A. Nature of Semi-Autonomy

A SARA is a legal entity which fits the description of an executive agency or government unit in a GFS and public finance management (PFM) context. A SARA’s governing structure and operations are more self-contained than ministries, departments, and agencies (MDAs) in the core civil service. Many SARAs have the following common features.

• institutional status: a SARA is a legal and accounting entity with many characteristics that are similar to a public corporation but it is also not a private entity (as often viewed) 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: the majority of SARAs require the executive management team to report to a board of directors—in some cases, 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,² and report to a supervisory board (as well as the MOF and legislature); and

• budget flexibility: SARAs enjoy flexible budget rules in terms of allocation (including retention policies), bulk and prompt cash releases, and enhanced virement powers.

The paper is limited to financial accounting and does not evaluate the performance or effectiveness of SARAs with respect to the foregoing features (see Crandall & Kidd (2005), Taliercio (2004), Mann (2004) and Terkper (2003). In summary, SARAs fall on a continuum of civil service and public sector bodies such as corporations—a spectrum that includes traditional tax departments and services that keep separate records. SARAs are provided extra budget funds and often recruit qualified staff to prepare the GAAP-based records.

The accounting requirements may be in the 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 (Section C). These are viewed as a transition to full accrual accounting. Box 1 shows a summary of the PFMA requirements (similar to the repealed provisions of the SARS Act 34, 1997).³

B. Potential Benefits in Keeping Separate SARA Records

The main challenge in separate SARA accrual records is the likely divergence from a treasury’s cash accounting methods for all MDAs. Moreover, SARA accrual accounting may be viewed as perpetuating “enclave” policies (Taliercio 2005) and demanding expectations which a SARA may not meet—as the perception with other performance goals (Crandall and Kidd, 2005). Thus, self-accounting can worsen a poor recording and reporting culture rather than improve it.

However, these risks and drawbacks are worth balancing against the rationale and potential benefits of SARA accrual accounting.

Legal requirement: As noted in Section A, SARAs have a legal obligation to keep accrual records and, in this regard, need assistance to achieve this goal. Any improvements in SARA accounting methods would be positive because of their enormous responsibility in generating revenues for the budget. SARAs control substantial government, taxpayer and public assets and they 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 as some executive agencies and corporate bodies. Moreover, a SARA’s improved work conditions can enable it recruit qualified staff and automate its systems.

Improved fiscal reporting: The cash statements and reports by tax agencies do not reflect items such as tax and refund arrears, cash-in-transit, fixed assets, and liens on those assets—except in memoranda form. A transparent accrual reporting of non-cash items helps the treasury prepare better public records and allocate funds more efficiently for tax programs. It also improves the understanding of fiscal policies such as the tax gap due to non-compliance by taxpayers.

Improved accounting framework: The framework for public sector accrual accounting has improved since the initial SARAs were established in the late 1980s and 1990s. As noted in Section C, the International Federation of Accountants (IFAC) now publishes detailed public sector standards for SARA-type transactions.

Example for taxpayers: Tax laws require taxpayers to keep proper records and SARAs also implement assistance and enforcement programs to help them achieve this goal. SARAs are obliged to keep good records as both a fiscal responsibility and an example for taxpayers.

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 in an environment where the treasury is switching or expected to switch to accrual accounting.

C. Regulatory Framework

Budget and financial accounting laws (BFALs), such as South Africa’s PFMA, are the original basis for recording and reporting MDA transactions. Treasuries link the BFAL procedures to fiscal or statistical standards such as the IMF’s GFS2001.⁴ In terms of procedures, the MDA records are linked to centralized treasury cash accounting systems that use charts of accounts (COA) to classify the revenue and non-revenue transactions. As fiscal bodies, tax agencies are required to comply with these basic laws and rules in accounting for their operating (including revenues), financing and investing activities (Part III).

