S2: Accounting and S2: Accounting and Financial Financial

ManagementManagement

Session OverviewSession Overview

Session objectivesSession objectives Scope of the issuesScope of the issues Basis of AccountingBasis of Accounting Recognition and Recognition and

MeasurementMeasurement Qualitative CharacteristicsQualitative Characteristics

SessionSession Objectives Objectives

To explain the broad principles of To explain the broad principles of accounting and financial management accounting and financial management in respect of cash basis of accounting in respect of cash basis of accounting to ensure financial accountability. to ensure financial accountability.

The major inputs will be on: The major inputs will be on: The statement of receipts and The statement of receipts and

disbursements during the year disbursements during the year Cash flows statement of the EntityCash flows statement of the Entity

Scope of the issuesScope of the issues

A Financial Report may be treated as a set of A Financial Report may be treated as a set of Statements, Schedules and accompanying notes Statements, Schedules and accompanying notes that conveys comprehensive financial information that conveys comprehensive financial information about an Entity e.g. balance sheet, Profit and loss about an Entity e.g. balance sheet, Profit and loss account, income and expenditure account etc.account, income and expenditure account etc.

Finance Accounts of the Government presented Finance Accounts of the Government presented to the Legislature constitute the comprehensive to the Legislature constitute the comprehensive body of financial information about a Government body of financial information about a Government and are in the nature of a general purpose and are in the nature of a general purpose Financial Report. Financial Report.

Scope of the issuesScope of the issues Appropriation Accounts, which are a Appropriation Accounts, which are a

condensed presentation of Grant-wise condensed presentation of Grant-wise compliance information with respect to the compliance information with respect to the Appropriation Acts, may be treated as Appropriation Acts, may be treated as compliance reports.compliance reports.

The Union and some State Governments have The Union and some State Governments have passed the passed the Fiscal Responsibility ActsFiscal Responsibility Acts in the in the recent past.recent past.

Under these Acts or the subordinate Under these Acts or the subordinate legislation, financial information relating to legislation, financial information relating to the Government Account as well as the Government Account as well as information relating to the position of the information relating to the position of the economy, flowing from National Accounts economy, flowing from National Accounts Statistics may be relevant to the Parliament Statistics may be relevant to the Parliament or the Legislatures for decision making.or the Legislatures for decision making.

Basis of AccountingBasis of Accounting The government accounting is done on Cash Basis, i.e. The government accounting is done on Cash Basis, i.e.

single entry system of accounting as opposed to the single entry system of accounting as opposed to the accrual system of accounting done on double entry basis.accrual system of accounting done on double entry basis.

The basis of accounting being cash, the depreciation or The basis of accounting being cash, the depreciation or losses or write-offs of the physical assets at the end of losses or write-offs of the physical assets at the end of their life are not recognised or expensed.their life are not recognised or expensed.

The primary unit for government accounting is the Pay The primary unit for government accounting is the Pay and Account Officer for the Union Government and and Account Officer for the Union Government and Treasuries for the State Governments. Treasuries for the State Governments.

The compilation of accounts is governed by the Civil The compilation of accounts is governed by the Civil Accounts Manual for the PAOs and Treasury codes in the Accounts Manual for the PAOs and Treasury codes in the States.States.

The accounting in the government companies, The accounting in the government companies, autonomous bodies and statutory corporations are autonomous bodies and statutory corporations are maintained on accrual basis. maintained on accrual basis.

The accounting in the Departmentally managed The accounting in the Departmentally managed commercial undertakings like the railways are commercial undertakings like the railways are maintained primarily on cash basis. maintained primarily on cash basis.

Recognition and Recognition and Measurement of Financial Measurement of Financial

elements-Ielements-I The Cash Receipts and Disbursements of the The Cash Receipts and Disbursements of the

Entity are recorded at the point of the cash Entity are recorded at the point of the cash transaction, for the value of the cash transaction, for the value of the cash transaction taking place, with the exception of transaction taking place, with the exception of specific cases of non-cash transactions.specific cases of non-cash transactions.

The amounts under the debt, deposit, The amounts under the debt, deposit, suspense, miscellaneous and remittance suspense, miscellaneous and remittance heads, with certain exceptions are individually heads, with certain exceptions are individually closed to balances. These are part of Public closed to balances. These are part of Public Accounts.Accounts.

Account heads under the Consolidated Fund Account heads under the Consolidated Fund are closed to accounts.are closed to accounts.

Recognition and Recognition and Measurement of Financial Measurement of Financial

elements-IIelements-II The balances of liabilities as well as the The balances of liabilities as well as the

balances of loans and advances are balances of loans and advances are recognised in Financial Reports.recognised in Financial Reports.

