1. S2: Accounting and Financial Management

2. Session Overview Session objectives Session objectives Scope of the issues Scope of the issues Basis of Accounting Basis of Accounting Recognition and Measurement Recognition and Measurement Qualitative Characteristics Qualitative Characteristics

3. Session Objectives To explain the broad principles of accounting and financial management in respect of cash basis of accounting to ensure financial accountability. To explain the broad principles of accounting and financial management in respect of cash basis of accounting to ensure financial accountability. The major inputs will be on: The major inputs will be on: The statement of receipts and disbursements during the year The statement of receipts and disbursements during the year Cash flows statement of the Entity Cash flows statement of the Entity

4. Scope of the issues A Financial Report may be treated as a set of Statements, Schedules and accompanying notes that conveys comprehensive financial information about an Entity e.g. balance sheet, Profit and loss account, income and expenditure account etc. A Financial Report may be treated as a set of Statements, Schedules and accompanying notes that conveys comprehensive financial information about an Entity e.g. balance sheet, Profit and loss account, income and expenditure account etc. Finance Accounts of the Government presented to the Legislature constitute the comprehensive body of financial information about a Government and are in the nature of a general purpose Financial Report. Finance Accounts of the Government presented to the Legislature constitute the comprehensive body of financial information about a Government and are in the nature of a general purpose Financial Report.

5. Scope of the issues Appropriation Accounts, which are a condensed presentation of Grant-wise compliance information with respect to the Appropriation Acts, may be treated as compliance reports. Appropriation Accounts, which are a condensed presentation of Grant-wise compliance information with respect to the Appropriation Acts, may be treated as compliance reports. The Union and some State Governments have passed the Fiscal Responsibility Acts in the recent past. The Union and some State Governments have passed the Fiscal Responsibility Acts in the recent past. Under these Acts or the subordinate legislation, financial information relating to the Government Account as well as information relating to the position of the economy, flowing from National Accounts Statistics may be relevant to the Parliament or the Legislatures for decision making. Under these Acts or the subordinate legislation, financial information relating to the Government Account as well as information relating to the position of the economy, flowing from National Accounts Statistics may be relevant to the Parliament or the Legislatures for decision making.

6. Basis of Accounting The government accounting is done on Cash Basis, i.e. single entry system of accounting as opposed to the accrual system of accounting done on double entry basis. The government accounting is done on Cash Basis, i.e. single entry system of accounting as opposed to the accrual system of accounting done on double entry basis. The basis of accounting being cash, the depreciation or losses or write-offs of the physical assets at the end of their life are not recognised or expensed. The basis of accounting being cash, the depreciation or losses or write-offs of the physical assets at the end of their life are not recognised or expensed. The primary unit for government accounting is the Pay and Account Officer for the Union Government and Treasuries for the State Governments. The primary unit for government accounting is the Pay and Account Officer for the Union Government and Treasuries for the State Governments. The compilation of accounts is governed by the Civil Accounts Manual for the PAOs and Treasury codes in the States. The compilation of accounts is governed by the Civil Accounts Manual for the PAOs and Treasury codes in the States. The accounting in the government companies, autonomous bodies and statutory corporations are maintained on accrual basis. The accounting in the government companies, autonomous bodies and statutory corporations are maintained on accrual basis. The accounting in the Departmentally managed commercial undertakings like the railways are maintained primarily on cash basis. The accounting in the Departmentally managed commercial undertakings like the railways are maintained primarily on cash basis.

7. Recognition and Measurement of Financial elements-I The Cash Receipts and Disbursements of the Entity are recorded at the point of the cash transaction, for the value of the cash transaction taking place, with the exception of specific cases of non-cash transactions. The Cash Receipts and Disbursements of the Entity are recorded at the point of the cash transaction, for the value of the cash transaction taking place, with the exception of specific cases of non-cash transactions. The amounts under the debt, deposit, suspense, miscellaneous and remittance heads, with certain exceptions are individually closed to balances. These are part of Public Accounts. The amounts under the debt, deposit, suspense, miscellaneous and remittance heads, with certain exceptions are individually closed to balances. These are part of Public Accounts. Account heads under the Consolidated Fund are closed to accounts. Account heads under the Consolidated Fund are closed to accounts.

