - Tax revenues are not SARA operating income even if a SARA retains a ratio to meet operating and capital expenses; operating incomes and expenses are subject to separate budget appropriation and allocation processes.

### B. Meaning of Full Accrual Accounting
- Definition and requirements:
  - Accrual accounting: SARAs must record transactions upon recognition, not when cash is received or paid (contrast with cash accounting used under most treasury rules).
  - Records must conform to matching, double-entry, entity and other GAAP rules to convert from single entry or incomplete records to full accrual accounting.
- Documents and records:
  - SARAs use several documents as bases for accounting entries in subsidiary books, cashbooks, and ledgers — cashbook is the key record under cash accounting systems.
  - Initial entries based on detailed charts of accounts (COAs) and GFS classification of transactions under function and economic codes.
  - Ledger records are used to prepare financial statements: (a) operating statement (incomes and expenses); (b) balance sheet (assets, liabilities and equity); (c) cash flow statement (sources and applications of funds).
- Modified approaches:
  - Intermediate approach: prepare “own” accrual records and “administered” records on cash basis (example: South Africa).
  - Incremental augmentation of cash records with accrual data recommended as a necessary first step to full accrual accounting.
  - Cited views: Reed and Swain, 1997; Shiavo-Campo and Tomasi, 1999 — modified cash basis recognition examples (e.g., 3 months) and modified accrual definitions noted.

### C. SARA Accounting Records
- SARAs should prepare proper and, if necessary, separate records in three main categories:
  - (a) Revenue or trust records: tax and non-tax revenues collected and held in trust for the government before transfer to consolidated/general funds.
  - (b) Operating income and expense records: budget funds used to generate the revenues.
  - (c) Program records: material activities performed on behalf of other government agencies (e.g., student loans, social security).
- Examples of legal/administrative provisions:
  - Ghana’s autonomy laws require “separate records and accounts for (a) taxes, penalties and interest collected and paid into the consolidated fund; (b) funds provided for the administration of the Service; and (c) the special refund account described in Part IV[b].”
  - South Africa: separate “own” and “administered” financial records and statements (SARS, March 2007).
  - UK HMRC: separate resource, trust and program records consolidated into comprehensive financial statements (see simplified Box 2 structure in source).
- Record structure options:
  - Revenue and program activities may be maintained as (a) sub-accounts (total or control accounts) in the general ledger to mirror individual accounts; or (b) separate trust fund and program records.
- Reiteration:
  - Tax revenues are not operating incomes for SARAs in the treasury/economy sense.
  - Consolidated records are needed to show a SARA’s overall responsibility for revenues, programs, and budget resources.

### IV. RECORDING AND REPORTING RULES — Overview
- Part IV reviews recognition and other accounting rules SARAs use to keep revenue, operating (income and expense), investing and financing records and to facilitate preparation of financial statements (Part V).
- Main operating activity defined as generating revenues, which IPSAS 23 and the GFS define in income terms (from treasury perspective) as an increase in net worth (net assets or equity) from tax and non-tax sources.

