Government Accounting Framework Sailendra Pattanayak, FAD International Monetary Fund
Key Elements of an Accounting Framework • Accounting basis – cash or accrual • Budget classification and chart of accounts • General Ledger and subsidiary records • Accounting process (manual or computerized) and outputs • Accounting policies • Reporting entity • Financial statements/reports Skilled personnel is important resource to implement the above
Accounting Framework in a Typical LIC – Main Issues • Manual book keeping • No ledger-based double entry system • Lack of a comprehensive chart of accounts (or a detailed coding system with various segments) • Substantial delay in annual accounts preparation • Lack of clarity on the ‘reporting entity’ concept for consolidation of annual accounts • Lack of clear methodology and accounting policies/standards for financial statements/reports
Cash Basis Accounting • Transactions are recognized only when the related cash receipts and payments occur
Accrual Basis Accounting • Flows are recorded at the time economic values are created, transformed, exchanged, transferred, or extinguished – GFSM 2001 • A basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid) - IFAC Public Sector Committee
Basis of Recording Government Financial Operations • Cash based accounts: • Revenue / expenditure transactions are recognized only when cash flow results • Ignores liabilities until due for payment • Ignores non-cash operations altering stock of government assets and/or liabilities • Needs to be supplemented by memoranda items to bring to light economic flows escaping the accounts • Accrual based accounts: • Economic flows are recorded at the time economic value is created, transformed, exchanged, transferred, or extinguished. • All economic flows (not just cash flows) are recorded. • At the heart of accrual based accounts are the criteria adopted for recognizing an economic flow. • Imprecise and non-transparent recognition criteria will compromise the integrity of accrual based accounts
Basis of Recording Government Financial Operations • Modified Accrual based Accounts: • The term modified accrual basis, no longer defined as a formal, distinct accounting basis, is generally used to imply relaxed standards for recognition of economic flows. • Modified accrual basis is commonly employed: • To enhance cash based accounting by accounting for certain operations like expenditure commitments before cash flow results • To provide a migration path from cash-based to accrual based accounting systems • Modified Cash based Accounts: • This term is used to describe accounting systems under which cash-based accounts are “kept open” for some days/months beyond the close of the year to take on board transactions in pipeline at the time of year-end
Accounts Keeping Process and Outputs STEPS RECORDS Collect Source Documents -- Vouchers -- Bank Statements -- Transfer entrees Daily bank statements Register of checks Payment vouchers Revenue receipts Transfer entrees Record in Journals General / Special Journals Post General Ledger Post Subsidiary Ledgers General Ledger Subsidiary Ledgers Trial Balance Prepare Trial Balance Prepare Correction Entrees Consolidated Financial Statements Prepare Financial Statements
Government Financial Statements • Annual Government Financial Statements • Final Government accounts duly certified by the independent Supreme Audit Institution (SAI), together with a comprehensive audit report on the regularity, integrity, and propriety of government fiscal operations • Government accounts should, at the minimum consist of : • Under cash based accounting: • Statement on sources, allocations, and use of cash resources – Finance Accounts • Statement on approved budget estimates and actuals – Budget Execution Accounts/Appropriation Accounts • Under accrual based accounting: • Statement of Government Operations • Statement of Other Economic Flows • Balance sheet • Statement of Sources and Uses of Cash • Budget Execution/Appropriation Accounts
Chart of Accounts • Countries do not always have a chart of accounts • That means that they do not have a proper general ledger system • Occasionally, some transactions are recorded in one system, and other transactions are recorded in another system • Without a COA and ledger system, the accounting framework can be considered to be lacking in basic accounting discipline and controls • The reliability and accuracy of the accounting system can be in doubt
Chart Of Accounts – what it is • Logical framework for recording and reporting financial information • Modern systems include budget classification fully in COA • COA can accommodate progressive move to accrual accounting • Asset and liability accounts in addition to revenue and expense accounts • The Chart of Accounts needs to meet the business requirement of the Government • COA forms core of the information to be generated and tracked in a GFMIS 11
Budget Classification and Chart of Accounts • BC = revenue, expenditure & borrowings • COA = BC + asset, liability and equity accounts • COA also includes any internal management classification such as departments, cost centers, regions. • GFSM 2001 should be followed when developing budget classification • Uniform budget classification system, at all levels of government (e.g. Brazil, India) – helps in general government reporting.
