CH 06

Financial Reporting
6 in the Malaysian
Public Sector
Learning Outcomes
 Understand the legal requirements for financial

reporting in the Malaysian public sector
 Demonstrate the accounting treatment for
government revenues and expenditures under
applicable accounting standards
 Understand the federal government’s financial
statements
Public Sector Accounting Governance and Accountability in the Malaysian All Rights Reserved
Context 6–3
Introduction
 Following are the objectives of financial reporting:

1. To provide financial Information useful for making
economic, political and social decisions, and
demonstrating accountability and stewardship, and
information useful for evaluating managerial and
organizational performance
2. To assess compliance of legal and other statutory
requirements regarding how resources are obtained
and spent
Context 6–4
Introduction (cont.)
3. To ensure relevant authorities in government make

rational decisions about allocation, distribution, and
utilization of resources for various sectors of the
economy
4. To serve as a tool to monitor performance of
governmental organizations in terms of their efficiency and
effectiveness in the use of public resources
5. To assess capability and capacity of government
organizations to provide high quality products and
services and its ability to continue to serve the public
Context 6–5
Introduction (cont.)
6. To provide the government the opportunity to put

forward statements of its achievement to influence
users and the public
7. To provide information to all relevant interest groups
or users on the economic resources and obligation
of government organizations for a certain time
period.
Context 6–6
Legal Requirements for Financial
Reporting in the Malaysian
Public Sector
 The financial reporting statements are prepared annually
by the Accountant General’s Department of Malaysia
according to the requirements of the following provisions:
1. Article 99(4) of the Federal Constitution
2. Section 16(1) of the Financial Procedure Act 1957
3. Treasury Circular No. 5/1994
4. Treasury Circular No. 4/2007
5. International Public Sector Accounting Standards
(IPSASs)
Context 6–7
Public Sector (cont.)
6. Malaysian Public Sector Accounting Standards

(MPSASs)
Article 99(4) of the Federal Constitution states that: ‘... the

said statement shall also show, so far as practicable, the
assets and liabilities of the Federation at the end of last
completed financial year, the manner in which those assets
are invested or held, and the general purpose in respect of
which those liability are outstanding’.
Context 6–8
 Section 16(1) of the Financial Procedure Act 1957
states that: ‘The financial authority shall for the purpose
of section 9 of the Audit Act 1957, as soon as
practicable after the end of every financial year prepare
in respect of that year:
(a) a statement of Consolidated Revenue Accounts;
(b) a statement of Consolidated Loans Accounts;
(c) a statement of Consolidated Trust Accounts;
(d) a statement of assets and liabilities of Federation
or State at end of financial year.’
Context 6–9
 Treasury Circular No. 5/1994 - designed to improve
accountability through the preparation and presentation
of annual reports and financial statements.
 Treasury Circular No. 4/2007 - to identify minimum

disclosure requirements in the Malaysian federal
statutory bodies’ annual reports and to inform on the
accounting standards that these entities should accept.
Context 6–10
 The International Public Sector Accounting Standards
Board (IPSASB) - dedicated to promoting the
acceptance of and the international convergence to
IPSASs.
 The International Public Sector Accounting Standards

Board (IPSASB) - dedicated to promoting the
acceptance of and the international convergence to
IPSASs. 2011 - was announced and agreed that the
Malaysian government should adopt accrual accounting
for better fiscal discipline management.
Context 6–11
 The Accountant General’s Department is responsible in
issuing MPSASs which apply to the accrual basis of
accounting and sets out requirements dealing with
transactions and other events in the general-purpose
financial reports. Reports are intended to meet the
information needs of users who are unable to require
the preparation of financial reports tailored to meet their
specific information needs.
Context 6–12
Transition to the Malaysian
Public Sector Accounting
Standards (MPSASs)
 Financial transactions are accounted for and recorded

when there is an inflow or outflow of cash in a
particular accounting period.
 The qualitative characteristics of information included

