CHAPTER FOUR
BUDGETING AND PERFORMANCE REPORTING
4.1. Budgeting in the Public Sector
Budgeting can be defined as the process of preparing a budget, which sets estimations for revenues
and expenses for future periods. It is a mechanism for allocating resources to goals and objectives
of an entity and is related to the strategic plan. The budget is the financial statement prepared in
order to forecast the expenditures and revenues for the budgetary period and to be used by
managers and policy makers in decision making and accountability processes. The budget can
refer to 1 year (annual budget) or more than 1 year (multiyear budget). In any case, the process of
preparing the budget takes place during the months before the year it refers to so that it can be used
by the beginning of the fiscal year.
In the public sector, the budget is a document for financial management but it is also used for
policy implementation and for controlling and monitoring the achievements and the legal
compliance of political decisions approved. It provides the basis for authorizing expenditure and
for the collection of fees and charges. In most countries, the budget has a limitative character for
the expenditures, which means that it sets the maximum that the government can spend on each
budgeted item. It is approved through a political process and after a parliamentary debate, which
usually requires the majority of votes. So, the budget can be considered as a contract between
citizens and state, showing how resources are raised and allocated for the delivery of public
services. Statutory frameworks ensure that public sector organizations set balanced budgets where
the estimated revenues cover the expenditures.
Budgeting is a cornerstone of the trust between states and their citizens and key to transparency
and accountability. At the end of the year, the budgetary reporting shows the expenditures and
revenues of the year along with the differences between them and the approved budget. Thus, the
budget provides the basis for budgetary control. The main objectives of public sector budgeting
are: -
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To assist strategic planning and defining the objectives for the budgetary period
To help in planning expenditures and what resources (for example taxes) are necessary to
carry them out
To implement and control policies
To provide the basis for authorizing expenditure
To provide the basis for budgetary control
To provide the basis for accountability
To measure and monitor performance
Generally, the public budget is annual plan of the government which outlines planned public
revenue and expenditure, and usually is passed by the highest governmental bodies, such as:
parliament, municipal councils and regional/provincial councils, known as legislature.
4.2. Classification of Budget
“Budget classification is one of the fundamental building blocks of a sound budget management
system, as it determines the manner in which the budget is recorded, presented, and reported,
and as such has a direct impact on the transparency and coherence of the budget.
Federal, State and local governments prepare and utilize different budgets. Thus, Budgets are
classified differently considering dimensions such as Expenditure Program, Legal Status;
Flexibility; Source on Finance; and Preparers. Budgets are classified as Capital or Current based
on the Expenditure Program; Tentative or Enacted based on legal status; General or Special based
on source of Finance; Flexible or Fixed budget based on flexibility; and Executive or Legislative
based on preparers of budget.
A. On the Expenditure Program
a. Current Budget: A current or temporary budget (also referred to as the Adjusted
Budget) is the amount of budget available to spend in the current fiscal year period,
which is July 1 through June 30. The temporary budget can be the original beginning
budget and/or amount from temporary budget adjustments.
A recurrent budget tracks ongoing revenues and expenses that occur on a regular basis,
be they monthly, quarterly, semiannually, or annually. Also known as an operational
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budget, a recurrent budget includes line items such as wages, utilities, rent or lease
payments, and taxes. It also includes purchases that are expected to last for less than a
year, such as office supplies. A recurrent budget can help a company manage its money
and come up with strategies for cutting day-to-day costs.
b. Capital budget: A capital budget is used to evaluate potential investments or
expenditures for specific projects or purposes. When a company draws up a capital
budget, it is typically doing so to determine whether it makes financial sense to acquire
a specific asset -- e.g., a warehouse or a piece of equipment -- or to pursue a new project.
Capital budgets cover purchases that are expected to last more than a year. The amount
a company spends on such purchases is known as a capital expenditure.
B. Based on legal status
a. Tentative budget: The Tentative Budget contains the projected revenues and
expenditures for the upcoming fiscal year. Tentative budget means a budget that is
approved by Council prior to the beginning of a new fiscal year to set priorities and
guidelines for the final budget to be approved.
b. Enacted budget: The Enacted Budget Summary reflects the state spending plan
passed by the Legislature and signed by the Governor. The Enacted Budget Summary
provides Summary Charts, Enacted Budget Summary information for selected Major
Program Areas, and veto messages.
C. Based on source of Finance:
a. General Budget: General budget General budget is the core document of public
finances to a study in the countries of the world, being included in the sides of state
spending and revenues that appear through which planned objectives, and indicate
the budget numbers to the evolution of the growing importance of the budget.
b. Special Budget: Budgets prepared for business plans proposing new ventures or
substantial changes in existing programs are examples of special purpose budgets.