### IV.A Revenue Transactions
- Revenue generation and recording:
  - SARAs generate and record most tax (e.g., income tax, VAT, tariffs, and other levies) and non-tax (income and fees) revenues through assessment, sanctions (penalties and interest), tax credits and refunds.
  - Processes accommodate voluntary compliance (self-assessment) and official assessment/enforcement; SARAs traditionally keep accrual records for individual taxpayers but usually report in total to the treasury on net cash basis.
- Tax assessments — factors in switching to accrual accounting:
  - Accruing tax revenues:
    - Individual tax liabilities accrue when taxpayers self-assess or tax offices issue official (administrative or presumptive) assessments.
    - Under strict accrual rules, total/control accounts reflecting amounts due to the treasury would include potential revenues and adjustments from tax arrears and receivables for a period; they would exclude advance payments relating to other periods.
    - GFS and IPSAS require prudence in reporting tax revenues on accrual basis — need for actual and provision for bad debt rules.
  - Bad debts (arrears):
    - IPSAS and GFS endorse accrual accounting for revenues but require recognition only of revenues with a realistic chance of being realized.
    - Recoverable taxes are reported as revenues in the year they fell due; irrecoverable arrears are excluded.
    - Tax offices should immediately write off actual bad debts against individual taxpayer accounts and control/total accounts; provisions for bad debts should be offset against total arrears in the balance sheet (Part V).
    - SARAs should provide for contingencies (notes to financial statements) for doubtful cases not shown as a provision (e.g., estimates of arrears to be written off upon appeals).
    - Effective recovery, write-off and installment powers are needed to make bad debt policies meaningful.
  - Advance and late payments:
    - Taxpayers pay estimates of income tax in advance (typically monthly or quarterly installments); tax offices adjust individual taxpayer accounts to reflect receivables, credits or refunds after final net liability is determined.
    - Under accrual accounting, reports to the treasury should reflect these adjustments.
- Refunds and tax credits:
  - Refunds are cash payments of negative balances on individual taxpayer accounts rather than carrying forward as credits.
  - Tax law may allow credits against, waiver, or remittance of tax liability.
  - GFS and IPSAS classify refunds as negative revenue to be offset against amounts due to the treasury; some treasuries treat refunds as expenses.
  - HMRC: automatic tax credits classified as negative revenues; expenses when disbursed in cash.
  - Prudence: recognize all tax refunds and credits due to taxpayers as a liability, provision or contingency.
- Penalties and interest receivable:
  - Imposed administratively or by courts on tax liabilities and delinquencies; generally non-tax revenues to be kept in separate accounts, though GFS allows interest and penalties assessed with a particular tax to be recorded with that tax.
  - SARAs should anticipate interest and penalties on accrual basis but adopt prudent write-off and provision policies for irrecoverable amounts.
- Non-netting of revenues (GFS and IPSAS guidance):
  - Tax offices should not net out multiple or composite transactions; separate entries improve analysis and decision-making.
  - Examples of netting pitfalls:
    - Revenue retained as expenses: when SARAs retain/withhold percentage of tax or non-tax revenues to meet operating costs (including tax refunds), they should record all elements — revenues, operating income, expenses, refunds.
    - Liability and refund/credit offsets: where laws allow offsets of credits/refunds against other tax arrears, records should show separate entries for settlement of arrears and refunds.
    - Treasury credit notes (TCN) and offsets: when TCNs/vouchers settle tax liabilities (e.g., import VAT and duties) on behalf of MDAs, treasury and tax office should show separate entries for revenues and expenses rather than only net cash amounts.
- Cash management (high-level points):
  - SARAs collect and hold tax revenues in “trust” for governments and transfer them promptly to the central bank.
  - Key operational risks and controls:
    - cashiering: use of tax or treasury offices to receive cash, make lodgments, and pay refunds/expenses can lead to delays, safety, reconciliation and liquidity risks due to handling and holding large cash amounts in tax offices.
    - cut-off and reconciliation: need clear rules for dates/periods used to report and reconcile receipts, payments and transfers among taxpayers, tax offices, commercial banks, and central banks — to minimize retentions, suspense items, and unlawful use of funds and to establish amounts to be accrued for financial statements.
    - retention and investment policies: tax offices should not invest trust funds; use of operating funds for investment should be regulated (e.g., TSA rules discussed below).
  - Operational guidance:
    - Proper banking and cut-off rules can eliminate large cash handling in tax offices and minimize cash/liquidity risks.
    - Treasuries should impose strict time limits (e.g., 24-48 hours) for tax offices and banks to transfer tax revenues to the central bank.
  - TSA practices:
    - Some countries designate SARA bank accounts as TSAs to minimize risks.
    - TSA policies typically designate MDA bank accounts as treasury accounts that must be “swept” daily or frequently to maintain zero balances; MDAs generally cannot open accounts without treasury permission.
    - TSAs facilitate forecasting, liquidity and debt management; banks cannot invest or on-lend tax revenues to the government.

### IV.B Operating Income Rules
- Purpose:
  - Sections B and C discuss operating income and expense rules for preparing relatively complex operating statements (Part V).
  - Main issue: augment cash receipts and payments rules with recognition of arrears and prepayments that may become liabilities and assets.
- Sources for operating income:
  - Tax agencies receive the bulk of operating income from the budget and, with few exceptions, not automatically or directly from the revenues they generate.
  - Budget funding: Budget funds are allocated periodically (e.g., monthly) by the treasury; process involves approval, allocation, commitment, and disbursement, with some exceptions for SARAs under autonomy laws.