As noted earlier, however, autonomy laws require SARAs to comply with the public sector GAAPs which, in principle, shift the basis of accounting from cash to accrual accounting. The GAAPs are discretionary and mandatory standards which were originally issued by professional accounting bodies for the private sector. Hence, there was significant potential for divergence between the GAAP and BFAL records.⁵ However, several public sector accounting standards are now available, notably, IFAC’s International Public Sector Accounting Standards (IPSAS). Furthermore, IFAC and the international financial institutions (IFIs) have been harmonizing the accounting and fiscal or statistical rules.⁶

Many developing countries are using IPSAS to formulate their national accounting standards, which accounts for SARAs using IPSAS to meet their accrual accounting requirements.⁷ The most relevant for SARAs revenue transactions is IPSAS 23 (Revenue from Non-Exchange Transactions—Taxes and Transfers)—due to come into effect in January 2008 (with a 5-year transition period from cash to accrual accounting). However, as noted later, the preparation of financial statements on accrual basis will also require compliance with other IPSASs.

It would not be prudent to adopt full IPSAS at a rapid rate, should they diverge significantly from the treasury’s cash procedures. This would make fiscal reporting difficult since the use of different recording, classification, and IT methods would require complex bridging or mapping rules and programs to reconcile and consolidate the tax and treasury records. SARAs can also undermine their fiscal responsibility by not switching smoothly and quickly to accrual accounting. In this regard, the paper discusses some intermediate steps later Part III.

D. Basic Tax and Treasury Accounting Systems

SARAs alter a tax agency’s traditional relationship with the treasury with respect to the three main categories of transactions (see first vertical column in Table 1). These are:

Table 1.

Summary of records kept by tax agencies

Table 1.

Summary of records kept by tax agencies

Types of Transactions	Full Integration	Partial Integration or Interface	Self-Accounting
Operating (tax revenues)	Tax offices keep detailed individual taxpayer records; treasury keeps total records.	SARAs and tax “departments” keep detailed individual taxpayer and control (or total revenue) records on cash or accrual basis
Operating (incomes & expenses)	Treasury keeps operating records and prepares the income statement	Tax offices keep records and transfers them to the treasury for completion and consolidation	SARAs keep detailed income & expenditure records and prepares operating statement
Investment & financing	Treasury keeps most of the records and, typically pool asset and liability records for MDAs. However, tax offices may keep detailed memo or ledger records (e.g., asset register) under partial accounting regimes		SARAs keep detailed ledger records for assets & liabilities and prepares a balance sheet

View Table

Table 1.

Summary of records kept by tax agencies

Types of Transactions	Full Integration	Partial Integration or Interface	Self-Accounting
Operating (tax revenues)	Tax offices keep detailed individual taxpayer records; treasury keeps total records.	SARAs and tax “departments” keep detailed individual taxpayer and control (or total revenue) records on cash or accrual basis
Operating (incomes & expenses)	Treasury keeps operating records and prepares the income statement	Tax offices keep records and transfers them to the treasury for completion and consolidation	SARAs keep detailed income & expenditure records and prepares operating statement
Investment & financing	Treasury keeps most of the records and, typically pool asset and liability records for MDAs. However, tax offices may keep detailed memo or ledger records (e.g., asset register) under partial accounting regimes		SARAs keep detailed ledger records for assets & liabilities and prepares a balance sheet

Tax revenues—collected on behalf of the government from taxpayers, called administered and trust funds in South Africa and the UK respectively (SARAs should account separately for special material programs, such as social security, administered on behalf of other agencies).

Operating incomes and expenses—incomes allocated from the budget and other sources (and which are disbursed as operating expenses) to support revenue generation and program activities (called resource or own records in the UK and South Africa respectively).

Financing and investment activities—these are 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).

The horizontal items in Table 1 show three partial and integrated options for keeping these transactions under most treasury accounting systems.

Full integration: Under this traditional method (e.g., as in Dominica or St. Vincent), the tax agency’s budget and accounting records and procedures form part of the core treasury system. The treasury records the allocation of budget funds, to the tax agency, as operating or capital incomes and their disbursement as operating expenses and investments.⁸ Even under these procedures, tax agencies keep detailed records for individual taxpayers to facilitate self-assessment and compliance.

