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Session 6 & 7

Session Title:
Introduction to Accounting Standards, its
objective, basis of accounting, Accounting
Standards issued by ICAI and IPSAS
Standards (Accrual basis and Cash Basis)
with their objective, Revisiting Accounting
Framework, International efforts and reforms
made in India. TFC and formation of GASAB,
Operational Framework issued by GASAB,
Progress of GASAB so far, list of IGASs and
IGFRSs with their objectives.

SESSION OVERVIEW:

In order to make accounting methods and principles uniform and


comparable and financial reporting show true and fair view of all
the activities of the government, to the extent possible, standards
are necessary to be evolved. The basic objective of Accounting
Standards is to remove variations in the treatment of several
accounting aspects and to bring about standardization in
accounting and its presentation. In this context, it is appropriate
to discuss Accounting Standards issued by IPSAS (both accrual
and cash basis). The twelfth Finance Commission (TFC)
recommended Accrual Accounting for the Union and the State
Governments. The GASAB in the office of the C&AG (2002) was
set up to recommend an operational framework and detailed
roadmap for its implementation. GASAB has so far developed five
IGASs namely (i) IGAS 1-Guarantees given by governments:
Disclosure requirements (ii) IGAS 2 - Accounting and classification
of grants-in-aid (iii) IGAS 3- Loans and advances made by
governments (iv) IGAS 7- Foreign currency transactions and loss
or gain by exchange rate variations (v) IGAS 10- Public debt and
other liabilities of governments : Disclosure requirements and four
IGFRSs namely (i) IGFRS 2 (i) Property, plant and equipment (ii)
IGFRS 3- Revenue from government exchange transactions (iii)
IGFRS 4- Inventories (iv) IGFRS 5- Contingent liabilities (other than
guarantees) and contingent assets: Disclosure requirements

Session Structure:
1. Introduction to Accounting Standards.
2.

Objective of Accounting Standards.


3. TFC, 13th Finance Commission, 14th
report of 2nd Administrative Reforms
Commission
recommendations
and
formation of GASAB
4. Road map and Operational Framework of
GASAB.
5. Accounting treatment and measurement
procedures proposed by GASAB.
6. ICAI Accounting Standards and IPSAS
7.
IGASs
and
IGFRS
(Notified/Under
Notification/ prepared/ Proposed by GASAB)
8.Excercise and Group Discussion

Introduction:
Financial Statements

specially Appropriation and Finance


Accounts of governments are prepared to summarize the
end-result of all the activities by the government during
an accounting period in monetary terms.
Combined Finance Accounts compares the financial
results of different state governments and union
government.
The government accounting in India are on cash
basis and accounting follows the rule based.
Though there is standardized classification structure (List
of Major and Minor heads) of government activities are
available, but reporting governments may adopt
divergent policies in methods and principles in their
financial reporting.
In order to make accounting methods and principles
uniform and comparable and financial reporting show
true and fair view of all the activities of the government,
to the extent possible, Standards are necessary to be
evolved.

What is Accounting Standards?


i. Accounting Standards are the statements of code of practices
of regulatory accounting bodies (C&AG, CGA for government
accounting) that are to be observed in preparation and
presentation of financial statements.
ii. that Accounting Standards are rules according to which
accounts have to be drawn up.
iii.
In layman terms, accounting standards are written
documents issued by experts, institutes or other regulatory
bodies covering various aspects of measurement, treatment,
presentation and disclosure of accounting transactions,
whether it is based on single entry cash basis or double entry
accrual basis.
What are the objectives of Accounting Standards?
(i) The basic objective of Accounting Standards is to remove
variations in the treatment of several accounting aspects and
to bring about standardization in accounting and its
presentation.
(ii) They intent to harmonize the diverse accounting policies
followed in the preparation and presentation of financial
statements by different reporting entities.

Accounting Standards issued by various


authorities:

(A) Accounting Standards (Accrual basis) issued by the


Institute of Chartered Accountant of India (ICAI) are as
follows:

Accountin
g
Standards
(ASs) No.

Accounting
Standards on

Objectives of the Standards

AS 1

Disclosure of
Accounting
Policies

in preparation and presentation of the


financial statements

AS2

Valuation of
Inventories

to formulate the method of


computation of cost of inventories /
stock, determine the value of closing
stock / inventory at which the
inventory is to be shown in balance
sheet till it is not sold and recognized
as revenue

AS3

Cash Flow
Statements

This statement exhibits the flow of


incoming and outgoing cash.

AS4

Contingencies
and Events

The Accounting Standard deals with


Contingencies and Events occuring

Accounting Accounting
Standards Standards on
(ASs) No.

Objectives of the Standards

AS5

Net Profit or
Loss for the
period, Prior
Period items
and changes in
Accounting
Policies.

to prescribe the criteria for certain items


in the profit and loss account so that
comparability of the financial statement
can be enhanced. Profit and loss account
being a period statement covers the
items of the income and expenditure of
the particular period. This also deals with
change in accounting policy, accounting
estimates and extraordinary items.

AS6

Depreciation
Accounting

It is a measure of wearing out,


consumption or other loss of value of a
depreciable asset arising from use,
passage of time. Depreciation is nothing
but distribution of total cost of asset over
its useful life

AS7

Construction
Contracts

As the period of construction contract is


long, work of construction starts in one
year and is completed in another year or
after 4-5 years or so. There may be
following two ways to determine profit or

Accountin Accounting
g
Standards
Standards on
(ASs) No.

Objectives of the Standards

AS8

Accounting
for Research
and
Development

This deals with


development

AS9

Revenue
Recognition

The standard explains as to when the revenue should


be recognized in profit and loss account and also
states the circumstances in which revenue
recognition can be postponed.

AS10

Accounting
for Fixed
Assets

It is an asset, which is:- Held with intention of being


used for the purpose of producing or providing goods
and services.

AS11

The effects of
Changes in
Foreign
Exchange
Rates
(Revised
2003)

This accounting Standard applicable to accounting for


transaction in Foreign currencies in translating in the
Financial Statement Of foreign operation Integral as
well as non- integral and also accounting for For
forward exchange. Effect of Changes in Foreign
Exchange Rate, an enterprises should disclose
following aspects:
Amount Exchange Difference included in Net profit or
Loss;
Amount accumulated in foreign exchange translation

accounting

for

research

and

Accountin Accounting
g
Standards
Standards on
(ASs) No.

