CH 05

Accounting Standards
5 and Systems in the

Public Sector
Learning Outcomes
 Explain the roles of accounting and accountants in

managing public moneys in the public sector
 Understand the concepts that form the basis for
public sector accounting standards
 Explain the transition from (modified) cash accounting
to accrual accounting for the Malaysian public sector
 Understand the basics of funds and fund accounting
 Understand the existing accounting systems used in
the Malaysian public sector
Public Sector Accounting Governance and Accountability in the Malaysian All Rights Reserved
Context 5–3
Introduction
 Public sector accounting (PSA) - an accounting

method that is applied by governmental entities (or
public sector organizations comprising federal and state
governments, as well as local authorities) to govern
their day-to-day activities.
 The purpose of PSA - establish a good public

governance structure which is regarded as a
mechanism to enable users, particularly those in charge
of the state affairs, to make informed decisions.
Context 5–4
Introduction (cont.)
 The statements of financial position, income and

expenditure, and cash flow, as well as notes to the
accounts, statutory declarations and auditor
certificates are the examples of financial reporting
presented in the government’s public accounts.
Context 5–5
 The Government Accounting Standards (PPKs) serve

as guidelines for financial statement presentations in the
public sector. There are two sets of standards adopted
by the Malaysian government:
1. IPSASs
─ International Public Sector Accounting Standards
2. MPSASs
─ Malaysian Public Sector Accounting Standards
Context 5–6
There are three legal requirements for financial reporting

in the public sector:
1. The Federal Constitution
2. The Government Accounting Standards (PPKs)
3. The Financial Procedure Act 1957.
Two types of accounting systems:

1. Cash Accounting
2. Accrual Accounting.
Context 5–7
Accountants and the Public
Sector
 Before being tabled in Parliament, all financial statements are required to be audited by the Auditor General.
 In the context of the Malaysian public sector, it is the responsibility of the Accountant General to ensure that the receipt
and payment systems are adequate and reliable and meet the standards required to secure public moneys and ensure
accountability.
Context 5–8
Sector (cont.)
 The Certificate of the Auditor General will be issued by

the Auditor General after auditing the public accounts.
(As stated in the Audit Act 1957)
 The role of the government as agents on behalf of the

primary principal (the citizens) includes identifying,
collecting, recording, analyzing, verifying and presenting
relevant information plays a vital role in the chain of
accountability.
Context 5–9
Sector (cont.)
 In preparing sound financial reports, there is a need for

public sector accountants to observe some accounting
concepts that reflect the position of public sector
entities.
Context 5–10
Sector (cont.)
Context 5–11
IPSAS Conceptual Framework
 The main objective of most public sector entities is to

deliver quality services to the public. This is in contrast
to the main private sector objective, i.e. making profit
and generating impressive return on equity to investors.
 The International Public Sector Accounting Standards
Board (IPSASB), a part of the International Federation
of Accountants (IFAC), is responsible for issuing the
International Public Sector Accounting Standards
(IPSASs).
Context 5–12
(cont.)
 IPSASB develops accounting standards and guidance

for use by public sector entities.
 The structures and processes that support the
operations of the IPSASB are facilitated by IFAC.
 In support of IPSASs issued by IFAC, the Malaysian
government has attempted to converge them with the
national accounting standards where appropriate to
promote their acceptance in Malaysia. Such standards
are referred to as MPSASs.
Context 5–13
(cont.)
MPSASs
High-quality accounting standards for use by public sector

entities in Malaysia in the preparation of general purpose
financial statements.
Aimed at facilitating the public sector entities to report

their financial performance, financial position and cash flow
more accurately, towards enhancing accountability and
transparency in the public sector’s financial management.
Context 5–14
(cont.)
 Accountability in the Public Sector
 One of the key elements under the

accountability of public sector entities is its
financial reporting in fulfilling the government’s
duty to be publicly accountable.
Context 5–15
(cont.)
 The objectives of financial reporting in public

sector
1. To fulfil the legal requirements (such as Article
99 of the Federal Constitution, section 16 of the
Financial Procedure Act 1957, and section 54 of
the Local Government Act 1976) and discharge
the accountability accordingly, and
2. To provide information that can help the users
in making decisions.
Context 5–16
(cont.)
Information Needs of
Service Recipients and
Resource Providers
Reasons for
financial
reporting in the
public sector ;
Context 5–17
(cont.)
Non-exchange Transactions
Based on IPSAS 23 — Revenue from Non-Exchange