Partial integration/interface: This intermediate option (e.g., Jamaica and Trinidad) allows tax departments to keep more detailed records under full treasury classification and recording rules. The treasury delegates substantial responsibilities for revenues and operating incomes—but to a limited extent for investing and financing activities (since assets are usually pooled). All manual or electronic records are integrated with the treasury’s consolidated records for all MDAs. In essence, the tax agency’s records mirror those of the treasury at departmental level.

Self-accounting: Under this option, tax agencies keep separate operating (revenue, income and expense), investing, and financing records within broad treasury rules or guidelines. In a PFM, this approach is consistent with the 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. Countries with autonomy laws and explicit or implicit GAAP requirements include South Africa, Ghana and Kenya.

These three options, including automation (Part E), do not automatically improve a tax agency’s accounting records. As noted in Section B, while there are advantages to keeping separate accrual records, there are risks that can make it difficult to realize them.

E. Automated Accounting Systems

Treasuries and tax offices embark on major automation programs to improve their accounting and budget systems. Accounting software can also be used to improve the application of accrual accounting systems and integrate SARA and treasury records more successfully. In practice, however, the 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). A discussion of IFMIS is outside the scope of the paper but, in general, the goal is to improve fiscal controls by integrating procedures for MDAs closely linked to the budget (Khemani and Diamond 2005; Petersen, 2006). IFMIS systems vary in complexity but they are mostly based on two models: (a) common, centralized or integrated treasury systems; or (b) standard decentralized platforms for linking inter-agency or interdependent systems (Shiaro-Campo and Tomasi, 1999). Hashim and Allan (1999) also describe IFMIS configurations as (a) core and (b) ancillary non-core systems (that provide data to the core systems).

Some non-core IFMIS systems are said to cover revenue systems or modules which “… would generally be set up as separate subsystems of the Accounting System”. However, this seems to refer to cash management modules because the interface between the full tax and treasury systems is usually very weak. While this weakness seems to improve, most legacy or OTS tax systems (e.g., TRIPS and ASYCUDA)⁹ were not originally coordinated with IFMIS in countries such as Ghana and Guyana. The integration tends to fail and, in summary, tax and treasury systems tend to have the following operational features:¹⁰

• 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; and

• 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 have internal interface and compatibility problems since most tax systems have only revenue modules and do not support all the operating, financing, and investing activities. Hence, SARAs tend to install separate finance systems for incomes and expenses while the revenue modules cater for assessments, penalties and interest (including arrears and bad debts). Most of the finance systems are adapted from OTS private software and are not compatible with revenue and treasury systems.

A. Nature of Tax Transactions

The common terminology used in the GAAPs and the GFS means that SARAs and treasuries can view their accounting activities from a common perspective. Both of them classify transactions as operating, investing and financing activities.

Operating activities: The main operating or current flows are (a) tax and non-tax revenues, which are collected on behalf of the government paid directly into consolidated funds; and (b) the operating incomes from a separate budget allocation process, which are disbursed as operating expenses in generating the revenues. The GFS classifies tax refunds as negative revenues but some treasuries classify the refunds with interests and penalties as expenses.

Investing activities: The investing activities are capital or stock items that span multiple fiscal or financial periods—unlike the operating items with a fiscal or financial year span. The main investing items are fixed assets (e.g., equipment or premises) for supporting operations into the medium-to-long term. Upon establishment, and to improve operational efficiency, SARAs take over or acquire significant values of assets through direct transfers and budget allocations.

Financing activities: The financing activities are also long-term funds for supporting both operating and investing activities. The financing of SARAs is mainly from the budget since even SARAs do not have external shareholders and they also have very limited powers to contract loans. The operating activities may result in temporary stock items called current assets which are financed from current liabilities and equity or other long-term sources.

