The Management Of Liabilities

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02 Nov 2017

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List the conditions under which a provincial department is exempted from the requirement in terms of the PFMA that all money received by it must be deposited into the relevant provincial revenue fund. [5]

List the expenditure and funds that may be included in the national adjustments budget. [7]

Name the three (3) main areas in which budgetary control should be exercised. [3]

Discuss the legislative requirements for the management of liabilities. [15]

Question 5

Explain how loans should be dealt with by national government, with specific reference to:

The purpose for which money may be borrowed;

The signing of loan agreements; and

The repayment of loans [10]

Question 6

Write an essay in which you describe the banking and cash management arrangements that should be applied in government departments. [30]

Question 7

Write an essay in which you explain the accounting process in the public sector, including the reporting on a public institution’s financial results. [30]

TOTAL: [100]

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ASSIGNMENT

PUBLIC SECTOR FINANCIAL MANAGEMENT II

DUE DATE: 19 APRIL 2013

QUESTION 1

List the conditions under which a provincial department is exempted from the requirement in terms of the PFMA that all money received by it must be deposited into the relevant provincial revenue fund. [5]

A provincial department in a province is exempted from this requirement if the following conditions prevail:

It is operating a trading entity which receives money in the ordinary course of operating the trading entity;

It is kept in trust for a specific person or category of persons or for a specific purpose;

It is received from another department to render an agency service on behalf of that department;

If the money is of a kind described in Schedule 4; or

If the money is exempted in terms of the annual Division of revenue Act from being paid into the Revenue Fund.

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QUESTION 2

List the expenditure and funds that may be included in the national adjustments budget. [7]

As and when necessary the Minister may table an adjustments budget in the National Assembly,

A national adjustments budget may only provide for the following:

Adjustments required due to significant and unforeseeable economic and financial events affecting the fiscal targets set by the annual budget;

Unforeseeable and unavoidable expenditure recommended by the national executive or any committee of Cabinet members to whom this task has been assigned;

Any expenditure in emergency situations in term of Section 16 of the PFMA;

Money appropriated for expenditure already announced by the Minister during the tabling of the annual budget;

The shifting of funds between and within votes or to follow the transfer of functions in terms of Section 42 of the PFMA;

The utilisation of savings under a main division of a vote for the defrayment of excess expenditure under another main division of the same vote in terms of Section 43 of the PFMA; and

The roll-over of unspent funds from the preceding financial year.

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QUESTION 3

Name the three (3) main areas in which budgetary control should be exercised. [3]

3.1 This control can be broken down into the following three main areas (AAT, 1992:280-281)

3.1.1 Control during preparation of budget;

3.1.2 Control during out-turn; and

3.1.3 Control by review

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QUESTION 4

4. Discuss the legislative requirements for the management of liabilities. [15]

Liabilities or debts are the legally enforceable economic obligations of a municipality in

accounting terms.

4.1 Elements of liability management

Liability management must deal with the identification, incurring, measurement, settlement and recording of liabilities, contingent liabilities or commitments for capital expenditure:

4.1.1 The identification of liabilities

4.1.1.1 The options for incurring a liability and the timely establishment of the existence of a

liability are determined.

4.1.1.2 Employee entitlements, loans, repayable advances, leasing liabilities and revenue received

for goods or services that have not been approved are included.

4.1.2 Incurring liabilities

4.1.2.1 The incurring of liabilities for authorised purposes only and for obtaining the appropriate

authority before incurring liabilities.

4.1.3 Measurement of liabilities

4.1.3.1 The assessment of the amount of the liability.

4.1.4 Settlement of liabilities

4.1.4.1 The payment of liabilities when they become due.

4.1.5 Recording of liabilities includes the following:

4.1.5.1 recording all liabilities in the name of the municipality;

5.1.5.2 recording the details of the liabilities, including the date it is incurred, the settlement date,

payment terms and interest rates;

5.1.5.3 maintenance of an adequate audit trail;

5.1.5.4 identification and recording transaction about liabilities;

5.1.5.5 providing information about liabilities to allow the timely provision of relevant and reliable

information to the institution’s managers and for purposes of external reporting.

4.2 Short-Term Debt

4.2.1 Short-term debt may only incur by a municipality when necessary for bridging purposes. In

this case bridging purposes refer to situations where there are shortfalls in the expected income

for a specific financial year that impact on the municipality’s cash flow.

4.2.2 Within the specific financial year when a short-term debt was incurred a municipality has to

pay it off, and it is not allowed to renew or refinance short-term debt, whether its own debt or

that of another entity.