Objectives of the Standards

AS12

Accounting
for
Governmen
t grants

Government Grants are assistance by the Govt.


in the form of cash or kind to an enterprise in
return for past or future compliance with
certain conditions.

AS13

Accounting
for
investment
s

It is the assets held for earning income by way


of dividend, interest and rentals, for capital
appreciation or for other benefits.

AS14

Accounting
for
Amalgamatio
n

It deals with accounting to be made in books of


Transferee company in case of amalgamation

AS15

Employees
Benefit
(Revised
2005)

The scope of the accounting standard


has been enlarged, to include accounting for
short-term employee benefits and termination
benefits

AS16

Borrowing
costs

It prescribe the treatment of borrowing


cost (interest + other cost) in accounting,
whether the cost of borrowing should be

Accountin Accounting
g
Standards
Standards on
(ASs) No.

Objectives of the Standards

AS17

Segment
Reporting

Disclosure of information regarding multiple


products/services and their operations is called
segment reporting

AS!8

Related
Party
Disclosures

disclosure of related party transaction is


essential for proper understanding of financial
performance
and
financial
position
of
enterprise

AS19

Leases

Lease is an arrangement by which the lesser


gives the right to use an asset for given period
of time to the lessee on rent. It involves two
parties,

AS20

Earning Per
share

The statement is applicable to the enterprise


whose equity shares or potential equity shares
are listed in stock exchange.

AS21

Consolidate the consolidated balance sheet if prepared


d Financial
should be prepared in the manner prescribed
Statements by this statement.

Accountin Accounting
g
Standards
Standards on
(ASs) No.

Objectives of the Standards

AS22

Accounting This accounting standard prescribes the


for taxes on accounting treatment for taxes on income.
Income

AS23

Accounting
for
Investment
s in
Associates
in
Consolidate
d financial
statements

It set out the principles and procedures


recognizing the investment in associates in
consolidated financial statements of
investor,

AS24

Discontinui
ng
operations

The objective of this standard is to establish


principles for reporting information about
discontinuing operations.

AS25

Interim
Financial
Reporting

As per clause 41 of listing agreement the


companies are required to publish the financial
results on a quarterly basis

for
the
the

Accountin Accounting
g
Standards
Standards on
(ASs) No.

Objectives of the Standards

AS26

Intangible
Assets

An Intangible Asset is an Identifiable nonmonetary Asset without physical substance


held for use in the production or supplying of
goods or services for rentals to others or for
administrative purpose

AS27

Financial
Reporting
of Interests
in Joint
Ventures

'Joint control' is the contractually agreed


sharing of control over economic activity.

AS28

Impairment
of Assets

As per AS-28 asset is said to be impaired when


carrying amount of asset is more than its
recoverable amount.

AS29

Provisions,
Contingent
Liabilities
and
Contingent
Assets

Objective of this standard is to prescribe the


accounting
for
Provisions,
Contingent
Liabilities, Contingent Assets, Provision for
restructuring cost

Accountin Accounting
g
Standards on
Standards
(ASs) No.

Objectives of the Standards

AS30

Financial
Instruments :
Recognition and
Measurement and
Limited Revisions to
AS 2, AS 11 (revised
2003), AS 21, As 23,
AS 26, AS 27, AS 28,
and AS 29

this Standard is to establish principles for


recognizing and measuring Financial assets,
financial liabilities and some contracts to buy
or sell non-financial items

AS31

Financial
Instruments:
Presentation

This Standard is to establish principles for


presenting financial instruments as liabilities
or equity and for offsetting financial assets
and financial liabilities.

AS32

Financial
Instruments:
Disclosures, and
Limited Revision to
Accounting
Standards(AS) 19 ,
leases

The objective of this Standard is to require


entities to provide disclosures in their financial
statements that enable users to evaluate:
the significance of financial instruments for
the entitys financial position and
performance; and
the nature and extent of risks arising from
financial instruments to which the entity is
exposed during the period and at the reporting

(B) International Public Sector Accounting Standards


(IPSAS) issued by International Federation of
Accountings (IFAC)[Effective from 01.01.2004]
The
International Federation of Accountants
International Public Sector Accounting Standards Board
(the IPSASB) develops accounting standards for public
sector entities referred to as International Public Sector
Accounting Standards (IPSASs).

The IPSASB recognizes the significant benefits of


achieving consistent and comparable financial
information across jurisdictions and it believes that the
IPSASs will play a key role in enabling these benefits to
be realized.
The adoption of IPSASs by governments will improve
both the quality and comparability of financial
information reported by public sector entities around
the world.
IPSASs are being prepared for application by entities
adopting the accrual basis of accounting and for
application by entities adopting the cash basis of
accounting.

(a) Accrual Basis


Accountin Accounting
g
Standards
Standards on
IPSAS No.

Objectives of the Standards

IPSAS 1

Presentation
of Financial
Statements

The objective of this Standard is to


prescribe the manner in which general
purpose financial statements should be
presented in order to ensure comparability
both with the entitys own financial
statements of previous periods and with the
financial Statements of other entities.

IPSAS2

Cash
Flow
It sets out requirements for the
Statements
presentation of the cash flow statement and
related disclosures.

IPSAS3

Net Surplus
or Deficit for
the
period,
Fundamental
Errors
and
changes
in

The objective of this Standard is to


prescribe the classification, disclosure and
accounting treatment of certain items in the
financial statements so that all entities
prepare and present these items on a
consistent basis.

Accountin Accounting
g
Standards
Standards on
IPSAS No.

Objectives of the Standards

IPSAS4

The effect of
changes in
Foreign
Exchange
Rates

The principal issues in accounting for


foreign currency transactions and foreign
operations are to decide which exchange
rate to use and how to recognize in the
financial statements the financial effect of
changes in exchange rates.

IPSAS 5

Borrowing
Costs

This Standard generally requires the


immediate expensing of borrowing costs.

IPSAS 6

Consolidated
Financial
Statements
and
Accounting
for
Controlled
entities

This Standard establishes requirements for


the preparation and presentation of
consolidated financial statements, and for
accounting for controlled entities in the
separate financial statements of the
controlling entity.

Accountin Accounting
g
Standards
Standards on
IPSAS No.

