PREPARATION AND PRESENTATION OF

FINANCIAL STATEMENTS FOR LOCAL

GOVERNMENT
1.1 Introduction
Article 240 of the 1992 Constitution provides for the establishment of system of local government and
administration which should be decentralized. The Local Government Act, 1993 (Act 462) was promulgated to
ensure that the functions, powers, responsibilities and resources of the state are transferred from central
government to local governments in a coordinated manner. The Local Government Act, 1993 (Act 462) was
repealed by the Local Governance Act 2016 (Act 936). In Ghana, the local government concept is what is termed
the district assembly system in Ghana.

The district assembly concept is a vehicle to drive the concept of decentralisation of government.
Decentralisation is the process of redistributing or dispersing functions, powers, people or things away from a
central location or authority in government, decentralisation refers to the transfer of power, responsibilities
functions and resources from the central government to the local people through the local authorities.
Decentralised governance refers to the restructuring or reorganization of authority so that there is a system of
co-responsibility between institutions of governance at the central, regional and local levels according to the
principle of subsidiarity, thereby increasing the overall quality and effectiveness of the system of governance,
while increasing the authority and capacities of sub-national levels.
Forms of Decentralisation

Decentralisation can take many forms including political, administrative, fiscal and market decentralisation.

• Political decentralization aims to give citizens or their elected representatives more power. It involves
giving citizens, or their representatives, more influence in the formulation and implementation of laws
and policies. It is stronger when the local citizens are allowed to elect their own leaders who will be
accountable to them.

• Administrative decentralisation involves giving the local people administrative powers to make
decisions without recourse to the central government. There are three forms of administrative
decentralisation:

• De-concentration, the weakest form of decentralization, shifts responsibility for decision-making,

financing and implementation of certain public functions from officials of central government to those in
existing districts or, if necessary, new ones under direct control of the central government;
• Delegation passes down responsibility for decision-making, financing and implementation of certain
public functions to semi-autonomous organizations not wholly controlled by the central government,
but ultimately accountable to it;

• Devolution transfers all responsibility for decision-making, financing and implementation of certain
public functions to the sub-national level, such as district, regional, or state government.

• Fiscal decentralization means decentralizing revenue raising and/or expenditure of moneys to a lower
level of government while maintaining financial responsibility. Fiscal decentralization can be achieved
by allowing sub national government structures to levy user fees, encouraging user participation
through monetary or labour contributions, expansion of local property or sales taxes, intergovernmental
transfers of central government tax monies to local governments through transfer payments or grants,
and authorization of municipal borrowing with national government loan guarantees such as issue of
municipal bonds.

• Economic decentralization is achieved through privatization of public owned functions and businesses.
 2 REVENUES OF THE MMDAS

• 2.1 Introduction

Under the Local Governance Act, 2016 (Act 936) there are three main re-headings of the Assemblies:

i. decentralised transfers;

ii. internally generated funds; and

iii. donations and grants.

Decentralised Transfers

• Decentralised transfers to the MMDA is as a result of legal mandate or policy requirements.

Decentralised transfers comprise funds from the following revenue sources:

• the District Assemblies Common Fund;

• grants-in-aid from the central government such as the district development and facilities; and

• any other revenue transferred from the central government to the MMDAs such as subvention for
compensation for employees of established position.
Internally Generated Funds

This refers to revenues raised by the MMDA itself on the basis of the mandate granted by the Local
Governance Act, 2016 (Act 936). IGF comprise funds from the following sources:

• licenses (vehicle licenses and entertainment licenses);

• fees and miscellaneous charges;

• taxes (taxes chargeable on the income of certain categories of income earners);

• investment income; and

• rates

• IGF specifically identified under the schedules to the Act 936 is summarized below.
Donations and Grants

Donations and grants refer to funds paid directly to a District Assembly by a development partner on non-
exchange transaction basis.
 3 FINANCIAL REPORTING BY MMDAS

Responsibility for financial reporting in the MMDAs

Under Act 936, each District Assembly shall keep accounts and proper records in relation to the accounts and shall
prepare immediately after the end of each financial year, a statement of its accounts in the form that the Auditor-
General may direct.

