7 Overview of Government Accounting 1 Chapter 1 Overview of Government Accounting (Fearn | Objectives 1, Differentiate government accounting from the accounting for business entities. (2. State the government entities charged with accounting responsibility. .. Describe briefly the GAM for NGAs. State the basic principles used in government accounting. State the recognition criteria for assets. Introduction “eons encompasses the | processes of ae : (State Audit Code of the Philippines, P.D. No. 1415, Sec. 109) The objectives of government accounting are: 2) To produce information. concerning past operations and resent conditions; b) To provide a basis for guidance for future operations; ©) To provide for control of the acts of public bodies and officers in the receipt, disposition and utilization of funds and property; and d) To report on the financial position and the results of operations of government agencies for the information of all persons concerned. (PD. No. 1445, Sec. 110)NG 2 Chapter 1 _Like_the_accounting_for_business_entities, government is also qi ernment accounting, howev: places greater emphasis on the following: ‘a. Sources and utilization of government funds; and b. Responsibility, accountability and liability of entities entrusted with government funds and properties. > Thejsources of government funds include receipts from taxes and other fees; Borrowings, and ggrants from other governments and international bodies. > The iftilization of government funds includes expenditures on , unanticipated losses from calamities and the like. Responsibility, Accountability and Liability over Government Funds and Property A ernment Funds and Property shall be utilized efficiently and th the law. The head of a government and Responsibility over Go 1. Government resources effectively in accordance wit sagenity is direct! is primarily i n ‘ose who are entrusted with the possession of government resources are directly responsible to the head of the agency. 2. All those who are exercising authority over a government agency shall (State Audit Code of the Philippines, P.D. No. 1445) Accountability over Government Funds and Property 1. A government ‘officer entrusted with the possession of government resources is responsible for the safekeeping= Overview of Government Accounting therefor in accordance with the law. Every accountable officer shall be properly bonded. (PD. No. 1445 and E.0. No. 292) The transfer of government funds from one officer to another shall, except as allowed by law, be made only after the authorization of the COA. The transfer shall be properly documented in an invoice and receipt. (P.D. No. 1445) y Liability over Government Funds and Property 1. The unlawful use of government resources shall be the personal liability of the employee found to be directly responsible therefor. 2. Every accountable officer shall be liable for all losses resulting from the unlawful use or negligence in the safekeeping of government resources. eel 3. No accountable officer shall be relieved from liability merely because he has acted under the direction of a superior officer in unlawfully utilizing the government resources entrusted to him, unless before that act, he has notified the superior officer, in writing, that the utilization is illegal. The superior officer shall be primarily liable while the accountable officer who fails to serve the required notice shall be secondarily liable. 4 An accountable officer shall immediately notify the COA for any loss of government funds from unforeseen events (force * majeure) within 30 days. Failure to do so will not relieve the officer of liability. (P.D. No. 1445) + Main concept: Government resources must be utilized efficiently and effectively in ‘| accordance with the law. Government officials are responsible in implementing this policy, are accountable for the government resources in their custody, and are liable for any loss.——— Chapter 1 __ The Unsung Heroes The number of Filipinos going abroad to seek employment is increasing every year. In 2012, it was estimated that about 10.4 million Filipinos worked abroad.' Almost all Filipinos know at least one other Filipino — a family member, a relative, or a friend, who is working abroad. We refer to our overseas workers as unsung heroes. How so? This is mainly because overseas workers remittances greatly increase the spending in our country, and the more money is spent. the more taxes the government collects. A portion of the money we spend on almost everything (food, clothing, bills entertainment. medicine, rentals, etc.) represents payment for tax. Taxes are the main source of government funds used in developing our country. Working abroad entails great sacrifices, not only for the overseas worker but also for family members left at home. We need efficient and effective utilization of our government resources sO that someday our countrymen can have better options of finding 2 livelihood in our country. Accounting, as a tool for planning and control, contributes to the achievement of this goal by providing information that is useful in planning the sources and uses of government funds and comparing ‘ctual results with expected results to promote the efficient and effective utilization of government funds. TcNN * Accounting responsibility The following offices are charged with government accounting, responsibility: a. Commission on Audit (COA) b. Department of Budget and Management (DBM) c. Bureau of Treasury (BTr) d. Government agencies Commission on Audit (COA) The Commission on Audit (COA): a. Has the exclusive authority to promulgate accounting and auditing rules and regulations.