Objectives of the Standards

IPSAS 7

Accounting
This Standard provides the basis for
for
accounting for ownership interests in
Investments associates.
in Associates

IPSAS 8

Financial
This Standard provides the basis for
Reporting of accounting for interests in joint ventures
Interests in
Joint
Ventures

IPSAS 9

Revenue
from
Exchange
Transactions

The objective
prescribe the
revenue arising
and events.

IPSAS 10

Financial
Reporting in
Hyperinflatio
nary
Economics

In a hyperinflationary economy, reporting of


operating results and financial position in
the local currency without restatement is
not useful.

of this Standard is to
accounting treatment of
from exchange transactions

Accountin
g
Standards
IPSAS No.

Accounting
Standards
on

Objectives of the Standards

IPSAS 11

Construction
Contracts

The objective of this Standard is to


prescribe the accounting treatment of costs
and revenue associated with construction
contracts.

IPSAS 12

Inventories

The objective of this Standard is to


prescribe the accounting treatment for
inventories under the historical cost
system.

IPSAS 13

Leases

The objective of this Standard is to


prescribe, for lessees and lessors, the
appropriate
accounting
policies
and
disclosures to apply in relation to finance
and operating leases.

IPSAS 14

Events after
the
Reporting
Date

The objective of this Standard is to


prescribe:
(a) When an entity should adjust its
financial statements for events after the
reporting date; and

Accountin
g
Standards
IPSAS No.

Accounting
Standards
on

Objectives of the Standards

IPSAS 15

Financial
Instruments:
Disclosure
and
Presentation

he objective of this Standard is to enhance


financial statement users understanding of
the significance of on-balance-sheet and
off-balance-sheet financial instruments to a
governments or other public sector entitys
financial position, performance and cash
flows. In this Standard, references to
balance sheet in the context of onbalance- sheet and off-balance-sheet
have the same meaning as statement of
financial position.

IPSAS 16

Investment
Property

The objective of this Standard is to


prescribe the accounting treatment for
investment property and related disclosure
requirements

IPSAS 17

Property,
The principal issues in accounting for
Plant
and property, plant and equipment are the
Investment
timing of recognition of the assets, the
determination of their carrying amounts

Accounti
ng
Standard
s IPSAS
No.

Accounti
ng
Standar
ds on

Objectives of the Standards

IPSAS 18

Segment
Reporting

The objective of this Standard is to establish


principles for reporting financial information by
segments. The disclosure of this information will:
(a) Help users of the financial statements to better
understand the entitys past performance and to identify
the resources allocated to support the major activities of
the entity; and
(b) Enhance the transparency of financial reporting and
enable the entity to better discharge its accountability
obligations.

IPSAS 19

Provisions
,
Continge
nt
Liabilities
and
Continge
nt Assets

The objective of this Standard is to define provisions,


contingent liabilities and contingent assets, identify the
circumstances in which provisions should be recognized,
how they should be measured and the disclosures that
should be made about them.

IPSAS 20

Related
Party

The objective of this Standard is to require the disclosure


of the existence of related party relationships where

(b) Cash Basis IPSAS


Sectio
n

Accounting
Objectives of the Standards
Standards on

PART 1 REQUIREMEN
T

The purpose of this Standard is to prescribe


the manner in which general purpose
financial statements should be presented
under the cash basis of accounting..

1.1

Scope of the
requirement

An entity which prepares and presents


financial statements under the cash basis of
accounting, as defined in this Standard,
should apply the requirements of Part 1 of
this Standard in the presentation of its
general purpose annual financial statements

1.2

Cash Basis

The cash basis of accounting recognizes


transactions and events only when cash
(including cash equivalents) is received or
paid by the entity.

Sectio
n

Accounting
Objectives of the Standards
Standards on

1.3

Presentation
and
Disclosure
Requirement

The specific disclosure requirements of


International Public Sector Accounting
Standards need not be met if the resulting
information is not material.

1.4

General
Consideratio
n

It consists standards on
Reporting Period
Timeliness
Authorization Date
Information about the entity
Restrictions on cash balances and access to
borrowings

1.5

Correction of
errors

When an error arises in relation to a cash


balance reported in the financial statements,
the amount of the error that relates to prior
periods should be reported by adjusting the
cash at the beginning of the period.

Section

Accounting
Objectives of the Standards
Standards on

1.6

Consolidated
Financial
Statements

consolidated financial statements which present


financial information about the economic entity as a
single entity without regard for the legal boundaries
of the separate legal entities.

1.7

Foreign
Currency

Governments and government entities may have


transactions in foreign currencies such as borrowing
an amount of foreign currency or purchasing goods
and services where the purchase price is designated
as a foreign currency amount. They may also have
foreign operations and transfer cash to and receive
cash from those foreign operations. In order to
include foreign currency transactions and foreign
operations in financial statements the entity must
express cash receipts, payments and balances in
reporting currency terms

1.8

Effective
date of
Sections 1.1
to 1.7 of Part
1 and
Transitional

Sections 1 to 7 of Part 1 of this International Public


Sector Accounting Standard become effective for
annual financial statements covering periods
beginning on or after 1 January 2004.

Provisions

Sectio
n

Accounting
Standards
on

Objectives of the Standards

1.9

Presentatio
n of Budget
Information
in Financial
Statements

An approved budget as defined by this


Standard reflects the anticipated revenues or
receipts expected to arise in the annual or
multi-year budget period based on current
plans and the anticipated economic conditions
during that budget period, and expenses or
expenditures approved by a legislative body,
being the legislature or other relevant authority.

1.10

Recipients
of External
Assistance

The entity should disclose separately on the


face of the Statement of Cash Receipts and
Payments, total external assistance received in
cash during the period.

PART 2 ENCOURAG
ED
ADDITIONA
L
DISCLOSUR
ES

It sets out encouraged additional disclosures for


reporting under the cash basis. It should be
read together with Part 1 of this Standard,
which sets out the requirements for reporting
under the cash basis of accounting.

