Financial Management and Analysis of Projects - Reporting and Auditing - Accounting Standards and Policies

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Foreword

1. Introduction to the Guidelines

2. User Instructions

3. Preparing and Appraising Investment Project

4. Financial Management of Executing Agencies

5. Reporting and Auditing

5.1. Financial Reporting and Auditing Overview

5.2. Accounting Standards and Policies

5.2.1. Introduction

5.2.2. International Accounting Standards

5.2.3. ADB Accounting Policy Requirements

5.3. Financial Reporting

5.4. Auditing Standards and Auditor Engagement

5.5. Reviewing Financial Reports

5.6. Reviewing Auditors' Reports

6. Financial Institutions

7. Knowledge Management

Financial Management and Analysis of Projects : 5. Reporting and Auditing : 5.2. Accounting Standards and Policies

5.2.3. ADB Accounting Policy Requirements

5.2.3.1. Requirement to Meet International Standards

5.2.3.1.1. Financial analysts need to fully understand IASs. They also need to be reasonably familiar with the accounting standards in use in the countries in which they operate. In this respect, financial analysts should review DSAA, where they have been prepared (see section 4.2.5). More particularly, financial analysts should become familiar with the accounting policies used by the EAs and IAs that manage ADB-financed projects. This will enable analysts to recommend approaches that will: (i) provide ADB with adequate information to understand the efficiency of the management of borrowers' investments, and (ii) contribute to narrowing differences between IASs and national accounting standards.

5.2.3.1.2. ADB will seek to agree with the borrower, EA and PIU on the acceptable accounting standards and policies governing the preparation of financial statements not later than at loan negotiations. Financial statements for private sector companies and organizations, and for revenue-earning public sector EAs, should be prepared in accordance with accounting policies that are consistent with IASs.¹¹ Alternatively, ADB may accept audited annual financial statements of projects, EAs and IAs that are based on national or other defined standards, provided that the Notes to the Financial Statements include realignments and adjustments of the financial information in the audited annual financial statements to provide a report in accordance with IASs. In relation to nonrevenue-earning projects in the public sector, ADB expects sound financial policies, proper accounting records, proper internal control systems, timely reporting to management, and sound auditing practices.

5.2.3.1.3. ADB therefore recommends that all public and private sector revenue-earning EAs and IAs should move to account and report for projects financed by ADB on the basis of accounting policies consistent with IASs current at the date of loan negotiations, or any other date(s) in the project implementation period agreed between ADB and the borrower. Borrowers, EAs or IAs should adopt IAS-compliant accounting policies by an agreed date.¹² Until this time, financial statements should be prepared in accordance with a set of accounting policies acceptable to ADB and noted in the Minutes of Loan Negotiations.

5.2.3.2. Timetable to Introduce Acceptable Accounting Policies

5.2.3.2.1. ADB expects that public and private sector revenue-earning project financial reports will be prepared on the basis of IAS-compliant accounting policies.¹³

5.2.3.2.2. In some cases, national accounting standards and practices will not conform to accepted international standards.

5.2.3.2.3. Where only minor items are involved (for instance, overhead-allocation methods or inventory-valuation policies), the continued use of these standards and practices may be acceptable so long as the variances are quantified and disclosed in the Notes to the Financial Statement and in the Auditor's Report.

5.2.3.2.4. ADB recognizes that some time will be required for borrowers, EAs and IAs to adopt IAS-compliant accounting policies and will negotiate with existing borrowers on a project-by-project basis for the timing of their introduction.

5.2.3.2.5. In these instances, financial analysts should coordinate with the Supreme Audit Institution (SAI) of the borrowing country, the EA and the PIU, to determine required modifications of accounting policies and the required date for their introduction. The introduction date of the revised policies and practices may be included as a loan covenant, or as a requirement prior to the commencement of project implementation activities.

5.2.3.2.6. ADB will develop a timetable for each borrower and EA in the private sector and for each public sector revenue-earning EA for the complete adoption of accounting policies that are consistent with IASs, or to local standards that are similar to IASs.¹⁴ In this respect, financial analysts should review the action plans developed as part of the DSAA, where they have been prepared (see section 4.2.5).

5.2.3.3. Statements on Accounting Standards and Policies

5.2.3.3.1. Financial analysts should pay close attention to the text or wording of statements made by EAs in the financial statements on the accounting standards and policies used to prepare the reports. Attention should also be given to auditors' comments on the accounting standards and policies used.

