FINANCIAL ACCOUNTING & REPORTING

1. FINANCIAL ACCOUNTING & REPORTING Public Accounts & Accounting Development in Malaysia

2. Lecture Outline • Public Accounts (PA) – Definition & Contents • Significant Accounting Policies of Government • Current Development in Accounting System: • Accrual Accounting in Malaysia • Micro Accounting System (MAS) • Standard Accounting for Government Agencies (SAGA)

3. Public Accounts • Introduction • Public Accounts contains financial statements of Federal Government which are prepared annually by the Accountant General for the Minister of Finance in compliance with section 16(1) of Financial Procedure Act 1957. • Public accounts is certified by the Auditor General and is then laid before parliament in compliance with section 16(2) of the Financial Procedure Act.

4. Public Accounts • The statement summarises financial transactions of the government for a year and accounts for the sources & applications of financial resources appropriated by parliament. • It is prepared from the centralised records maintained by the Accountant General’s Department.

5. Public Accounts • The Public Accounts is prepared in two volumes: • Volume 1 : • contains the Balance Sheet & its supporting summary on financial statements as well as the the Accountant General’s report on the Public Accounts. • Volume 2 : • contains all the detailed of financial statements.

6. Contents of PA • Accountant-General Report; • A report summarising the nations’s economic position, government finance, the consolidated funds - revenue account, trust account, loan account, and assets & liabilities of government. • Auditor-General’s Certificate; • The certificate, in compliance with the provision of the Audit Act 1957, indicates the approval by the Auditor General of the accounts of the government for a particular period.

7. Significant Accounting Policies of Government • Federal Government as an Accounting Entity • includes all ministries, departments & agencies of the Federal Government, but does not include statutory bodies & government-owned companies. • Federal Consolidated Fund • 3 separate accounts are maintained in respect of Federal Consolidated Fund: • Consolidated Revenue Account • Consolidated Trusts Account • Consolidated Loan Account

8. Significant Accounting Policies of Government • Consolidated Fund • this section consists of: • Balance Sheet of the government as at the end of last financial year; • Statement of the Memorandum Accounts; • Notes to the Public Accounts giving the significant accounting policies applicable to the government; and • Summary statement of cash & investments.

9. Significant Accounting Policies of Government • Consolidated Revenue Account • The account into which the revenues of the government is paid & from which the operating expenditure is paid. • contains statement of revenues & operating expenditures of government for a particular financial period. • Consolidated Trust Account • under which all receipts & payments of both government trust funds & monies received by the government for specific purposes are accounted for • contains summary statement of all trust accounts (government & public) including Development Fund and Housing Loan Fund.

10. Significant Accounting Policies of Government • Consolidated Loan Account • Accounts in which all loans receipt & disbursements therefrom for the purpose of repayment outstanding Loans & transfers to other funds is accounted for ; • Statement of Memorandum Account • The memorandum which accounts for assets & liabilities of the government that do not form part of the balance of the Consolidated fund, is not included in the Balance Sheet but in a separate Memorandum Accounts Statement. • consists of those items of assets such as Recoverable Loans, Investments, Subscription to International Organisations & liabilities such as Public Debts, Guarantees & Notes Payables.

11. Significant Accounting Policies of Government • Basic Concepts • Concept of the Federal Consolidated Fund which states that all revenues & monies raised or received, except zakat, fitrah & baitulmal, be paid into & form one fund to be known as Federal Consolidated Fund (Article 97) • the concept that no monies except specified charged expenditures, shall be withdrawn from the Federal Consolidated Fund unless they are appropriated or otherwise authorised by Parliament (Article 104).

12. Significant Accounting Policies of Government • Basis of Accounting • all transactions are accounted for on a cash basis, appropriately modified to provide for payments to be made in January in respect of supplies received & services rendered up to 31 December of the preceding year. • Financial Year • 12 months ending 31 December.

13. Significant Accounting Policies of Government • Assets & Liabilties • Fixed Assets are charged to expenditure at the time of acquisition or construction. • Financial claims acquired by the government such as revenue due but not collected & recoverable loans are not reported in the balance sheet. • Financial claims against the government not paid by the close of the financial year are not reported in the balance sheet.

14. Significant Accounting Policies of Government • Revenues • Revenue collections are accounted for on a cash basis. Revenue due but not yet received in the financial year is not taken into account. Refunds of revenue are charged to expenditure.

15. Significant Accounting Policies of Government • Expenditure • all charges to the budgetary appropriations for goods & services & for transfer payments such as contributions to the Development Fund, Sinking Fund, & Housing Loan Fund as well as funds provided to state governments, statutory bodies & government owned companies by way of grants, loans & investments are treated as expenditure.

16. Current Development of Accounting System • Accrual Accounting • Micro Accounting System • Standard Accounting for Government Agencies

17. Accrual Accounting (AA) • Definition: • A technique that recognises revenues & expenses of an organisation over a particular financial period for the purpose of determining profit: • Revenues are recognised when they are accrued over a certain period of time irrespective of whether or not they have been received. • Expenses are also recognised when they are due in a particular period of time, not when they are paid.

18. Advantages of AA • Profit figure is more meaningful & useful for investors & creditors and accepted as a standard measure of performance and capital. • Accrual basis distinguishes between receipt of cash & the right to receive cash, payment of cash & the right or legal obligation to pay cash. • Revenues & expenses provide measures of economic goods & services consumed, transformed & earned.

19. Disadvantages of AA • More subjectivity • In the period of rising prices (Inflationary period), accrual concept is less relevant. • Requires more administrative & accounting costs. • May lead to a certain kind of manipulation. • Less understandable than cash accounting.