8. Recognition and Measurement of Financial elements-II The balances of liabilities as well as the balances of loans and advances are recognised in Financial Reports. The balances of liabilities as well as the balances of loans and advances are recognised in Financial Reports. The progressive investment of Government in statutory corporations, Govt. companies, etc. as well as the progressive capital expenditure, though closing to government accounts annually, are recognised in Financial Reports. The progressive investment of Government in statutory corporations, Govt. companies, etc. as well as the progressive capital expenditure, though closing to government accounts annually, are recognised in Financial Reports.

9. Qualitative characteristics of Financial Reports (a) Relevance (b) Reliability (c) Materiality (d) Timeliness (e) Offsetting (f) Consistency of Presentation (g) Comparative Information Inappropriate accounting treatments are not rectified either by disclosure of the accounting policies used, or by notes or explanatory material. Inappropriate accounting treatments are not rectified either by disclosure of the accounting policies used, or by notes or explanatory material.

10. Qualitative Characteristics - I Relevance requires that the accounting policy may ensure that the Financial Reports are relevant to the decision-making needs of users and fulfill the objectives of financial reporting. Relevance requires that the accounting policy may ensure that the Financial Reports are relevant to the decision-making needs of users and fulfill the objectives of financial reporting. Reliability of financial information demands Reliability of financial information demands 1. A faithful presentation of financial performance and financial position of the entity; 2. That the Financial Reports reflect the economic substance of events and transactions and not merely the legal form; 3. There is no bias, that is, the information is neutral; 4. Prudence has been exercised in cases where adjustments are effected; and 5. Completeness in all material respects. Information is reliable when it is free from material error and bias and represents faithfully what it is supposed to represent or could reasonably be expected to represent. Information is reliable when it is free from material error and bias and represents faithfully what it is supposed to represent or could reasonably be expected to represent.

11. Qualitative Characteristics –II Materiality– information is material if its omission or mis- statement could influence the decision-making or assessments by users about allocation and use of resources and the performance of the entity. Materiality– information is material if its omission or mis- statement could influence the decision-making or assessments by users about allocation and use of resources and the performance of the entity. Materiality depends on the nature or size of the item or error judged in the particular circumstances of omission or mis-statement. Materiality depends on the nature or size of the item or error judged in the particular circumstances of omission or mis-statement. Each material item should be presented separately in Financial Reports. Immaterial amounts should be aggregated with amounts of similar nature or function and need not be presented separately. Each material item should be presented separately in Financial Reports. Immaterial amounts should be aggregated with amounts of similar nature or function and need not be presented separately. In deciding whether an item or an aggregate of items is material, the nature and the size of the items are evaluated together. Items that are material by virtue of their nature or by virtue of their size may be presented separately in Financial Reports. Items can also be material by virtue of their context. In deciding whether an item or an aggregate of items is material, the nature and the size of the items are evaluated together. Items that are material by virtue of their nature or by virtue of their size may be presented separately in Financial Reports. Items can also be material by virtue of their context.

12. Qualitative Characteristics - III The inherent nature or characteristics of an item or a group of items may also render these material. For example - where the law or regulation requires these to be separately disclosed, it may be considered material regardless of the amount involved. The inherent nature or characteristics of an item or a group of items may also render these material. For example - where the law or regulation requires these to be separately disclosed, it may be considered material regardless of the amount involved. Materiality provides a threshold rather than being a primary qualitative characteristic as to which information must be included. An item that is not sufficiently material to warrant separate presentation in the Financial Reports may be presented separately in the notes. Materiality provides a threshold rather than being a primary qualitative characteristic as to which information must be included. An item that is not sufficiently material to warrant separate presentation in the Financial Reports may be presented separately in the notes.

13. Qualitative Characteristics IV Timeliness: Financial information should be made available within a reasonable period of time. Financial Reports prepared annually should be made available before the end of six months from the end of the reporting year. Timeliness: Financial information should be made available within a reasonable period of time. Financial Reports prepared annually should be made available before the end of six months from the end of the reporting year. If there is an undue delay in the reporting of information, it may lose its relevance. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use for making decisions in the interim. If there is an undue delay in the reporting of information, it may lose its relevance. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use for making decisions in the interim. In achieving a balance between relevance and reliability on the one hand and timeliness on the other, the overriding consideration is how best to satisfy the needs of the decision-makers. In achieving a balance between relevance and reliability on the one hand and timeliness on the other, the overriding consideration is how best to satisfy the needs of the decision-makers.