The Assemblies shall prepare monthly and annual financial statements which shall reflect their Internally Generated
Funds, the Consolidated Fund, donor funds and all other sources of funds available to the Assembly. The Assembly
shall also submit returns to the CAGD for the preparation of the Public Accounts. The annual financial statements
shall be audited by the Auditor-General. The financial year of the Assembly shall extend from the 1st January to the
31st December each year

The MMDAs are separate legal entities and therefore have to prepare their individual Accounts. Each District
Assembly shall publish at its own office including sub-district offices and in any other manner directed by the Minister
for Local Government and Rural Development, including publishing the financial statements on the website of the
Assemblies (PFMR, 2019).
Set of financial statements of MMDAs

Like other covered entities, the accounting standards, policies and classification to be applied are determined by
the Controller and Accountant General. The set of financial statements required under the PFM Act, 2016 (Act
921) and the consequential Regulations are similar to what is required of other covered entities. The financial
statements required under the financial laws and IPSAS include:

• a statement of financial position (also known as a balance sheet) of the covered entity;

• a statement of financial performance (also known as revenue and expenditure statement) of the covered
entity;

• a cash flow statement of the covered entity;

• a statement of changes in net asset and equity of the entity;

• budget information in comparison with the actuals; and

• notes to the financial statements.

Preparation of statement of financial performance

In preparing statement of financial performance, the following guidelines are important:

• Total Revenue of the Assembly is shown separately for sub-classifications of total revenue using a classification

basis as spelt out in the Chart of Accounts;

• Total expenditure of the Assembly is shown separately for sub-classifications of total expenditure using a

classification basis as spelt out in the Chart of Accounts;

• Revenue and Expenditure for each Class and sub-classification are reported gross in the Statement of Financial

Performance; and

• Revenue and Expenditure may be reported on a net basis when they arise from transactions which the Assembly

administers on behalf of other parties and which are recognized in the Statement of Financial Performance.

• Expenditure of the Assembly may be classified and report based on the nature of the expenditure or by

functions of the Assembly.

Formats of statement of financial performance
Preparation of statement of financial position
This is similar to the those prepared under Consolidated Fund.
Preparation of cash flow statements
The cash flow statement is similar to those for Consolidated Funds except for few classification differences. It is also prepared in line
with IPSAS 2: Cash Flow Statement.
The format of the cash flows from operating activities under the indirect method is shown below.
Notes

In the cash flow statement, only cash resources controlled by the entity are reported. Therefore, any transaction
that does not pass through the entity’s bank accounts is not included in the cash flow statement. Example of
transactions not included in the cash flow statement in the given examples are:

• Salary subvention: the amount involved is paid to the employees directly by Controller and Accountant General
on behalf of the Assembly. Even though, such transactions qualify for revenue recognition, they do not form part
of the cash flow transactions of the Assembly.

• Established Post salary is an expense incurred by the Assembly but does not involve cash outflow from the
Assembly.

• Service in kind transactions create situations where services received by the assembly without any payment
from the assembly. Such services may have been paid for by a development partner directly. It does not affect
the cash flow of the entity.

• Vehicles transferred to the assembly has nothing to do with the Assembly's cash flow. And therefore, not
reflected in the cash flow statement.
 5 PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS OF THE
LOCAL GOVERNMENT

Introduction to combined financial statements

There are 260 MMDAs in Ghana operating under the Ministry of Local Government and Rural Development

as at 2020. Given the nature and structure of their operations, there is the need for each of the Assemblies to

prepare separate financial statements to provide information to the users about their respective financial

performance, position and cash flow position. In addition, useful information will be provided to achieve

financial reporting by reporting together their combined financial performance, position and cash flow

information.

In line with the International Public Sector Accounting Standards (IPSAS) 40, Public Sector Combination, the

Ministry of Local Government and Rural Development is required to prepare a set of Consolidated Financial

Statements of all the MMDAs. This is a new requirement and therefore the Ministry is yet to prepare the

maiden set of Combined financial statements.

 Application of IPSAS 40 to the MMDAs

The primary objective of the IPSAS 40 is to establish the requirements for classifying, recognizing and measuring public sector

combinations.

Public sector combination is defined as the bringing together of separate operations into one public sector entity. Examples of public sector

combinations include:

• nationalization;

• restructuring of central government ministries;

• reorganization of local or regional government, for example by rearranging territorial boundaries or by combining entities; and

• transfer of operations from one government (or governmental unit) to another.

The following do not constitute public sector combinations Under IPSAS 40:

• the acquisition or receipt of an asset or a group of assets (along with any related liabilities) that does not constitute an operation;

• the assumption of a liability or a group of liabilities that does not constitute an operation; and

• the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
 Operation

Operation is an integrated set of activities and related assets and/or liabilities that is capable of being

conducted and managed for the purpose of achieving an entity's objectives, by providing goods and/or

services.