— Overview of Government Accounting b. Keeps the general accounts of the government, supporting, vouchers, and other documents. ¢. Submits financial reports to the President and Congress. Department of Budget and Management (DBM) The Department of Budget and Management (DBM) is responsible for the formulation and implementation of the national budget with the goal of attaining the nation’s socio-economic objectives. Bureau of Treasury (BTr) The Bureau of Treasury (BTr) functions under the Department of Finance and is the cash custodian of the government. The BTr is authorized to: a. Receive and keep national funds and manage and control the disbursements thereof; and b: Maintain accounts of financial transactions of all national government offices, agencies and instrumentalities. Government Agencies Government agency refers to any department, bureau or office of the national government, or any’ of its branches and instrumentalities, or any political. subdivision, as well as any government owned or controlled corporation (GOCC), including its subsidiaries, or other self-governing board or commission of the government. (P.D. No. 1445) The government agencies are responsible in directly implementing the projects of, and performing the functions delegated by, the government, Each agency (entity) shall maintain accounting books and budget registries which are reconciled with the cash records of the BTr and the budget records of the COA and DBM. Government agencies are required by law to have accounting units/divisions/departments. in the Philippines) is required & Even a barangay (the smallest administrative di per.” to have an accounting unit, e.g, the barangay’s “bool6: Chapter 1 Financial Reporting System of the National Government Bureau of Treasury (BT?) = Eachentity reconciles accounting books with cash records of BTr. : . Each entity's accounting books are subject to audit by Government Agencies | (eanites COA. Commission on Audit Each entity maintains|-——-_Each entity reconciles » —pp (CoA) i budget registries with budget records of COA. = ‘Each entity submits financial reports to ne iaton. . e Bache no COR or conan. Consolidates financial udget registries with reports of government budget records of DBM. .. agencies and submits it to } the Present and Congress. Department of Budget and Management (DBM) > Entity - refers to a government agency, department or operating/field unit. \ > Financial Reporting — is the process of preparation, presentation and submission of general purpose financial statements and other reports. The objective of financial reporting is to provide information about the entity that is useful to users for accountability purposes and decision-making.rr. Overview of Government Accounting The GAM for NGAs An “old” government accounting system had been used for about five decades before it was replaced by the New Government Accounting System (NGAS) in 2002. However, on January 1, 2016, the NGAS was replaced by the Government Accounting Manual for National Government Agencies (GAM for NGAs). The GAM for NGAs was promulgated primarily to harmonize the government accounting standards with international accounting standards, particularly the International Public Sector Accounting Standards (IPSAS). The IPSASs are based on the International Financial Reporting Standards (IFRS). The Philippine Government has. adopted~ the IPSAS through the Philippine Public Sector Accounting Standards (PPSAS). The provisions of the PPSAS are incorporated in the GAM for NGAs. Since the PPSAS are based on the IPSAS, which are in turn based on the IFRSs/PFRSs, most of the concepts. that we will be learning in this book would be very familiar to you ¥©. Legal basis The GAM for NGAs is promulgated by the Commission on Audit (COA) based on the authority conferred to it by the Philippine Constitution: Relevant provision of law: » “The Commission (on Audit) shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the. techniques and methods required therefor, and gate accol audit les and_regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive; extravagant, or unconscionable expenditures, or uses of government funds and properties." (Art. IX-D, Sec. 2(2), Philippine Constitution)oc Chapter 1 Coverage The GAM for NGAs provides the basic concepts to be used in: a. Preparing general purpose financial statements in accordance with the Philippine Public Sector Accounting Standards (PPSAS) and other financial reports as may be required by laws, rules and regulations; and b. Reporting of budget, revenue and expenditure in accordance with