Sectio
n

Accounting
Standards
on

Objectives of the Standards

2.1.2

Future
Assets that are used to generate net cash
Economic
inflows are often described as embodying
Benefits
future economic benefits.
and Service
Potential

2.1.3
to
2.1.5

Going
Concern

2.1.6
to
2.1.7

Extraordina An entity is encouraged to separately disclose


ry items
the nature and amount of each extraordinary
item. The disclosure may be made on the face
of the statement of cash receipts and
payments, or in other financial statements or in
the notes to the financial statements

When preparing the financial statements


of an entity, those responsible for the
preparation of the financial statements
are encouraged to make an assessment of
the entitys ability to continue as a going
concern

Sectio
n

Accounting
Standards
on

Objectives of the Standards

2.1.8

Distinct
from
ordinary
activities

Whether an event or transaction is clearly


distinct from the ordinary activities of the entity
is determined by the nature of the event or
transaction in relation to the activities
ordinarily carried on by the entity rather than
by the frequency with which such events are
expected to occur.

2.1.9

Not
Expected to
Recur in
the
Foreseeabl
e Future

The event or transaction will be of a type


that would not reasonably be expected to
recur in the foreseeable future, taking
into account the environment in which the
entity operates

2.1.10

Outside the
Control or
Influence of
the Entity

A transaction or event is presumed to be


outside the control or influence of an entity if
the decisions or determinations of the entity do
not normally influence the occurrence of that
transaction or event.

Sectio
n

Accounting
Standards
on

Objectives of the Standards

2.1.11
to
2.1.14

Identifying Whether or not an item is extraordinary will be


Extraordina considered in the context of the entitys
ry Items
operating environment and the level of
government within which it operates.

2.1.15
to
2.1.17

Administer
ed
Transaction
s

An entity is encouraged to disclose in the notes


to the financial statements, the amount and
nature of cash flows and cash balances
resulting from transactions administered by the
entity as an agent on behalf of others where
those amounts are outside the control of the
entity.

2.1.18
to
2.1.20

Revenue
Collection

Public sector entities may control cash or


administer cash receipts or payments on behalf
of the government or other governments or
government entities.

2.1.21

Passthrough
Cash Flows

Cash flows arising as a consequence of


transactions as administrative arrangements
where government entity undertakes as an
agent of another party are sometimes termed

Sectio
n

Accountin
g
Standards
on

Objectives of the Standards

2.1.22

Transfer
Payments

amounts appropriated to a government entity (a


department, agency or similar) may include amounts to
be transferred to third parties in respect of, for example,
unemployment benefits, age or invalid pensions, family
allowances and other social security and community
benefit payments. Where this occurs, the entity will
recognize the cash appropriated for transfer during the
reporting period as a cash receipt, the amounts
transferred during that reporting period as a cash
payment and any amounts held at the end of the
reporting period for transfer in the future as part of
closing balance of cash.

2.1.23
to
2.1.30

Disclosure
of Major
Classes of
Cash Flows

An entity is encouraged to disclose, either on the face of


the statement of cash receipts and payments or other
financial statements or in the notes to those statements:
(a) an analysis of total cash payments and payments by
third parties using a classification based on either the
nature of the payments or their function within the
entity, as appropriate; and (b) proceeds from borrowings.
In addition, the amount of borrowings may be further
classified into type and source

Section

Accountin
g
Standards
on

Objectives of the Standards

2.1.33
to
2.1.35

Disclosure
of Assets,
Liabilities

An entity is encouraged to disclose in the notes to the


financial statements: (a) information about the assets and
liabilities of the entity; and (b) if the entity does not make
publicly available its approved budget, a comparison with
budgets

2.1.36
2.1.40

Compariso
n with
Budgets

Public sector entities are typically subject to budgetary


limits in the form of appropriations or other budgetary
authority which may be given effect through authorizing
legislation

2.1.41
to
2.1.43

Consolidat
ed
Financial
Statement
s

An entity is encouraged to disclose in the notes to the


financial statements:
(a) the proportion of ownership interest in controlled entities
and, where that interest is in the form of shares, the
proportion of voting power held (only where this is different
from the proportionate ownership interest); (b) where
applicable:
(i) the name of any controlled entity in which the controlling
entity holds an ownership interest and/or voting rights of 50%
or less, together with an explanation of how control exists;
and
(ii) the name of any entity in which an ownership interest of

Sectio
n

Accounti
ng
Standard
s on

Objectives of the Standards

2.1.44
to
2.1.48

Acquisition
s
and
Disposals
of
Controlled
Entities
and Other
Operating
Units

An entity is encouraged to disclose and present


separately the aggregate cash flows arising from
acquisitions and from disposals of controlled
entities or other operating units.

2.1.49
to
2.1.50

Joint
Ventures

An entity is encouraged to make disclosures about


joint ventures which are necessary for a fair
presentation of the cash receipts and payments of
the entity during the period and the balances of
cash as at reporting date

2.1.51t
o
2.1.52

Financial
Reporting
in
Hyperinfl
ationary

In a hyperinflationary economy, the presentation of


the financial statements in the local currency
without restatement is not useful.

Section

Accounting
Standards
on

Objectives of the Standards

2.1.53
to
2.1.58

The
Restateme
nt
of
Financial
Statements

An entity that reports in the currency of a hyperinflationary


economy is encouraged to:
(a) restate its statement of cash receipts and payments and
other financial statements in terms of the measuring unit
current at the reporting date;
(b) restate the comparative information for the previous
period, and any information in respect of earlier periods in
terms of the measuring unit current at the reporting date; and
(c) use a general price index that reflects changes in general
purchasing power. It is preferable that all entities that report
in the currency of the same economy use the same index

2.1.59

Comparativ If comparisons with previous periods are to be meaningful,


e
comparative information for the previous reporting period will
Information be restated by applying a general price index so that the
comparative financial statements are presented in terms of
the measurement unit current at the end of the reporting
period.

2.1.60
to
2.1.61

Consolidate If the statement of cash receipts and payments and other


d Financial
financial statements are to be prepared on a consistent basis,
Statements the financial statements of any such controlled entity will be
restated by applying a general price index of the country in
whose currency it reports before they are included in the
consolidated financial statements issued by its controlling

Section

Accounting
Standards
on

Objectives of the Standards

2.1.62
to
2.1.63

Selection
and Use of
the
General
Price Index

The restatement of financial statements in accordance


with the approach encouraged by this Standard requires
the use of a general price index that reflects changes in
general purchasing power. It is preferable that all entities
that report in the currency of the same economy use the
same index.