Transactions, public sector entities are required to analyse
inflows of resources from non-exchange transactions to
determine if they meet the definition of an asset and the
criteria recognition as an asset.
Context 5–18
(cont.)
 The non-exchange transactions include:

1. Taxes
2. Transfers:
a) Grants
b) Debt forgiveness and assumption of liabilities
c) Fines
d) Bequests
e) Gifts and donations, including goods-in-kind
f) Services in-kind.
Context 5–19
Basis of Accounting
 Two types of accounting bases that are commonly used

to report financial performance of various organizations:
1. cash accounting
2. accrual accounting.
cash accounting accrual accounting
revenues that are recorded on the date cash is received; revenues and expenses are recorded on the date they
and expenses are recorded on the date cash is paid. are occurred whether there is exchange of cash or not
Not accurate contains more accurate and timely transactions

compared to cash accounting
Context 5–20
Basis of Accounting (cont.)
 Government accounting practices generally classified

into four bases, which are:
Context 5–21
Cash Basis
The cash basis - an accounting basis that only reports on
cash balances and cash flows (inward and outward). It
measures cash flows at the time accounting transactions
actually take place.
This basis does not follow the matching concept.
Depreciation of assets is not provided for, which causes
cash accounting to tend to hide basic information e.g.
missing information relating to fixed assets, debtors and
creditors.
Assets are written off in the year of purchase.
Context 5–22
 Cash basis only allows the government to track its

liquidity and the ability to meet the short-term
commitments.
 Does not require high accounting skills to handle the
accounts.
 Cheaper and a much more convenient accounting
system.
 This basis has been predominantly used as a basis of
accounting for many democratic governments due to its
simplicity and no special accounting skills are required.
Context 5–23
Modified Cash Basis

Modified cash accounting is similar to cash basis, except
that the government’s books of accounts are kept open until
31 January of the following year.
For this method, short-term items are recorded based on
cash accounting while long-term items are recorded
according to accrual accounting.
The modified cash basis can be understood as an
accounting basis that allows a short period of time after the
year-end for settling liabilities of the year just ended, and
treats this expenditure as occurring in the year just ended.
Context 5–24
 The modified cash basis accounting, which include the

following:
 Such information may not be useful and the disclosure
could be potentially misleading from the financial
reporting perspective.
 All expenditures are expensed off during the financial
year when payments are made, without taking into regard
the timing and manner.
 The financial position of Federal Consolidated Fund is too
narrow to faithfully represent the resources controlled by,
as well as the present obligation of, the government.
Context 5–25
 It has limited basis for determining fiscal strategy, limited

product or service pricing and has limited disincentives
against fraud and corruption
Context 5–26
Accrual Accounting
In accrual accounting, revenues and expenses are
recorded when they are earned, regardless of when the
money is actually received or paid.
a well-accepted method of accounting worldwide and is
mainly used in the private sector. Increasingly, the public
sector is also moving towards accrual accounting as it
helps governments to obtain a better picture of the
performance of their policies.
Context 5–27
 The differences between cash and accrual accounting:
Context 5–28
Context 5–29
Context 5–30
Context 5–31
Fund Accounting System
 Fund accounting represents a system of financial record

keeping that focuses on how an organization uses its
finances─the activity of analyzing, recording,
summarizing, reporting and interpreting the financial
transactions of governments. This is accomplished
through the use of various types of funds.
Context 5–32
(cont.)
 Characteristics of fund accounting include:

1. It is an independent accounting entity.
2. Each fund has its own set of accounts with
complete double entry and financial
statements.
3. Self-balancing and autonomous, i.e. total assets
of a particular fund must equal to total liabilities
and fund balance or capital.
Context 5–33
(cont.)
Purpose of Fund Accounting
To determine the financial position and its changes in the

organization
To know the results of operations of the organization
To check its compliance with legal restrictions.
Context 5–34
(cont.)
Regulatory Requirements for Fund Accounting in the

Malaysian Public Sector
Federal government accounting is based on the concept

of the Consolidated Fund, where all revenues and moneys
raised or received except zakat, fitrah and baitulmal or
similar Islamic religious revenue have to be paid into and
form one fund known as the Consolidated Fund─required
by Article 97 of the Federal Constitution
Context 5–35
(cont.)
 Unless appropriated or otherwise authorized by

Parliament, no moneys except specified charged
expenditure shall be withdrawn from the Consolidated
Fund as required by Article 104 of the Federal
Constitution.
 Based on section 7 of the Financial Procedure Act

1957, The Consolidated Fund is divided into three
consolidated accounts.
Context 5–36
(cont.)
The Consolidated Account
Context 5–37
(cont.)
Public Trust Funds and Government Trust Funds

The Consolidated Trust Account consists of the
government trust funds, the public trust funds and deposits.
The government owns the assets and earnings of
government trust funds, and it can raise or lower future trust
fund collections and payments.
Categories of Public trust funds
1. The general trust fund
2. Deposits.
Context 5–38
(cont.)
Context 5–39
(cont.)
Consolidated Fund
Allgovernment revenues and moneys received have to
be accounted for into a fund, known as the Consolidated
Fund.
Cash and investments are held in three categories of

accounts under the Consolidated Fund, which are:
Context 5–40
(cont.)
 Consolidated Revenue Account

Federal government revenue comprises tax revenue,
non-tax revenue, nonrevenue receipts and revenue
from the Federal Territories.
1.Tax revenue - derived from direct taxes and indirect
taxes.
2.Non-tax revenue - includes fees and charges on
permits issued, services fees and rental of government
assets, interest and return on investments, fines and
penalties.
Context 5–41
(cont.)
3. Non-revenue receipts - include refunds of

expenditure and receipts from government
agencies
4. Revenue from the Federal Territories - includes
tax revenue and nontax revenue collected on
behalf of the Federal Territories of Labuan, Kuala
Lumpur and Putrajaya
Context 5–42
(cont.)
 Consolidated Trust Account

1. The main source of inflows as it is the allocation
of the revenue account through the budget.
2. It includes the Development Fund, the Housing
Loans Fund, government trust funds, public trust
funds, deposits and pensions trust funds.
Context 5–43
(cont.)
 Consolidated Loan Account

1. Consists of both external and internal borrowings
and can be referred to as an account that includes
all loan receipts and disbursements for the purpose
of repayment of outstanding loans and transfers to
other funds.
2. The government raises funds, at a gross sum at a
nominal value, from the domestic market by issuing
Treasury Bills (TB), Malaysian Government
Securities (MGS) and in Government Investment
Issues (GII)
Context 5–44
Accounting Systems in the
Malaysian Public Sector
Integrated Government Financial and Accounting

Management System (iGFMAS)
An integrated centralized
Starting from accounting system to further
1 June 2018 Develop accrual accounting
at the national level.
An accounting system
that was used by the
Accountant General’s
Department since
Developed to further
2006.
strengthen the government’s
Capable of facilitating payment process and also to
financial planning, account for government
budget control and revenue collections
government more efficiently
accounting.
Context 5–45
Malaysian Public Sector (cont.)
 It combines all accounting functions that cover

payments, receipts, salary management, unclaimed
moneys, government loans, loans and advanced loans
to civil servants, investment and the preparation of
public accounts into an integrated platform.
 iGFMAS’s functions include the following:

1. To provide accurate data and relevant
information for the decision-making process in the
federal government
Context 5–46
2. To enhance skills and productivity by incorporating

industry’s best practices
3. To meet new challenges and demands as well as
future requirements
4. To enhance financial transparency and
accountability in the public sector.
Context 5–47
Standard Accounting System for Government