20. Problems to implement Accrual Accounting • Public Sector assets have very peculiar characteristics -large, long lifetime and difficult to be subdivided – depreciation issue, • Receivables & payables not easily determined. • large volume & diverse - too time consuming to compute. • Nature of reporting in AA is not suitable with the main objectives of PSO – accountability /stewardship; • Huge costs and additional administrative works are required in the process of implementingAA; and

21. Micro Accounting System (MAS) • Background • First guidelines was issued in July 1992 under Public Administration Improvement Circular no. 3/92. • Provides detail accounting with emphasis of costing outputs - services & products of each agency.

22. Objectives of MAS • Facilitating the collection of, processing and preparation of the cost information • Preparing information on cost efficiency and in a more flexible manner • Producing reliable cost information for decision making • To improve accountability in the public sector

23. Features of MAS

24. Reports Produced by MAS

25. Scope of MAS • The implementation of MAS is for all government agencies, whether services oriented, production oriented, revenue earning or otherwise.

26. Weaknesses of Present System • Cash basis for expenditure & revenue. • Vote books & other records provide little information to managers, • These recordings do not providing management with information on how resources are allocated to various output & how efficient is the utilisation of resources.

27. Environment to implement MAS successfully • Client’s Charter: • specify output & time frame to provide the services. • TQM • for overall improvement on quality of services.

28. Implementation Strategy • Implementation Machinery • MAS Steering Committee –plan, supervise and guide, and monitor and coordinate MAS implementation • Training • Train trainers who will perform their in-house training • Implementation Approach • Start with direct cost identification – ABC, Average Costing, Job Costing • Follow up • Computerised implementation • Introduced in 1999

29. Basic Requirements of MAS Implementation • Output Identification • products or services produced should be specific & measurable, • Identification of activities & processes • help to identify inputs & itemise them systematically • Input Identification, • Sources of Input of data records • eg. fixed assets register, vote books, personnel records

30. Master Plan for Implementation • In house training, • Pilot implementation, • Review & improvement, • Replication/adaptation by other division.

31. Methodology of MAS • Examine the objectives, programs & activities, • Determine the output & responsible officer, • Monitor costs & performance of output, • Analyse the cost information (variance analysis) and determine the corrective / remedial actions.

32. Challenges to MAS • MAS is a new concept • MAS is based on accrual basis while the current basis adopted by public sector is either cash or modified cash basis of accounting; • MAS is a departmental based system which need to be operated by non-accounting staff; • MAS involves creating and upgrading the information system

33. Challenges to MAS • Unique features of public sector • No clear bottom line motives unlike private sector’s motive of profit maximisation; • The nature of government services is monopolistic (lack of competition); • Minimal direct positive consequences or rewards for the department or personnel who perform their job cost effectively.

34. Future Direction of MAS • To be implemented along with Accrual Accounting; • To delegate more power to managers to improve & change the financial management; • To establish interdepartmental changes; and • To encourage cost savings.

35. Standard Accounting System for Government Agencies (SAGA) • Background • Initiated by Cabinet in September 1994 to ensure accounts can be updated daily, and submitted in time for auditing. • Prime Minister’s Department on 1 February 1996 issued a circular - Development Administration Circular no. 1 of 1996 on the Implementation of a Standard Computerised Accounting System in the Federal Statutory Bodies.

36. Objectives of SAGA • Maintain a complete & up-to-date set of accounts, • Allows daily closing of accounts (daily batch processing), • Improves financial management, • Timely submission of Pre-Audit Financial Reports.

37. Implementation of SAGA • Agencies that involves in the implementation of SAGA: • MAMPU • Accountant General Office • Auditor General Office • Konsortium Jaya Sdn Bhd - consultant

38. Implementation of SAGA • Initial implementation of SAGA were in the following agencies: • Human Resources Development Council, • National Film Development Corp.(FINAS). • Langkawi Development Authority (LADA) • Fisheries Development Authority, • Urban Development Authority (UDA)

39. Components of SAGA • Accounting Information System (AIS) • Records all relevant and standard accounts used by statutory bodies • Operational Accounting System (OAS) • Provides information for monitoring, evaluating and taking necessary steps to improve the financial performance of an organisation

40. Accounting Information System (AIS) • Function: • Provides management level the information for the purposes of monitoring, evaluation & taking the necessary steps to improve the financial performance of organisation. • AIS has 2 options: • Financial Management, • Annual Financial Statement Preparation.

41. Financial Management of AIS • Function: • provide an up-to-date information & standard indicators on performance of statutory bodies • ie.: • examine income & expenditure, • view month & year to date for income & expenditure & variance from budget, • view in graphical form • check the balance sheet & view the overall figure on a daily basis for assets, liabilities etc., • select Ratio Option to view Std. Fin. Ratios.

42. Annual Financial Statement Preparation of AIS • Function: • to assist users in the preparation of the pre-audit annual financial & management reports: • may automate preparation of Pre-Audit Reports. • review the Annual Financial Reports • produce various reports to accompany Pre-Audit Reports.

43. Modules of AIS

44. Modules of OAS

45. Daily Processing • This is the main feature of SAGA: • Process all transactions for the day & update the general ledger, • Produce the balance sheet for up-to-date account balances.

46. SAGA Operational Capabilities • Easy as it is fully menu-driven • Secured as it has effective security system • Transparent as it has Manual of Operating Procedures • Bilingual – English & BM • Standardised with common format • Customised for statutory bodies • Fast & allow viewing of reports • Fully supported by MAMPU & Accountant General Department.

47. Advantages of SAGA • Allow day-to-day maintenance of accounts; • Allow for more strategic use of financial management information; and • Enable users to look forward to more accurate, timely & up-to-date information on a regular basis.