2.1.64
to
2.1.65

Assistance
Received
From NonGovernmen
tal
Organizatio
ns (NGOs)

Where practicable, an entity is encouraged to apply to


assistance received from non-governmental organizations
(NGOs), the required disclosures identified in paragraphs
1.10.1 to 1.10.27 of Part 1 of this Standard and the
encouraged disclosures identified in paragraphs 2.1.66 to
2.1.93.

2.1.66
to
2.1.93

Recipients An entity is encouraged to disclose by significant class in


of External notes to the financial statements:
Assistance (a) the purposes for which external assistance was
received during the reporting period, showing separately
amounts provided by way of loans and grants; and
(b) the purposes for which external assistance payments
were made during the reporting period

Section

Accounting
Standards
on

2.2

Objectives of the Standards

Governments and Other Public Sector Entities


Intending to Migrate to the Accrual Basis of
Accounting

2.2.1 to
2.2.2

Presentati
on of the
Statement
of Cash
Receipts
and
Payments

An entity which intends to migrate to the accrual basis of


accounting is encouraged to present a statement of cash
receipts and payments in the same format as that required
by International Public Sector Accounting Standard IPSAS 2
Cash Flow Statements.

2.2.3 to
2.2.6

Scope
of
Consolidat
ed
Statement
s

Exclusions
from
the
Economic
Entity

When an entity adopts the accrual basis of accounting in


accordance with the accrual IPSASs, it will not consolidate
entities in which control is intended to be temporary
because the controlled entity is acquired and held
exclusively with a view to its subsequent disposal in the
near future.
Temporary control may occur where, for example, a
national government intends to transfer its interest in a
controlled entity to a local government.

REVISITING ACCOUNTING FRAMEWORK:


International efforts on Standard setting:
(1) In 1980s INTOSAI emphasized standard setting for
governments and in early 1990s INTOSAIs Accounting
Standards
Committee
issued
Accounting
Standards
Framework.
(2) Similarly several national governments set up accounting
standard boards/ committees
(3) IFAC- Public Sector Committee takes lead in issuing IPSAS
(Cash based and Accrual basis)
(4) IMF issued Government Financial Standards (GFS) laying
down statistical reporting standards for governments
(5) In USA, FASAB (Federal Accounting Standard Advisory Board)
framed SFFAS (Statement of Federal Financial Accounting
Standards), GASAB(Governmental Accounting Standard Board)
(State & Local as well as agencies)
(6) In Canada, CICAs (Canadian Institute of Chartered
Accountant) & FSAB sets standards for government.
(7) In Australia and New Zealand, AASB( Australian Accounting
Standard Boards) framed FRS.( Financial Reporting Standards)

(8) In India:
(i) Report of Admn. Reform commission on Accounts and Audit
(1968).
(ii)Multi-tier
Classification
System
introduced
(A.K.Mukherjee
Committee)
(iii) Management Accounting at the Union Government ( 1976 Budget
speech of the Finance Minister)
(iv) Departmentalization scheme of Union Government introduced in
1976.
(v) Financial Advisory Unit (FA System) introduced in 1980.
(vi) Classification system rationalized (R.C.Ghai Committee) in 1987
(vii) EAS Sarma Committee report on FRBM in 2000
(viii) Ahuwalia Committee, 2004 (RBI) on
Medium term fiscal policy ( 3 year rolling target receipts, payments,
borrowing etc)
Fiscal Policy Strategy Statement (Taxation, Borrowings, Pricing,
Guarantees, Subsidy etc.)
Macro economic framework statement (GDF, Fiscal balance, BOP etc)
(ix)
Lahiri
Committee
(2004)
introduced
Multidimensional
classification) on functional and economic classification
(x) Twelfth Finance Commission (TFC) recommends Accrual
Accounting.
(xi) New GFR (General Financial Rules) was introduced in 2005.

The Twelfth Finance Commission TFC (2004) Transition


to Accrual Based Accounting and formation of GASAB:
1. The Twelfth Finance Commission (TFC) recommended Accrual
Accounting for the Union and the State Governments. The Central
Government has accepted the recommendation in Principle. At the
same time, TFC recognized that transition to accrual based accounting
is a time consuming process and suggested changeover only in
medium term.
2. In the Interim period, TFC suggested to add some additional
information to the present system of accounting to enable more
informed decision making. TFC has suggested standardization of
accounting classification upto object head level for all States to
improve fiscal management. Additional eight statements relating to
subsidies, expenditure on salaries, expenditure on pensions,
committed liabilities, maintenance expenditure, segregation of salary
and non-salary portions and liabilities and repayment schedule on
outstanding debts. The TFC has also suggested that definition of
revenue and fiscal deficits be standardized.
3. Accepting the recommendations in Principle, the GASAB in the office of
the C&AG (2002) was set up to recommend an operational framework
and detailed roadmap for its implementation. Apart from the Central
Government, so far 23 State Governments have accepted the idea of
accrual accounting in principle.

The Twelfth Finance Commission TFC (2004) Transition


to Accrual Based Accounting and formation of GASAB:
(cont)

4. There are two fold mandate of GASAB:


(i) To establish and improve standards of
governmental accounting and financial reporting
and formulate and propose standards that improve
the usefulness of financial reports based on the
needs of the users.
(ii) Since the principles of accrual accounting being
followed in commercial entities cannot be
transposed in their entirely in Government
accounting, GASAB was entrusted with preparation
of a Roadmap for transition to Accrual Accounting
System and Operational Framework of such a
system that will prevail in Government.

The Twelfth Finance Commission TFC (2004) Transition


to Accrual Based Accounting and formation of GASAB:
(cont)

5. The Operational Framework developed / to be improved by


GASAB would detailed out the broad accounting heads and
treatment of transactions relating to:
Revenues and Expenditure Accounting
Fixed Assets Accounting
Long term Liability Accounting.
Accounting for current Assets and Liabilities
Accounting for period costs Interest and Depreciation.
Non-financial and Contingent Liabilities.
6. The design of framework suggested by GASAB indicates
broad deviations from the conventional basis of accrual
accounting due specific requirements emerging from the
nature of transitions of the Government. The framework for
transition spread over across five stages depending upon
the recognition on accrual basis given to expenses,
revenue, assets and liabilities at different point of time.