Agencies (SAGA)
Designed to meet all accounting standards’ requirements

and the audit set out for financial reports to be tabled in
Parliament.
SAGA is designed to meet the following objectives :-
1. Provide facilities to enable the maintenance of
complete and timely accounts
2. Enable the daily closing of accounts
Context 5–48
3. Enhance financial management accounting facilities

to be more effective
4. Prepare financial statements on time.
Context 5–49
 Flowchart for SAGA:
Context 5–50
Federal vs State Accounting
System
 The federal government has its own accounting

standards, known as PPKs.
 PPKs set accounting policies and standards as well as

serve as a basis for preparation of government financial
reporting in accordance with requirements of the
Federal Constitution and the Financial Procedure Act
1957.
Context 5–51
System
 The Accountant General’s Department has issued six

PPKs which include:
1.Government Accounting Policies
2.Presentation of Financial Statement
3.Consolidated Revenue Account
4.Consolidated Trust Account
5.Consolidated Loan Account, and
6.Investment.
Context 5–52
System
 Other than following the rules and regulations as

indicated in the Federal Constitution and the Financial
Procedure Act 1957, the state governments also follow
the PPKs.
 The processes of preparing the state’s financial report

are the same as that of federal government except for
the audited state financial report.
 This difference is due to binding laws and different

accounting bases adopted.
Context 5–53
Learning Outcomes
 Explain the roles of accounting and accountants in

managing public moneys in the public sector
 Understand the concepts that form the basis for public
sector accounting standards
 Explain the transition from (modified) cash accounting to
accrual accounting for the Malaysian public sector
 Understand the basics of funds and fund accounting
 Understand the existing accounting systems used in the
Malaysian public sector
Context 5–54

CH 05

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CH 05

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Accounting Standards

5 and Systems in the

 Explain the roles of accounting and accountants in

 Public sector accounting (PSA) - an accounting

 The purpose of PSA - establish a good public

 The statements of financial position, income and

 The Government Accounting Standards (PPKs) serve

There are three legal requirements for financial reporting

Two types of accounting systems:

 The Certificate of the Auditor General will be issued by

 The role of the government as agents on behalf of the

 In preparing sound financial reports, there is a need for

 The main objective of most public sector entities is to

 IPSASB develops accounting standards and guidance

High-quality accounting standards for use by public sector

Aimed at facilitating the public sector entities to report

 Accountability in the Public Sector

 One of the key elements under the

 The objectives of financial reporting in public

Based on IPSAS 23 — Revenue from Non-Exchange

 The non-exchange transactions include:

 Two types of accounting bases that are commonly used

Not accurate contains more accurate and timely transactions

 Government accounting practices generally classified

 Cash basis only allows the government to track its

Modified Cash Basis

 The modified cash basis accounting, which include the

 It has limited basis for determining fiscal strategy, limited

 The differences between cash and accrual accounting:

 Fund accounting represents a system of financial record

 Characteristics of fund accounting include:

Purpose of Fund Accounting

To determine the financial position and its changes in the

Regulatory Requirements for Fund Accounting in the

Federal government accounting is based on the concept

 Unless appropriated or otherwise authorized by

 Based on section 7 of the Financial Procedure Act

The Consolidated Account

Public Trust Funds and Government Trust Funds

Cash and investments are held in three categories of

 Consolidated Revenue Account

3. Non-revenue receipts - include refunds of

 Consolidated Trust Account

 Consolidated Loan Account

Integrated Government Financial and Accounting

 It combines all accounting functions that cover

 iGFMAS’s functions include the following:

2. To enhance skills and productivity by incorporating

Standard Accounting System for Government

Designed to meet all accounting standards’ requirements

3. Enhance financial management accounting facilities

 Flowchart for SAGA:

 The federal government has its own accounting

 PPKs set accounting policies and standards as well as

 The Accountant General’s Department has issued six

 Other than following the rules and regulations as

 The processes of preparing the state’s financial report

 This difference is due to binding laws and different

 Explain the roles of accounting and accountants in

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