These broad categories set the capital or stock (i.e., investing and financing) items apart from the current or flow (i.e., operating) items. This is useful in preparing full accrual records and financial statements (Sections C and D). It is necessary to note that tax revenues do not SARA operating income—even if it 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

Accrual accounting means that SARAs must record transactions upon their recognition and not when they receive or pay cash—which is the basis of cash accounting under most treasury rules. The accrual records form the basis for recording the operating, investment and financing activities and for preparing the financial statements discussed later. The records must conform to the matching, double-entry, entity and other GAAP rules to make the conversion from single entry or incomplete records to full accrual accounting effective. A detailed review of these accounting rules (or concepts, principles and conventions) is beyond the scope of this paper.¹¹

SARAs use several documents as basis for making the accounting entries in subsidiary books, cashbooks, and ledgers—the cashbook being the key record under cash accounting systems.¹² These initial entries are based on detailed charts of accounts (COAs) and, for example, the GFS classification of transactions under function and economic codes.¹³ Finally, SARAs use the ledger records to prepare financial statements that comprise (a) an operating statement summarizing incomes and expenses; (b) a balance sheet summarizing assets, liabilities and equity; and (c) a cash flow statement for sources and applications of funds (Part V).

An intermediate or modified approach requires a SARA to prepare “own” accrual records and “administered” records on cash basis (e.g., South Africa¹⁴). This is a necessary first step to full accrual accounting, which would require SARAs to augment the cash records incrementally with accrual data (see Reed and Swain, 1997; Shiavo-Campo and Tomasi, 1999).¹⁵ While Shiavo-Campo and Tomasi argue that full or modified accrual accounting may be too advanced for developing countries, this need not be the case for single entities such as a SARAs.

C. SARA Accounting Records

SARAs must prepare proper and, and if necessary, separate records in three main categories, namely (a) revenue or trust records for tax and non-tax revenues collected and held in trust for the government before being transferred to the consolidated or general funds; (b) operating income and expense records for budget funds used to generate the revenues; and (c) program records for material activities which a SARA performs on behalf of other government agencies.

These programs include student loans and social security—which may involve multiple activities such as receipts, recovery of arrears or debts, and disbursement of funds.

These specific accounting requirements may be enshrined in SARA laws. For example, 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].”¹⁶ As noted earlier, South Africa prepares separate “own” and “administered” financial records and statements (SARS, March 2007) while UK’s HMRC prepares separate resource, trust and program records and statements—which are consolidated in comprehensive financial statements (Box 2).

The revenue and program activities may be in (a) sub-accounts (i.e., total or control accounts) in the general ledger—to mirror the individual accounts; or (b) separate trust fund and program records. To reiterate, tax revenues are not operating incomes for SARAs, in the sense in which a treasury considers them for the economy. The consolidated records are needed to show a SARA’s overall responsibility for revenues, programs, and budget resources.

A. Revenue Transactions

SARAs generate and record most tax (e.g., income tax, VAT, tariffs, and other levies) and nontax (i.e., income and fees) revenues through similar receipts or payments processes comprising assessment, sanctions (penalties and interest), tax credits and refunds. These processes cater for voluntary compliance or self-assessment by taxpayers and official assessment and enforcement by tax offices. Traditionally, SARAs keep accrual records for individual taxpayers for these items while usually reporting in total to the treasury on net cash basis.

Tax assessments: The main factors in switching to account to accrual accounting include:

• Accruing tax revenues: Individual tax liabilities accrue when taxpayers self-assess or tax offices issue official (administrative or presumptive) assessments. Under strict accrual rules, the total or control accounts reflecting amounts due to the treasury would include potential revenues and adjustments from tax arrears and receivables for a period. On the other hand, they would exclude advance payments relating to other periods. The GFS and IPSAS require SARAs to be prudent in reporting tax revenues on accrual basis, hence the need for the actual and provision for bad debt rules discussed below.

• Bad debts (arrears): Both IPSAS and GFS endorse accrual accounting for revenues but require SARAs to recognize only revenues that have a realistic chance of being realized. This is often interpreted to mean cash flows but the appropriate accrual perspective is to have sound actual and provision for bad debts as well as remissions policies. These will cater for a range of tax activities such as non-payments, insolvencies or bankruptcies, and fraud. In essence, recoverable taxes are reported as revenues in the year they fell due while irrecoverable arrears are excluded.

• Advance and late payments: Taxpayers are required to pay estimates of income tax due for the year in advance—typically, in monthly or quarterly installments. Consequently, tax offices adjust the individual taxpayer accounts to reflect receivables (which could culminate into arrears), credits or refunds after the final or net liability is determined. Under accrual accounting, the reports to the treasury should also reflect the adjustments.