A broad framework for transition to the accrual


accounting is as under:
Stages

Expenses

Revenue
s

Assets

Liabilities

Contingen
t
Liabilities

Current
Stage

ExpCurrent
and
Capital

Receipts

Financi
al
Assets

Stock of Public
Debt and
Borrowings on
Public Account

Guarantees

Stage I

Current
Receipts
Expense
on accrual
basis and
Capital
Expenditur
e on cash
basis

Financi
al
Assets

Stock of Public
debt and
Borrowing on
Public Account +
Payables

Guarantees

Stages

Expenses

Revenue
s

Assets

Liabilities

Conting
ent
Liabiliti
es

Stage II

Current
Expenses
on Accrual
basis and
Capital
Expendit
ure on
Cash
Basis
( Excludin
g
Expendit
ure on
Military
Assets)

Non Tax
Revenue
s on
Accrual
Basis
+
Receivabl
es
+
Tax
Revenue
on Cash
Basis

Financial
Assets
+
Receivabl
es
+
Military
Assets

Stock of Public Debt


and Borrowing on
Public Account
+
Payables
+
All other
Liabilities
(Except
Superannuation
benefits.
Compensated
leaves, provisions
and social security)

Guarant
ees

Stage III

All
expenses
on accrual
basis
+
Depreciati
on

---do---

All Assets

All liabilities
(except superannuation
benefits,
compensated
leaves, provisions
and social

All
explicit
conting
ent
liabilitie
s

(Excluding
infrastructure,
land, heritage,
intangible
assets)

Stages

Expenses

Revenues

Assets

Liabilities

Conting
ent
Liabiliti
es

Stage IV All
expenses
on accrual
basis
+
Depreciatio
n
+
Provisions

Non Tax
Revenues
on Accrual
Basis
+
Receivables
+
Tax Revenue
on Cash
Basis

All Assets
including
infrastruct
ure and
land
(excluding
heritage and
intangible)

All Assets
including
infrastructure
and land
(excluding
heritage and
intangible)

All
explicit
conting
ent
liabilitie
s

Stage V

All
Revenues
on accrual
basis

All Assets

All Liabilities

All
explicit
conting
ent
liabilitie
s

All
Expenses

7. Transition through these stages is likely to happen at


varying pace in different departments of government
entities. GASAB suggests that Stage I depicted in
Table above should be the starting point for introduction
of accrual basis of accounting in Governments.
Accounting reforms should incrementally graduate to
Stage V, which represents full accrual accounting. It is,
however, noted that there could be certain entities
within the Government, e.g. the Railways, which may
like to straightaway adopt full accrual due to their
preparedness and nature of activities
(i) Stage-I introduces accrual based recognition
principle for current expenses. Capital expenditures,
as well as all revenues, will continue to be accounted for
on cash basis as at present. Recognition of current
expenses on accrual basis would lead to recognition of
payables, which will be shown as a liability.

(ii) Stage-II introduces accrual recognition of non-tax


revenues. Tax revenues will continue to be recognized on
cash basis. Recognition of non-tax revenues on accrual
basis would lead to recognition of receivables, which will be
included in assets. Military assets will also be recognized on
accrual basis at this stage and included in assets shown in
the Statement of Financial Position. The remaining capital
expenditure will continue to be shown on cash basis.
Another change would be inclusion of all other liabilities
except those on account of superannuation benefits,
compensated leaves, provisions and social security
(iii) Stage-III requires recognition of all expenses on
accrual basis including recognition of depreciation .
No provisions will be recognized at this stage. Assets
recognized at this stage on accrual basis would
include all financial and physical assets [with the
exception of infrastructure, land, heritage, and
intangibles] and inventories . Tax Revenue continues to
be recognized on cash basis. There is no change in terms of
liability over Stage-II. Disclosure of all explicit
contingent liability is made .

(iv) Stage IV requires inclusion of provisions as expense


and
extension
of
physical
assets
to
cover
infrastructure and land on accrual basis. Other
elements are same as that in the previous stage.
(v) Stage V is introduction of full accrual accounting for
all the four elements expense, revenues, assets and
liabilities. All expenses, all revenues, all assets and all
liabilities are recognized on accrual principles and presented.
(8) In the Road Map, the proposed transition was envisaged in
three stages namely
(i) Value addition within the existing system by additional
statements short term activity;
(ii) Value addition in the existing system with minor
modifications to enable greater disclosures such as arrears in
revenue, committed liabilities, etc. This is a medium term
activity; and
(iii) Achieving the desired accounting system in the long-term
based on accrual system.
Note: Other modalities of Road Map have already been
discussed in Session III.

(9) As the Operational Framework provides the overall architecture of


the accounting model, these guidelines also aim at laying down the
principles for recognition and measurement for General Purpose
Financial Reporting (GPFR).
(i) Objectives of General Purpose Financial Reporting:
Provide financial information about the reporting entity which would
be useful in making decisions about providing resources to the
entity and in assessing whether the government has made efficient
and effective use of the resources.
Make financial reporting more transparent.
Improve understandability of financial statement by users.
Make financial statements more relevant.
Improve performance reporting in keeping with Results Framework
Document (RFD)
(ii) Components of GPFR:
GPFS + MDA = GPFR
GPFS : General Purpose Financial Statements
(a) The Conceptual Framework of International Accounting Standards
(IPSAS)
On General Purpose Financial Statements (GPFS) provides guidance
for the structure and minimum requirement for the contents of
financial statements prepared under accrual basis of accounting.

(i)

The complete set of financial statements, keeping in view the


requirement as prescribed by the Government of India, may
include the following statements:
GPFS

Statement
of
Financial
Position

MDA

Statement
of
Financial
Performan
ce

Statement
of changes
in Net
Assets

Cash
Flow
Stateme
nts

Appropriation
Account
s

: Management and Discussion Analysis

Account
ing
Policies
and
Notes
to the
Financi
al
Statem
ents

A management report commenting on financial statements


highlighting key performance indicators
To be signed by the Chief Accounting Authority as prescribed in
GFR 64
(ii) For a complete set of General Purpose Financial Reporting
(GPFR), Management Discussion and Analysis report is essential.
(iii) Statement of Financial Position:
The Statement of
Financial Position exhibits the balance of assets and liabilities as
on a particular date. The assets and liabilities may be further
classified into current and non current categories. Statement of
Financial Position must include the following:
Assets This should include all physical and financial assets,
cash and cash equivalents, investment, inventories, receivables
from exchange and non exchange transactions, capital work in
progress.
Liabilities This should include all debts and borrowings of the
government, payables, and benefits payables to employees.
The progressive total of capital expenditure available in Finance
Accounts should reconcile with lump sum figure in the
Statement of Financial Position after making adjustment for
valuation of historical assets.

