act4161accounting practices in ps

8/10/2019 ACT4161Accounting Practices in PS

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ACCOUNTING PRACTICES &

DEVELOPMENT IN PUBLIC SECTOR

Prepared By:


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Introduction

The Malaysian Government has adopted &

developed various accounting systems in ensuring

effectiveness & accountability in accounting &reporting for public sector organizations

Among the accounting systems being used are

Accrual Accounting, Micro Accounting System

(MAS), & Standard Accounting System for

Government Agencies (SAGA)


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ACCRUAL ACCOUNTING

Accrual accounting concept states that: Revenues

are recognized in the period in which the revenues

are earned & expenses are recognized in theperiod in which the expenses are incurred in

generating the revenue

It is a technique of recognizing revenues &

expenses of an organization over a particular

period for the purpose of determining profit


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ACCRUAL ACCOUNTING

It does not require any movement of cash

for accounting purposes

Because accrual accounting makes the

distinction between the receipt of cash &

the right to receive; and the payment of

cash & the legal obligation to pay cash.


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ACCRUAL ACCOUNTING

The Statement of Standard Accounting Practices(SSAP) No. 2 states that:

Revenue & costs are accrued (that is recognizedas they are earned or incurred, not as money isreceived or paid) or matched with one another sofar as their relationship can be established or

justifiably assumed, & dealt with in the Profit &Loss Account of the period to which they relate;provided that where the accruals concept isinconsistent with the prudent concept, the lattershall prevails.


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ACCRUAL ACCOUNTING

Under the Modified Accrual Accounting System:

All revenues are recognized either when they are

received in cash or when collection of the amountcan be reasonably estimated to be received in the

near future

All expenditures are recognized in the period inwhich goods & services are received or a liability

is incurred


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CASH, ACCRUAL & MODIFIED

ACCUAL BASES OF ACCOUNTING

BASES OF ACCOUTNING

Point of Recognition CASH ACCRUAL MODIFIED

REVENUE When cash is When revenue is When measurable

received earned & available

EXPENDITURE When cash is When expenses When expenditure

paid is incurred is incurred


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APPLICATION OF ACCRUAL

ACCOUNTING IN PUBLIC SECTOR

Currently the Malaysian public sector uses

either cash basis, modified cash or accrual

basis of accounting in preparing theiraccounts

Abdul Samad (2001) states that these

situations exist because there is no specificprovisions for public accounting & financial

management


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Neither found in the following rules orregulations:

1. Financial Procedure Act 1957, nor the2. Unclaimed Monies Act 1965, or the

3. Pension Fund Act 1991

Stating the mode of accounting to beadopted by the Public Sector organizationsfor preparing their accounts


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The earlier purpose of PS financial reporting was

to demonstrate compliance with legal &

contractual provisions (Juhari 1992) These provisions did not require the determination

& reporting of profit

As a result accrual accounting was less practiced

& known among public sector agencies


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Due to the growing establishment of

business-like Government organizations,

the need for improvement in the accounting& reporting practices of those entities

became essential

Generally with the view of disclosing moremeaningful information in the financial

statements prepared by Government entities


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Many countries have begun to change theiraccounting techniques from cash basis to either

modified cash basis, accrual basis, modifiedaccrual basis or a combination of those techniques

In Malaysia, there is no such body similar to theUS Government Accounting Standard Board or to

the Public Sector Accounting Standard Board ofAustralia to look into the pronouncements orguidelines in formulation standards applicable tothe public sector as a whole


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Therefore, any reform or reengineering in

improving the Public Sector organizations

as a whole would take a much longer time

The continuous & increasing deficits of

Government annual budgets coupled with

the mounting of Public debts in the pastdecade, have posed a heavy burden to the

Public Sector Finance (Juhari 1992)