The progressive investment of The progressive investment of Government in statutory corporations, Government in statutory corporations, Govt. companies, etc. as well as the Govt. companies, etc. as well as the progressive capital expenditure, though progressive capital expenditure, though closing to government accounts annually, closing to government accounts annually, are recognised in Financial Reports.are recognised in Financial Reports.

Qualitative characteristics Qualitative characteristics of Financial Reportsof Financial Reports

(a) Relevance(a) Relevance(b) Reliability(b) Reliability(c) Materiality(c) Materiality(d) Timeliness(d) Timeliness(e) Offsetting(e) Offsetting(f) Consistency of Presentation(f) Consistency of Presentation(g) Comparative Information(g) Comparative Information Inappropriate accounting treatments are Inappropriate accounting treatments are

not rectified either by disclosure of the not rectified either by disclosure of the accounting policies used, or by notes or accounting policies used, or by notes or explanatory material.explanatory material.

Qualitative Qualitative Characteristics - ICharacteristics - I

Relevance Relevance requires that the accounting policy may requires that the accounting policy may ensure that the Financial Reports are relevant to the ensure that the Financial Reports are relevant to the decision-making needs of users and fulfill the objectives decision-making needs of users and fulfill the objectives of financial reporting.of financial reporting.

ReliabilityReliability of financial information demands of financial information demands1.1. A faithful presentation of financial performance and financial A faithful presentation of financial performance and financial

position of the entity;position of the entity;2.2. That the Financial Reports reflect the economic substance of That the Financial Reports reflect the economic substance of

events and transactions and not merely the legal form;events and transactions and not merely the legal form;3.3. There is no bias, that is, the information is neutral;There is no bias, that is, the information is neutral;4.4. Prudence has been exercised in cases where adjustments are Prudence has been exercised in cases where adjustments are

effected; andeffected; and5.5. Completeness in all material respects.Completeness in all material respects.

Information is reliable when it is free from material error Information is reliable when it is free from material error and bias and represents faithfully what it is supposed to and bias and represents faithfully what it is supposed to represent or could reasonably be expected to represent.represent or could reasonably be expected to represent.

Qualitative Qualitative Characteristics –IICharacteristics –II Materiality–Materiality– information is material if its omission information is material if its omission

or mis-statement could influence the decision-or mis-statement could influence the decision-making or assessments by users about allocation making or assessments by users about allocation and use of resources and the performance of the and use of resources and the performance of the entity.entity.

Materiality depends on the nature or size of the Materiality depends on the nature or size of the item or error judged in the particular item or error judged in the particular circumstances of omission or mis-statement.circumstances of omission or mis-statement.

Each material item should be presented separately Each material item should be presented separately in Financial Reports. Immaterial amounts should be in Financial Reports. Immaterial amounts should be aggregated with amounts of similar nature or aggregated with amounts of similar nature or function and need not be presented separately.function and need not be presented separately.

In deciding whether an item or an aggregate of In deciding whether an item or an aggregate of items is material, the nature and the size of the items is material, the nature and the size of the items are evaluated together. Items that are items are evaluated together. Items that are material by virtue of their nature or by virtue of material by virtue of their nature or by virtue of their size may be presented separately in Financial their size may be presented separately in Financial Reports. Items can also be material by virtue of Reports. Items can also be material by virtue of their context.their context.

Qualitative Characteristics - Qualitative Characteristics - IIIIII

The inherent nature or characteristics of an The inherent nature or characteristics of an item or a group of items may also render item or a group of items may also render these material. For example - where the law these material. For example - where the law or regulation requires these to be separately or regulation requires these to be separately disclosed, it may be considered material disclosed, it may be considered material regardless of the amount involved. regardless of the amount involved.

Materiality provides a threshold rather than Materiality provides a threshold rather than being a primary qualitative characteristic as being a primary qualitative characteristic as to which information must be included. An to which information must be included. An item that is not sufficiently material to item that is not sufficiently material to warrant separate presentation in the warrant separate presentation in the Financial Reports may be presented Financial Reports may be presented separately in the notes.separately in the notes.

Qualitative Qualitative Characteristics IVCharacteristics IV Timeliness:Timeliness: Financial information should be Financial information should be

made available within a reasonable period of made available within a reasonable period of time. Financial Reports prepared annually time. Financial Reports prepared annually should be made available before the end of should be made available before the end of six months from the end of the reporting year.six months from the end of the reporting year.

If there is an undue delay in the reporting of If there is an undue delay in the reporting of information, it may lose its relevance. information, it may lose its relevance. Conversely, if reporting is delayed until all Conversely, if reporting is delayed until all aspects are known, the information may be aspects are known, the information may be highly reliable but of little use for making highly reliable but of little use for making decisions in the interim. decisions in the interim.

In achieving a balance between relevance and In achieving a balance between relevance and reliability on the one hand and timeliness on reliability on the one hand and timeliness on the other, the overriding consideration is how the other, the overriding consideration is how best to satisfy the needs of the decision-best to satisfy the needs of the decision-makers.makers.