in the financial statements.
Context 6–13
Standards (MPSASs) (cont.)
Information of financial reporting is reliable if
Information is relevant if it can help the there is no material error and it is fair.
user in evaluating a past, present and Reliability
future situation. To be relevant, the
information also needs to be timely. This concept takes into account the degree of
vigilance in consideration of the need to
Relevance Prudence budget under uncertain circumstances, such
as an asset or yield not being overlooked and
the obligation or expense is not understated.
Financial information is easily The information in the financial

understood by users with statements can be compared. Users can
reasonable knowledge.
Understandability
Characteristics Comparability
identify similarities and differences
between information in different reports.
Transactions and other events that need to be

Substance The information in the financial statements
reported are accounted for and presented in Completeness
accordance with the priorities of the values and over form should be complete in terms of materiality
economic realities and not just in the form of and cost.
legislation.
Materiality
The form of information and its materiality
determines the importance of information.
Context 6–14
Government Operating Activities
Based on MPSAS 2—Cash Flow Statement, government
operating activities are defined as the activities of the entity
that are not investing or financing activities.
The amount of net cash flow arising from operating
activities is a key indicator of the extents to which the
operations of the entity are funded by the way of:
1. Taxes (directly or indirectly)
2. Recipient of goods and services provided by the
entity.
Context 6–15
 Cash flows from operating activities are primarily derived from the
principal cash-generating activities of the entity. Examples of cash
flows from operating activities are:
1. Cash receipts from taxes, levies, and fines
2. Cash receipts from charges for goods and services provided
by the entity
3. Cash receipts from grants or transfers and other
appropriations or other budget authority made by central
government or other public sector entities
4. Cash receipts from royalties, fees, commissions, and other
revenue
Context 6–16
5. Cash payments to other public sector entities to
finance their operations (not including loans)
6. Cash payments to suppliers for goods and services
7. Cash payments to and on behalf of employees
8. Cash receipts and cash payments of an insurance
entity for premiums and claims, annuities, and other policy
benefits
9. Cash payments of local property taxes or income
taxes (where appropriate) in relation to operating activities
Context 6–17
10. Cash receipts and payments from contracts held for
dealing or trading purposes
11. Cash receipts or payments from discontinuing
operations
12. Cash receipts or payments in relation to litigation
settlements
13. Cash receipts or payments for the government trust
account.
Context 6–18
Exchange and Non-exchange Transactions

Public sector entities may derive revenues from exchange
or non-exchange transactions.
In distinguishing between exchange and non-exchange re
venues, substance rather than the form of the transactions
should be considered.
Since these two types of revenues are different in terms o
f the nature of sources and value in exchange, these two re
venues are addressed in two different MPSASs.
Context 6–19
Exchange transactions
Transactions in which one entity receives assets or servic
es or has liabilities extinguished, and directly gives approxi
mately equal value to another entity in exchange.
This is governed under MPSAS 9—Revenue from Exchan
ge Transactions.
Context 6–20
Non-exchange transactions
MPSAS 23—Revenue from Non-Exchange Transactions
Defines the transactions as an entity that either receives v
alue from another entity without directly giving approximatel
y equal value in exchange, or gives value to another entity
without directly receiving approximately equal value in exch
ange.
Context 6–21
Differences
between exchange
and non-exchange
transactions
Context 6–22
Recognition of Revenues
 The recognition criteria for public sector revenues are

applied separately to each transaction.
Revenues from Exchange Transactions

 Revenue is measured at the fair value of the consideration
received or receivable.
1. Rendering of service—when the outcome of a
transaction involving the rendering of service can be
estimated reliably, revenue associated with the
transaction is recognized by reference to the stage of
completion of the transaction at the reporting date.
Context 6–23
(cont.)
2. Sale of goods—revenue from the sale of goods is