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The Public Sector has been urged to find

ways & means to commercialize their

services

The issuance of a number of statutes &

rulings have been seen as a stepping stone

for some Malaysian Government agenciesto convert their cash accounting systems to

the accrual basis system of accounting


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However, Malaysia is still in the process of

of studying & analyzing the feasibility for

the migration to accrual accounting as thatbeing done by other countries in the world

Countries such as Canada, New Zealand,

Australia & the United Kingdom, havesuccessfully migrated to accrual accounting


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APPLICATION OF ACCRULA


The objectives of migrating to accrual accounting

in New Zealand for example are to inform the

Government regarding costs of outputs produces& the value of assets owned

Thus, providing the Government with better

information for purchase & ownership

The Australian Public Sector also did the same

with the commencement by the Victorian

Government in early 1990


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ADVANTAGES OF USING

ACCRUAL ACCOUNTING

1. The use of accrual accounting will provide a true

financial position of the public sector agencies

It is believed that accrual accounting can showexactly how much an organization earned rather

than how much they have collected in terms of

revenue in particular accounting period

It enables expenses incurred to be matched with

revenue earned in the same period


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ADVANTAGES OF USING

ACCRUAL ACCOUNTING

2. It has been accepted as a standard to measureperformance in a similar manner to the Private

Sector That profit measured implies the level of successin a particular period

The cash basis merely provide the amount of

cash inflows & outflows in a particular period Thus restricting the measure of performances

among Public Sector agencies & discouraginginter-sector comparisons


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ADVANTAGES OF USING

ACCRUAL ACCOUNTING

3. The presentation of both an operating statement

& a statement of financial position will allow the

calculation of performance indicators The performance indicators can be used to

compare targets with other Public Sector or

Private Sector entities

This is expected to create a more efficient

operations in Public Sector entities


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ADVANTAGES OF USING

ACCRUAL ACCOUNTING

4. Accrual accounting will allow for a distinctionto be made between capital & operating

expenditures This important for an assessment ofintergenerational equity issues

When there is no distinction being made, it is

argued that the generation that pays for non-current assets actually subsidizes the latergenerations that receive the benefits from thoseassets


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ADVANTAGES OF USING

ACCRUAL ACCOUNTING

Henderson & Pierson (1995):

An accrual accounting system which

distinguishes between capital expenditure &

operating expenditure & which charges

depreciation on assets would enabled capital

costs to be spread across generationsprovided that the prices were set to cover

the full costs of providing the services


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ADVANTAGES OF USING

ACCRUAL ACCOUNTING

5. The accrual accounting provides a morecomprehensive accountability framework thenthe cash based system.

It focuses attention on the effects of decisionsmade by the Government that may be favorableor unfavorable

The accrual management framework alsoencourages Public Sector entities to consider thefull financial implications of a particulardecision to be made


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DISADVANTAGES OF

ACCRUAL ACCOUNTING

1. Accrual accounting brings about moresubjectivity into the accounts & this coulddistort the accounting information that is being

produces

For example, the use of different depreciationmethods would lead to a different amount of

depreciation expenses to be charged to aparticular accounting period, as well as

The estimates used in determining the salvagevalue of an asset & its expected useful life


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DISADVANTAGES OF USING

ACCRUAL ACCOUNTING

2. During period of rising prices, the

relevance of the accrual concept is rather

limited

For example, during inflation the same

quantity of sales made will result in a

higher sales value figure compared tosales made during a period of normal

prices


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ACCRUAL ACCOUNTING

In such a situation, an organizations profit

will merely indicates the excess of the

initial capital invested by the organizationrather than the true profit figure

Thus, the income statement becomes less

acceptable as a measure of performanceduring an inflationary period


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ACCRUAL ACCOUNTING

3. The cost of switching to an accrual accountingsystem will be high as it involves moreadministrative & accounting costs

All Government assets must be measured &valued before being reported for the first time inthe Balance Sheet

The numerous numbers of Government assetswith different types & of different nature wouldinvolves a large amount of costs to be allocated& used for measuring those assets


