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5.4.3 Focus on Government Financial Management Requirements


June 28, 2009

This is section 5.4.3 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Government financial management differs from the private sector accounting. Many other financial functions such as civil service management and procurement are more similar to private sector practices. The following checklist describes necessary core government financial management functions.

Function PFM Implication FreeBalance Accountability Platform
Government Financial System Set-Up
Fiscal year and periods. Government fiscal year and fiscal periods need to be configured in financial systems. Different periods may have legal implications for budgets. CONFIGURED. Support any start/end date for fiscal year and multiple periods within a year. Support additional periods at the end of the year to support year-end closing. Supports different calendars such as solar and lunar.
Year-end procedures The private sector does not use budget accounting, so there is no need to have rules for unspent budgets. Governments have complicated rules for unspent budgets. Some budgets, like capital projects can carry-over budget to another fiscal year. Some budgets cannot be carried over. CONFIGURED. Set carry-over rules based on the elements of the Chart of Accounts (COA.)
Language Governments can have many official languages. Some of these languages may be necessary to support in certain regions. CONFIGURED. Import a translation file in documented spreadsheet format. Support Unicode for different character sets.
Terminology Terminology can differ among governments using the same language. For example: “commitment”, “obligation” and “encumbrance” used to describe the same thing in English depending on the government. CONFIGURED. Edit any term.
User and group configuration and set-up. Governments often have more staff than private sector organizations. This calls for more complex user management. CONFIGURED. Set up functional groups, roles and users across functionality. Support security against any combination of COA segments.
Government Chart of Accounts
Flexible Chart of Accounts (COA) Design Government COA can be very complex compared to private sector. The COA needs to support accounting codes and budget classifications CONFIGURED. Set up multiple segments, alphanumeric data, multiple levels of hierarchy and structure.There is no limit to the number of segments, characters or hierarchies in the FreeBalance Accountability Platform although good practices indicate that the COA coding block should not exceed 30 characters.
Reporting objects in COA Governments often have to report in different ways than how information has been captured. This is used for transparency reports and supporting international standards like GFS and COFOG. Accounting users should not need to know these codes when entering data. CONFIGURED. Create side tables or reporting objects to enable government and international organization reporting.
Valid code combinations The use of multiple segments in a government COA can generate unwanted errors. For example, an expenditure for a project could be assigned to the incorrect organization or fund. CONFIGURED. Identify proper code combinations to prevent errors.
Code offsets Double-entry accounting requires users to debit and credit accounts. Not all data entry clerks understand the proper debits and credits to enter and can assign revenue or expenditures to the incorrect code or recognize an expenditure as revenue by mistake. CONFIGURED. Set up standard offset codes for data entry. These are configured for Accounts Payable and Accounts Receivable functions to simplify data entry and reduce errors.
Consolidated COA Governments are involved in many “lines of business”. There are often many tiers of governments such as national, state and local governments. Financial information is often shared among this government entities. A consistent COA for all entities often makes the COA too complex. Many specialized ministerial or sub-national needs are often not reflected in a single COA for the entire government. CONFIGURED. Roll up COA from different entities into a consolidated COA. Support budget transfers and reporting across multiple tiers of government.
Budgetary Controls
Aggregate budgetary controls Budgetary controls are not present in private sector accounting.  Many financial applications in government require line-item budgeting. This adds a burden on civil servants to issue budget transfers when the details in the line item budget are not material to the government budget law. CONFIGURED. Support line item and aggregate budgetary controls. Support ability to control on different hierarchies. Support budget and appropriation controls that reflect the government budget and the authority to spend. These controls can be at different levels of details and different periods. There is no limit to the number of controls, although good practice indicates that it is wise to have less than 4.
Budget variance Private sector financial management often shows budget variance but rarely forecasts future budget variance. CONFIGURED. Model and forecast variance  for financial and salary budgets based on budget assumptions and trends.
Salary budget management Salaries are often the largest expense for government organizations. These expenses can vary based on training program usage, bonus plans, vacancies and changes to salary scales. Human Resources and payroll software often has not concept of salary budgets.
Commitment levels Private sector accounting does not manage the commitment cycle where budgets are set aside to ensure that there is no overspending. CONFIGURED. Activate any commitment step for controls. Support purchase requisition commitment (or pre-encumbrance), purchase order contractual obligation (encumbrance), goods receipt encumbrance (in countries that do not recognize the PO as a contractual obligation) and Expense Voucher (pre-payment) stages.
Tolerances Hard controls can make commitment accounting inflexible. For example, a minor foreign currency fluctuation could prevent an expense. A monthly control on supplies may not be mat CONFIGURED. Activate  hard control, control with tolerance %, control with tolerance amount, and control with warning on budgets, appropriations and commitments.
Budget transfers Macroeconomic changes can affect revenue flows. Legislatures sometimes have not passed the budget law prior to start of a fiscal year. CONFIGURED. Support budget transfers, virements, warrants, supplemental budgets and temporary budget authority.
Multiple year commitments Many government projects cover multiple years, particularly capital project. CONFIGURED. Support multiple year commitments.
Multiple year budgets Budget good practices recommend the use of medium term three year budget preparation. Many government programs require many years to show outcomes. Credible budgets require a multiple year view. CONFIGURED. No limit to the number of forward year budgets that can be prepared. No limit to the number of past year budgets that can be analyzed.
Progressive Activation
Support Cash, Modified Cash, Modified Accrual and Full Accrual accounting Unlike private sector, Governments rarely use full accrual accounting. Governments need to migrate from Cash to Accrual CONFIGURED. Support all 4 accounting methods. Migrate to full accrual through progressive activation. Report on past years with the current and past accounting method.
Line item to aggregate Many government organizations do not provide discretionary budget management when systems are first implemented. However, these governments will provide more discretion through aggregate budgeting as human capacity increases. CONFIGURED. Adjust level of control aggregation at any time.
Commitment levels Governments often modernize commitment management by adding commitment steps such as a “pre-encumbrance” when an internal requisition is issued. CONFIGURED. Activate additional commitment levels for next fiscal period. Supports reporting on previous year information based on current commitment level method.
Multiple year COA Government priorities change. Financial management processes modernize. This often requires adding codes and segments such as supporting program budgeting or performance management. CONFIGURED. Change the COA from one year to the next.  Supports mapping previous COA elements to new COA. Supports ability to report on previous COA based on the COA of that time or on a subsequent COA.
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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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