Tax offices should immediately write off the actual bad debts against the individual taxpayer accounts and control or total accounts. On the other hand, they should only offset the provision for bad debts account against the total arrears in the balance sheet (Part V). SARAs should also provide for contingencies (in the form of notes to the financial statements) for further doubtful cases not shown as a provision (e.g., estimates of arrears to be written off upon appeals).¹⁸ Tax agencies need effective powers (e.g., recovery, write-off and installment) to make the bad debt policies meaningful in order to report realistic accrued amounts as revenues. The accrual of revenues may help explain issues such as the tax gap attributed to delinquencies more clearly.

Refunds and tax credits: Refunds are cash payments of negative balances on individual taxpayer accounts, instead of being carried forward as credit. The tax law may also include powers to grant credit against—or complete waiver or remittance of—a tax liability. As noted in Part III, some treasuries treat tax refunds as expenses but the GFS and IPSAS classify them as negative revenue to be offset against the amount due to the treasury. HMRC follows OECD rules in classifying automatic tax credits as negative revenues but as expenses when disbursed in cash. It is prudent to recognize all tax refunds and credits due to taxpayers in the form of a liability, provision or contingency.

Penalties and interest receivable: Penalties and interest receivable are imposed by the courts or administratively by SARAs on tax liabilities and other delinquencies. In general, interest and penalties are non-tax revenues which should be kept in separate accounts. However, the GFS allows interest and penalties assessed with infringement of particular taxes to be recorded with those taxes. While SARAs can anticipate interest and penalties due in reporting on accrual basis, as with assessments, they should adopt prudent policies that write-off or make provision for actual and potential irrecoverable amounts that may never be paid.

Non-netting of revenues: The GFS and IPSAS state that tax offices should not net out multiple or composite transactions. This may easily impair analysis and decision-making. Transactions that are susceptible to netting include—

• Revenue retained as expenses: Where SARAs retain or withhold a percentage of tax or non-tax revenues (e.g., customs service or overtime charge) to meet operating costs— including tax refunds (e.g., Ghana)—they should show all the activities that could flow from this single event. They should make cash or accrual entries for all elements such as revenues, operating income, expenses, and refunds.

• Liability and refund/credit offsets: Tax laws often allow tax offices to offset credits and refunds due to taxpayers against arrears of other taxes. Again, the records should have separate entries for all the elements such as the settlement of arrears and refunds.

• Treasury credit notes (TCN) and offsets. Where treasury credit notes (TCN) or vouchers are issued to settle tax liabilities (especially import VAT and duties) on behalf of MDAs, the treasury and tax office should show separate entries for the revenues and expenses involved. It is not sufficient under accrual rules for a SARA to report the net cash amount only. This rule also applies where refunds or credits (e.g., VAT refunds) are used to settle a liability, often in another tax category (e.g., income tax).

Cash management: SARAs collect and hold tax revenues in “trust” for governments and transfer them promptly to the central bank. The paper does not cover cash management rules or principles in detail but the following points are worth noting:

• cashiering: the use of tax or treasury offices to receive cash, make lodgments, and pay refunds and expenses can lead to delays as well as safety, reconciliation and liquidity risks, mainly as a result of handling and holding large amounts tax offices;¹⁹

• cut-off and reconciliation: SARAs and treasuries should have clear rules for dates or periods used to report and reconcile receipts, payments and transfers among taxpayers, tax offices, commercial banks, and central banks—first, to minimize retentions (see below), suspense items, and unregulated or unlawful use of funds; and, second, to establish theamounts to be accrued in preparing the financial statements;

• retention and investment policies: as noted earlier, tax offices may not invest trust funds and their use of operating funds for this purpose should also be regulated, for example, through application of treasury single account (TSA) rules discussed blow.

Proper banking and cut-off rules can eliminate the handling of large cash amounts in tax offices and minimize most cash and 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.

Some countries designate the SARA bank accounts as TSAs to minimize the risks. In general, TSA policies designate MDA bank accounts as treasury accounts that must be “swept” daily or frequently to maintain zero balances on the bank account. In general, therefore, MDAs cannot open an account without treasury permission. These measures facilitate forecasting as well as liquidity and debt management through better analysis of trends and deviations. Banks can also not invest or on-lend tax revenues to the government.