D. Based on Flexibility
a. Flexible Budget: The flexible budget also known as variable budget can be
defined as a financial estimate revenues and expenses on the basis of
current/actual volume of sales/ production/ activity level which changes with the
change in the actual input and outputs levels.
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b. Fixed Budget: A fixed budget is a budget that doesn't change due to any change
in activity level or output level. A flexible budget is a budget that changes as per
the activity level or production of units. The fixed budget is static and doesn't
change at all.
E. Based on preparers of budget
c. Executive Budget: the executive budget process consists of three main phases:
development of the President's budget proposal, submission and justification of
the President's budget proposal, and execution of enacted annual appropriations
and other budgetary legislation. Congress may become involved in any of these
phases.
d. Legislative Budget: A legislative Budget is prepared by the various committees
appointed by the legislature from among its members.
4.3. Approaches of Budgeting
A. Incremental budgeting. Incremental budgeting is the traditional budgeting method
whereby the budget is prepared by taking the current period's budget or actual performance
as a base, with incremental amounts then being added for the new budget period.
Incremental budgeting is the traditional budgeting method whereby the budget is prepared
by taking the current period's budget or actual performance as a base, with incremental
amounts then being added for the new budget period. These incremental amounts will
include adjustments for things such as inflation, or planned increases in sales prices and
costs.
A school will have a sizeable amount in its budget for staff salaries. Let's say that in one
particular year, staff salaries were $1.5m. When the budget is being prepared for the next
year, the head teacher thinks that he will need to employ two new members of staff to teach
languages, who will be paid a salary of $30,000 each (before any pay rises) and also, that
he will need to give all staff members a pay increase of 5%. Therefore, assuming that the
two new staff will receive the increased pay levels, his budget for staff will be $1.638m
[($1.5m +$30k + $30k) x 1.05].
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B. Zero-Based Budgeting: Zero-based budgeting (ZBB) is an approach to making a budget
from scratch. The budget is not based on previous budgets. Instead, the budget starts at
zero. It involves re-evaluating every line item of cash flow statement and justifying all the
expenditure that is to be incurred by the department. Zero-based budgeting (ZBB) is a
method of budgeting in which all expenses must be justified for each new period. The
process of zero-based budgeting starts from a "zero base," and every function within an
organization is analyzed for its needs and costs. The budgets are then built around what is
needed for the upcoming period, regardless of whether each budget is higher or lower than
the previous one.
C. Performance budgeting: is “the systematic use of performance information to inform
budget decisions, either as a direct input to budget allocation decisions or as contextual
information to inform budget planning, and to instil greater transparency and accountability
throughout the budget process, by providing information to legislators and the public on
the purposes of spending and the results achieved”. A shorter definition is “any budget that
represents information on what agencies have done, or expect to do, with the money
provided to them’’ (Schick).
The broader definition of performance budgeting includes spending reviews and
programme evaluation as well as preparation of the annual budget using performance
information. However, these Best Practices refer mainly to the core processes of budget
formulation, budget execution, monitoring and reporting.
D. Program-Based Budgeting: developed by U.S. president Lyndon Johnson, is the
budgeting system that, contrary to conventional budgeting, describes and gives the detailed
costs of every activity or program that is to be carried out with a given budget. It is a
budgeting tool where all budgetary information is organized. around the City's programs
and services. The budget will show the costs of the program, the. revenues that the program
generates, as well as showing a way to evaluate the programs.
A good example of program budgeting in the context of a sport organization occurs when
calculations are made to find the probable revenues and costs associated with providing
coaching, clothing, competition fixtures and pitches to all junior members of a football club
for a season (i.e., the Junior Football program).
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E. Planning-Programming-Budgeting System (PPBS): Program Planning Budgeting
System (PPBS) PPBS is a technique that allows the integration of budgeting and planning
through the programs. The budgetary process in this case has three basic phases: (a) the
planning phase, where the objectives of the organization must be defined in order to
evaluate the different possible ways of achieving these objectives; (b) the programming
phase, which took the proposals of the planning phase and integrated them in the programs
defined through a hierarchy of the objectives; and (c) the third phase is the translation of
each multiyear program into a set of specific annual actions. The information about the
execution and control of the annual budget offers usually conclusions or lessons that are
useful for reviewing the plan in the medium and long terms. The PPBS can be a useful
long-term planning tool as it informs not only about the short term but also about future
implications of present decisions.