(iv) Statement of Financial Performance: The


Statement of Financial Performance exhibits the
revenue and expenses for an accounting period and
the excess/deficit of revenue over expenses. The
Statement of Financial Performance must include the
following:
Revenue from exchange transactions
Revenue from non exchange transactions
Expenditure by function and nature.
Surplus/Deficit
Appropriation to earmarked funds
Cost of borrowings
(v) Statement of Changes in Net Assets: The
Statement of Changes in Net Assets represents the
changes between two reporting dates reflecting the
increase or decrease in its assets during the period.

(vi) Cash Flow Statements


The Cash Flow Statement should provide cash flows during the
period classifying them into operating, investing and financing
activities.
1. Cash flows from operating activities are primarily derived from
the principal cash-generating activities. This includes cash
receipts from taxes, from non-tax revenues, cash payments to
suppliers/contractors, grants in aid received or given.
2. Cash flows from investing activities are derived from acquisition
and disposal of long term assets and other investments not
included in cash equivalents. This includes cash payments to
acquire or construct property, cash advances and loans made,
etc.
3. Cash flow from financing activities represents the changes in
the size and composition of the contributed capital and
borrowings.
(vii) Appropriation Accounts
As part of GPFS, Appropriation Accounts would continue to reflect
1. Comparison of budget with actual
2. Original with final budget
3. Detailed reason for variations of actual with final budget

(viii) Accounting Policies and notes to the


Financial Statements:
1. Accounting policies, rules and practices applied by
an entity in preparing and presenting financial
statements be stated
2. Use of reasonable estimates and valuation methods
for assets and liabilities be stated
3. Stages and period of transition be stated
(b) Various stages of Operational Framework highlight
maintenance and recognition of Assets and
Liabilities, recognition principles for Current
Expenses and Receipts new head 'Payables',
Revenue receipts and new head 'Receivables'.

(ii) Provision for depreciation:


1. Provision of depreciation should be made by allocating the
value of assets category wise.
2. Capital assets may be depreciated over their estimated useful
lives unless they are either inexhaustible or infrastructure
assets.
3. The provision should be estimated on a realistic basis and only
revised where justified in the light of further experience.
4. The provision of depreciation should be made each year and
put away in a sinking fund.
5. As is the accepted principle, land is not depreciated.
(iii) Liabilities:
1.The first step towards accrual based accounting system is
identification and categorization of liabilities into distinct
groups eg. short term, long term and contingent liabilities.
2. Guarantees should be disclosed in accordance with Indian
Government Accounting Standard (IGAS 1) on 'Guarantees
given by Governments: a disclosure requirement' notified by
Government of India in December 2010.
3. Accounting and classification of Grants-in-Aid should be
disclosed in accordance with Indian Government Accounting
Standard (IGAS 2) notified by Government in May 2011

4. Liabilities of the Government including Stock of


Public Debt and Borrowings on Public Account
and Liabilities on account of superannuation
benefits,
compensated leave, provisions and social security
are to be provided for on accrual basis.
5.
Recognition
of
expenses
relating
to
superannuation benefits, compensated leaves,
provisions and social security may be taken after
actuarial valuation.
6. Contingent liabilities other than guarantees,
Claims made by third parties against the
Government should also be disclosed.
(iv) Recognition of all expenses and
payables:
Recognition of all expenses on accrual basis would
lead to recognition of payables, which will be
shown as a liability.

(c) The following table shows the accounting


treatment and measurement to be followed in case of
common expenses.
Item of
Expenditure

Realizatio Measur
n Criteria ement

Recommended basis of
Accounting (Accrual)

Salaries, Wages,
Dearness
Allowance,
Traveling
Allowance, office
expenses, etc

Obligation
Agreed
established
amount
in the period
of utilization
of service

Full cost should be charged to the


accounts of the relevant period
e.g.' within the period in which the
employees work. Material amounts
earned but unpaid at the end of
the period should be accrued and
placed under the head payables

Interest

Obligation
established
at the time
of entering
into the loan
agreement.

Liability to be recognized
periodically on the due date for
payment. Expense recognition to
be in the period for which it is
charged under the head payable,
regardless of when the payment is
made.

Multiple
of loan
value,
period,
and rate
of interest

Item of
Expenditure

Realizatio Measur
n Criteria ement

Recommended basis of
Accounting (Accrual)

Contribution to PF
and
defined
contribution
to
Superanuation
Funds

Obligation
Agreed
established
amount
when
an
employee
enters
service

To be accounted on accrual basis.

Gratuity and
Superanuation
liabilities

Obligation
established
when an
employee
enters
service

To be
determine
d on the
basis of
actuarial
valuation

To be accounted to the extent of


contribution made to recognized
funds accrual basis

Leave
encashment
benefit

Obligation
established
when an
employee
enters
service

To be
determine
d based
on service
rules

To be accounted when it is dueaccrual basis (except when leave


encashment is permitted within
the reporting period)

The following table shows the accounting treatment and


measurement to be followed in case of common expenses.
Item of Realization
Expendi Criteria
ture

Measure
ment

Recommended basis of
Accounting (Accrual)

Rents

Right to charge
Agreed
rent established at amount
the time of
entering into
agreement,
realizable on due
date for payment
of rent.

To be accounted for in the


accounting period to which it is
realizable Accrual basis. If rent
becomes overdue, income should be
recognized and a provision should be
made.

Hire
charges
of
machine
ry

Right established
at the time of
entering the
contract

Agreed
amount

To be accrued and accounted for in


the accounting period to which it
relates accrual basis

Interest

Realizable on the
due dates for the
interest payment

Function of
loan value,
period and
rate of
interest

Interest income to be accounted on


accrual basis on the due dates. If
interest becomes overdue, income
should be recognized & provided for.

