GB.274/PFA/7 - Governing Body

ILO is a specialized agency of the United Nations

GB.274/7 274th Session Geneva, March 1999

Programme, Financial and Administrative Committee	PFA

SEVENTH ITEM ON THE AGENDA

Accrual accounting

Proposed amendments to the Financial Regulations
and Financial Rules

1. At its 259th Session (March 1994), the Committee considered a paper⁽¹⁾ on the introduction throughout the UN system of the common accounting standards adopted by the Administrative Committee on Coordination (ACC). In presenting the standards, the Office explained that the major difference between the standards and ILO practice was the basis of recognition of income and expenditure. A fundamental accounting assumption in the standards is the accrual basis of accounting for revenue and expenditure. This means that income is recognized when it is due and not when it is received and that expenditure is recognized when obligations arise and not when payments are made.⁽²⁾ Under the ILO's Financial Regulations, income and expenditure are recognized on a cash basis, that is to say when money is received and cash payments are made.

2. The recognition of income when it is due could give rise to serious treasury problems if budgetary expenditure were to be incurred regardless of the level of contributions actually collected and if budgetary surpluses were to be distributed with no cash backing. In recognition of this risk, the initial version of the standards allowed for provision to be made for delays in the collection of income, but the methodology for determining the amount of this provision was not stated.

3. As regards the issue of expenditure, the ILO operates on a cash basis for the regular budget and other sources of funds, while for expenditure under UNDP- and UNFPA-financed projects, unliquidated obligations are recorded as expenditure in accordance with specific criteria provided by these two funds. However, for the regular budget and other sources of funds, virtually the same result is achieved as with the accrual method, by continuing to make payments relating to the budget of the financial period during January of the following year in accordance with article 17 of the Financial Regulations.

4. In his reports on both the 1994-95 and 1996-97 accounts, the External Auditor recommended that the Office take final steps towards the full introduction of the standards, mentioning accrual accounting as the major area in which the ILO did not comply with the standards; he stated however that such compliance would require amendments to the Financial Regulations and the Financial Rules. The Office had indicated, in notes to the financial statements for both these biennia, the areas in which the accounting standards had not been applied, in accordance with the requirement in the standards that when organizations find it necessary to depart from the practice set out in the standards they should disclose the reasons for so doing in the statement of significant accounting policies included in their financial statements. In adopting the standards, it had been the intention of the ACC that the standards should form the basis for the accounting policies of each organization in conjunction with the organization's financial regulations and relevant decisions of their legislative authorities. It had been recognized that organizations' individual legislative authorities had ultimate responsibility for deciding on the financial arrangements for their work, and that their regulations, rules and decisions might in some cases involve variations from common approaches as set out in the standards.

5. A further revision of the standards, in October 1997, defined more clearly the provision for delays in the receipt of assessed contributions, recognizing that, when a provision is made, it must be 100 per cent of the unpaid contributions at the date of the financial statements at the end of the financial period.⁽³⁾ With this change, the treasury problems mentioned above would no longer exist since the inclusion of such a provision effectively reinstates accounting for assessed contributions on a cash basis.

6. The Office has now completed a study of the introduction of accrual accounting, including a review of the Financial Regulations and the Financial Rules. It is evident that the introduction of accrual accounting for income no longer holds the same risks as before, since a provision of 100 per cent for delays in payment of contributions can be made. As regards other income, accrual accounting would produce a more balanced picture, as income would be recorded when it was actually earned, rather than when it was received. An example is investment income where interest earned but not yet received would be recorded at the end of each financial period, and investment income for the financial period would reflect real earnings for the full period rather than cash income which depended on the dates of maturity of investments.

7. As mentioned in paragraph 3 above, it is not expected that a move to accrual accounting for expenditure will produce any significant changes in expenditure totals. Expenditure accrued at the end of a financial period would consist of unliquidated obligations⁽⁴⁾ at that time, the sole difference from the present practice being that these would be recorded as expenditure through the setting up of liabilities in the accounts rather than through payments in January. The criteria for determining which obligations should be accrued would be based on those generally in use in the other organizations of the UN system which use accrual accounting. Modifications to computer systems would be necessary, but would be of a minor nature.