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ACCRUAL ACCOUNTING

In addition, the use of accrual accounting

will also result in a higher cost for

maintaining sundry debts & creditorsaccounts

This is because substantial amounts of

administrative & accounting time will nowconsumed for adjusting those accounts at

the end of an accounting period


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ACCRUAL ACCOUNTING

4. Accrual accounting can lead to a certain kind of

manipulations, particularly at the end of a fiscal

year For example, if a Government agency have a

favorable balance in the budget, the agency

manager might purposely spend more on some

not so essential purchases in order to avoidbeing questioned for not spending the approved

budget allocations


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CHALLENGES IN IMPLEMENTING

ACCRUAL ACCOUNTING

Although the adoption to accrual accounting

provides several advantages to the Public Sector,

at the same it also offers several drawbacks Thus, the implementation of the full accrual basis

of accounting in the Public Sector is not an easy

task

Several problems needed to be solved first to

ensure the successful adoption of the accrual

accounting system


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ACCRUAL ACCOUNTING

1. Accrual accounting does not support the mainobjectives of accounting for the Public Sectori.e. for stewardship & performance evaluation

purposes

These objectives require Governmentagencies to report fully, frankly & promptlyupon the stewardship of receipts, payments,assets & liabilities

In addition, such reports must discloseresources used & how resources were used


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ACCRUAL ACCOUNTING

With regard to accounting for performance

evaluation purposes, it can only be achieved by

combining the analysis of financial statementswith information that has been produces from

other available resources

2. The iterative changes in the implementation

process involves additional works & requiredevelopment of new skills by Department

finance officers


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ACCRUAL ACCOUTNING

The time factor & lack of skilled

personnel to handle the conversion to

accrual accounting in the Public Sectorhas contributed to the resistance towards

the changes required by accrual

accounting


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ACCRUAL ACCOUTNING

3. The conversion to accrual accounting willrequire the Public Sector organizations to

identify their fixed assets The peculiar characteristics & nature of

Public Sector assets may cause difficultiesin determining the value of those assets

In addition, there will also be problems inproviding depreciation on those assets


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ACCRUAL ACCOUTNING

This is due to the fact that the assets

acquired for community benefits are

frequently large, have long lives & notcapable of being subdivided for easy

disposal

Besides, the Public Sector assets usuallyhave no readily determinable market value

as well as determinable economic lives


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THE FUTURE OF ACCRUAL

ACCOUNTING IN MALAYSIA

The adoption & use of accrual accounting in

Malaysia is seen feasible as the

corporatization & privatization of majorGovernment projects have proven to be

successful

Examples include Syarikat TelekomMalaysia, Tenaga National Berhad & Pos

Malaysia


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THE FUTURE OF ACCRUAL

ACCOUNTING IN MALAYSIA

Upon privatization exercises, the concept of

valuation of assets are needed to comply

with the commercial requirements

Therefore, the Government entities will be

compelled by circumstances to produce

accounts of acceptable standards forcommercial use.


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MICRO ACCOUNTING SYSTEM

The costing of Government services has been awidely discussed issue

The public has frequently queried regarding therelevancy & applicability of costing in PublicSector

As a result, a guideline on costing of Government

services known as Micro Accounting System(MAS) was issued on 30thJuly 1992 under thePublic Administration Improvement Circular No3/92


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Background information:

Prior to the introduction of MAS, budgeting

& accounting system of the Public Sectorprovided limited information to managers

Only information on revenue, budgeted

allocation & expenditure by responsibilitycenters & programs and/ activities wereavailable to the Government managers


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There were lack of information on the

allocation of resources & the efficiency of

the organization on the utilization of theresources

The Government has issued a few circulars

as a mean to provide a suitable environmentfor the implementation of MAS

CIRCULARS ISSUED PRIOR TO


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MAS

GOVERNMENT DESCRIPTION

CIRCULARS

Program Performance & This circular has laid down the foundation for

Budgeting System costing in Government agencies through the

Responsibility centers/cost centers structure &

the Program/Activity structure, which relates

cost to the higher level of classification



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MAS

GOVERNMENT DESCRIPTION

CIRCULAR

Clients charter This circular requires Government

agencies to specify clearly the outputs

& time frame for provision of services

Total Quality This circular provides the guidelines

Management for good management & operationalpractices with the objective of overallimprovement in the quality of services