Budget Classifications • GFSMrequires Economic and Functional Classifications • Salary, goods and services, grants, subsidies are economic classifications • Education, health, defense, are functions • Other Classifications • Countries usually also have administrative classification — ministries and departments • Other classifications may include: programs, fund, geographic location, etc.
Account Type • Revenue and expense type • Asset, liability type • Net-worth/Equity type • Revenue and expense accounts are netted off at year-end and the surplus/deficit is transferred to Net-worth/equity • Asset liability account balances are carried forward to next year
Year-end Processes • First step is to extract a trial balance (TB) • Modern computerized systems produce TB automatically • A trial balance is a list of all account balances in the general ledger • Once the TB is obtained, the balances should be reviewed to ensure that there are no obvious mistakes, etc. • If double-entry has been followed, the trial balance must be in balance, i.e., total debits must equal total credits • All revenue and expense type accounts are then written off to the net-worth/equity accounts, etc. • The remaining account balances relate to assets and liabilities and constitute the closing balance sheet for this year • This is also the opening balance sheet for next year
Cash Basis: Cash Flow Statement Part 1 • Cash flows from operating activities Receipts Taxes ... ... ... Social contributions ... ... ... Grants ... ... ... Other revenues... ... ... Total Receipts Continued...
Cash Basis: Cash Flow Statement Part 1 • Cash flows from operating activities Payments Wages and allowances ... ... ... Goods and Services ... ... ... Interest payments Subsidies ... ... ... Grants… … … Social benefits ... ... ... Other expenditures ... ... ... Total Payments Net cash flows from operating activities
Cash Basis: Cash Flow Statement Part 2 • Cash flows from investment activities Acquisition of fixed assets Buildings and structures ... Inventories Strategic stocks ... Valuables Non-productive assets Land ... Less proceeds from sale of assets Net cash flows from investment activities
Cash basis: Cash flow statement-Part 3 Cash flows from financing activities Proceeds from domestic borrowing ... Proceeds from foreign borrowing ... Less repayment of borrowing Net cash flows from financing activities Net increase / decrease in cash Opening cash balance Closing cash balance
Accrual Basis - the Analytic Framework • Net operating balance = Revenue – expense • Net lending/borrowing = Net operating balance –net acquisition of non-financial assets • Net worth =Asset- liability • Closing net worth = Opening net worth + Net operating balance + other economic flows
F L O W S TRANSACTIONS Revenue minus Nonfinancial Assets Nonfinancial Assets Nonfinancial Assets Nonfinancial Assets Nonfinancial Assets Expense OTHER ECONOMIC FLOWS OPENING BALANCE SHEET CLOSING BALANCE SHEET Holding Gains & Losses Other Changes in the Volume of Assets = NET OPERATING BALANCE minus Financial Assets Financial Assets Financial Assets Financial Assets • Financial • Assets • cash • other financial assets = NET LENDING/ BORROWING minus Liabilities Liabilities Liabilities Liabilities Liabilities Net Worth Net Worth Changes in Net Worth GFSM 2001 ANALYTIC FRAMEWORK
GFSM 2001 Statements • Statement of Government Operations • Statement of Sources and Uses of Cash • Statement of Other Economic Flows • Balance Sheet
GFSM 2001 Analytical Balances • Statement of Government Operations shows the following measures of government performance: • Net/gross operating balance • Net lending/borrowing • Statement of Sources and Uses of Cash shows the following measures of government performance: • Cash flows from operating activities • Cash surplus/deficit • Cash flows from financing activities other than cash • Net change in the stock of cash • Statement of Other Economic Flows shows: • Total change in net worth due to holding gains/ losses and other changes in volume of assets • Balance Sheet shows: • Net worth