Classification of public sector combinations

There are two type of public sector combinations under the IPSAS 40, amalgamation and acquisition. The

preparer is required to identify the type of combination required for a particular situation. The classification

of the combination is crucial as the recognition and measurement criteria for the transferred assets and

liabilities are different under the modified pooling of interests approach used for amalgamations versus the

acquisition method used

for acquisitions.
 Amalgamation

This gives rise to a resulting entity and is either:

• a public sector combination in which no party to the combination gains control of one or more operations; or

• a public sector combination in which one party to the combination gains control of one or more operations,

and there is evidence that the combination has the economic substance of an amalgamation.
 Acquisition

This is a public sector combination in which one party to the combination (the acquirer) gains control of

one or more operations, and there is evidence that the combination is not an amalgamation.

Where one party to a public sector combination gains control of one or more operations as a result of the

combination, an entity considers the economic substance of the combination in determining the

appropriate classification. To do so, an entity considers the following two indicators: (a) indicators

relating to consideration; and (b) indicators relating to the decision-making process.

In the circumstances of the MMDAs, amalgamation is the most appropriate combination to apply. In

accounting for amalgamations, the resulting entity applies the modified pooling of interest method of

accounting. The resulting entity is defined as the entity that is the result of two or more operations

combining in an amalgamation.
 Modified pooling of Interests method
Modified pooling of interests method of accounting is a variation of the pooling of interests method of accounting

(sometimes referred to as "merger accounting") in which the amalgamation is recognized on the date it takes place.

The resulting entity recognizes the assets, liabilities and any non-controlling interest that are recognized in the

financial statements of the combining operations as at the amalgamation date and measures them at their carrying

amounts in the financial statements of the combining operations. The resulting entity recognizes the difference

between the assets and liabilities assumed in an amalgamation as one or more components of net assets/equity.

Requirements for applying the modified pooling of interest method of accounting include:

Identification of the resulting entity. In the MMDAs, the resulting entity is the district assemblies or local

governments.

Determination of amalgamation date, which is the financial year of government.

Recognition and measurement of the assets received, liabilities assumed and other non-controlling interest in the

combining operations.

Recognition and measurement of the components of net assets/equity other adjustments from amalgamation.
The following general guidelines may be useful for amalgamation of the financial statements of the MMDAs

using the modified pooling of interest method:

i. The financial statements of the resulting entity reflect the combined entity's results as if they had always

been combined.

ii. Assets and liabilities recognized under amalgamation are those recognized by combining operations;

iii. Assets and liabilities are amalgamated at carrying amounts and not their fair value.

iv. Difference between consideration (if any) of assets and liabilities transferred recognized.

Net assets/ equity components not specified.

No restatement of the value of assets and liabilities is required.

v. The existing values (carrying amount) retrospectively reported in the statement of financial position of

the resulting entity, adjusted only to harmonies accounting policies.

vi. Revaluation reserves and accumulated depreciation should also be

recognized.

vii. No goodwill arises in merger accounting as there is retrospective restatement.

viii. Eliminate the effect of all transactions between the combining operations in preparing the financial

statements of the resulting entity.

ix. The resulting entity shall classify and designate the assets and liabilities received in the amalgamation

using the classification and designation previously applied by the combining operations.
Example 3 (continued): Combined financial statements
Additional Information
• The Ministry of Local Government and Rural development prepares consolidated financial statement of the two

Assemblies using the modified pooling of interest's method of accounting recommended under IPSAS 40: Public

Sector Combination.

• MUA previously measured property, plant and equipment using revaluation model whereas ZDA applies the cost

model. Meanwhile the Ministry of Local Government and Rural Development has adopted the accounting policy of

measuring property, plant and equipment using the revaluation model. The Ministry has engaged the professional

valuer who adjusted the carrying amount of the property, plant and equipment of ZDA to GH¢193,000,000. The

resulting increase in depreciation charge for the year was GH¢3,000,000.

• MUA recognized its internally generated fund in compliance with the IPSAS however ZDA recognises the internally

generated fund on cash basis. The Ministerial enquiry reveals that an amount of GH¢12,000,000 was earned as

internally generated funds by ZDA but was not captured by the separate financial statement. The Ministry

recognises revenues in compliance with IPSAS 9: Revenue from Exchange Transactions and IPSAS 23: Revenue from

Non Exchange Transactions.

• MUA has rented its earth moving equipment to ZDA at an amount GH800,000 to grade the untarred

roads within the Assembly. ZDA has not paid for the rental at the end of the year and had since

recognized the amount as payables to MUA. MUA has recognized the revenue as internally generated

funds in accordance with IPSAS 9: Revenue from Exchange Transactions.

Required:

• Prepare a Statement of Consolidated Financial Performance for the year ended 31st December 2020

and Statement of Consolidated Financial Position as at 31st December 2020 for the Local Government,

as the resulting entity under the IPSAS 40: Public Sector Combinations.