Reflections on

public financial SUBMITTED BY

management in Khan Arif Mahmud Shawn

IDE: 41943033
Batch: 43rd
the Covid-19 Dept. of Marketing
University of Dhaka

pandemic
Financial Management (Sec: B)
MKT-506
 Reflections on public financial management in the Covid-19 pandemic

The economic shock of the coronavirus outbreak has an unprecedented impact on public finances.
Governments are implementing massive fiscal packages including both budgetary and
nonbudgetary measures to fight the pandemic while receipts are sharply down. Communicating
the financial consequences of COVID-19 to all stakeholders in a timely manner is important to
create enduring broad support. Audited financial statements play a key role in building citizen trust
in government. This policy note provides reflections on how governments could make use of
existing systems of financial reporting during the pandemic as well as opportunities for improved
financial reporting systems for the post-crisis environment. It also seeks to share insights into the
impact of the pandemic on government financial performance, position, and cash flows.
When policy makers needed to take prompt action following the outbreak of the coronavirus, they
needed to be well-informed about the financial position of the government. If no recent financial
statements are available, policy makers have to continue to rely on daily cash statements and other
reports from management information systems, and may not have a comprehensive picture of
financial performance and position to assess the government’s firepower to confront the crisis. For
these statements to be useful to policy makers, they need to be available within a reasonable period
of time after the end of the fiscal year. Their usefulness is impaired if they are unavailable within
the timeframe enshrined in the government’s legal and regulatory framework (usually 3 to 6
months from the end of financial year). In normal times, the audited financial statements of the
previous year should arrive well in time to be taken into consideration when deciding on the budget
for the following year. In these unusual times, up-to-date financial information is even more
important. To provide an overall picture of the government’s financial position, financial
statements need to cover central government and its controlled entities.4 This makes timely
preparation even more challenging because it requires making available the audited financial
statements of all significant controlled entities. Furthermore, given the quickly changing nature of
the pandemic, and the important number of fiscal measures involved, the availability of up-to-date
financial information is more important than ever to allow governments to take decisions on a
timely basis. An interim financial report is a complete or condensed set of financial statements for
a period shorter than an entity’s full financial year (e.g., a quarter, a month, a week, or even a day).
However, governments may face challenges on preparing such statements considering the
intensive use of remote work and in the absence of prior investment in appropriate technology.
This has to be taken in consideration and addressed if possible. No matter if the financial
statements are annual or interim, their discussion and analysis are critical for analyzing and
explaining material items, differences, and variances against comparators. The commentary is an
opportunity to make the financial statements more understandable to the users by explaining
materially large figures and significant changes caused by the COVID-19 pandemic. It is useful to
produce accessible summary material and appropriate narrative and notes within the financial
statements. The accompanying narrative in financial statements helps users make sense of the
figures.
The fiscal impact of the coronavirus crisis on the government’s financial performance, position,
and cash flows is expected to be far-reaching. This section highlights several key account heads
that are expected to be most severely impacted by the pandemic. For each country, the context and
impact will be different.

Revenue
Lockdowns are causing significant deterioration in tax revenues, mainly from industries such as
manufacturing, construction, retail, travel, and food. Value added tax (VAT) accounts for a large
part of the deterioration, in some countries causing VAT receipts to fall short of refunds (negative
net VAT receipts). Similarly, profit tax may be negative for the government as companies set off
losses for the current year against profits in previous years. Profit tax refunds may thus exceed
receipts (negative net profit tax receipts). Wage taxes will be down sharply as unemployment rises
to unprecedented levels, although not as much as would have been the case without the government
providing job retention support to employers. Fuel duties are double hit. Fuel usage is down
because of the lockdown, and fuel duty per liter is down if the levy is a percentage of the sales
price. Companies in trouble may have a hard time paying tax liabilities, so government may have
to impair tax receivables that were already recognized before the crisis.

Expenses
Government spending goes up sharply on public health, unemployment benefits, social security,
subsidies and grants, and lending to public enterprises and lower levels of government. To fight
the economic consequences of the pandemic, governments have announced large scale bailouts
of companies small and large, government assistance, and disaster relief packages. Governments
may be reluctant to take austerity measures as they are considered a procyclical fiscal policy. For
many governments, debt interest spending is not expected to increase as sharply as public debt, as
interest rates are expected to remain low for the foreseeable future. For governments with a lower
credit rating, interest rates may increase if they face difficulty in rolling over loans and issuing
new ones.

Surplus/(deficit) for the period

The statement of financial performance will show lower revenues, higher expenses, and as a
consequence, a higher deficit.