B. Operating Income Rules

Sections B and C discuss the operating income and expense rules for preparing relatively complex operating statements (Part V). The main issue is augmenting the cash receipts and payments rules with the recognition of arrears and prepayments that may become liabilities and assets. A crucial question is whether SARAs should accrue budget incomes from year to year.

Sources for operating income: Tax agencies get the bulk of operating income from the budget and, with a few exceptions, not automatically or directly from the revenues they generate.

• Budget funding: Budget funds are allocated periodically (e.g., monthly) by the treasury, which may also record their disbursements as line items for most non-SARAs. SARAs keep their own records and, the process involving approval, allocation, commitment, and disbursement, has some exceptions for SARAs under autonomy laws (Box 3).

  Box 3.

  Some SARA Budget Issues

  SARAs often receive more budget funds to improve their work and employment conditions. They also benefit from more flexible budget rules to enhance executive control over budget resources and to 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).

  In general, 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. In this regard, some countries (Ghana) require that the amount retained should be held in a TSA account only.

• 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 also generate significant income from staff activities (e.g., sporting, canteen or entertainment clubs). While some of these may be managed directly by the staff, it is important to have clear guidelines for the proper treatment of assets and incomes (e.g., interest and rentals).

• Fees, commissions and other incomes: SARA may receive direct budget allocations to manage programs or earn incomes, fees or commissions from the 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 they should also account for gains (or losses) on the realization of fixed assets reflected in the financial statements (Part V).

Outstanding budget funds: Under strict accrual accounting, SARAs would record operating incomes upon budget approval or appropriation. In practice, however, 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. In contrast, 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

The bulk of a SARA’s incomes are spent on its revenue generating activities, making it necessary to maintain only one set of expense records and to keep separate records for only material program expenses (Section E). SARAs should classify the expense items, in particular, in detailed COA and GFS format for management and fiscal purposes.

Nature of operating costs: While the classification may differ, autonomy laws have significant implications for administration (including staffing), maintenance and development costs. As noted earlier, refunds and penalties payable should also be given proper treatment.

• Staff costs—SARA employees cease to be part of the civil service and so 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 the taking over of significant assets that are no longer pooled with those of other MDAs. SARAs also devote more resources to taxpayer services (e.g., publicity) and enforcement (e.g., audit) to improve performance. The accounting policies must include non-cash items such as the provisions for depreciation and bad debts discussed earlier.

• 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 the specific programs administered for other agencies.

Accrual and prepayment of expenses: The shift to accrual accounting will increase the records for arrears, prepayments and provisions. Most accruals are the result of delays in disbursing budget funds. The relationship between expenses and some capital items would also become important as SARAs stop immediate expensing of capital items and set rules for pooling and writing off costs that may not be deemed to be material enough to be added to fixed assets.

D. Investing and Financing Activities

SARAs usually control significant fixed and current assets for managing the revenues or trust funds and program activities. The assets may be financed from budget and non-budget sources as equity (capital and operating grants) and from liabilities such as loans and creditors. Both categories include assets belonging to taxpayers (e.g., held as lien). The remaining paragraphs use a balance sheet format to discuss these items, which must conform to several GFS rules and IPSAS standards such as IPSAS 23, 9, 12-13 and 16–17.²⁰

• 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. They are initially operating and derived from balances on various accounts after preparing the income statement (Part V). The details include:

• cash (in tax offices and banks): these represent operating (unspent)²¹ 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: these include items such as consumables that a SARA may not have exhausted but expect to use within an ensuing accounting period or year; and

• taxpayers’ properties: these are mainly seized assets, liens and sureties that may mature as revenues or 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 asset. Secondly, 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). This means that a 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). Finally, as noted, 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. The main conventional and non-conventional items include—

• creditors and loans—these include arrears owing to suppliers (e.g., consumables) and banks (e.g., bridging loans and overdrafts); these may also include guarantees;

• arrears of tax refunds/credits, and interest and penalties—these are 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—these are balances on total or control accounts not remitted to the treasury (again, contra for cash-in-transit on the asset side); and

• 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. Even though most provisions (e.g., bad debts and depreciation) are liabilities, they are shown as offsets against relevant assets in a balance sheet (Part V).