*Italic source attribution: IMF working paper content (Part III & start of Part IV) as provided in the source PDF.*

### Box 3. Some SARA Budget Issues

### Box 3. Some SARA Budget Issues

### Budget allocations, controls, and retention policies
- SARAs often receive more budget funds to improve their work and employment conditions and benefit from more flexible budget rules to enhance executive control and remove operational constraints such as cash shortages.
- Allocation and controls:
  - SARAs often benefit from periodical bulk allocations (e.g., quarterly instead of monthly), quick cash disbursements, and less stringent line-item or virement rules.
- Retention policies:
  - Some autonomy laws (e.g., Ghana and Peru) allow SARAs to retain a portion (e.g., 2–3 percent) of total or part of the revenues generated to finance operating expenses and refunds (e.g., Ghana and Malawi).
  - Some retentions are limited to specific revenues (e.g., customs service or overtime charges, penalties and interest) and for specific expenses (e.g., staff bonus). Others are broader and cover capital expenditures and refunds (e.g., Ghana).
  - Retentions should be well regulated since the amount is part of the consolidated funds. Some countries (Ghana) require that the amount retained should be held in a TSA account only.

### Project, donor funds, investment incomes, and other revenues
- Project and donor funds:
  - Donors may provide funds directly in cash or in kind to tax agencies to support their operations and investment.
  - In principle, these funds should go through the budget, at a minimum, as contra entries in the treasury and SARA records.
  - Some donations in kind (e.g., vehicles and equipment) should be recorded at market value as capital, not operating, items under a streamlined accrual accounting process.
- Investment incomes:
  - SARAs need detailed regulations on investment incomes.
  - As a general rule, SARAs cannot invest trust funds but the guidelines are often less certain with respect to operating cash balances.
  - SARAs may generate significant income from staff activities (e.g., sporting, canteen or entertainment clubs); clear guidelines are important for treatment of assets and incomes (e.g., interest and rentals).
- Fees, commissions and other incomes:
  - SARAs may receive direct budget allocations to manage programs or earn incomes, fees or commissions from beneficiary agencies for providing those services (Section E). This latter category may be retained directly from the revenue generated.
  - SARAs may also earn income from taxpayers (e.g., customs service charge) and should account for gains (or losses) on the realization of fixed assets reflected in the financial statements (Part V).
- Outstanding budget funds and recognition of income:
  - Under strict accrual accounting, SARAs would record operating incomes upon budget approval or appropriation. In practice, it may not be prudent to show the treasury as a debtor for amounts that would never be received.
  - Some SARAs may attempt to track operating incomes due as accounts receivable against the treasury. A more conservative approach is to recognize the income when a treasury issues a warrant or similar liquid form of commitment.
  - It may be prudent to accrue fees which can be recovered directly from programs administered by SARAs (e.g., student loans).

### C. Operating Expense Rules — classification and nature of operating costs
- General guidance:
  - The bulk of a SARA’s incomes are spent on its revenue generating activities; maintain one set of expense records and keep separate records only for material program expenses (Section E).
  - SARAs should classify expense items in detailed COA and GFS format for management and fiscal purposes.
- Nature of operating costs:
  - Autonomy laws have significant implications for administration (including staffing), maintenance and development costs. Refunds and penalties payable should also be given proper treatment.
- Staff costs:
  - SARA employees cease to be part of the civil service; a SARA’s obligations include income tax (PAYE) and contributory or non-contributory pensions and social security withholding and management.
  - These raise funding, investment and operating issues and transition periods that often prolong because the old staff can remain on previous civil service schemes, including welfare and loan programs.
- Non-staff costs:
  - Rental, maintenance and development costs increase with taking over significant assets that are no longer pooled with other MDAs.
  - SARAs devote more resources to taxpayer services (e.g., publicity) and enforcement (e.g., audit).
  - Accounting policies must include non-cash items such as provisions for depreciation and bad debts.
- Refunds, penalties, interest and tax credits:
  - SARAs should classify these items properly as negative revenues (e.g., refunds and credits) or expenses (e.g., penalties and interest) and in relation to their core and non-core activities.
  - It may be necessary to include some of these items in specific programs administered for other agencies.
- Accrual and prepayment of expenses:
  - The shift to accrual accounting will increase records for arrears, prepayments and provisions. Most accruals result from delays in disbursing budget funds.
  - The relationship between expenses and some capital items becomes important as SARAs stop immediate expensing of capital items and set rules for pooling and writing off costs not material enough to be added to fixed assets.