laws, rules and regulations. Objective The GAM for NGAs aims to update the following: a. Standards, policies, guidelines.and procedures in accounting for government funds and property; b. Coding structure and accounts; and ¢. Accounting books, registries, records, forms, reports and financial statements. (GAM for NGAs; Chapter 1, Sec. 3) Basic Accounting and Budget reporting Principles The financial records and reports of government entities shall comply with the following: 1. Philippine Public Sector Accounting Standards (PPSAS) and relevant laws, rules and regulations; 2. Accrual basis of accounting; Under the accrual basis of accounting, transactions are recognized when they occur (and not only when cash is received or paid). Therefore, transactions are recognized in the periods to which they relate. 3. Budget basis for presentation of budget information in the financial statements; Revised Chart of Accounts prescribed by COA; ———— eee eae eneOverview of Government Accounting 5. Double entry bookkeeping; 6. Financial statements based on accounting and budgetary records; and 7. Fund cluster accounting. The books of accounts are maintained by fund cluster (ie, according to the types of funds being accounted for) as follows: Code _| Fund clusters 01 _ | Regular Agency Fund 02 | Foreign Assisted Projects Fund 03 Special Account-Locally Funded/Domestic Grants Fund 04 Special Account-Foreign ie Grants Fund 05 Internally Generated Funds 06 Business Related Funds 07__| Trust Receipts For example, separate accounting books (Journals and Ledgers) and budget registries shall be maintained for Regular Agency Fund. Another separate accounting books and ‘budget registries shall be maintained for Foreign Assisted Projects Funds, and so on. Qualitative Characteristics of Financial Reporting Information reported shall meet the qualitative characteristics. Qualitative characteristics are the attributes that make information useful to users. & Understandability - information is understandable when users can reasonably be expected to comprehend its meaning. Accordingly, users are assumed to have i. reasonable knowledge of the entity’s activities; and ii, willingness to study the information.10 Chapter 1 Information about complex matters is not excluded simply because it may be too difficult for certain users to understand. b. Relevance - Information is relevant if it can assist users in evaluating past, present or future events or in confirming or correcting past evaluations. In order to be relevant, information must also be timely. . . c. Materiality - Materiality affects the relevance of information. Information is material if its omission or misstatement could influence the decisions of users. Materiality depends on the nature or size of the item or error, judged in the particular circumstances of its omission or misstatement. d. Timeliness. Information loses its relevance if there is undue delay in its reporting. The complexity of an entity’s operations is nota sufficient reason for failing to report on a timely basis. e. Reliability — reliable information is free from material error and bias, and can be depended on by users to represent faithfully that which it purports to represent or could reasonably be expected to represent. Trade-offs between Relevance and Reliability To provide timely information, it may be necessary to report before all aspects of a transaction are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who need to make decision in the interim. To achieve a balance between relevance and reliability, the overriding consideration is how users’ needs are best satisfied. £ Faithful representation - For information to represent faithfully transactions and other events, it should be presented in accordance with the substance of the transactions and other events, and not merely their legal form.nmen Accounting g. Substance over form ~ The substance of transactions or other events is not always consistent with their legal form. If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they be accounted for and presented in accordance with their substance and economic reality, and not merely their legal form. h. Neutrality - Information is neutral if it 7 en Information shall not be selected or presented in a manner that is designed to influence the user’s decision in order to achieve a predetermined outcome. Prudence — is the exercise of a degree of caution when making estimates under conditions of uncertainty, such that assets or revenue are not overstated and liabilities or expenses are not __ understated. However, prudence does not allow the creation __ of hidden reserves or excessive provisions, the deliberate "understatement of assets or revenue, or the deliberate _ overstatement of liabilities or expenses, because the financial _ statements would not be neutral and, therefore, not reliable. mapa Completeness - Information should be complete within the bounds of materiality and cost. Comparability - Information is comparable when users are able to identify similarities and differences between that information and information in other reports. Comparability