4.2.3 It is also important that banks or financial institutions, providing short-term debt to

municipalities, are aware of the fact that they may not wilfully extend credit to a municipality

for the purpose of renewing or refinancing short-term debt.

4.2.4 If a resolution of the municipal council, signed by the mayor, has approved the debt agreement

only then may a municipality incur short-term debt.

4.3 Long-Term Debt

4.3.1 Municipalities are allowed to incur long-term debt for capital expenditure on property, plant or

equipment that will be used for achieving the objectives of a municipality or for re-financing

existing long-term debt.

4.3.2 A municipality may only incur long-term debt if a resolution of the municipal council, signed

by the mayor, has approved the debt agreement, and the MM has signed the agreement and / or

other documents which creates or acknowledges the debt.

4.3.3 A municipality may borrow money for the purpose of re-financing existing long-term debt on

the following conditions:

4.3.3.1 The existing long-term debt was lawfully incurred;

4.3.3.2 The re-financing does not extend the term of the debt beyond the useful life of the property,

plant or equipment for which the money was originally borrowed;

4.3.3.3 The net present value of projected future payments after re-financing is less than the net

present value of projected future payments before re-financing.

4.3.4 A municipality may only incur debt if the debt is denominated in South African currency and is

not indexed to, or affected by fluctuations in the value of the rand against any foreign currency.

4.4 Security for incurred debt

4.4.1 A Municipality may provide security for any of its own debt obligations or those of a municipal

entity under its sole control by resolution of its council.

4.4.2 Security for the contractual obligations of the municipality undertaken in connection with

capital expenditure by other persons on property, plant or equipment that will be used for the

purpose of achieving the objectives of local government in terms of Section 152 of the

Constitution can also be provided.

4.4.3 A council resolution authorising the provision of security must determine whether the asset or

right, for which the security is provided, is necessary for providing the minimum level of basic

municipal services and indicate the manner in which the availability of the asset or right will be

protected.

4.4.4 Until the secured debt has been paid in full or the secured obligations have been performed in

full, as the case may be, even if that asset or right is not necessary for providing the minimum

level of basic municipal services, a council resolution authorising the provision of security is

binding on a municipality.

4.5 Guarantees for incurred debt

4.5.1 Except on the following conditions, may a municipality not issue any guarantee for any

commitment or debt of any organ of state or person, (See Section 50 of the MFMA):

4.5.1.1 the guarantee must be within limits specified in the municipality’s approved budget;

4.5.1.2 in the case of a guarantee for the debt of a municipal entity under its sole control, a

municipality may only provide a guarantee if it is authorised by the council in the same

manner and subject to the same conditions applicable to the specific municipality;

4.5.1.3 a municipality may only provide a guarantee with the approval of the National Treasury, in

the case of a guarantee for the debt of a municipal entity under its shared control or of any

other person.

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QUESTION 5

Explain how loans should be dealt with by national government, with specific reference to:

The purpose for which money may be borrowed;

The signing of loan agreements; and

The repayment of loans [10]

a) The purpose for which money may be borrowed:

For the following purposes only the Minister may borrow money:

For national budget deficits to be financed;

To refinance maturing debt or a loan paid before the redemption date;

To obtain foreign currency;

To maintain credit balances on a bank account of the National Revenue Fund;

To regulate internal monetary conditions should the necessity arise; or

Any other purpose approved by the National Assembly by special resolution.

b) The signing of loan agreements

On conditions determined by the Minister when the Minister borrows money the Minister of Finance may authorise another person to sign a loan agreement.

c) The repayment of loans

The following payments in connection with loans are direct charges against the National Revenue Fund:

The repayment of money borrowed by the Minister in terms of Section 66(2)(a) or repaid in terms of Section 74;

The interest payable on money borrowed; and

Any costs associated with such borrowing and approved by the National Treasury.

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QUESTION 6

Write an essay in which you describe the banking and cash management arrangements that should be applied in government departments. [30]

The Council is the trustee of the public revenues, which it collects, and it therefore has an obligation to the community to ensure that the Municipality’s cash resources are managed effectively and efficiently, and in a manner which will ensure that sufficient cash resources are available to finance the capital and operating budgets of the Municipality. The Municipality shall at all times manage its banking arrangements and investments and conduct its Cash Management Policy in compliance with the provisions of and any further prescriptions made by the Minister of Finance in terms of the Municipal Finance Management Act No. 56 of 2003. A paraphrase of the provisions of this Act is attached as Annexure I to this policy.