4.4. Budgets and Outturn Reporting (IPSAS 24)
The Standard is applied by entities that are required, or elected, to make their approved budgets
publicly available; and they are held publicly accountable for those budgets. A publicly available
approved budget means that the budget has been:
approved; and
made available to the public at large by tabling in Parliament, legislature, municipal
council. Or
made public by the entity through its own actions (i.e., voluntarily)
For some entities, determining whether the approved budget was made available to the public may
not be straightforward. Entities should consider whether (a) the budget was approved and made
publicly available by tabling with a legislative body, through inclusion in a publication, website
or other media by the entity, and (b) the entity will be held publicly accountable for those budgets.
“Approved” means that the budget was approved by a legislative body such as Parliament,
Legislature, Municipal Council or other relevant authority. An “approved” budget is an
expenditure authority derived by law, appropriation bill, regulations or similar in relation to
anticipated revenue or receipts for a budget year. An “approved” budget is not a forward estimate,
forecast or projection.
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For each level of legislative oversight, the comparison of budget and actual amounts should present
separately:
a. the approved and final budget amounts;
b. the actual amounts on a comparable basis; and
c. an explanation of material differences between the approved budget and actual amounts
in a note disclosure (or cross referenced to another report).
There are two methods to present the comparison:
a. additional budget columns in the primary financial statements; or
b. a separate additional financial statement referred to as the “Statement of Comparison of
Budget and Actual Amounts” or similar.
Additional budget columns: This method is used when the budget and financial statements are
prepared on a comparable basis. I.e., the amounts in the financial statements are presented on the
same accounting basis, same classification basis/ structure or presentation format, using the same
formats and classification schemes, for the same entities and for the same period as the approved
budget. Additional columns will identify approved and final budget amounts and, if the entity so
chooses, differences between the budget and actual amounts.
Separate financial statement: This method is used when the budget and financial statements are
not prepared on a comparable basis. It can also be used when the budget and financial statements
are prepared on a comparable basis. Thus, it is important that the financial statements clarify when
the budgetary basis and accounting basis differ.
The approved budget includes detailed information about specific activities and programmes, and
may be published in various formats, e.g., schedules, note disclosures, etc. To ensure the
information is presented at the relevant level of oversight, the information is aggregated into broad
classes, budget classifications, or budget headings. The Standard explains that entities should
present the comparison of budget and actual information to be consistent with the broad classes
and budget classifications, or headings so that the comparisons are made at the relevant level of
oversight set by the relevant authority approving the budget and identified in the approved budget.
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In some cases, financial information included in approved budgets needs to be aggregated for
presentation in financial statements to avoid disclosure overload and to reflect relevant levels of
oversight set by Parliament, the legislatures, the municipal councils, or other relevant authority
approving the budget.
For example:
If the approved budget comprises the full set of primary financial statements, then the
comparison of budget and actual information is presented as the full set of financial
statements.
If the approved budget is presented as the statement of financial performance or cash flow
statement, then the comparison of budget and actual information is presented as those parts
of the primary financial statements that make up the approved budget.
Therefore, the extent of the comparison and level of aggregation involves judgement. Such
judgement is exercised in the context of the Standard’s objective and the qualitative characteristics
of financial reporting. The Standard requires that the actual amounts should be presented on a
comparable basis to the budget in the comparison of actual and budget amounts. The approved
budget is a legal document through which entities will be held accountable, as such the actual
amounts in the financial statements should be adjusted to align with that budget.
Comparable basis means that the actual amounts from the financial statements are adjusted to
reflect the same basis of accounting (i.e., cash or accrual), same classification system/structure
(i.e., nature, function or other basis), same entities (i.e., for a group of entities, or an individual
entity), and reporting period, as the approved budget. Where the approved budget is prepared on
the cash or modified cash basis and the classification system is different to the financial statements,
it means that the actual amounts will be presented based on the accounting basis and classification
system adopted for the approved budget.
The Standard requires an explanation of material differences between the budget and actual
amounts to be disclosed in the notes to the financial statements (or cross referenced to another
report). The Standard requires presentation of the approved and final budget amounts in the
comparison of actual and budget amounts.
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An approved budget is defined as: “The expenditure authority derived from laws, appropriation
bills, regulations and other decisions related to the anticipated revenue or receipts for the budgetary
period.”
A final budget is defined as: “The approved budget adjusted for transfers, allocations,
supplemental appropriations, and other changes applicable to the budget period.” Therefore, the
final budget includes all changes made by the entity subsequent to the budget being approved by
Parliament, the legislatures, municipal councils or other relevant authority. Unlike the approved
budget, the final budget may not necessarily be made publicly available. In some cases, the
approved and final budget may be the same.