5.2.3.3.2. It is common for financial statement preparers (i.e., EAs) and external auditors to use vague phrases, such as "approved standards”, "official local standards”, and "international standards”. Analysts should insist on the accurate description of both accounting standards and policies used to compile the financial statements and the definition of the auditing standards applied by the auditor.

5.2.3.4. ADB Reports on Accounting Standards and Policies

5.2.3.4.1. ADB reports relating to project identification, preparation, appraisal (RRP), and supervision should describe the current status of application and use of IASs in the country concerned, and by the EA and/or PIU.¹⁵ The reports should include recommendations, or commentaries on, timetables and associated steps by ADB to encourage borrowers, EAs and IAs to adopt IAS-compliant accounting policies.

5.2.3.5. Example of Accounting Policies

5.2.3.5.1. Accounting policies are the specific principles, bases, conventions, rules, and practices adopted by an entity in preparing and presenting financial statements. Financial statements must include a Statement of Accounting Policies. In the case of nonrevenue-earning EAs, Statements of Accounting Policies are likely to be simplistic (for instance, they may cover only cash-recognition policies).

5.2.3.5.2. The following table provides guidance on General Accounting Policies. Particular Accounting Policies should set out the policies applicable to revenues, expenses, assets and liabilities. It is highly recommended that financial analysts review the model set of IAS-based accounting policies and financial statements available at www.iasplus.com.* An IAS disclosure checklist is also available from this website

Issue	Details	Example
Reporting Entity	Accounting policies should clearly define the reporting entity.	These are the consolidated financial statements of ABC Limited and its subsidiaries: DEF Limited, GHI Limited and JKL Limited.
Reporting Period	Rreporting period should be stated.	These financial statements apply to the financial year ended 31 December 20X2.
Legislative Basis	Legal basis under which the financial statements have been prepared should be clearly stated.	These financial statements have been prepared in accordance with Article 123 of the Companies Act 20X1.
Accounting Policy Basis	Accounting policy basis should be stated.	These accounting policies are based upon the International Accounting Standards (IASs) issued by the International Accountants Standards Board (IASB as at 30 September 20X2. Where no IAS has been issued on specific topics, the accounting policy is based on other authoritative sources.
Measurement Base	Measurement base used to prepare the financial statements should be described.	These financial statements have been prepared using the accrual basis of accounting. The measurement base applied is historical cost adjusted for revaluations of assets.
Changes in Accounting Policies	Changes in accounting policies should be noted.	There have been no material changes in accounting policies during the financial year.
Going Concern	There should be a clear statement as to whether or not the entity is a going concern.	The financial statements have been prepared on a going concern basis.
Indirect Taxes and Duties	Treatment of indirect taxes and duties should be clearly stated.	Revenue and expense items are recognized net of VAT. The net amount receivable in respect of VAT is included as part of accounts receivable. Assets are recorded net of VAT if the tax is recoverable.
Comparatives	Where there have been changes of format or presentation from one accounting period to the next, comparatives should be restated, and that fact disclosed in the notes to the financial statements together with any explanation necessary for the reader to understand the changes which have occurred.	Where there is any change of format or presentation from one accounting period to the next, comparatives are to be restated, and that fact disclosed in the notes to the financial statements together with any explanation necessary for the reader to understand the changes that have occurred.
Basis of Combination (Consolidation)	Where consolidated financial statements have been prepared, the combination basis should be stated.	Controlled entities are consolidated using the purchase method of combination. Corresponding assets, liabilities, revenues and expenses are added together line by line. Transactions and balances between these sub-entities are eliminated on combination.
Related Parties	The policy applied to the disclosure of related-party transactions should be stated.	There were no related party transactions during the financial year.
Foreign Currency	The basis for recording foreign currency transactions and translating these transactions and balances should be stated.	Foreign currency transactions are measured and recorded in United States Dollars (USD) using the exchange rate in effect at the date of the transaction. However, where short-term transactions are covered by a forward exchange contract, the forward rates specified in those contracts have been used to translate the transactions into USD. At the end of each reporting period any foreign currency monetary balances (being money held and assets and liabilities to be received or paid in money) have been translated into USD using the spot exchange rate in effect on that date. Exchange differences, arising when there is a change in the exchange rate between the transaction date and the date of settlement, have been recognized as either revenues or expenses.

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¹¹ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
¹² Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
¹³ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
¹⁴ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).
¹⁵ Financial Analysts have discretion to agree alternative arrangements (see paragraph 2.4.3).

*The ADB website provides links to external websites that are not under its control. ADB is not responsible for the content of these sites.

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5.2.2. International Accounting Standards