ANNEXURE I

PARAPHRASE OF REQUIREMENTS OF MUNICIPAL FINANCE MANAGEMENT ACT NO 56 OF 2003

Note: In terms of Section 60(2) of the Municipal Systems Act No. 32 of 2000 the council may delegate the authority to take decisions on making investments on behalf of the municipality only to the executive mayor, executive committee or chief financial officer. The foregoing policy is based on the assumption that such authority has been delegated to the chief financial officer.

SECTION 7: OPENING OF BANK ACCOUNTS

Every municipality must open and maintain at least one bank account. This bank account must be in the name of the municipality, and all monies received by the municipality must be paid into this bank account or accounts, promptly and in accordance with any requirements that may be prescribed.

A municipality may not open a bank account:

• otherwise than in the name of the municipality;

• abroad; or

• with an institution not registered as a bank in terms of the Banks Act 1990.

Money may be withdrawn from the municipality’s bank account only in accordance with the requirements of Section 11 of the present Act.

SECTION 8: PRIMARY BANK ACCOUNT

Every municipality must have a primary bank account, and if the municipality has only one bank account that account is its primary bank account. If the municipality has more than one bank account, it must designate one of those bank accounts as its primary bank account.

The following must be paid into the municipality’s primary account:

• all allocations to the municipality;

• all income received by the municipality on its investments;

• all income received by the municipality in connection with its interest in any municipal entity;

• all money collected by a municipal entity or other external mechanism on behalf of the municipality, and;

• any other monies as may be prescribed.

The accounting officer of the municipality must submit to the national treasury, the provincial treasury and the Auditor-General, in writing, the name of the bank where the primary bank account of the municipality is held, and the type and number of the account. If the municipality wants to change its primary bank account, it may do so only after the accounting officer has informed the national treasury and the Auditor-General, in writing, at least 30 days before making such change.

BANKING ARRANGEMENTS

10.1 The Municipal Manager is responsible for the management of the Municipality’s bank accounts, but may delegate this function to the Chief Financial Officer. The Municipal Manager and Chief Financial Officer are authorised at all times to sign cheques and any other documentation associated with the management of such accounts. The Municipal Manager, in consultation with the Chief Financial Officer, is authorised to appoint two or more additional signatories in respect of such accounts, and to amend such appointments from time to time. The list of current signatories shall be reported to the Executive Committee or the Executive Mayor, as the case may be, on a monthly basis, as part of the report dealing with the Municipality’s investments.

10.2 In compliance with the requirements of good governance, the Municipal Manager shall open a bank account for ordinary operating purposes, and shall further maintain a separate account for each of the following: the administration of the external finance fund and of the asset financing reserve (if these accounts are legally permissible). One or more separate accounts shall also be maintained for the following: capital receipts in the form of grants, donations or contributions from whatever source; trust funds; and the Municipality’s self-insurance reserve (if legally permissible). In determining the number of additional accounts to be maintained, the Municipal Manager, in consultation with the Chief Financial Officer, shall have regard to the likely number of transactions affecting each of the accounts referred to. Unless there are compelling reasons to do otherwise, and the council expressly so directs, all the Municipality’s bank accounts shall be maintained with the same banking institution to ensure pooling of balances for purposes of determining the interest payable to the Municipality.

10.3 The Municipal Manager shall invite tenders for the placing of the Municipality’s bank accounts within six months after the election of each new Council, such new banking arrangements to take effect from the first day of the ensuing financial year. However, such tenders may be invited at any earlier stage, if the Municipal Manager, in consultation with the Chief Financial Officer, is of the opinion that the services offered by the Municipality’s current bankers are materially defective, or not cost-effective, and the Executive Mayor or the Executive Committee, as the case may be, agrees to the invitation of such tenders.

SECTION 13: CASH MANAGEMENT AND INVESTMENTS

The Minister, acting with the concurrence of the cabinet member responsible for local government, may prescribe a framework within which municipalities must conduct their cash management and investments, and invest money not immediately required.

A municipality must establish an appropriate and effective cash management and investment policy in accordance with any framework that may be so prescribed.

A bank where the municipality at the end of the financial year holds a bank account, or held a bank account at any time during such financial year, must, within 30 days after the end of such financial year, notify the Auditor-General, in writing, of such bank account, indicating the type and number of the account, and the opening and closing balances of that account in that financial year. The bank must also promptly disclose any information regarding the account when so requested by the national treasury or the Auditor-General.

