accounting for public liability

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ACCOUNTING FOR PUBLIC LIABILITY

Copyright©Redeemer

Krah 2014

3/14/2014 1 Copyright @REDEEMER Y. KRAH

What is Public Liability?

• It refers to a present obligation of a government arising from past events, the settlement of which is expected to result in an outflow from public resources embodying economic benefits.

• All liabilities that meet the definition and recognition criteria should be reported in the statement of financial position.

• Usually commitments, guarantees or contingent liabilities do not qualify as liability for recognition.


Types of Liability

• The liability of government may be grouped into three:

– Sundry creditor or Payables for goods, services, works and contracts

– Trust monies and deposits held by government in a trustee capacity

– Borrowings of funds (public debt)


• Payables are amount owing on supply of goods, services, works and contracts.

• They arise as result of normal operation of government entities.

• Examples include:

– Payable on supply goods to government entities

– Arrears on services such as salaries

– Amount due to contractors

– Utility bills unpaid

Public liability- Payables


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Public liability- Trust monies and Deposits

• Trust monies – These are monies received into, or

held in the consolidated fund and administered by public officers on behalf of a the public or nay private or public agency in accordance with the term of any enactment, agreement or trust deed.

• Deposits – They refer to a sum of money required

by an enactment or agreement to be paid into the consolidated fund as security for the doing of any act or thing and held or disposed of in accordance with the enactment or agreement.

– Examples include: tender security, retentions, commitment charges etc


Public Liability- Debt • Public debt

– Public debt as the aggregate of amount borrowed, the interest accrued and other incidental cost associated with procurement and management of the debt (Article 181 &182).

– No loan shall be raised by government on its own behalf or on behalf of any other public entity, unless by or under an Act of Parliament. ( Constitution & Loan Act 1970)


Public debt

• Reporting of public debt

– The amount of debt (domestic and foreign debt) should be reported as liability a on the statement of financial position.

– Additionally, Statement of Public Debt is required to show the debt stock at start, the debt repayments during the year, the debt acquisitions during the year, interest accruing on the debt and any debt forgiveness during the year.


Terminologies • Gross debt

– It refers to the total debt a government owes as a result of issuance of bills, bonds and other means of borrowing.

• Net debt – It refers to the difference between the

sum of all financial assets and the sum of all liabilities of government as at a particular period.

• Total liabilities – Represents all the amounts owed by

government to external parties. It includes accounts payable, bonds and bills, pension obligations and other amounts owing to individuals, organisations outside government as well as other countries.


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• Funded debt – Its a debt for which a special fund

(known as sinking fund) is created to accumulated money to redeem the debt over a period

• Unfunded debt – Is a debt which is not backed by any

specific fund for its redemption. Such debts are usually paid from the consolidated fund directly.

• Concessionary debt – Loan facility with soft terms and

conditions. Interest rates are low and payment period span for over many years.

• Commercial debts – Debts that contains commercial terms

and conditions


Procedure for procuring debt

• There are three stages in public borrowing process:

– Preparatory stage

– Approval stage

– Signing and executing stage


• Preparatory stage

– This stage involves the receipt or identification of project proposal by the sector ministries, financial evaluation of the project and the preparation of memorandum to Cabinet for consideration and approval.

• Approval stage

– This stage involves obtaining Cabinet/Executive approval and Parliamentary approval through the following processes. When both

• Signing and execution stage

– This stage from the Signing of Credit Agreement, Commercial Contract Agreements to the time of first disbursement/drawdown, mobilization or down payment.


Why Government Borrows? • Government incur debt for the

following reasons: – To finance budget deficit, which is the

excess of government spending over government revenues

– To stabilize the economy in times of economic rescission

– To investment in public infrastructure like roads

– To undertake self-funding projects/institutions such as building Gas reserves.

– To take advantage of cheap loans available in the market

– To meet emergencies such as catastrophe or wars

– To meet political pressures


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Argument against borrowing

• The negative effects of borrowing include:

– Huge cost of debt servicing which may deny the country the use of its tax revenues for a long period

– Harsh conditions and terms may undermined future economic fortune of the country

– Huge debt stock of a country discourages foreign direct investment.