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OBJECTIVES OF MAS

1. To assist in strategic planning & optimumutilization of Government resources

2. To facilitate the collection, processing &preparation of cost information

3. To prepare information on cost efficiency

& in a more flexible manner4. To produce reliable cost information for

decision-making


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MAS is a detailed accounting system with

emphasis on costing the outputs i.e. the

goods & services of the various FederalGovernment Ministries & departments

The implementation of MAS include all

production-oriented, service-oriented &revenue-earning Government agencies


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The introduction of MAS, which provides the

most cost-effective method in providing quality

services to the public at large has become amechanism for better accountability of resource

utilization among Public Sector organizations

The Ministry of Works, Ministry of health & the

Accountant-General Department are among theagencies which have shown good progress in the

implementing of MAS in Malaysia


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MAS IN-BUILT FACILITIES

FACILITIES DESCRIPTIONS

Interface with other The data for computerized Micro

accounting system Accounting System can be obtained

from the interfacing of BudgetaryControl & Planning System (for

expenditure & budget).

Asset management system (for asset

depreciation & usage of material) &

the Human Resource ManagementSystem (for labor cost).

The system also can function as a stand-alone

system.


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Facilities Descriptions

Cost Analysis Possess facilities to compare standard

cost with actual costs & analyze the

variance to its source

Cost Comparison Maintain information on movement of

costs & the changes in the workload

over a year period

Cost Distribution Possess facilities to allocate indirect

costs accepted & overhead to the

output based on formula


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Facilities Descriptions

Cost Definition Possess facilities to give detailed cost

expenditure for the costing of output

Integration Provide two forms of costing which are

integrated:

* Process costingfor output that are

homogeneous & routine

* Job costingfor output based on

order or for specific job

BASIC REPORTS GENERATED


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BY MAS

Report No. Usage

M 01 Summary of cost output

Provides unit cost for output produced

by Government AgenciesM 02 Total variance for output

Provides information for comparison between actualcosts & standard costs the variances between the two

M 03 Cost variance for output

Provides comparison between actual costs & standardcosts & analysis of variance

M 04 Monthly cost statement

Provides an analysis of the cost component i.e. labor,material, other direct cost & indirect costs for everyoutput



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BY MAS

Reports No. Usage

M 05 Costs comparison between months

Provides cost comparisons between months

M 06 Budgetary variance per expenditureProvide comparison between actual costs &

budgets

M 07 Cumulative cost statement

Provide cumulative costs & average costs for

every outputM 08 Personal costs contribution

Provide information of each personal cost for eachproject or specific job based on time sheet

MAS IMPLEMENTATION


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MAS IMPLEMENTATION

STRATEGIES

It comprises of (Sudirman 1995):

Implementation machinery

Training

Implementation approach

Follow up

Computerized implementation

IMPLEMENTATION


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IMPLEMENTATION

MACHINERY

The MAS Steering Committee involves all

Government agencies heads

Was set up to ensure successful

implementation of MAS in each agency

Responsible to plan, supervise & guide the

implementation team, monitor & coordinateimplementation of MAS

IMPLEMENTATION


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IMPLEMENTATION

MACHINERY

The Committee also answerable to the

Public Sector Improvement Panel which is

chaired by the Chief Secretary of theFederal Government

The members of the Steering Committee

comprises of the Heads & Deputy Heads ofthe agencies, the Heads of Divisions & the

implementation team members

ROLE OF MAS STEERING


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ROLE OF MAS STEERING

COMMITTEE MEMBERS

MEMBERS ROLES

Head of Agency Chairman

Deputy Head of Agency Chief facilitator & in somecircumstances act as alternate

Chairman

Heads of Divisions Members

Implementation team Secretariat

IMPLEMENTATION


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IMPLEMENTATION

MACHINERY

The Chief Facilitator is responsible for the overallimplementation of MAS

Among his duties are to guide & supervise theimplementation team, resolve problems & toreport to the Steering Committee on its progress &any problems faced by the agencies