14. Qualitative Characteristics – V Disallow offsetting: Items of Receipts and Expenditure as well as Assets and Liabilities should not be offset except under a specific order of the Government. Disallow offsetting: Items of Receipts and Expenditure as well as Assets and Liabilities should not be offset except under a specific order of the Government. The recording of all transactions may be on gross basis unless specifically authorized. The netting of expenditure with receipts is tantamount to inflation of budgetary appropriations. The recording of all transactions may be on gross basis unless specifically authorized. The netting of expenditure with receipts is tantamount to inflation of budgetary appropriations. The aggregation may be as per norms; however, material details, even if below the level of aggregation may be explicitly disclosed. The aggregation may be as per norms; however, material details, even if below the level of aggregation may be explicitly disclosed. The netting refunds of tax from tax receipts, without adequate disclosure in Financial Reports, can vitiate both tax forecasting and tax policymaking. These may be reported upon in the Statement of Cash Receipt and Expenditure under each Tax Revenue head. The netting refunds of tax from tax receipts, without adequate disclosure in Financial Reports, can vitiate both tax forecasting and tax policymaking. These may be reported upon in the Statement of Cash Receipt and Expenditure under each Tax Revenue head. The offsetting of the payment of interest on these refunds from tax receipts is irregular. Any such payment needs to be made after obtaining a budget appropriation under Interest Payment. The offsetting of the payment of interest on these refunds from tax receipts is irregular. Any such payment needs to be made after obtaining a budget appropriation under Interest Payment.

15. Qualitative Characteristics VI The devolution of taxes to State Governments is an instance where netting is reasonable, giving the structure of fiscal federalism. The devolution of taxes to State Governments is an instance where netting is reasonable, giving the structure of fiscal federalism. Sale proceeds of capital assets are also shown as reduction in capital expenditure, but separately as a distinct head at a higher level, if material. The capital expenditure budgeted for cannot however be reduced by sale proceeds of capital non-financial assets. Sale proceeds of capital assets are also shown as reduction in capital expenditure, but separately as a distinct head at a higher level, if material. The capital expenditure budgeted for cannot however be reduced by sale proceeds of capital non-financial assets. Recoveries of expenditure for services or supplies made to non government entities or other Governments are in all cases classified as the receipts of the government rendering services or suppliers. Recoveries of expenditure for services or supplies made to non government entities or other Governments are in all cases classified as the receipts of the government rendering services or suppliers. When the services are undertaken merely as an agent of a private body, the recoveries may be taken as reduction of expenditure. When the services are undertaken merely as an agent of a private body, the recoveries may be taken as reduction of expenditure.

16. Qualitative Characteristics-VII Consistency of Presentation: The presentation and classification of items in the Financial Reports should be retained from one period to the next unless Consistency of Presentation: The presentation and classification of items in the Financial Reports should be retained from one period to the next unless A significant change in the nature of the operations of the entity being reported upon or review of its Financial Reports demonstrates that the change will result in a more appropriate presentation of events or transactions; or A significant change in the nature of the operations of the entity being reported upon or review of its Financial Reports demonstrates that the change will result in a more appropriate presentation of events or transactions; or An Indian Government Accounting Standard or a later amendment requires a change in presentation thereto. An Indian Government Accounting Standard or a later amendment requires a change in presentation thereto.

17. Qualitative Characteristics– VIII Comparative Information: Comparative information should be disclosed in respect of the previous period for all numerical information to be disclosed in the Financial Reports. Comparative Information: Comparative information should be disclosed in respect of the previous period for all numerical information to be disclosed in the Financial Reports. Comparative information should be included in narrative and descriptive information when it is relevant to enhance the understanding of the current period’s Financial Reports. Comparative information should be included in narrative and descriptive information when it is relevant to enhance the understanding of the current period’s Financial Reports. When the presentation or classification of items in the Financial Reports is amended, corresponding amounts in the previous period should be reclassified, to ensure comparability with the current period, with adequate disclosure of the nature, amount and reason thereof. When the presentation or classification of items in the Financial Reports is amended, corresponding amounts in the previous period should be reclassified, to ensure comparability with the current period, with adequate disclosure of the nature, amount and reason thereof. If it is impracticable to reclassify comparative amounts in the successive periods, reasons for the same should be disclosed. If it is impracticable to reclassify comparative amounts in the successive periods, reasons for the same should be disclosed. In practice, a balancing or trade-off between qualitative characteristics is often necessary in order to meet the objective of Financial Reports. In practice, a balancing or trade-off between qualitative characteristics is often necessary in order to meet the objective of Financial Reports.