– Delay in disbursement of the loan after agreement signed may distort government programmes and projects

– Continuous borrowing may lead to shameful consequences like HIPC


Ways of reducing public debt

• Public debt can be reduced through the following ways:

– Reducing budget deficit or running balanced budget

– Increase Tax revenues through widening the tax net

– Financial engineering where much cheaper debts may be procure to pay off much expensive ones

– Ensuring prudent economic policies and financial discipline

– Adopting sound debt management practices .


Types of public debt • Public debt may be classified

based on the payment term or source of loan.

• Based on payment term we have; – Short term debt (payable within 1

year). E.g T-Bills, ways and means, etc

– Medium term debt (payable within 2-5 years). E.g. Bonds, Bank loans etc

– Long term debt (above 5years).Eg Bonds.

• Based on the source of borrowing we have: – Domestic debt

– External/foreign debt


Domestic debt • Domestic debt are debt procured

from local citizens and institutions

• Domestic borrowing is fast growing and gaining more momentum, not only due to expansion in coverage but also the diversification of sources and types.

• Common sources of domestic debts are:

– Issue of government securities

– Commercial banks

– Non Bank institutions

– Domestic suppliers credit

– Ways and means advances


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• Government securities – These are the Government

borrowing through the issuance of Treasury bills and Notes/ bonds on the domestic market, usually by the Bank of Ghana, as Agent.

– This source also includes other non-marketable instruments or government deficits securitized into long term bonds and stocks.

• Commercial banks – Government borrows from the

commercial banks in Ghana.

• Non-banks – Government borrows from non-

banking sector, including SSNIT ( pension fund loans


• Domestic supplier’s credit

– These include pre-finance contracts undertaken by domestic contractors or suppliers.

• Ways and means advances

– Government borrows from the reserves of the Bank of Ghana in time of financial difficulty.

– This source is rarely explored by governments in recent days because it undermines the money policies of government.


External Debt • External debt is defined on gross

basis at any given point in time as disbursed and contractual liabilities of the central government to nonresidents to repay principal, with or without interest, or to pay interest, with or without principal.

• Basically, external debt is therefore the amount owed to creditors /lenders which are non-resident of the country.

• External borrowing sources are further segmented into four categories as; Multilateral, Bilateral, Commercial and Private.


• Multilateral debts

– These are sources of borrowing obtained from international organisations or grouping.

– It could be a worldwide member countries organisation like the

• World Bank (WB),

• Regional Organisation like the African Development Fund (ADF),

• or the economic grouping organisation like the OPEC Fund for International Development (OFID)

• Fund and religious/sectional organisation like the Islamic Development Fund.

– The MIL is further categorized into Multilateral Non-concessional (MILN), e.g.IBRD, ADB and Multilateral Concessional (MILC), IDA, ADF.


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• Bilateral debt

– These are sources of borrowing between the Republic of Ghana and other recognised sovereign nations. For example, a credit transaction between the Republic of Ghana and the Republic of Korea, represented by the appropriate institutions.

– This BD is further categorized into Bilateral Non-concessional (BILN) e.g. the Export Credit Agencies and Bilateral Concessional (BILC) e.g. the soft loans (usually Government to Government)


• Commercial borrowings – These sources relates to the

borrowing from the international commercial banks, the international capital markets and other potential sources such as the Mutual funds, Pension Funds, recognised stock markets and other specialized funds.

– For example, the 2007 Ghana’s maiden Eurobonds were issued.

• Private sources – These are sources derived from

international private individuals or organisations. Example is the export credit facility.


Composition of Public Debt

• The obligation on public debt arises in two ways:

– central government as borrower and

– Publicly guaranteed type borrowings.


• Central government borrowing – This is borrowed by central

government for itself or on behalf of parastatal entities: • Borrowing by central government

represented by MOF

• Borrowing by central government with intention of on -lent to parastatal

• PPP finance arrangement.