8. The introduction of accrual accounting from the 66th financial period (1998-99) would thus present no major difficulties, and would have the advantage of complying with the common accounting standards of the UN system. The amendments to the Financial Regulations and Financial Rules that would be necessary to introduce accrual accounting are given in Appendices II and III to this paper.

9. The Programme, Financial and Administrative Committee may therefore wish to recommend to the Governing Body that it --

(a) propose to the International Labour Conference, for adoption at its 87th Session (June 1999), the draft resolution in Appendix I amending the Financial Regulations;

(b) approve the draft amendments to the Financial Rules set out in Appendix III to this paper, on the understanding that the amendments would only enter into force should the International Labour Conference adopt the resolution mentioned in (a) above.

Geneva, 4 January 1999.

Point for decision: Paragraph 9.

Appendix I

Resolution to be submitted to the 87th Session
of the International Labour Conference

The General Conference of the International Labour Organization,

Recognizing that amendments to the Financial Regulations are required to enable the Organization to follow the common accounting standards of the United Nations system;

Decides to make the following amendments to the Financial Regulations:

(a) Paragraph 5 of article 10 shall read:

5. All contributions due in a financial period shall be recorded as income in that financial period, and shall be accounted for in United States dollars at the budget rate of exchange for that financial period.

(b) Paragraph 1 of article 17 shall read:

1. Expenditure charged against the appropriations of a financial period shall consist of payments made during the financial period and unliquidated obligations as at the last day of the financial period. Such portion of appropriations as may be required to meet these unliquidated obligations shall remain available for twelve months at the end of which any remaining balances shall be credited to miscellaneous income.

(d) The present paragraph 3 of article 17 shall be renumbered as paragraph 2 and shall read:

2. Obligations which could not be charged to the appropriations of the preceding financial period may, if the Director-General should so decide, be charged to the appropriations of the current financial period. Nevertheless, there shall be included in the budget for each financial period an item entitled "Unpaid liabilities" to which may be charged any payments of a similar character which it would not be appropriate to pay from any other item of the budget. Payment of obligations due in respect of transactions covered by the budget of any financial period preceding the last financial period shall be subject to the prior authorization of the Governing Body.

(e) Paragraph 4 of article 17 shall be deleted.

(f) Article 18 shall read:

1. The excess or shortfall of income over expenditure in any complete financial period shall be calculated by deducting budgetary expenditure from budgetary income with a financial provision being made for delays in the payment of contributions. Such provision shall amount to 100 per cent of the contributions unpaid at the date of the financial statements at the end of the financial period.

2. Any such excess of income over expenditure, expressed in Swiss francs calculated at the budget rate of exchange for that financial period, shall be used to reduce the contributions of Members in the following way: Members which paid their ordinary contributions in the financial period in which this surplus accrued shall have their share of the surplus deducted from their contributions assessed for the second year of the succeeding financial period; other Members shall not be credited with their share until they have paid the contributions due from them for the financial period in which the surplus accrued. When they have done so, their share of such surplus shall be deducted from their contributions assessed for the first year of the next financial period for which a budget is adopted after such payment.

Appendix II

Amendments to the Financial Regulations
of the International Labour Organization

(Additions are shown in bold type; deletions are indicated by square brackets)

Article 10

...

5. All contributions [received] due in a financial period shall be recorded as income in that financial period and shall be accounted for in United States dollars at the budget rate of exchange for that financial period.

...

Article 17

[1. All payments in respect of transactions for which provision is made in the budget shall be charged to the accounts of the financial period during which the transactions take place if the payments are made not later than 31 January of the year following the close of said financial period.]

