GOVERNMENT ACCOUNTING & ; ACCOUNTING FOR NON-PROFIT ORGANIZATIONSGOVERNMENT ACCOUNTING | & Accounting for Non-Profit Organizations BASED ON GOVERNMENT ACCOUNTING MANUAL FOR NATIONAL GOVERNMENT AGENCIES (GAM for NGAs) and 2 PHILIPPINE FINANCIAL REPORTING STANDARDS (PERSs) Nation’s Foremost CPA Review Inc. (NCPAR) 4 Pelizloy Centrum, Lower Session Road, Baguio City 2600, Philippines Mobile Number: (0917) 870 6962 af) Like us on | Facebook — Nation's Foremost CPAR0 ALL RIGHTS RESERVED 2018 3 ‘ No part of ‘this work covered by the copyright hereon may be reproduced or used in any form or by any means - electronic or mechanical, including photocopying - without the written permission of the author. ISBN 978-621-8029-15-6 Any copy of this book not bearing the signature of the author shall be considered as proceeding from an illegal source. ee Published by: BANDOLIN ENTERPRISE (Publishing and Printing) #21 1F M BLDG., PARAMOUNT, STO. TOMAS, BAGUIO CITY CONTACT NOS. (0917) 870 6962; (0917) 813 6037Dear Reader, This book has two parts. The first part is Government Accounting and the second part is Accounting for Non-profit Organizations. As with all the books that I have written and co-written so far, this book is also a labor of love and it is dedicated to you, my dear reader. . When I was a student ‘like you, I disliked government accounting and accounting for non-profit organizations simply because I found these topics too difficult to understand. My aim in writing this book is to present concepts in a manner that would make sense to you. I hope that, this way, you will find it easier to appreciate these topics. One day, if you have the opportunity to become a government accountant, you would already have the basic knowledge necessary for you to start building a meaningful career. Being a government accountant is one of the noble professions in the practice of accountancy. You will not only be serving your personal aspirations but also the aspiration of many Filipinos - and that is, to have a great nation! As a public servant, you will have the privilege of directly serving our beloved country. Remember, theories become truly useful only when applied in order to achieve something that is meaningful. If later on, you have queries, comments, or suggestions on how I can improve my work, I would be glad if you inform me. Here are my contact details: zeusvernonmillan@gmail.com and (0917) 870 6962. Good luck in your leaming and best wishes in your journey through life......thank you for making me a part of it. Sincerely, Zeus vernon'B. Millaniv Dedicationy For my wife - Eureka, my son — Devin Joshua and daughter ~ Athena. My deepest gratitude goes to my parents - Agapito, Jr. and Dr. Remedios, and all my teachers in elementary, high school and college for inculcating in me the importance of education, Special thanks to all the people at Bandelin Enterprise (7dihing and Printing). My sincere thanks also go to my dear friend Mr. Rodel Villanueva (a GOCC Audit Manager) for sharing his valuable time in answering my queries during the writing of this book as well as his experiences in the field of government accounting. ~ Zeus vernon B. Millan About the Author The author is a 6" Placer in the October 2006 CPA board examinations. He is a co-founder of, and a CPA reviewer at, Nation’s Foremost CPA Review Inc. (NCPAR), a teacher, and an entrepreneur.TABLE OF CONTENTS CHAPTER 1 OVERVIEW OF GOVERNMENT ACCOUNTING RESPONSIBILITY, ACCOUNTABILITY AND LIABILITY OVER GOVERNMENT FUNDS AND PROPERTY. ACCOUNTING RESPONSIBILITY. THE GAM FOR NGAS.. BASIC ACCOUNTING AND BUDGET REPORTING PRINCIPLES QUALITATIVE CHARACTERISTICS OF FINANCIAL REPORTING... COMPONENTS OF GENERAL PURPOSE FINANCIAL STATEMENTS ELEMENTS OF THE FINANCIAL STATEMENTS CHAPTER 1 SUMMARY: ... RBReovan, CHAPTER 2 THE BUDGET PROCESS .. THE NATIONAL BUDGE’ ‘THE BUDGET CYCLE Budget Preparation Budget Legislation. The Approved Budget .. Budget Execution Budget Accountability... Responsibility Accounting CHAPTER 2 SUMMARY: 42 CHAPTER 3 THE GOVERNMENT ACCOUNTING PROCESS BOOKS OF ACCOUNTS AND REGISTRIES.. BUDGET REGISTRIES Object of Expenditures. KEEPING OF THE GENERAL ACCOUN Basic RECORDINGS .. Appropriation.. Allotment Incurrence of Obligation Obligation Request and Status (ORS) Disbursement Authority - Notice of Cash Allocation (NCA) .vi Disbursements Remittance of Amounts Withheld .. Tax Remittance Advice (TRA) Billings, Collections & Remittances .. Reversion of Unused Notice of Cash Allocation (NCA) THE REVISED CHART OF ACCOUNTS... THE GOVERNMENT ACCOUNTING CYCLE. CHAPTER 3 SUMMARY: CHAPTER 4 REVENUES AND OTHER RECEIPTS ... FUNDAMENTAL PRINCIPLES FOR REVENUE Types of funds. ‘SOURCES OF REVENUE .. Exchange Transactions. Non-exchange Transactions. Bequests. Grant with Condition 126 Pledges 127 Concessionary Loans 128, OTHER RECEIPTS. CHaPTER 4 Summa CHAPTER 5 DISBURSEMENTS .... FUNDAMENTAL PRINCIPLES FOR DISBURSEMENT OF PUBLIC FUNDS ... AUTHORITY TO DiSBURSE/PAY.. Basic REQUIREMENTS & CERTIFICATIONS FOR DISBURSEMENTS... Mones oF DISBURSEMENTS Disbursements through Check Disbursements through Cash Disbursements through Advice to Debit Account (ADA) Disbursements through electronic Modified Disbursement System . 