recognized when all the following conditions have been
satisfied:
(a) The entity has transferred to the purchaser the
significant risks and rewards of ownership of the
goods
(b) The entity retains neither continuing
managerial involvement to the degree usually
associated with ownership, nor effective control over
the goods sold
(c) The amount of revenue can be measured
reliably
Context 6–24
(cont.)
3. Interest, royalties, and dividends—interest is

recognized on a time-proportion basis that takes into
account the effective yield on the asset; royalties are
recognized as they are earned in accordance with the
substance of the relevant agreement; and dividends
or similar distributions are recognized when the
shareholder’s or the entity’s right to receive payment
is established.
Context 6–25
(cont.)
Revenues from Non-exchange Transactions
 An asset acquired through a non-exchange transaction is

initially measured at its fair value as at the date of
acquisition.
Context 6–26
Recognition of Expenditures
 MPSAS 1—Presentation of Financial Statements defines

expenses as ‘decreases in economic benefits or service
potential during the reporting period in the form of outflo
ws or consumption of assets or incurrences of liabilities t
hat result in decreases in net assets/equity, other than th
ose relating to distributions to owners.’
Context 6–27
(cont.)
 ‘Expenses’ recognized under different bases of ac

counting
Context 6–28
(cont.)
 The difference between the different bases of accounting

for expenses or expenditures is often not so much what i
s considered to be an expense or expenditure, but when
an item is recognized in measuring the results of operati
ons.
 The difference is that the modified accrual basis fully
recognizes the cost when the asset is acquired whereas
the full accrual basis recognizes the cost over the life of
the asset as the service potential of the asset is
consumed
Context 6–29
Accounting Treatment for
Assets and Liabilities
 An inflow of resources from a non-exchange

transaction, other than services in kind, that meets the
definition of an asset is recognized as an asset when,
and─only when, the following recognition criteria are
met:
1. It is probable that the future economic benefits or
service potential associated with the asset will flow
to the entity
2. The fair value of the asset can be measured
reliably.
Context 6–30
Assets and Liabilities (cont.)
 A present obligation arising from a non-exchange

transaction that meets the definition of a liability is
recognized as a liability when, and only when, the
following recognition criteria are met:
1.It is probable that an outflow of resources embodying
future economic benefits or service potential will be
required to settle the obligation
2. A reliable estimate can be made of the amount of the
obligation.
Context 6–31
Assets and Liabilities (cont.)
Accounting treatment for
non-exchange
transactions
Context 6–32
Format and Presentation of
Financial Statements in the
Public Sector
 The components of the financial statements in the
Malaysian public sector include the following:
Statement of Statement of Statement of Statement of Notes to the
Financial Status Cash Receipts Financial Memorandum Financial
(Position) and Payments Performance Accounts Statements
1 2 3 4 5
• Consists of two major
• The financial statements
• The amount of cash categories :-
 Shows the assets and include information about the
and investments held • Includes the amount of
liabilities of the federal basis of preparation of the
in respect of three 1- Revenue revenue, finance costs,
government that are financial reporting and the
accounts of the comprises receipts in the surplus or deficit, share
not disclosed in the specific accounting policies
Consolidated Fund are forms of loans, capital of the surplus or deficit
Statement of Financial used.
as follows: receipts, trust receipts, of associated and joint
Position.
tax revenue, non-tax ventures accounted for
1. Consolidated Revenue • There are eight financial
revenue and non- the equity method and
 It consists of aspects of the federal
Account revenue receipts. pre-tax gain or loss
Memorandum of government’s financial
recognized on the
Assets and management:
2. Consolidated Loan disposal of assets or
Memorandum of 1. Revenue
Account 2- Expenditure. settlement of liabilities
Liabilities. 2. Expenditure
comprises payments in the attributed to
3. Consolidated Trust form of operating discounting operations 3. Borrowing
Account. expenditure developmen 4. Control and management of
t expenditure, repayment funds
of loans, external 5. Budget and financial
assistance, capital statements
expenditure and trust 6. Auditor General
expenditure. 7. National Finance Council
8. Sabah and Sarawak affairs.
Context 6–33
Users of the Federal
Government Financial Reports
 The principal users in the business sector can be

