Sailendra Pattanayak, FADInternational Monetary Fund

Government Accounting Framework

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Key Elements of an Accounting Framework

Accounting basis – cash or accrualBudget classification and chart of accountsGeneral Ledger and subsidiary recordsAccounting process (manual or computerized)

and outputsAccounting policies Reporting entity Financial statements/reports

Skilled personnel is important resource to implement the above

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Accounting Framework in a Typical LIC – Main Issues

Manual book keepingNo ledger-based double entry systemLack 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

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Cash Basis Accounting

Transactions are recognized only when the related cash receipts and payments occur

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Accrual Basis AccountingFlows 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

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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

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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

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Accounts Keeping Process and Outputs

STEPS RECORDS

PostGeneralLedger

PostSubsidiaryLedgers

Prepare Trial Balance

Prepare Financial Statements

Prepare Correction Entrees

Collect Source Documents-- Vouchers-- Bank Statements-- Transfer entrees

Record in JournalsGeneral / Special Journals

General LedgerSubsidiary Ledgers

Trial Balance

Daily bank statementsRegister of checksPayment vouchersRevenue receiptsTransfer entrees

Consolidated Financial Statements

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Government Financial StatementsAnnual 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

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Chart of Accounts

Countries do not always have a chart of accountsThat means that they do not have a proper general

ledger systemOccasionally, 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

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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

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Budget Classification and Chart of Accounts

BC = revenue, expenditure & borrowings COA = BC + asset, liability and equity accountsCOA also includes any internal management

classification such as departments, cost centers, regions.GFSM 2001 should be followed when developing budget

classificationUniform budget classification system, at all levels of

government (e.g. Brazil, India) – helps in general government reporting.

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Budget Classifications

GFSM requires Economic and Functional ClassificationsSalary, goods and services, grants, subsidies

are economic classificationsEducation, health, defense, are functions

Other ClassificationsCountries usually also have administrative

classification — ministries and departmentsOther classifications may include: programs,

fund, geographic location, etc.

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Account Type

Revenue and expense typeAsset, liability typeNet-worth/Equity typeRevenue 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

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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 yearThis is also the opening balance sheet for next year

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Cash Basis: Cash Flow Statement Part 1

Cash flows from operating activities

Receipts

Taxes ... ... ...Social contributions ... ... ...Grants ... ... ...Other revenues... ... ...

Total Receipts

Continued...

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Cash Basis: Cash Flow Statement Part 1

Cash flows from operating activitiesPayments

Wages and allowances ... ... ...Goods and Services ... ... ...Interest paymentsSubsidies ... ... ...Grants… … …Social benefits ... ... ... Other expenditures ... ... ...

Total Payments

Net cash flows from operating activities

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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

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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

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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- liabilityClosing net worth = Opening net worth +

Net operating balance + other economic flows

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OPENINGBALANCE

SHEET

Nonfinancial Assets

Financial Assets

Liabilities

Net WorthChanges in Net

Worth

F L O W S

CLOSINGBALANCE

SHEET

Net Worth

Nonfinancial Assets

Financial Assets

Liabilities

TRANSACTIONS

Revenue

Expense

= NET OPERATING BALANCE

minus

Nonfinancial Assets

= NET LENDING/ BORROWING

minus

Liabilities

FinancialAssets• cash

• other financial assets

minus

OTHER ECONOMIC FLOWS

Holding Gains & Losses

Other Changes inthe Volume of Assets

Nonfinancial Assets

Financial Assets

Liabilities

Nonfinancial Assets

Financial Assets

Liabilities

GFSM 2001 ANALYTIC

FRAMEWORK

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GFSM 2001 Statements

Statement of Government OperationsStatement of Sources and Uses of CashStatement of Other Economic FlowsBalance Sheet

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GFSM 2001 Analytical BalancesStatement of Government Operations shows the

following measures of government performance:Net/gross operating balanceNet lending/borrowing

Statement of Sources and Uses of Cash shows the following measures of government performance:Cash flows from operating activitiesCash surplus/deficitCash flows from financing activities other than cashNet 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 assetsBalance Sheet shows:

Net worth

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