146 Disbursements through Cashless Purchase Card (CPC) System. Disbursements through Non-Cash Availment Authority (NCAA] ACCOUNTING FOR DISALLOWANCES, ACCOUNTING FOR OVERPAYMENTS: CHAPTER S SUMMARY: 151.CHAPTER 6 FINANCIAL ASSETS CASH AND CASH EQUIVALENTS Petty Cash Fund... Accounting for Cash Shortage/Overage of Disbursing Officer. Dishonored Checks. Bank Reconciliation RECEIVABLES. INVESTMENTS... Categories of Financial Assets.. Impairment of Financial Assets. Derecognition of Financial Asset: DERIVATIVES... CHAPTER 6 SUMMAR CHAPTER 7 INVENTORIES... MEASUREMENT. Cost FORMULAS «. RECEIPT AND DISPOSITION OF INVENTORIES .. CHAPTER 7 SUMMARY: CHAPTER 8 AGRICULTURE. RECOGNITION MEASUREMENT. DETERMINATION OF FAIR VALUE DISCLOSURES ....... CHAPTER 8 SUMMARY: CHAPTER 9 INVESTMENT PROPERTY .... INITIAL MEASUREMENT. ‘SUBSEQUENT MEASUREMENT ... TRANSFERS TO OR FROM INVESTMENT PROPERTY .. DERECOGNITION IMPAIRMENT.. CASH GENERATING UNI REVERSAL OF IMPAIRMENT ...INTIAL MEASUREMENT. Subsequent Expenditures on recognized PPE. SUBSEQUENT MEASUREMENT ... IMPAIRMENT... Computation of Value i in Use. HERITAGE ASSETS .. INFRASTRUCTURE ASSETS. REFORESTATION PROLECTS.. DERECOGNITION. IDLE, FULLY DEPRECIATED, UNSERVICEABLE AND LOST PPE. RECEIPT AND DISPOSITION OF PPE. BORROWING COSTS... CHAPTER 10 SUMMARY: CHAPTER 11 INTANGIBLE ASSETS.. RECOGNITION.. INITIAL MEASUREMENT ‘SUBSEQUENT MEASUREMENT IMPAIRMENT... DERECOGNITION CHAPTER 11 SUMMARY’... CHAPTER 12 LIABILITIES .. FINANCIAL LIABILITIES Initial Measurement. Subsequent Measurement... PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS.. Measurement... CHAPTER 12 SUMMARY:CHAPTER 13 LEASES. FINANCE LEASE ... 320 LEASE OF LAND AND BUILDING .. 321 Accounting for Finance lease by Lessees 322 Accounting for Finance lease by Lessors. 323° OPERATING LEASE ... CHAPTER 13 SUMMARY: CHAPTER 14 FINANCIAL STATEMENTS .... GENERAL PRINCIPLES....... 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. NOTES TO FINANCIAL STATEMENTS. Events After the Reporting Date Changes in Accounting Policies. Changes in Accounting Estimates Errors CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS. INTERIM FINANCIAL STATEMENTS... OTHER REPORTS .. DEADLINES ON SUBMISSION OF REPORTS. CHAPTER 14 SUMMARY: CHAPTER 15 MISCELLANEOUS TOPICS SERVICE CONCESSION ARRANGEMENTS BY GRANTOR... Recognition and Measurement of Asset.. Recognition and Measurement of Liability Financial Liability Model. Grant of Right to the Operator Model Dividing the Arrangement... INTERESTS IN JOINT VENTURE ... Jointly Controlled Operations Jointly Controlled Assets. Jointly Controlled EntitiesTHE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. Initial Measurement. Subsequent Measurement. Exchange Differences Translation of Financial Statements.. CHAPTER 15 SUMMARY: CHAPTER 16 NON-PROFIT ORGANIZATIONS. (CURRENT TREND IN PRACTICE (CHARACTERISTICS OF A NON-PROFIT ORGANIZATION PFRS PRINCIPLES APPLICABLE TO NPOS..... ACCOUNTING FOR NON-PROFIT ORGANIZATIONS .. Fund theory vs. Fund accounting. Contributions Recognition and measurement... Cash and other Non-cash assets Unconditional promises Conditional promises Services . Works of art and similar items Deferral method of recognizing contribution: FINANCIAL STATEMENTS ... Statement of financial position. Statement of activities ... Statement of cash flows. . ACCOUNTING PROCEDURES PECULIAR TO SPECIFIC TYPES OF NPOS Health Care Organizations... Private, non-profit, Colleges and Universities. Voluntary Health and Welfare Organizations .. Other non-profit organizations... ACCOUNTING FOR OTHER ASSETS HELD BY NPO: CHAPTER 16 SUMMARY: 410 418 420 420 420 422 423 423 429 430 431 432 CHAPTER 17 ILLUSTRATIVE FINANCIAL STATEMENTS OF NPOS.. ILLUSTRATIVE FINANCIAL STATEMENTS ~ BASED ON U.S, GAAP ILLUSTRATIVE FINANCIAL STATEMENTS ~ BASED ON IFRSS 462 ILLUSTRATIVE FINANCIAL STATEMENTS — BASED ON IFRSS, SOME U.S, GAAP PRINCIPLES ‘ARE INCORPORATED. 473Overview of Government Accounting - i Chapter 1 ‘Overview of Government Accounting Learning Objectives 1. Differentiate government accounting from the accounting for business entities. 2. State the government entities charged with accounting responsibility. 3. Describe briefly the GAM for NGAs. 4, State the basic principles used in government accounting. 