The Standard requires an explanation of changes between the approved and final budget in the
notes to the financial statements (or cross referenced to another report). Depending on the
legislation governing budgets, changes between the approved and final budget may undergo an
approval process. Entities should provide explanations of these changes as it will assist the users
of financial statements to understand what gave rise to those changes.
The explanation will include whether, for example, changes arose as a result of reallocations within
the approved budget parameters or other factors, such as changes in the overall budget parameters.
Due to the material nature of these changes, the changes should be explained regardless of the size.
The Standard requires entities to explain in the notes to the financial statements:
the budgetary basis and classification system adopted in the approved budget
period covered by the approved budget; and
entities included in the approved budget.
The financial statements already include information on the basis of preparation for the financial
statements. By disclosing this additional information, it will assist the users of financial statements
to understand the relationship between the budget and actual information disclosed in the financial
statements. When the financial statements and approved budget are not prepared on a comparable
basis, the Standard requires a reconciliation of the actual amounts on a comparable basis to the
budget and the actual amounts presented in the financial statements (hereafter referred to as “the
reconciliation”) to be presented on the face of the statement or in the notes.
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The reconciliation should separately identify any basis, timing and entity differences for the
following:
a. if the budget is prepared on the accrual basis, total revenues, total expenses and net cash
flows from operating activities, investing activities and financing activities; or
b. if the budget is prepared on a basis other than accrual basis, net cash flows from operating
activities, investing activities and financing activities.
The Standard does not prohibit entities to reconcile each major total and subtotal, or each class of
items, presented in a comparison of budget and actual amounts with the equivalent amounts in the
financial statements. The reconciliation is presented to explain to the users of the financial
statements the sources of differences between the actual amounts on a comparable basis and the
equivalent amounts recognized in the financial statements. The differences may include:
Basis differences - occur when the financial statements and budgets are prepared on a
different accounting and classification basis.
Timing differences - occur when the budget and actual amounts are not prepared for the
same period.
Entity differences - occur when the entities included in the budget are not the same as those
included in the financial statements.
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Operating Financing Investing Total
Actual Amount on Comparable Basis as Presented in the X X X X
Budget and Actual Comparative Statement
Basis Differences X X X X
Timing Differences - - - -
Entity Differences X X X X
Actual Amount in the X X X X
Statement of Cash Flows
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4.5. Performance Budgeting and Reporting
Performance-based budgeting aims to improve the efficiency and effectiveness of public
expenditure by linking the funding of public sector organizations to the results they deliver, making
systematic use of performance information. There are a number of models of performance-based
budgeting that use different mechanisms to link funding to results. Some have very sophisticated
features and require the support of correspondingly sophisticated public management systems (see
below), while others focus more on the basics.
Performance budgeting is generally understood as a system of presentation of public expenditure
terms of functions, programmes, performance units, viz. activities1 projects, etc., reflecting
primarily, the governmental output and its cost. It is essentially a process which brings out the total
governmental operations through a classification by functions, programmes and activities.
Through suitable narrative statements and workload data that form an integral part of the
presentation, it indicates the work done, proposed to be done and the cost of carrying these out.
The main thrust of performance budgeting has been on providing output-oriented budget
information within a long-range perspective so that resources could be allocated more efficiently
and effectively. Its emphasis is on accomplishment rather than on the means of accomplishment.
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Performance budgeting, therefore, involves the development of more refined management tools,
such as work measurement, performance standards, unit costs, for the sake of:
correlate the physical and financial aspects of programmes and activities;
improve budget formulation, review and decision-making at all levels of management in
the government machinery;
facilitate better appreciation and review by the legislature;
make possible more effective performance audit;
measure progress towards long-term objectives as envisaged in the plan; and
bring annual budgets and developmental plans together through a common language.
Budget reporting: considered to be of two types: ex-ante—the external reporting of the budget
approved by the legislative body at or near the beginning of the fiscal period as well as external
reporting of prospective or forecast budgetary data; and ex-post—the external reporting of the
financial activities relative to the approved budget for the fiscal period until the final audit after
the end of the fiscal period. The budget to actual comparative statement is generally issued as a
component of the historical financial statements.
A budget report is a document that provides a comparison between the actual budget and a
projected budget. The report is used to determine why the expenditure is high and which
components are responsible for it. With this information, an action plan can be created to bring
down the expenditure levels to its budgeted amount. Through a budget report, businesses are able
to maintain control of their finances.
A budget report will show where your company or organization financially stands. Quarterly
reports allow you to track your spending and ensure that you are on track to meet your budget
goals. Quarterly reports also allow you to make adjustments as necessary. A budget report should
consist of a document as well as a presentation where you can answer questions and make
adjustments during your meeting. A successful budget report will address both past spending and
future spending.
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