Fixed assets (FA): SARAs hold substantial FAs independently to support their operations and they are required to keep proper records of these items, including their disclosure in financial statements (Part V). The main categories include:

• tangible FAs: these are physical items (e.g., land and buildings, equipment, furniture and vehicles) held over relatively long periods at headquarters and regional/local offices;

• intangible FAs: these cover items such as the acquisition or development cost of software and licenses that are deemed to be substantial enough to be capitalized;

• property, bonds, security deposits etc: these tangible and intangible assets belonging to taxapayers are held for more than a year against liabilities, provisions and reserves (or contingencies) until they crystallize as revenues or they are returned.

The 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).²² The historical cost rules and policies may diverge from the GFS market-based rules.²³ On the other hand, the IPSAS and GFS are consistent on other FA issues, such as the rules for financial and operating leases.

Investments: As noted in Section B, countries forbid SARAs from investing trust, program or operating funds, often through stringent TSA rules. Where SARAs invest, however, the assets should be classified properly in terms material or portfolio short-term and long-term items. SARAs may also be in control of significant funds from independent employee activities such as staff pensions and welfare schemes (e.g., staff canteen or sports club). The operating, investing and financing items may even warrant separate records or segmentation (IPSAS 18).

Financing activities: SARAs may finance the fixed assets and working capital (discussed later) from a variety of sources whose broad IPSAS and GFS classifications seem consistent:

• equity (net worth or capital/general funds): these are accumulated capital and surplus (or deficits) funds from budget and non-budget (e.g., grants from donors) sources;

• reserves—these may be general or special funds set aside by the management to meet specific needs (e.g., pensions, contra for taxpayers’ assets etc.); and

• long-term liabilities—these may not be significant since, as noted, SARAs have limited borrowing powers (Part II) and do not incur substantial long-term or even short-term liabilities such as loans and overdrafts.

In general, while SARAs may not borrow and, therefore, not have material long-term loans, they 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): The working or operating capital is the difference between current assets (CA) and current liabilities (CL) in conventional accounting terms. It is a temporary financing item or a rough measure of the adequacy of short-term funds to finance the current year’s operating activities. As 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.

E. Program Activities

T material programs which SARAs administer on behalf of other agencies may be shown as (a) sub-accounts in the ledger; or (b) a 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). The accounting treatment depends on factors such as whether (a) it 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: The 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). Similarly, the accounting for expenses (including bad debts) depends on the program arrangements discussed earlier. The non-cash items such as depreciation will also depend on the SARA investing and financing activities discussed below)

Investing and financing items: Except for large programs, which a SARA may run as a separate operation, the assets—and the liabilities arising from its operation—would not be separated from the mainstream records. This means that SARAs would normally have a single balance sheet to reflect all capital investments and financing activities. Some programs may be organized separately, even be physically from the mainstream revenue operations.

The expenses should be matched in an income statement against the budget or fees for specific programs (Part V). Where SARAs do not receive specific budget funds or do not make a separate charge for the special programs, they should allocate or apportion certain common expenses from the general fund to improve accountability.

A. Simple Cash Statements

Where the fiscal systems are not developed sufficiently, tax agencies prepare simple cash reports for revenue and operating activities.²⁵ They should support the cash statements with memoranda records for selected current capital, investing and financing items to improve accountability. The cash statements must also conform to IPSAS cash accounting rules.

Revenue statement: These are periodical (e.g, daily, weekly, monthly or annual) summaries of tax receipts, refunds, and transfers to the general or consolidated fund. The statement reflects the revenue control account and, in principle, the balance represents cash in transit, tax offices and banks. The statement must show summaries of different revenue and program items separately, preferably in GFS format.

Operating statement: This is a summary of cash receipts and their disbursement as expenses to support the revenue and program activities. The receipts do not include revenues. The simple cash statements may not distinguish between capital and current items and, therefore, represent a simple cash flow statement and not an operating statement. The net amount implies a shortfall in funding or cash held (in tax offices and banks, subject to TSA and other fiscal rules).

