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
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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 Collect Source Documents -- Vouchers -- Bank Statements -- Transfer entrees Record in Journals RECORDS Daily bank statements Register of checks Payment vouchers Revenue receipts Transfer entrees General / Special Journals General Ledger Subsidiary Ledgers Trial Balance
Post General Ledger
Post Subsidiary Ledgers
Prepare Trial Balance
Prepare Correction Entrees

Prepare Financial Statements Consolidated Financial Statements
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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 Statement of Government Operations Statement of Other Economic Flows Balance sheet Statement of Sources and Uses of Cash Budget Execution/Appropriation Accounts
Under accrual based accounting:

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
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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 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.
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Budget Classifications
GFSM requires 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.
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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 Networth/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 year
This 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 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
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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- liability Closing net worth = Opening net worth + Net operating balance + other economic flows
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FLOWS TRANSACTIONS Revenue

minus
GFSM 2001 ANALYTIC FRAMEWORK
OPENING BALANCE SHEET
Expense
= NET OPERATING BALANCE
OTHER ECONOMIC FLOWS Holding Gains Other Changes in & Losses the Volume of Assets
minus
CLOSING BALANCE SHEET
Nonfinancial Assets
Nonfinancial Assets
= NET LENDING/ BORROWING
Nonfinancial Assets
Nonfinancial Assets
Nonfinancial Assets
Financial Assets
Financial Assets
cash other financial assets
Financial Assets
Financial Assets
Financial Assets
minus
Liabilities
Liabilities
Liabilities
Liabilities
Liabilities
Net Worth
Net Worth
Changes in Net Worth
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GFSM 2001 Statements

Statement of Government Operations
Statement of Sources and Uses of Cash Statement of Other Economic Flows Balance Sheet
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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
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Sailendra Pattanayak, FAD International Monetary Fund

Key Elements of an Accounting Framework

Accounting Framework in a Typical LIC Main Issues

Cash Basis Accounting

cash receipts and payments occur

Accrual Basis Accounting

transformed, exchanged, transferred, or extinguished GFSM 2001

Basis of Recording Government Financial Operations

Basis of Recording Government Financial Operations

Modified Cash based Accounts:

Accounts Keeping Process and Outputs

Post General Ledger

Post Subsidiary Ledgers

Prepare Trial Balance

Prepare Correction Entrees

Government Financial Statements

Government accounts should, at the minimum consist of :

Under cash based accounting:

Under accrual based accounting:

Chart Of Accounts what it is

Budget Classification and Chart of Accounts

COA also includes any internal management

economic classifications Education, health, defense, are functions

Asset, liability type

Cash Basis: Cash Flow Statement Part 1

Cash Basis: Cash Flow Statement Part 1

Cash Basis: Cash Flow Statement Part 2

Cash basis: Cash flow statement-Part 3

Less repayment of borrowing Net cash flows from financing activities

Net increase / decrease in cash

Accrual Basis - the Analytic Framework

FLOWS TRANSACTIONS Revenue

GFSM 2001 ANALYTIC FRAMEWORK

OPENING BALANCE SHEET

CLOSING BALANCE SHEET

Changes in Net Worth

GFSM 2001 Statements

GFSM 2001 Analytical Balances

measures of government performance:

Statement of Sources and Uses of Cash shows the following

measures of government performance:

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