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Financial Management and Analysis of Projects : 5. Reporting and Auditing : 5.3. Financial Reporting
5.3.10. Designing Financial Reports for Non-Revenue-Earning Projects
5.3.10.1. While annual financial statements
are likely to be required to demonstrate the financial position
and performance of all revenue-earning EAs, including project implementation
and operational performance, the requirements for non-revenue-earning
EAs are usually determined on a case-by-case basis.
5.3.10.2. Many of these projects are
in the public sector, and are implemented and operated by government
departments or agencies. In each case, it should be decided whether
financial reporting is limited to project activities only, or the
project-related activities of the EA that manages the project, or
the whole agency. For example, a health care center project to be
implemented by a regional or district health authority is unlikely
to require an audit of the related Ministry of Health or of a complete
Regional Health and Hospitals Division.
5.3.10.3. However, in case of a project
that includes the reorganization or improvement of the financial
management of a Ministry or a municipality, ADB may require financial
reporting and auditing of these institutions. This requirement would
assist in the monitoring of performance of project implementation,
even though the project's principal components may be non-revenue
earning. Examples are provided in the box below.
Examples of Financial Reporting and Auditing Requirements
For
a Government Ministry
A
Hospital Management Division of a Ministry of Health is
required to administer an annual budget of $2.5 million
equivalent. It has no effective budget compilation procedure,
because it has no budgetary control records, nor does it
maintain any records of individual hospitals' expenditures
and incomes. A health project component is introduced to
rectify these budgetary and accounting failures, and to
ensure that mismanagement of funds could not occur in the
future. By requiring the preparation of financial reports
on this Hospital Management Division's activities, and audits
thereof, ADB can monitor the extent to which mismanagement
is being replaced by a sound system.
For
a Local Government Municipality
A
housing sites and services project may be used as a means
of improving the financial management of municipal housing
by providing financial assistance to improve the accounting
and rent collection control systems within the municipality.
The municipality also regularly subsidizes its housing stock.
In order to ensure that this stock does not place an unreasonable
burden on the remainder of municipal services, ADB requires
that audited financial statements of the municipality, which
will show the overall finances of the municipality, the
housing subsidies, and the housing accounting and income
control, are to be provided.
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5.3.10.4.
Project objectives, particularly financial
objectives, will also determine the scope of financial reporting
requirements. Projects developed in some sectors by a municipality
or regional authority may have components that may not be revenue-earning
and may or may not affect the EA's financial performance or status.
For example, a sites and service housing scheme could be executed
by a municipality using grant funds, with resulting increases in
property tax revenues from the higher property values accruing to
the municipality.
5.3.10.5. If, in such a case, a project
objective is the improvement of municipal finance and operations,
the reporting requirements should address the municipality as a
whole, or specified key activities or departments. But if the objective
is slum upgrading only, the project could be treated as non-revenue-earning,
and the reporting requirements could be limited accordingly.
5.3.10.6. Broadly, ADB requires financial
reporting and auditing of nonrevenue-earning projects: (i) for project
transactions only when an EA executes the project, but does not
operate the facilities; (ii) for the relevant activities of the
EA, including project transactions, when an agency executes the
project and operates the resultant facilities, particularly if ADB
financing is used to meet incremental current expenditures of ongoing
operations; and (iii) for the relevant activities of the EA, including
project transactions, when it finances improvements in the financial
management of that agency.
5.3.10.7. Financial reports for a
nonrevenue-earning project preferably should contain, to the extent
possible, data constructed and presented in a similar manner and
form as for revenue-earning projects. This latter form of reporting
is designed to yield maximum information for management and ADB.
However, as a minimum, these reports may comprise Statements of
Income and Expenses, or Statements of Cash Receipts and Cash Payments
only. Staff should request borrowers to incorporate simple adjustments
(e.g., to convert the latter financial reports to an accruals basis,
to disclose the treatment of past and current obligations), if such
adjustments are necessary for good management and reporting. The
income or receipts shown in these minimum form statements should
disclose the sources of funds, including local funds, ADB loan disbursement
proceeds, and cofinanciers fund disbursements, where appropriate.
5.3.10.8. In a nonrevenue-earning
project that includes the financing of incremental current expenditures,
e.g., salaries, wages, the financial reports should include separate
statements of these expenditures, and any related recurrent income
of the EA. These statements should include annual budgetary provisions
and allotments, supplementary budget provisions and allotments,
and actual expenditures under each budget head and subhead. The
budget heads and subheads of expenditures for which ADB financing
is furnished and the actual expenditures and amounts of ADB disbursements
claimed should be indicated. In this respect, it is important during
project preparation to ensure that adequate budgetary descriptions
and line items are, or will be, made available to fulfill this analysis.
5.3.10.9. Details of the financial
position, at the start and end of each fiscal year, of a nonrevenue-earning
project or EA should be requested from the borrower. These details
may be best provided in a form of balance sheet, at the opening
and closing of each fiscal year, to show the accumulated totals
of transactions over the project period and to account for assets,
inventories, equity (or grants) and loans provided as part of the
project.
5.3.10.10. Balance sheet preparation
need not be an elaborate process. Its preparation can take the form
of an accumulation of data from income statements for completed
years, with adjustments to show closing balances of inventories
and cash, where appropriate. However, some government departments
may not be experienced in preparing and maintaining data for balance
sheets. In such cases, during project preparation, the analyst should
ask the government to arrange for the training of staff prior to
loan negotiations and project start-up. Otherwise, engagement of
competent personnel, including a fulltime financial management expert
and a project accountant to prepare the financial reports in the
required form and on a timely basis, should be provided.
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5.3.9. Designing Financial Reports for Revenue-Earning Projects | Next
5.3.11. Examples of Model Financial Statements |
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