Memoranda records: The main drawback of the cash statements is that they do not show accrued items. Hence a tax agency that does not prepare a conventional income statement and balance sheet (Section B) should support the cash statement 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).

The summary statements are mostly derived from the cashbook and, in some cases, central bank records. While the revenue and operating statements may be useful for cash management, they are not sufficient for making critical decisions on debts and assets without detailed memo records. SARAs may prepare separate simplified statements for material program activities.

B. Complex Financial Statements

The more complex financial statements are based on the SARA full or modified accrual records and consist of the operating statement, balance sheet, and cash flow statement for a period (usually one year). They are end-products in strict accrual accounting terms and, among others, must conform to IPSAS 3, 22, 24 and 18.²⁶

Operating statement: This statement matches operating incomes and expenses and the balance shows the surplus or deficit for the period. In principle, it is part of the ledger records and is prepared by “closing” all flow or current items in the ledger, after adjusting for accruals and prepayments (Part IV). It expresses the adequacy of budget funds for a SARA’s activities.

Balance sheet: This statement shows the investing, financing and working capital items held at the beginning or end of the period. It is a list (not an account) that expresses the accounting equation (equity/general fund = assets less liabilities). In broad terms, the balance sheet shows the sources from which SARAs finance their current and fixed assets.

Cash or funds flow statement: This statement shows the net increase or decrease in cash or near-cash by matching the source and application of funds between the beginning and end of the period. The main elements are the net operating income (after adjusting for all non-cash items such as depreciation) and changes in the investing and financing items.

The IPSAS rules cover the disclosure of accounting policies, accounting conventions and significant changes, which form part of complex financials.²⁷ The SARA statements are useful for managing funds internally in addition to using them to fulfill various requirements under autonomy laws, in reporting to revenue boards, MOFs, legislatures, and the general public.

C. Program Statements

A SARA may decide to prepare separate complex program statements, which must also conform to the relevant standards discussed earlier (e.g., IPSAS 22 and 23 as well as GFS). This means that the statements discussed in Section B would refer to only trust or revenue activities.

Program operating statements: The revenue and operating statements for material programs 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 the program activities—with the balance representing a surplus or deficit.

Where a tax agency is in charge of paying entitlements or benefits from the revenues generated or budget allocation, the revenue statement would have a disbursement component—or the disbursements could be treated expenditure items in the operating statement. The operating statement may also show administrative charges instead of direct expenses payable from budget allocations and fees or commissions.

Balance sheet: SARAs tend to prepare a single Balance Sheet to support both revenue and program activities. However, for some material programs which are often operated from a different location, it may be feasible to prepare a balance sheet. Besides the conventional items, the current and fixed assets include unremitted revenues, arrears (less bad debts), and taxpayers’ property (seizures and liens). The liabilities include arrears of refunds and credits, penalties and interest. It may be necessary to make bad debt provision for some of these items. The difference between assets and liabilities is a reserve or special fund.

D. Consolidated Financial Statements

These are more complex statements which may not be found in many countries. In principle, a SARA’s consolidated statement groups the revenue and program statements to show its overall responsibilities. The treasury may also prepare a consolidated statement to combine the SARA financial statements with those of other MDAs.

SARA consolidation—The SARA’s consolidated financial statement comprises the mainstream (i.e., resource or general), trust fund, and program statements. Where a SARA has domestic tax (i.e., VAT and income tax) and customs responsibilities, it may prepare departmental statements for two or more units or sections to improve accountability.

Treasury consolidation—The SARA financial reports are combined with other statements to prepare a single consolidated statement for all MDAs under the treasury. As noted earlier, however, the treasury and other MDA cash statements may not be compatible with the SARA accrual statements. The SARA may be required to prepare a cash statement for reporting purposes or follow specific guidelines to minimize the divergences in the statements.

A full discussion of consolidated statements is beyond the scope of the paper. In summary, they follow the similar basic rules for preparing group accounts, between parents and subsidiary companies (see IPSAS 6, 18 and 22).²⁸ 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 in order not to inflate the reserves or equity.