### D. Investing and Financing Activities — balance sheet perspective
- SARAs usually control significant fixed and current assets for managing revenues, trust funds and program activities. Assets may be financed from budget and non-budget sources as equity (capital and operating grants) and liabilities such as loans and creditors.
- Relevant standards:
  - Items must conform to several GFS rules and IPSAS standards such as IPSAS 23, 9, 12-13 and 16–17.
- Current assets (CA):
  - These are temporary investing items that fall due within a year, including non-conventional items such as taxpayers’ assets held by a SARA.
  - Details include:
    - cash (in tax offices and banks): represent operating (unspent) as well as trust and program funds (not transferred) held in tax offices, banks and in-transit—and due to be utilized or transferred/remitted to the central bank in the ensuing year;
    - tax arrears and receivables (less bad debts): tax arrears are due to actual default or lags in statutory and actual payment dates and should be shown net of bad debts;
    - inventories or stocks: include items such as consumables that a SARA may not have exhausted but expect to use within an ensuing accounting period or year;
    - taxpayers’ properties: mainly seized assets, liens and sureties that may mature as revenues or be returned within one-year (and, therefore, not classified as a fixed asset).
  - Where a SARA deems it prudent to accrue approved budget funds, they must be part of current assets.
  - Given the large number of individual taxpayer accounts, both IPSAS and GFS allow a SARA to use statistical methods to determine arrears (liabilities) and provisions (and, therefore, contingencies).
  - SARAs’ risk management methods (e.g., profiling and aging) may be used to satisfy some accrual accounting needs (SARS 2007, Annex 1 of unaudited annexures).
  - Some assets reflect as contra liabilities (e.g., liens).
- Current liabilities (CL):
  - These are balances of short-term liabilities, accruals and credits that fall due in one year. Main items include:
    - creditors and loans—include arrears owing to suppliers (e.g., consumables) and banks (e.g., bridging loans and overdrafts); may also include guarantees;
    - arrears of tax refunds/credits, and interest and penalties—unpaid balances due to taxpayers include arrears (due budget shortfalls and cut-off policies) and advance payments (“on account”, due to lags in statutory and actual payment dates);
    - unremitted funds—balances on total or control accounts not remitted to the treasury (again, contra for cash-in-transit on the asset side);
    - taxpayers’ liabilities—contra items for assets which a tax agency may have to return to taxpayers (e.g., after a court decides) or realize as revenues.
  - It is prudent to disclose the full extent of liabilities and contingencies for all claims to avoid overstating revenues and assets.
  - Most provisions (e.g., bad debts and depreciation) are liabilities shown as offsets against relevant assets in a balance sheet (Part V).
- Fixed assets (FA):
  - SARAs hold substantial FAs independently to support operations and must keep proper records, including disclosure in financial statements (Part V).
  - Main categories include:
    - tangible FAs: physical items (e.g., land and buildings, equipment, furniture and vehicles) held over relatively long periods at headquarters and regional/local offices;
    - intangible FAs: acquisition or development cost of software and licenses deemed substantial enough to be capitalized;
    - property, bonds, security deposits etc: tangible and intangible assets belonging to taxpayers held for more than a year against liabilities, provisions and reserves (or contingencies) until they crystallize as revenues or are returned.
  - IPSAS standards favor historical or replacement cost in valuing FAs, with periodical revaluations and recognition of realized capital gains. These costs are shown net of accumulated depreciation over the estimated useful life (EUL) of the FA (Box 4).
  - Historical cost rules and policies may diverge from the GFS market-based rules; IPSAS and GFS are consistent on other FA issues, such as rules for financial and operating leases.
- Investments and staff-related funds:
  - Countries often forbid SARAs from investing trust, program or operating funds, often through stringent TSA rules.
  - Where SARAs invest, assets should be classified properly as material or portfolio short-term and long-term items.
  - SARAs may control significant funds from independent employee activities such as staff pensions and welfare schemes (e.g., staff canteen or sports club).
  - Operating, investing and financing items may warrant separate records or segmentation (IPSAS 18).