1. Expenditure charged against the appropriations of a financial period shall consist of payments made during the financial period and unliquidated obligations as at the last day of the financial period. Such portion of appropriations as may be required to meet these unliquidated obligations shall remain available for twelve months, at the end of which any remaining balances shall be credited to miscellaneous income.

[2. Persons to whom any payment is due in respect of a transaction in any financial period shall be requested to submit their accounts in good time before 31 January of the year following the close of said financial period, and shall, as far as possible, be tendered payment before that date.]

2. [3. Notwithstanding the provisions of paragraph 1 above, debts] Obligations which could not be [paid in time to be chargeable to the accounts] charged to the appropriations of the preceding financial period [owing to unavoidable delay in the presentation of settlement of accounts] may, if the Director-General should so decide, be charged to the [account] appropriations of the current financial period. Nevertheless, there shall be included in the budget for each financial period an item entitled "Unpaid liabilities" to which may be charged any payments of a similar character which it would not be appropriate to pay from any other item of the budget. Payment of [debts] obligations due in respect of transactions covered by the budget of any financial period preceding the last financial period shall be subject to the prior authorization of the Governing Body.

[4. Creditors who, after their attention has been called to the provisions of this article, neglect to present their accounts in time to allow for payment by the prescribed date, if they cannot be paid in the manner indicated in paragraph 3 above without preventing payment of creditors who satisfy the requirements of paragraph 3, shall be informed that their accounts cannot be paid until the necessary sum has again been appropriated by the Conference.]

Article 18

2. [If the difference between budgetary income and expenditure in any complete financial period expressed in United States dollars constitutes a credit balance, the Swiss franc equivalent of the corresponding cash surplus] Any such excess of income over expenditure, expressed in Swiss francs calculated at the budget rate of exchange for that financial period, shall be used to reduce the contributions of Members in the following way: Members which paid their ordinary contributions in the financial period in which [the cash] this surplus accrued shall have their share of the [cash] surplus deducted from their contributions assessed for the second year of the succeeding financial period; other Members shall not be credited with their share until they have paid the contributions due from them for the financial period in which the [cash] surplus accrued. When they have done so, their share of such [cash] surplus shall be deducted from their contributions assessed for the first year of the next financial period for which a budget is adopted after such payment.

Appendix III

Amendments to the Financial Rules
of the International Labour Office

(Additions are shown in bold type; deletions are indicated by square brackets)

3.30 Miscellaneous Income

Miscellaneous income consists of the following categories of [receipts] income accruing to the ILO:

(i) [receipts from] interest income which [are] is not required to be credited to the fund from which [they derive] it derives;

(ii) [receipts] income from the sale of publications, including related royalties and fees;

(iii) the difference between gains and losses on exchange excluding gains and losses on exchange on valuations of budgetary income and expenditure and on the revaluation of regular budget assets and liabilities held in currencies other than the United States dollar;

(iv) amounts recovered in respect of payments effected by the Organization if received after the end of the financial period in which the related payment was made;

(v) cheques remaining uncashed for a period of twelve months after the date drawn where cancellation takes place in a different financial period;

(vi) any remaining balances of unliquidated obligations set up in the previous financial period; and

(vii) other [miscellaneous cash receipts] income.

3.31 Payments into Publications Revolving Fund

Up to 100 per cent of the [receipts] income from the sale of publications, including related royalties and fees, may be [paid into] credited to the Publications Revolving Fund at the discretion of the Director-General, and used in accordance with the separate rules governing the operation of the Fund approved by the Governing Body.

3.32 Treatment of [Receipts] Income from Rentals

[Receipts] Income from the rental of premises shall be [paid into] credited to the Building and Accommodation Fund, which may be drawn upon only with the authorization of the Governing Body for specific purposes relating to ILO premises, in particular to meet costs of construction, alterations, repairs and renewals. The [rentals received] rental income shall be credited to the Fund after deduction of an appropriate amount in respect of heating, lighting and other facilities and services covered by them, provided that [payment] expenditure and reimbursement for such facilities and services occur within the same financial period; the amounts deducted shall be credited to the budget provisions under which the [payments were made] expenditure was incurred. Otherwise the full amount of the [rentals received] rental income shall be credited to the Fund.