grouped as follows:
1. For investment information, existing and potential
investors and lenders, analysts, and rating
agencies may use the information to assess
financial condition and make decisions about
financial participation.
Context 6–34
(cont.)
2. For business decisions, existing and potential

suppliers, customers, venture partners, competitors, and
labour unions may use financial reports to assess the
risks in doing business with the firm, to identify
opportunities, and to benchmark their own
performance.
3. To evaluate management, boards of directors,
investors, and management itself may use audited
financial reports as a tool to assess management
performance and to compare performance with
peer organizations.
Context 6–35
(cont.)
2. To evaluate management, boards of directors,

investors, and management itself may use audited
financial reports as a tool to assess management
performance and to compare performance with
peer organizations.
3. To manage financial issues, boards of directors
and management may use financial reports to
identify issues related to the risk and opportunities
based upon year-to-year changes, long-term liabilities
or cash position, or current annual payments on
long-term debt.
Context 6–36
(cont.)
 The principal users of financial statements in the public
sector can be identified as follows:
Legislators The financial
The financial information is crucial to the legislators, as they are directly involved in
approving the budget as well as implementing new taxes.
Government Managers and The financial information reflected in the financial reports should facilitate managers and
Executives executives in the public services to formulate various plans, programmes, activities and
projects for possible implementation at various levels in line with the government’s
objectives.
r The financial information is useful to the government auditors and oversight committees
Government auditors and
oversight committees since they are responsible for ensuring that public moneys are properly spent in various
public sector organizations, as well as being accountable in assessing the level of
compliance with the government’s rules, regulations and policies.
Taxpayers This group of users is interested in obtaining information on the sources and utilization of
funds and moneys by the ruling government in view that they are the ones who pay various
taxes.
Investors and vendors Financial information will assist them in maximizing investment returns, as well as in making
decisions relating to business risks and opportunities in government projects and contracts.
Employees and voters Employees are interested on information about their salary structure and the strength of the
department they work for.
Non-governmental In Malaysia, the NGOs represent special interest groups. They need information on the
organizations (NGOs)
impact of government policies on certain sectors of the society.
Context 6–37
Learning Outcomes
 Understand the legal requirements for financial

reporting in the Malaysian public sector
 Demonstrate the accounting treatment for government
revenues and expenditures under applicable accounting
standards
 Understand the federal government’s financial
statements
Context 6–38

CH 06

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CH 06

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Financial Reporting

 Understand the legal requirements for financial

 Following are the objectives of financial reporting:

3. To ensure relevant authorities in government make

6. To provide the government the opportunity to put

6. Malaysian Public Sector Accounting Standards

Article 99(4) of the Federal Constitution states that: ‘... the

 Treasury Circular No. 4/2007 - to identify minimum

 The International Public Sector Accounting Standards

 Financial transactions are accounted for and recorded

 The qualitative characteristics of information included

Financial information is easily The information in the financial

Transactions and other events that need to be

Exchange and Non-exchange Transactions

 The recognition criteria for public sector revenues are

Revenues from Exchange Transactions

2. Sale of goods—revenue from the sale of goods is

3. Interest, royalties, and dividends—interest is

Revenues from Non-exchange Transactions

 An asset acquired through a non-exchange transaction is

 MPSAS 1—Presentation of Financial Statements defines

 ‘Expenses’ recognized under different bases of ac

 The difference between the different bases of accounting

 An inflow of resources from a non-exchange

 A present obligation arising from a non-exchange

 The principal users in the business sector can be

2. For business decisions, existing and potential

2. To evaluate management, boards of directors,

 Understand the legal requirements for financial

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