Events after the Reporting Date

Although the COVID-19 virus emerged during calendar year 2019, its impact was not expected to
be so severe. Therefore, impact on the government’s financial position and performance is
considered to have taken place after the reporting date. When preparing end-of-year financial
statements for 2019, the pandemic should be reported as a so-called non-adjusting event after the
reporting date. This means that the amounts recognized in financial statements do not reflect any
of the pandemic’s consequences. Valuation of assets and liabilities should relate to the condition
at the reporting date and should not reflect circumstances that arose in the following period.
However, governments preparing financial statements for a fiscal year ending December 31, 2019
should still consider including a disclosure. The pandemic events after the reporting date are
material and could influence the economic decisions of users taken on the basis of the financial
statements. Accordingly, the government should disclose an estimate of the financial effect of the
pandemic or a statement that such an estimate cannot be made.
Governments preparing financial statements with a March 31, 2020 year-end closing or later
should consider the impact of the pandemic when deciding on recognition and measurement. For
example, certain assets may have been impaired or provisions may be required, and the accrual
deficit for the year ended March 31, 2020 may have been impacted negatively by the pandemic.
For those governments that prepare financial statements within the recommended timeframe of 3
to 6 months after year-end closing, the judgments and estimates will be difficult. It is hard to
predict in this stage how long the pandemic will last and what the impact will be of the measures
taken by government. Properly reflecting the pandemic’s impact require considerable professional
judgment. Consultation with government auditors at an early stage may be helpful. A note
disclosure to the financial statements should provide insight into the judgments and estimates
made, enabling the user of the financial statements to understand the assessments made.

Arrears
Under pressure from large COVID-19 outlays, governments may build up arrears, which are
unpaid amounts that are past the due date for payment. Amounts payable for any expense,
acquisition of assets, or related to any liability including public debt may be in arrears. An increase
in arrears artificially boosts cash flow, at least for a while. Information on arrears is needed for
various kinds of policy analyses and solvency assessments and should be an encouraged disclosure
within accounts payable. In many countries, it may not be easy to assess the accumulated arrears.
The financial management information systems and processes in place may not capture all arrears,
as some transactions may be done outside the system. Governments need to put in place systems
to capture all arrears to be able to report accurate figures in financial statements. To enable users
of the financial statements to quickly understand the extent of arrears, governments should report
“days payable outstanding,” a yardstick of how long it takes the government to settle bills with
suppliers.

Extraordinary Items
On the face of the financial statements, government should maintain its regular classification of
revenue and expenses, be it by nature, function, administrative, or otherwise. Governments may
consider reporting COVID-19-related revenue and expenditure as extraordinary items depending
on the accounting standards or framework applicable in the country. For example, according to
IPSAS, extraordinary items may be described as “revenue or expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the entity, are not expected to
recur frequently or regularly, and are outside the control or influence of the entity.” Some resources
deployed for emergency response, including any external grants, may clearly meet this definition,
and it may be possible to quantify significant items included in revenue and expenditure that arose
solely due to the impact of the pandemic. These may be disclosed in the notes to the financial
statements or in the financial statement discussion and analysis only if it is possible to reliably
identify and separately quantify the pandemic’s impact. However, it is unlikely to be possible to
attribute items, such as decreases in tax revenue and increases in government expenditure, solely
to the impact of COVID-19 and therefore regular classification needs to be maintained.

Contingent Liabilities and Guarantees

COVID-19 may cause contingent liabilities to turn into provisions that should be recognized on
the government’s balance sheet. These include, for example, state guarantees for non-sovereign
borrowing, guarantees for loans provided to small and medium enterprises, and insurances.
Therefore, financial statements should adequately report on contingent liabilities. If the possibility
of outflow is remote, then no disclosure is required. Contingent liabilities are not recognized in the
statement of financial position due to uncertainty regarding any possible amount or timing of any
possible underlying claim or obligation. Other contingent liabilities that may need to be disclosed
include long-term agreements, such as public-private partnerships (PPPs). More than ever,
governments should monitor guarantees and assess the probability of whether an outflow of
resources will be required to settle obligations. At that point in time, a provision will have to be
recognized as a liability on the balance sheet, assuming that a reliable estimate can be made.
Because the lockdown has severely affected the transportation sector, governments should assess
the accounting impact of review of guarantees given within the context of PPPs in road
transportation (highways) and aviation (airports). If an operator of a PPP runs into trouble, and the
government steps in, it may trigger an altogether different accounting treatment in the
government’s books. If the government starts controlling or regulating the nature, recipients, and
price of the services the operator must provide, and any significant residual interest in the asset
(e.g., highway or airport), then the government should recognize the asset and the corresponding
liability on its balance sheet. This may severely impact the balance sheets of governments that
have entered into significant PPP arrangements.