• Publicly guaranteed type (contingent liability) – Government is required to guarantee

or consent to a loan agreement: • Parastatal borrowing which requires

Government Guarantee

• Ghana’s Public Borrowing Guidelines – Prepared by DMD Page 10

• Private Sector borrowing which requires Government Guarantee

• Parastatal or Private borrowing which requires Government consent


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Public Debt Management • Public debt management is the

process of establishing and executing a strategy for managing the government's debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other public debt management goals the government may have set, such as developing and maintaining an efficient market for government securities.


Public debt management

• The overall objective of PDM is to ensure that the government's financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.

• Sources of risk associated with PDM include: – Market risk – Roll over risk – Liquidity risk – Credit risk – Settlement risk – Operational risk


Public debt management in Ghana

• The management of public debt is the responsibility of the Minister of Finance (Article 181 of Constitution and Loan Act 1970)

• The Debt Management Unit of MOFEP is specifically responsible for the management of public debt.

• The main debt management objective is to minimize the financial cost of the public debt while maintaining the market and operational risks at an acceptable level, taking into account the general objectives of the fiscal and monetary policies.


Functions of Debt Management Division of

MOF • The functions of the debt management

division has been categorized into three – Back office functions – Middle Office functions – Front Office functions

• Back Office Functions- – Building and maintaining a comprehensive

central external and domestic debt database

– Implementing Ghana’s aid and debt management objectives, policies and strategies

– Monitoring the overall utilisation of aid with the view to improving aid absorption capacity

– Managing loans “on-lent” and ensure timely recovery of debt repayment &

– Implementing Ghana’s Debt Relief Initiatives, debt reorganisation and restructuring


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• Middle Office Functions – Advising on suitable sources of funding

for government projects and programmes

– Formulation, implementation and updating the country’s debt management objectives policies and strategies

– Carrying out regular analysis of the public debt portfolio and provide appropriate advice

– Designing and implementing the overall risk management strategies

– Evaluating loan proposals

• Front Office Functions – Assist in negotiating prudent terms and

conditions for new financing commitments

– Negotiate debt refinancing, reorganization, rescheduling and/or restructuring

– Investor and Development partners’ relations


Debt management terminologies

• Some these trilogies or strategies include:

– Debt assumption

– Debt write offs/downs

– Debt-for-equity swap

– Debt forgiveness

– Debt restructuring

– Debt rescheduling

– Debt rollover

– Contingency contract

– On-lent debt


• Debt Assumption

– It occurs when government guaranteed loans for statutory institution, state owned enterprises, or other parastatal entities and government is called upon to repay the amount due in times of default of the borrower.

• Debt write offs/down

– It refers to situation where the creditor decides to write off write down amount due from the borrower, especially when the borrower is in extreme difficulty such as bankruptcy, or restructuring


• Debt forgiveness

– It refers to the cancelation of debt by mutual understanding between the creditor and the borrower.

– A good example is the debt forgiveness scheme under Highly Indebted Poor Country initiative (HIPC).

• Debt-For-Equity Swap

– It a practice where the borrower offers shares in settlement for a debt.

– The creditor becomes a shareholder of the borrower’s operations.


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• Debt Restructuring

– This is where the borrower enters into agreement with the creditor to alter the terms and conditions of servicing an existing debt to a more favourable one. It requires renegotiation of the debt.

• Debt Rescheduling – It refers to the practices where the

debtor seeks the creditors consent to reschedule the debt interest and principal that are due for payment or already in arrears.

• Contingent contract – It refers to a provision in a debt

agreement that create a conditional financial claim on either party.

– It represents either potential assets or liabilities on government.

– Example is guarantee clause in debt agreement.


• Debt rollover

– This is when a borrower fails to honour its obligation on the due debt and the arrears (both interest and principal repayment) are added back to the debt stock of the borrower.

– Its costly to roll over debt.

• On-lent debt

– This is where government borrows and thereafter transfer the amount borrowed to parastatal entities or SOE.

– In this case the government is becomes a debtor to the Creditor and a creditor to the beneficiary of the loan.

– For example, GoG borrows and on lent it to VRA.


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