1. Government Accounting Framework
Sailendra Pattanayak, FAD
International Monetary Fund

2. 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

3. 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

4. Cash Basis Accounting
Transactions are recognized only when the related cash receipts and payments occur

5. 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

6. 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

7. 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

8. 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
Prepare Trial Balance
Trial Balance
Prepare Correction Entrees
Prepare Financial Statements
Consolidated Financial Statements

9. 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

10. 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

11. 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

12. 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.

13. 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.

14. 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

15. 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

16. Cash Basis: Cash Flow Statement  Part 1
Cash flows from operating activities
Receipts
Taxes
Social contributions
Grants
Other revenues
Total Receipts
Continued...

17. 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

18. 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

19. 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

20. 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

21. other financial assets
F L O W S
GFSM 2001 ANALYTIC FRAMEWORK
TRANSACTIONS
Revenue
Expense
= NET OPERATING BALANCE
minus
OPENING
BALANCE
SHEET
Nonfinancial
Assets
Financial
Liabilities
Net Worth
OTHER ECONOMIC FLOWS
Holding Gains
& Losses
Other Changes in
the Volume of Assets
Nonfinancial
Assets
Financial
Liabilities
CLOSING
BALANCE
SHEET
Net Worth
Nonfinancial
Assets
Financial
Liabilities
Nonfinancial
Assets
= NET LENDING/
BORROWING
minus
Liabilities
Financial
Assets
cash
other financial assets
minus
Changes in Net Worth

22. GFSM 2001 Statements Statement of Government Operations
Statement of Sources and Uses of Cash
Statement of Other Economic Flows
Balance Sheet

23. 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

24. Thank you