The implications of IPSAS23 for the Maltese government accounting on EU grants : a case study on steps

Abstract

The purpose of this study is that of gaining a deep understanding of how grants from the European Union Structural Funds are accounted for in the Maltese Government Accounts, which are presently based on cash-accounting and how they would need to be accounted for, once the accounting system is switched to accrual accounting, based on IPSAS standards. The study analyses the present system and procedures, identifies the needed changes, assesses whether the quality of financial information will be enhanced, identifies any transitional issues and puts forward recommendations for a smooth transition to IPSAS 23. Research methodology subdivides in two parts. The first part is based on interviews with officials from key stakeholders in order to build a better understanding of how the present system works. Limitations in the system are also discussed. This part focuses on a case study, the STEPS scheme, and how the different stakeholders are linked together. The second part is also based on interviews, but focuses on the proposal of a system based on accrual accounting. The research benefits from the. interviewees' expertise in order to identify possible solutions. The Maltese government pre-finances all projects which are co-financed by the European Union and then applies for refund once the project is certified as compliant with EU rules. The EU Grants are recorded in the national government accounts when they are received. Under accrual-based accounting, these grants would be recorded once certification of the project is complete. The implementation of IPSAS 23 would require additional structures to ensure that restrictions and conditions attached to each grant are being adhered to, prior to revenue recognition. The European Union's advance payment cannot be recorded as revenue in the National Government accounts. This payment would have to be treated as deferred income and recognized as revenue once the project that matches it, is certified. Transferred EU Grants can be reclaimed back by the EU upon the discovery of post-payment irregularities in the auditing of these projects. This highlights the importance of an appropriate contingent liability, quantifiable if possible, in the notes to the accounts. The current system and its present reporting makes it very difficult to have a clear picture of the financial assets and liabilities in connection with the EU grants and matching the refund with the pre-financed funds. There is also the need for consistency in the treatment of items such as provisions in case of irregularities and the quantification of the contingent liability. In order to address these issues, one recommends the expansion of the role of the EU Paying Authority to cater for, amongst others, EU-funded projects management, monitoring and verification, refund applications and management of receipts from the EU, efficient management of the advance payment, timely provision of accounting information for all the users and the provision of a set of financial statements incorporating all revenue, costs, assets and liabilities in connection with our country's financial relationship with the EU. The system proposed involves the combination of an effective risk management framework and the provision of clear and reliable information that will allow an easier assessment of the benefits and risks provided by these EU grants and can be used by the Executive and the Public Service top management to improve the net benefits from EU grants and by the layman to exercise his democratic rights in a more informed context.