applies to the comparison of financial statements of different entities and comparison of the financial statements of the same entity over different periods, Comparability requires that users must be informed of the entity's policies, changes to those Policies, and the effects of those changes and that financial _ statements show corresponding information for preceding periods. {AS 1/GAM for NGAs, Chapter 19, Sec. 6)12 Chapter 1 Components of General Purpose Financial Statements General Purpose Financial Statements are those intended to meet the needs of users who are not in a position to demand Teports tailored to meet their particular information needs. (pPsas 13) The complete set of general purpose financial statements consists of: . Statement of Financial Position; Statement of Financial Performance; Statement of Changes in Net Assets/Equity; Statement of Cash Flows; Statement of Comparison of Budget and Actual Amounts; and Notes to the Financial Statements, comprising a summary of significant accounting policies and other explanatory notes. moan op "Notice that the financial statements listed above are similar to those of a business entity. However, the financial statement unique to a government entity is the “Statement of Comparison of Budget and Actual Amounts” (letter ‘e’). We will elaborate on this later. Elements of the financial statements ASSETS Assets — are resources controlled by an entity as a result of past events, and from which future economic benefits or service potential are expected to flow to the entity. The key features of an asset are: a. The benefits must be controlled by the entity; b. The benefits must have arisen from a past event; and c. Future economic benefits or service potential must be expected to flow to the entity. > Control means the ability to benefit from an asset or prevent others from benefitting from that asset. “J_ > Overview of Government Accounting n eee Possession ot ownership normally evidences controt However, this is not always true. Por example, under 4 finance lease, the lessor retains legal ovenership over the heated anset but contro! is transferred to the lessee. > Benefit means the ability to use, exchange, lease, sell, or use the asset to settle liabilities, or distribute it to owners. Indicators of future economic benefits: a. distinguishable from the source of the benefit ie the particular physical resource or legal right; ‘b. does not imply that assets necessarily generate cash flows, the ‘benefits can also be in the form of ‘service potential’; © in determining whether a resource or right needs to be accounted for as an asset, the potential to contribute to the ‘objectives of the entity should be the prime consideration; d. capacity to contribute to activities/objectives/programs; and ‘e. the fact that an asset cannot be sold does not preclude it from providing future economic benefits. > Past event - A transaction or event giving rise to control of future economic benefits must have occurred. A mere intention to acquire assets in the future does not result to the Tecognition of assets in the present. Recognition of an Asset Anasset is recognized when: 4%. it is probable that the future economic benefits will flow to the entity; and ‘DB. the asset has a cost or value (eg, fair value) that can be measured reliably. le inflow of future economic benefits: } The chance of benefits arising is more likely rather than less likely (e.g. greater than 50%). Benefits can be expected on the basis of available evidence or logic.| ‘ | Chapter | 14 Reliable measurement: a. Valuation method is free from material error or bias. b. Faithful representation of the asset's benefits. c. Reliable information will, without bias or undue error, faithfully represent those transactions and events. LIABILITIES Liabilities - are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from. the entity of resources embodying economic benefits or service potential. . : EQUITY Net assets/equity — is the residual interest in the assets of the entity after deducting all its liabilities. REVENUE. - Revenue — is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets/equity, other than increases relating to contributions from owners. > Contributions from owners — are future economic benefits that have been contributed to the entity by external parties which do not result to liabilities of the entity and for which the contributor obtains interest in the net assets of the entity (i.e, right to dividends and right to net assets in cases of liquidation). comprise all funds derived from the income of any Revenue funds — propriation or agency of the government and available for ap) expenditure in accordance with law. (Section 3, P.D. No. 1445), oe Overview of Government Accounting 15 EXPENSES Expenses — are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrence of liabilities that result in decreases in net assets/equity, other than those relating to distributions to owners. » Distributions to owners - are future economic benefits distributed by the entity to its owners, either as a return on investment or as a return of investment. _