Note: revenue from taxes, Stamps and registration, at this satge , is


recommended on cash basis for conservative approach so as not to inflate
revenue.
(e) The Way Forward:
(i) 1st Phase: (2011-12 to 2012-13)
Formation of an apex body at Ministry of Finance level with representation
from key stakeholders at Union and State level for coordination,
monitoring, decision making and overseeing implementation issues
Formation of task based groups in each entity to initiate the transition
process in a time bound manner
Revision of Chart of Accounts to integrate accrual accounting needs
Development of an IT enabled Integrated Financial Management System
Centrally Sponsored Scheme for Treasury Modernization issued by MoF
mention developing of an Accounts Module and budget module. The
benefits of these modules can be greatly enhanced to include revision in
account code classification/ chart of accounts, building into it features of
asset management, liabilities and other key features of accrual
accounting.
Capacity building in terms of human resources
Identification and consolidation of assets category wise at DDO level
Valuation of all assets except historical assets
Valuation of asset with historical cost after determination of a cut off date
to ensure no backlog accumulates
Identification of liability and their valuation

(ii) 2nd Phase (2013-14 to 2014-15)


Valuation of historical assets
Provision of depreciation
Recognition of all expenses and payables
Recognition of revenues and receivables
(iii) 3rd Phase- Preparation of Statements of
General Purpose Financial Reporting (GPFS)
including the following (2015 onwards)
Statement of Financial Position
Statement of Financial Performance
Statement of Changes in assets/liabilities
Cash flow Statements
Appropriation Accounts
Accounting policies and Notes to the Financial
Statements
Management and Discussion Analysis

(iv) Indian Government Accounting Standards (IGASs) and Indian


Government Financial Reporting Standard (IGFRS) so far
notified/under consideration of GOI/approved/proposed by
GASAB :
Standa
rds

Standard on:

IGAS 1

Guarantees given
by
Governments:
Disclosure
Requirements
relating to the form
of accounts of the
Union, States and
Union
Territory
Governments (with
legislatures)

IGAS 2

Accounting
classification
Grants-in -Aid

Notified/pr
epared/dra
ft stage

Objective of the standards

Notified on
20th
December
2010

The objective of this standard is to


set out disclosure norms in
respect of Guarantees given by
the Union, the State Governments
and Union Territory Governments
(with
legislature)
in
their
respective Financial Statements to
ensure uniform and complete
disclosure of such Guarantees.

and Prepared &


of notified by
GOI

To prescribe the principles for


accounting and classification of
Grants-in-aid in the Financial
Statements of the Government
both as a grantor as well as
grantee. And their appropriate
disclosure.

Standa
rds

Standard
on:

Notified/prepa
red/draft
stage

Objective of the standards

IGAS 3

Cash
Flow Under
Statements
consideration of
Government of
India for
notification

To provide information about the


historical changes in cash and cash
equivalents of the Government by
means of a cash flow statement,
which classifies cash flows during the
period into operating, investing and
financing activities.

IGAS 4

General
Purpose
Financial
Statements of
Governments

To

Under
consideration of
Government of
India for
notification

lay down the principles to be


followed in presentation of general
purpose financial reports of
Governments and to prescribe the
minimum requirements relating to
structure and contents of financial
statements of government prepared
under cash basis of accounting.
General Purpose Financial
Statements (GPFS) essentially
consists of Finance Accounts and
Appropriation Accounts. The Financial
Statements referred to in this
standard are the General Purpose
Financial Reports (GPFR).

Standa
rds

Standard
on:

Notified/prepa
red/draft
stage

Objective of the standards

IGAS 5

Loans
and
Advances
Made
by
Governments

Under
consideration of
Government of
India
for
notification

To lay down the norms for


Recognition, Measurement, Valuation
and Reporting in respect of Loans
and Advances made by the Union
and the State Governments in their
respective Financial Statements to
ensure complete, accurate, realistic
and uniform accounting practices,
and to ensure adequate disclosure
on Loans and Advances made by the
Governments consistent with best
international practices.

IGAS 6

Under preparation by GASAB

IGAS 7

Foreign
Currency
transactions
and Loss or
Gain
by
Exchange
Rate Variation

Under
consideration of
Government of
India
for
notification

The objective of this standard is to


provide accounting and disclosure
requirements of foreign currency
transactions and financial effects of
exchange rate variations in terms of
loss or gain in the financial
statements. It also deals with the
requirements of disclosure of foreign
currency external debts and the rate
applied for disclosure

Standa
rds

Standard
on:

Notified/prepa
red/draft
stage

Objective of the standards

IGAS 8

Contingent
Proposed
Liabilities
(other
than
Guarantees)
and
Contingent
Assets:
Disclosure
Requirements

The objective of the proposed IGAS on


the subject is to lay down the principles
for
disclosure
requirements
of
Contingent Liabilities (other than
guarantees) and Continent Assets of
both the Union and the State
Governments
including
Union
Territories with Legislatures, in their
respective Financial Statements in
order
to
ensure
uniform
and
appropriate disclosure of such liabilities
and assets.

IGAS 9

Government
Investment in
Equity

Proposed

The objective of the Standard is to lay


down the norms for Recognition,
Measurement and Reporting in respect
of Investments made by the Union
Government, the State Governments
and Governments of Union Territories
with Legislatures in their respective

IGAS 10

Public Debt
and other
Liabilities of
Governments:
Disclosure

Under
consideration of
Government of
India for
notification

To lay down the principles for


identification, measurement and
disclosure of public debt and other
obligation of Union and the State
Governments including Union

Indian Government Financial Reporting Standards (IGFRS)


Standa
rds

Standar
d on:

Notified/
prepared
/draft
stage

IGFRS

Inventori
es

Proposed

To prescribe the accounting treatment for


inventories. This standard aims at using
accrual principles of accounting for Inventories
both at the stage of charging as expenditure
and depicting the closing stocks in the financial
statements at the end of reporting period.

IGFRS 2

Property, Prepared
Plant and
Equipmen
t

To prescribe the accounting treatment for


property, plant and equipment (PPE) so that
users of financial statements can obtain
information regarding an entitys investment in
its property, plant and equipment and any
changes in such investment.

IGFRS

Revenue
from
Exchange
Transacti
ons

This standard lays down the principles to be


followed for recognition of revenue by
Governments under accrual basis accounting.
This standard excludes from its scope revenue
recognition principles relating to specific items
(eg: Income from sale of Plant, Property and

Proposed

Objective of the standards