Qualitative Qualitative Characteristics – VCharacteristics – V

Disallow offsettingDisallow offsetting:: Items of Receipts and Items of Receipts and Expenditure as well as Assets and Liabilities should not Expenditure as well as Assets and Liabilities should not be offset except under a specific order of the be offset except under a specific order of the Government.Government.

The recording of all transactions may be on gross basis The recording of all transactions may be on gross basis unless specifically authorized. The netting of unless specifically authorized. The netting of expenditure with receipts is tantamount to inflation of expenditure with receipts is tantamount to inflation of budgetary appropriations. budgetary appropriations.

The aggregation may be as per norms; however, The aggregation may be as per norms; however, material details, even if below the level of aggregation material details, even if below the level of aggregation may be explicitly disclosed.may be explicitly disclosed.

The netting refunds of tax from tax receipts, without The netting refunds of tax from tax receipts, without adequate disclosure in Financial Reports, can vitiate adequate disclosure in Financial Reports, can vitiate both tax forecasting and tax policymaking. These may both tax forecasting and tax policymaking. These may be reported upon in the Statement of Cash Receipt and be reported upon in the Statement of Cash Receipt and Expenditure under each Tax Revenue head. Expenditure under each Tax Revenue head.

The offsetting of the payment of interest on these The offsetting of the payment of interest on these refunds from tax receipts is irregular. Any such refunds from tax receipts is irregular. Any such payment needs to be made after obtaining a budget payment needs to be made after obtaining a budget appropriation under Interest Payment.appropriation under Interest Payment.

Qualitative Characteristics Qualitative Characteristics VIVI The devolution of taxes to State Governments The devolution of taxes to State Governments

is an instance where netting is reasonable, is an instance where netting is reasonable, giving the structure of fiscal federalism. giving the structure of fiscal federalism.

Sale proceeds of capital assets are also Sale proceeds of capital assets are also shown as reduction in capital expenditure, shown as reduction in capital expenditure, but separately as a distinct head at a higher but separately as a distinct head at a higher level, if material. The capital expenditure level, if material. The capital expenditure budgeted for cannot however be reduced by budgeted for cannot however be reduced by sale proceeds of capital non-financial assets.sale proceeds of capital non-financial assets.

Recoveries of expenditure for services or Recoveries of expenditure for services or supplies made to non government entities or supplies made to non government entities or other Governments are in all cases classified other Governments are in all cases classified as the receipts of the government rendering as the receipts of the government rendering services or suppliers.services or suppliers.

When the services are undertaken merely as When the services are undertaken merely as an agent of a private body, the recoveries an agent of a private body, the recoveries may be taken as reduction of expenditure. may be taken as reduction of expenditure.

Qualitative Qualitative Characteristics-VIICharacteristics-VII

Consistency of Presentation:Consistency of Presentation: The presentation The presentation and classification of items in the Financial and classification of items in the Financial Reports should be retained from one period to Reports should be retained from one period to the next unlessthe next unless A significant change in the nature of the A significant change in the nature of the

operations of the entity being reported upon operations of the entity being reported upon or review of its Financial Reports or review of its Financial Reports demonstrates that the change will result in a demonstrates that the change will result in a more appropriate presentation of events or more appropriate presentation of events or transactions; ortransactions; or

An Indian Government Accounting Standard An Indian Government Accounting Standard or a later amendment requires a change in or a later amendment requires a change in presentation thereto.presentation thereto.

Qualitative Characteristics– Qualitative Characteristics– VIIIVIII Comparative InformationComparative Information: Comparative information : Comparative information

should be disclosed in respect of the previous period should be disclosed in respect of the previous period for all numerical information to be disclosed in the for all numerical information to be disclosed in the Financial Reports.Financial Reports.

Comparative information should be included in Comparative information should be included in narrative and descriptive information when it is narrative and descriptive information when it is relevant to enhance the understanding of the current relevant to enhance the understanding of the current period’s Financial Reports.period’s Financial Reports.

When the presentation or classification of items in When the presentation or classification of items in the Financial Reports is amended, corresponding the Financial Reports is amended, corresponding amounts in the previous period should be amounts in the previous period should be reclassified, to ensure comparability with the current reclassified, to ensure comparability with the current period, with adequate disclosure of the nature, period, with adequate disclosure of the nature, amount and reason thereof. amount and reason thereof.

If it is impracticable to reclassify comparative If it is impracticable to reclassify comparative amounts in the successive periods, reasons for the amounts in the successive periods, reasons for the same should be disclosed. same should be disclosed.

In practice, a balancing or trade-off between In practice, a balancing or trade-off between qualitative characteristics is often necessary in order qualitative characteristics is often necessary in order to meet the objective of Financial Reports.to meet the objective of Financial Reports.