The members of the implementation teamcomprises of the facilitator & the trainers

The trainers are responsible to train theimplementers at the divisional levels

IMPLEMENTATION


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IMPLEMENTATION

MACHINERY

MAS Implementation Steering Committee was setup on 27thSeptember 1993 & is chaired by theAccountant-General of Malaysia

Other members are representatives from theMalaysian Administration & Modernization Unit(MAMPU), Public Service Department (PSD),Financial Management System Unit of thetreasury, national Institute of PublicAdministration & the Accountant-GeneralDepartment which acts as the Secretariat

IMPLEMENTATION


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IMPLEMENTATION

MACHINERY

These people are responsible for:

The overall training programs of all the

Ministries and their Departments

Setting implementation targets, and

Carrying out periodic review of the

implementation of MAS


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TRAINING

The main approach used in the MASimplementation process is to train the

trainers The trainers formed part of the

Implementation team of each Ministry orDepartment

These trainers will then carry out their ownin-house training programs

IMPLEMENTATION


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IMPLEMENTATION

APPROACH

The First step in the implementation approach is tostart off by identifying the direct costs

The method adopted depends on the nature ofoutput produced by each Agency

The activity based costing is adopted for routine &standardized output where average costs per unit

of output can be obtained The job costing method is used for output which

are specific in nature, non-standardized & wherethe usage fro resources varies


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FOLLOW-UP

Follow-up action is very important to

sustain interests in MAS among the

Government managers This is because the commitment from the

management is important to successfully

implement MAS in the GovernmentAgencies

COMPUTERIZED


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COMPUTERIZED

IMPLEMENTAITON

Computerized MAS has been introduced in

August 1999 to reduce the process of cost

collection, calculation & analysis The main feature of this system lies on its

ability to interface with Budgetary &

Planning System, Asset ManagementSystem & the Human Resource

Management System

CHALLENGES IN


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CHALLENGES IN

IMPLEMENTING MAS

References to Sudirman (1995) thechallenges can be discussed into two major

categories: MAS IS A NEW CONCEPT OR SUBJECT

Is especially a new concept to mostGovernment agencies especially to theirofficials & staff

The following are evidences:

CHALLENGES IN


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CHALLENGES IN

IMPLEMENTING MAS

1. MAS is based on accrual basis accounting

whereas Government accounting is based on

cash basis or modified cash basis of accounting2. MAS is a departmental based system. Which

needs to be operated mostly by non-accounting

staff

3. MAS involves creating & upgrading the

information system for the consumption of

resources & output statistics

CHALLENGES IN


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CHALLENGES IN

IMPLEMENTING MAS

PUBLIC SECTOR ENVIRONMENT

The unique features of Public Sector

environment have become one of the maincontributors to the challenges in

implementing MAS in the Government

Agencies Among the examples are:

CHALLENGES IN


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CHALLENGES IN

IMPLEMENTING MAS

1. There is no clear bottom line of Public

Sector motives unlike the Private Sector

where profit is a very important motive forthem

2. Most of the government services are

monopolistic in nature, thus contributed tothe lack of competition among the service

providers in the market

CHALLENGES IN


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CHALLENGES IN

IMPLEMENTING MAS

3. There are minimal direct positive

consequences or rewards for the

Department or the public servant

who perform their jobs cost-

effectively


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STANDARD ACCOUNTING SYSTEM FOR

GOVERNMENT AGENCIES (SAGA)

The idea of introducing an accounting packageknown as SAGA was announced by the Cabinet inSeptember 1994