*Box 3. Some SARA Budget Issues*

### Box 4. Some Key Fixed Asset (FA) Issues

### Box 4. Some Key Fixed Asset (FA) Issues

### Fixed asset recognition and measurement
- Cost of asset:
  - FAs are shown at historical cost, which is the amount paid at the time of acquisition.
  - SARAs are allowed to revalue the assets to reflect upward or downward market and other conditions (e.g., accidents and damages).
- Estimated useful life (EUL):
  - EUL is the number of years the asset is expected to be in use and over which it will be depreciated.
  - EUL is useful in determining the depreciation amount.
- Depreciation:
  - Depreciation is the amount representing the annual “use” of the asset.
  - Depreciation is accumulated and deducted from the cost of the asset to show the book value of FA (which is often not the same as the market value).

### Financing activities for fixed assets and working capital
- Broad financing classifications (consistent with IPSAS and GFS):
  - equity (net worth or capital/general funds): accumulated capital and surplus (or deficits) funds from budget and non-budget (e.g., grants from donors) sources;
  - reserves—general or special funds set aside by management to meet specific needs (e.g., pensions, contra for taxpayers’ assets etc.);
  - long-term liabilities—may not be significant since SARAs have limited borrowing powers and do not incur substantial long-term or even short-term liabilities such as loans and overdrafts.
- Mortgage arrears and leases:
  - SARAs may have substantial mortgage arrears from transactions such as financial leases (itself an FA) that should be recognized properly as assets and liabilities in the records.
- Working capital (WC):
  - WC is the difference between current assets (CA) and current liabilities (CL).
  - WC is a temporary financing item or a rough measure of the adequacy of short-term funds to finance the current year’s operating activities.
  - Rule of thumb: a SARA may view a 2.1 or more working capital ratio as evidence of sufficient annual budget allocation for its operations.

### Program activities administered on behalf of other agencies
- Presentation and recordkeeping:
  - Material programs may be shown as (a) sub-accounts in the ledger; or (b) separate records.
  - In both cases, there should be clear rules for the operating (including revenues), investing and financing elements.
- Revenues:
  - A SARA may collect tax (e.g., levies or payroll taxes) and non-tax (e.g., fees and loan recoveries) under a variety of programs (e.g., social security and student loan schemes).
  - Accounting treatment depends on whether (a) the SARA is directly responsible for the scheme (including enforcement action); and (b) it has to transfer the revenues directly into the consolidated fund.
- Operating income and expenses:
  - Funds for managing the program may be derived from the budget and estimated by the SARA, or the SARA may earn a commission or fee for the service (e.g., based on a flat-sum or percentage).
  - Accounting for expenses (including bad debts) depends on the program arrangements.
  - Non-cash items such as depreciation depend on the SARA’s investing and financing activities.
- Investing and financing items:
  - Except for large programs run as separate operations, assets and liabilities arising from programs would not be separated from mainstream records; SARAs would normally have a single balance sheet.
  - Some material programs may be organized separately, even physically from mainstream revenue operations.
- Expense allocation:
  - Expenses should be matched in an income statement against the budget or fees for specific programs.
  - Where SARAs do not receive specific budget funds or do not make a separate charge for special programs, they should allocate or apportion certain common expenses from the general fund to improve accountability.

### SARA reporting obligations and statement types
- General:
  - Autonomy laws require SARAs to prepare relatively complex financial statements from the accrual records, in line with standards such as IPSAS 1 to 3.
  - Detailed financial statements include accounting policies and explanatory notes and serve reporting and public accountability needs with stakeholders such as MOF, the board, audit institution, legislature and taxpayers or the general public.
  - SARAs may prepare a composite or combined statement to summarize trust fund and program records, or prepare separate financial statements prior to consolidation.

- A. Simple cash statements:
  - Used where fiscal systems are not developed sufficiently; tax agencies prepare simple cash reports for revenue and operating activities.
  - Must support cash statements with memoranda records for selected current capital, investing and financing items to improve accountability.
  - Cash statements must conform to IPSAS cash accounting rules.
  - Revenue statement: periodical summaries of tax receipts, refunds, and transfers to the general or consolidated fund; reflects the revenue control account and, in principle, the balance represents cash in transit, tax offices and banks; should show summaries of different revenue and program items separately, preferably in GFS format.
  - Operating statement: summary of cash receipts and their disbursement as expenses to support revenue and program activities; receipts do not include revenues; simple cash statements may not distinguish between capital and current items—representing a simple cash flow statement rather than an operating statement.
  - Memoranda records: cash statements do not show accrued items; agencies not preparing conventional income statements and balance sheets should support cash statements with memoranda records or registers for items such as fixed assets, debtors (including tax arrears), cash (office, bank and transit) and creditors (including tax refunds).
  - SARAs may prepare separate simplified statements for material program activities.