Public Debt
Public debt is a material and, because of COVID-19, fast-growing item in government financial
statements and is a subject of interest for both macroeconomic and fiscal management purposes.
IPSAS, complementary to the Public Sector Debt Statistics of the Government Financial Statistics
methodology, provides a comprehensive and reliable framework for debt and liability reporting by
capturing all financial estimates of present and future economic benefits and obligations on a
consistent basis in whole-of-government financial reports. Therefore, it is appropriate for all
governments, including those reporting under the cash basis of accounting, to report extensively
on public debt. Issues in accounting for debt include valuation of the loans and the calculation of
debt servicing cost. Concessionary loans under accrual accounting will have a book value below
face value. Public debt is rising not only because of deficits, but also because of increases in
lending to state-owned enterprises (SOE). Disclosures should provide an explanation of the
increase of public debt during the period, including a breakdown in disbursements and repayments,
direct payments from lenders to suppliers, exchange rate differences on public debt denominated
in foreign currencies, interest arrears being added to the principal, or other causes.

Undrawn Borrowings
The financial statements should disclose undrawn borrowing facilities that may be available for
future operating activities and to settle capital commitments, indicating any restrictions on the use
of these facilities. Such a disclosure is helpful for the users of the financial statements in assessing
the government’s ability to raise cash in the short term to face the challenges posed by COVID-
19.

Consolidated Financial Statements

To paint a comprehensive picture of the impact of COVID-19 on public finances, the boundaries
of the reporting entity should be widened beyond budgetary central government. Governments
should ensure that the necessary systems and procedures are in place to consolidate their financial
statements at different levels of aggregation, including the general government (central and local
governments, social security funds) and whole of government (including public corporations).
Consolidated financial statements present a complete picture of all cash receipts and payments
using cash basis accounting. They also present a complete picture of assets, liabilities, revenues,
and expenses using accrual basis accounting. Many public sector entities publish separate financial
statements (i.e., financial statements of their own legal entity). Individually, these financial
statements provide a limited view of the impact of COVID-19 because part of their operations is
executed by controlled entities. Without consolidated financial statements, completeness of
financial performance and position of government are not fully established. Without consolidated
financial statements, a reader faced with a multitude of separate financial statements may not see
the wood for the trees.

Sovereign Wealth Funds or Rainy-Day Funds

Governments may in some jurisdictions be able to transfer money from sovereign wealth funds
(SWFs) or other rainy-day funds to finance emergency expenditures without having to
transparently report on it. Many SWFs do not publish financial statements, and their financial
information is rarely included in the government’s consolidated financial statements. Smoothing
fiscal policy is a typical objective of SWFs so there is nothing secretive about spending some of
the savings on unforeseen expenditures to meet the challenges caused by the pandemic. When such
expenditure is extra-budgetary, it may be depicted in a budget execution statement. However, if
the money has passed through the government’s bank accounts, inflows and outflows should be
reported on the cash flow statement.

Country Practices
There are five examples of COVID-19-related updates on the government’s financial position and
performance issued by Canada, India, New Zealand, South Africa, and the United Kingdom.
The government of Canada produced its first set of accrual-based financial statements for the year
ending 2003 (appendix A). Its reporting entity includes all organizations controlled by the federal
government but does not include the provinces and other lower levels of government. Financial
statements are prepared under Canadian public sector accounting standards, which are similar to
IPSAS.
The government of India prepares financial statements primarily on a cash basis. Additional
information, including those prepared on an accrual basis (e.g., relating to debt and off-budget
items), is included in individual statements as part of the government’s financial statements.
The New Zealand government produced its first fully accrual-based combined financial statements
in 1992. Its reporting entity includes all organizations controlled by the national government but
does not include lower levels of government.
The government of South Africa prepares financial statements on the cash basis of accounting
supplemented with additional disclosure items (appendix D). South Africa prepares three separate
sets of financial statements: one consolidation including all departments of national government,
another consolidation including the public entities, and a third set reporting on the national revenue
fund.
The government of the United Kingdom has prepared accrual-basis, whole-of government
accounts (WGA) since 2010 (appendix E). These financial statements provide a comprehensive
picture of the financial performance and position of the United Kingdom’s public sector, which
comprises more than 8,000 bodies including public corporations and lower levels of government.
WGA is prepared under International Financial Reporting Standards, which are interpreted and
adapted for the public sector context and similar to IPSAS.