This package is specifically designed for theStatutory Bodies

The Public Administration Improvement Circular

No1/96 was issued on 1 February 1996 by theGovernment to encourage the use of thecomputerized accounting systems in the

preparation of financial reports


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The main purposes of SAGA:

To ensure that the accounts of the Statutory

Bodies are being updated daily & submittedin time for auditing purposes

To ensure efficient processing of financialinformation as well as enhancing theaccountability in financial reporting at boththe operational & management levels


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Among the agencies that have adopted &

used SAGA are the Human Resource

Development Council under the Ministry ofHuman Resources, Langkawi Development

Authority (LADA), Majlis Amanah Rakyat

(MARA), the Urban development Authority(UDA) & the National Film Development

Corporation (FINAS)


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OBJECTIVES OF SAGA

1. To provide for the maintenance of a

complete & updated set of accounts

2. To allow for the daily closing of accounts

3. To improve the Financial Management

System

4. To provide for the timely submission of

Pre-Audit Financial Reports

OPERATIONAL CAPABILITIES


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OPERATIONAL CAPABILITIES

OF SAGA

There are 2 major components of SAGA:

1. The operational accounting system (OAS)

2. The accounting information system (AIS)THE OPERATIONAL ACCOUNTING

SYSTEM

There are 11 modules in the OAS of SAGAwhich are used to keep all the relevant &

standard accounts used by the Statutory Bodies


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THE ELEVEN MODULES

Modules Descriptions of Functions

General ledger Provide the Chart of Accounts structure &

interfaces to the other package modules for

transfer of data.Consolidated financial management

reports required by users are generated

under this module

Accounts payable Allows users to control aspects of the

payment process including theselection of invoices to be paid, the production

of computer printed cheques & payment

vouchers


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THE ELEVEN MODULES

Modules Description of Functions

Accounts receivables Allows users to take control of all

aspects of the receipts process,

monitoring of actual receipts against

projected receipts, collection &

postings of cash received

Assets management Allows users to account for all assets

held by the agency & to keep track of

their movements


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THE ELEVEN MODULES

Module Description of Functions

Investments Maintains information of investments made &

the management of the investment portfolios

such as fixed deposit accounts & records ofGovernment shares

Inventory Provides management with control of

inventory stock levels, prices, storage, the

issue of stocks to customers & receipt of stock

from vendorsOrder entry Creates customers invoices for payment

process & associated purchase or requisition order for

the acquisition & delivery of the goods


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THE ELEVEN MODULES

Module Description of Functions

Purchase orders Provides management & control of all

purchases made from vendors

Loans Allows for effective management of

loans portfolio

Payroll Maintains detailed personnel records

for the generation of employee payroll

Bank reconciliation Assists the agency in reconciling their

receipts & payments records against

the bank statements

THE ACCOUNTING


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THE ACCOUNTING

INFORMATION SYSTEM (AIS)

Provides information to the management for

monitoring, evaluating & taking the

necessary steps to improve the Financialperformance of an organization

There are options in AIS namely the

Financial Management & the AnnualFinancial Statement Preparation.


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THE TWO OPTIONS OF AIS

Options Functions

Financial Provides up-to-date information &

Management standard indicators on the performance

of the statutory body i.e.- Examine the Income & Expenditure

breakdown

- View month & year to date figures

for Income & Expenditure plus

variances in relation to budget

- View the above in graphical form & review

the detailed items



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Options Functions

Financial - Check on the Balance Sheet & view

Management the overall picture on a daily basis interms of Assets, Liabilities & Equity

- Select ratio Options & view StandardFinancial Ratios

Annual Financial Assist in the preparation of the Pre-

Statement Audit Annual Financial &

Preparation Management Reports

- Users may automate the preparation

of the Pre-Audit Report

- Review the latest update on the Annual

Financial Report

- Produce various reports to accompany thePre-Audit Accounts

act4161accounting practices in ps

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