- B. Complex financial statements:
  - Based on full or modified accrual records and consist of operating statement, balance sheet, and cash flow statement for a period (usually one year).
  - Must conform to IPSAS 3, 22, 24 and 18.
  - Operating statement: matches operating incomes and expenses; balance shows surplus or deficit for the period; prepared by “closing” all flow or current items in the ledger after adjusting for accruals and prepayments.
  - Balance sheet: shows investing, financing and working capital items held at beginning or end of the period; expresses the accounting equation (equity/general fund = assets less liabilities); shows sources from which SARAs finance current and fixed assets.
  - Cash or funds flow statement: shows net increase or decrease in cash or near-cash by matching source and application of funds between beginning and end of the period; main elements are net operating income (after adjusting for non-cash items such as depreciation) and changes in investing and financing items.
  - IPSAS rules cover disclosure of accounting policies, accounting conventions and significant changes.

- C. Program statements:
  - SARAs may prepare separate complex program statements which must conform to relevant standards (e.g., IPSAS 22 and 23 as well as GFS).
  - Program operating statements should include:
    - a revenues statement covering fees, interest and penalties receivable from beneficiaries (classified as non-tax revenue) and payable into the consolidated fund or payable into a separate account on behalf of the government agency; and
    - an operating statement comprising incomes (i.e., budget allocation or commissions) and their disbursement as operating expenses to support program activities—with the balance representing a surplus or deficit.
  - Where a tax agency pays entitlements or benefits from revenues generated or budget allocation, the revenue statement would have a disbursement component—or the disbursements could be treated as expenditure items in the operating statement.
  - Balance sheet for programs: SARAs tend to prepare a single Balance Sheet to support both revenue and program activities; for some material programs operated from different locations it may be feasible to prepare a separate balance sheet.
  - Current and fixed assets may include unremitted revenues, arrears (less bad debts), and taxpayers’ property (seizures and liens); liabilities include arrears of refunds and credits, penalties and interest; may be necessary to make bad debt provision; difference between assets and liabilities is a reserve or special fund.

- D. Consolidated financial statements:
  - Consolidated statements group the revenue and program statements to show overall responsibilities; treasury may also prepare consolidated statements combining SARA financial statements with those of other MDAs.
  - SARA consolidation comprises mainstream (resource or general), trust fund, and program statements; departmental statements may be prepared where SARA has multiple responsibilities (e.g., domestic tax and customs).
  - Treasury consolidation combines SARA reports with other statements to prepare a single consolidated statement for all MDAs under the treasury.
  - To avoid duplication, a consolidated statement should include assets, equity and liabilities that do not involve offsets or internal transfers; any lump sum item in the treasury records should be replaced with individual assets and liabilities from the SARA financial statements to avoid inflating reserves or equity.
  - Consolidated statements follow basic rules for preparing group accounts (see IPSAS 6, 18 and 22).

### Key conclusions and implementation issues
- Success factors:
  - SARA financial administration depends on proper guidelines and effective interaction between tax and treasury offices.
  - Independence does not eliminate the need for fiscal reporting, and integrating procedures should not prevent SARAs from exercising sufficient executive control over operations.
- Implementation difficulties:
  - Difficulties in implementing autonomy laws and switching to accrual accounting are often due to inadequate guidelines and agreements, weak coordination of reform efforts, and non-compatible automated systems.
- Coordination imperative:
  - SARAs and treasuries must improve coordination to avoid complex and expensive bridging or reconciliation of records.
  - Goal is to minimize divergence between SARA and treasury systems, especially as SARAs increasingly adopt IPSAS under autonomy laws—ahead of a similar requirement in public finance management.
  - Lack of coordination and agreement exacerbates existing manual and electronic accounting problems.

*Source: Box 4, _wp08116 - Box 4. Some Key Fixed Asset (FA) Issues*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08116.pdf_