A bank, insurance company or other financial institution which the end of the financial year holds, or at any time during the financial year held, an investment for the municipality, must, within 30 days after the end of that financial year, notify the Auditor-General, in writing, of that investment, including the opening and closing balances of that investment in that financial year. Such institution must also promptly disclose any information regarding the investment when so requested by the national treasury or the Auditor-General.

EFFECTIVE CASH MANAGEMENT

4.1 Cash Collection

a) All monies due to the Municipality must be collected as soon as possible, either on or immediately after due date, and banked on a daily basis. The bank reconciliation should be prepared on a daily basis. Every month end it must reflect agreeing balances between the balances as per bank statement and that arrived at by the Municipality in its bank account in terms of Bank and Cash, as per the Municipal GRAP Manuals. Prepared bank reconciliations must be reviewed by the Chief Financial Officer within five (5) days after the end of each month. The Chief Financial Officer must investigate any irregularities and report them to the Accounting Officer. The respective responsibilities of the Chief Financial Officer and other Heads of Departments in this regard is defined in a code of financial practice approved by the Municipal Manager and the Chief Financial Officer, and this code of practice is attached as Annexure II to this policy.

b) The unremittant support of and commitment to the Municipality’s Credit Control policy, both by the Council and the Municipality’s officials, is an integral part of proper cash collections, and by approving the present policy the Council pledges itself to such support and commitment.

4.2 Payments to Creditors

The Chief Financial Officer shall ensure that all tenders and quotations invited by and contracts entered into by the Municipality stipulate payment terms favourable to the Municipality, that is, payment to fall due not sooner than the conclusion of the month following the month in which a particular service is rendered to or goods are received by the Municipality. This rule shall be departed from only where there are financial incentives for the Municipality to effect earlier payment, and any such departure shall be approved by the Chief Financial Officer before any payment is made.

In the case of Small, Micro and Medium Enterprises, where such a policy may cause financial hardship to the contractor, payment may be effected at the conclusion of the month during which the service is rendered or within fourteen (14) days of the date of such service being rendered, whichever is the later. Any such early payment shall be approved by the Chief Financial Officer before any payment is made.

Notwithstanding the foregoing policy directives, the Chief Financial Officer shall make full use of any extended terms of payment offered by suppliers and not settle any accounts earlier than such extended due date, except if the Chief Financial Officer determines that there are financial incentives for the Municipality to do so.

The Chief Financial Officer shall not ordinarily process payments, for accounts received, more than once in each calendar month, such processing to take place on or about the end of the month concerned. Wherever possible, payments shall be effected by means of electronic transfers rather than by cheques.

Special payments to creditors shall only be made with the express approval of the Chief Financial Officer, who shall be satisfied that there are compelling reasons for making such payments prior to the normal month end processing.

4.3 Management of Inventory

Each Head of Department shall ensure that such Department’s inventory levels do not exceed normal operational requirements in the case of items which are not readily available from suppliers, and emergency requirements in the case of items which are readily available from suppliers.

Each Head of Department shall periodically review the levels of inventory held, and shall ensure that any surplus items be made available to the Chief Financial Officer for sale at a public auction or by other means of disposal, as provided for in the Municipality’s Supply Chain Management policy.

4.4 Cash Management Programme

The Chief Financial Officer shall prepare an annual estimate of the Municipality’s cash flows divided into calendar months, and shall update this estimate on a weekly basis. The estimate shall indicate when and for what periods and amounts surplus revenues may be invested, when and for what amounts investments will have to be liquidated, and when – if applicable – either Long-term or Short-term debt must be incurred. Heads of Departments shall in this regard furnish the Chief Financial Officer with all such information as is required, timeously and in the format indicated.

The Chief Financial Officer shall report to the Executive Committee or the Executive Mayor, as the case may be, on a monthly basis and to every ordinary council meeting the cash flow estimate or revised estimate for such month or reporting period respectively, together with the actual cash flows for the month or period concerned, and cumulatively to date, as well as the estimates or revised estimates of the cash flows for the remaining months of the financial year, aggregated into quarters where appropriate.

The cash flow estimates shall be divided into calendar months, and in reporting the Chief Financial Officer shall provide comments or explanations in regard to any significant cash flow deviation in any calendar month forming part of such report. Such report shall also indicate any movements in respect of the Municipality’s investments, together with appropriate details of the investments concerned.

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QUESTION 7

Write an essay in which you explain the accounting process in the public sector, including the reporting on a public institution’s financial results. [30]

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