6.30 Time-Limits for Presentation of Claims

(b) Particular care shall be exercised to [prevent arrear claims being made after the close of the financial period] ensure that all unliquidated obligations are recorded within the appropriate financial period.

7.60 Time-Limits for Payments

(c) Payments made against the regular budget after [the date set for the closing of the accounts of a given financial period (normally approximately two weeks after the end of the period)] the end of a financial period are not allowed as a charge against that financial period unless unliquidated obligations have been set up in the accounts for the period in accordance with paragraph 1 of article 17 of the Financial Regulations.

7.70 Currencies of Accounting and Currency Conversion Rates

(c) [Contributions received] Income from contributions in a financial period shall be accounted for in US dollars as budgetary income at the budget rate of exchange between the US dollar and the Swiss franc for that financial period. Swiss franc expenditure shall likewise be accounted for in US dollars as budgetary expenditure at the budget rate of exchange. Any differences between the US dollar amounts so calculated and those calculated at the applicable United Nations accounting rate of exchange shall be recorded as gains or losses on exchange in an Exchange Equalization Account.

Appendix IV

Extracts from the United Nations Accounting Standards:
Texts relevant to accrual accounting

Paragraph

Where individual organizations find it necessary to depart from the practice set out in the standards they should disclose the reasons for doing so in the statement of significant accounting policies included in their financial statements.

Going concern, consistency and accrual are fundamental accounting assumptions, which are described below as they apply in the United Nations system. Where fundamental accounting assumptions are followed in financial statements, disclosure of such assumptions is not required. If these fundamental accounting assumptions are not followed, that fact should be disclosed together with reasons.
(i) Going concern -- The organization is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the organization has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations;

(ii) Consistency -- It is assumed that accounting policies are consistent from one financial period to another;

(iii) Accrual -- The accrual basis of accounting for revenue in each financial period means that income is recognized when it is due and not when it is received. Accrual of expenditure in each financial period means that costs are recognized when obligations arise or liabilities are incurred and not when payments are made.

Income for a financial period is defined in the United Nations system as money or money equivalent received or accrued during the financial period which increases net assets. The following are the main types of income received by the organizations:
(i) Contributions assessed under --
- regular budgets, or
- special accounts;
(ii) Voluntary contributions pledges --
- in cash, or
- in kind;
(iii) Voluntary contributions received to fund specific activities under trust-fund and other arrangements;

(iv) Other/miscellaneous income.

Income from assessed contributions represents a legal obligation of contributors as from the date when it becomes due and payable. Such income should be accordingly recognized as at that date. However, provision may be made for delays in the collection of income so recognized and disclosed in accordance with the formats of the financial statements. Such provision shall be 100 per cent of the unpaid contributions at the date of the financial statements at the end of the financial period.

Expenditure for a financial period is the sum of disbursements and valid unliquidated obligations made against the appropriations/allocations of the period. The main types of expenditure incurred by the organizations are (i) expenditure under assessed regular or special budgets, which is governed by organizations' financial regulations, and (ii) expenditure under voluntary contributions, which may be governed either by the organizations' financial regulations or by separate rules established in accordance with those regulations.

Obligations are amounts of orders placed, contracts awarded, services received and other transactions which involve a charge against the resources of the current financial period and which will require payment during the same or a future period. Obligations under assessed regular or special budgets are maintained for the period specified in the organizations' financial regulations. Obligations charged to voluntary contributions may be maintained either for that period or until liquidated or cancelled.

1. GB.259/PFA/4/3.

2. The latest versions of the relevant standards are reproduced in Appendix IV.

3. See para. 32 in Appendix IV for the text of the relevant standard.

4. Such as those for external collaborators where work has been completed but not yet paid, or equipment purchases that have been delivered but remain unpaid.

Updated by VC. Approved by RH. Last update: 26 January 2000.