5, State the recognition criteria for assets. Introduction “Government accounting encompasses the processes of analyzing, recording, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds and property, and interpreting the results thereof.” (State Audit Code of the Philippines, P.D. No. 1445, Sec. 109) The objectives of government accounting are: a) To produce information concerning past operations and present conditions; 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 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) b) ¢) dq)Like the accounting for. business entities, governmey accounting is also a process of producing information that is usefy in making economic decisions, Government accounting, howeve, places greater emphasis on the following: a. . Sources and utilization of government funds; and b. Responsibility, accountability and liability of entities entrusteg with government funds and properties. > The sources of government funds include receipts from taxes and other fees, borrowings, and grants from other governments and international bodies. > The utilization of government funds includes expenditures on programs, projects, unanticipated losses from calamities and the like. Responsibility, Accountability and Liability over Government Funds and Property Responsibility over Government Funds and Property 1. Government resources shall be utilized efficiently and effectively in accordance with the law. The head of a government agency is directly responsible in implementing this policy and is primarily responsible for government resources entrusted to his agency. Those 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 share fiscal responsibility. (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. (P.D. No. 1445 and E.O. No. 292) 2. 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) 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. 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.__ te iChapter 1 AO The Unsung Heroes The number of Filipinos going abroad to seek employment ig 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 a 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 actual results with expected results to_ promote the efficient and effective utilization of government funds. ToNN 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. i.Overview of Government Accounting 5 b. Keeps the general accounts of the government, supporting vouchers, and other documents. c. 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 . disburséments 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. & Even a barangay (the smallest administrative division in the Philippines) is required to have an accounting unit, eg, the barangay’s “bookkeeper.”- § Chapter 1 SO ator Financial Reporting System of the National Government Bureau of Treasury (BT!) ~ Each entity reconciles ‘accounting books with cash records of BT. - Eachentity’s ‘accounting books are subject to audit by CoA. Commission on Audit I~. Each entity reconciles, —pp (COA) budget registries with budget records of COA. ~ Each entity submits financial reports to = Each entity reconciles COA {or consolidation. = Consolidates financial budget registries with $ reports of government budget records of DBM. agencies and submis itt 1 the President 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.Overview of Government Accounting Zz 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 promulgate accounting and auditing rules 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)8 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 c. 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; 4. Revised Chart of Accounts prescribed by COA;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 Assisted/Foreign 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. a. 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. J10 tO Chapter | et Information about complex matters is not excluded simply because it may be too difficult for certain users ty understand. 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. 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. Timeliness - Information loses its relevance if there is undue delay in its reporting. The complexity of an entity’s operations is not a sufficient reason for failing to report on a timely basis. 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 Teliability, the overriding consideration is how users’ needs are best satisfied. Faithful representation - For information to tepresent 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. ,Overview of Government Accounting il 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 is free from bias. 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. i, 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. j. Completeness - Information should be complete within the bounds of materiality and cost. k. 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. (PPSAS 1/GAM for NGAs, Chapter 19, Sec. 6)