Accounting for Public Assets

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ACCOUNTING FOR PUBLIC ASSETS

CopyrightRedeemer Krah -2014

3/4/2014 1 Copyright @ Redeemer Krah -

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What is Public Asset?

Public asset refers to resources (economic, cultural or historical) that are controlled by a government or its entities as a result of past event from which future benefits (economic, historical or cultural) are expected to flow to the government.

In public sector assets have more than economic benefit. For example, heritage asset has cultural and historical significance.

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Categories of Public Assets

There are two categories of public assets:

Financial assets

Non-financial assets

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What are Financial Assets? They are include cash and bank

accounts plus securities and investment accounts that can be readily converted into cash.

They assets are more liquid and non-physical resources.

They are derived from cash balance or moneys paid out of the public funds for a public purpose that either requires repayment or confers ownership right on the government

Examples are: Cash and bank, advances, loans, revenues receivables, equity investment and investment in other securities.


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What are Non-financial assets?

These are assets that have physical substance and are long live assets

Examples include:

Inventories ( consumable and non consumable stores)

Property plant and equipment (eg furniture, equipment, motor vehicle, premises)

Infrastructure ( roads, bridges, water network systems, sewage systems etc)

Heritage assets

Natural assets (gold, diamond, crude oil deposit)

Military assets


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Acquisition of public assets

Mode of acquiring public assets include:

Outright cash purchase

Leasing/hire purchase

Construction (roads, etc)

Nationalization (confiscation of private asset in accordance with law)

Natural deposit

Heritage


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ACCOUNTING FOR FINANCIAL ASSETS

Let examine each financial asset into much detail.

The financial assets includes:

Cash/bank

Advances and loans

Investment in securities

In general, these financial assets are represented on the statement of financial position, regardless of whether modified accrual or accrual accounting is used.


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Accounting and management of Cash

Cash is very important resource of every entity; blood of business.

Cash management and control is a critical concern in public financial management.\

Cash management and control involves

Cash forecast

Collection and disbursement

Custody (cash holdings)

Cash accounting and reconciliation.

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1. Cash forecast

Cash forecast (a. k. a cash budget) is a very important tool in cash management.

It shows projected cash collection (cash inflows) ,cash disbursement and the cash balance for a given period, say one month from now.

MDAs and others are required to prepare cash forecast to guide the disbursement of allocations.


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Benefits of Cash Forecast

It helps in planning sources of cash within the a planning period.

It helps in planning disbursement of cash

It provides information about future cash position (liquidity) of the entity for decision making.

It serves as a control over cash resources.


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2. Cash Collection and Disbursement

The management and control practices over collection and disbursement include:

Prompt lodgment of collection into appropriate bank account

Using bank accounts for holding cash balances. Only absolute minimum cash holding is allowed

Ensuring that collections and disbursement are made by cheque, bank transfer or direct payment to the bank.


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3.Custody of cash holding Custody of cash stock is essential

element of cash management that ensures that theft and misapplication of cash is avoid

As general rule, cash holdings should be kept at absolute minimum level.

The safest place to keep cash stock is the bank therefore all cash stock should be lodged into the bank account.

Only authorized officers should be allowed to hold authorized cash balances.

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Authorized Cash Balance.

It is the amount of cash that may be held by an officer during periods when their offices are closed for business.

It also includes uncrossed cheques held by an officer

Any officer who finds that the cash balance held by him exceeds the authorized cash balance must arrange to transfer the excess to a reserve cash safe or a vault/strong room.

Failure to comply constitute financial indiscipline.


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Determinants of Authorized cash balance include:

The needs of the public business

The availability of banking facilities during working hours

The availability of safe accommodation and seniority of key-holders

General security of the building in which the safe is located.


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4. Cash Accounting and Reconciliation

Proper cash records are important in cash management and control

The main cash records may include analytical cash book, petty cash book, imprest books etc.

The cash records must be reconciled periodically to ensure control and deter fraud.

Bank reconciliation is the most common control over cash accounting.

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Accounting for Imprest

Imprest is a sum of cash advanced to a public officer to meet payments which are otherwise inconvenience to disburse from public funds through the normal payment procedures.

HODs requires approval from CAG to operate an imprest.

Types of imprest (two):

Standing imprest- imprest held throughout the financial year and replenished as necessary by presentation of paid payment vouchers to the HOD.

Special Imprest- issued for making particular payments which must be fully retired by the date specified in the approval to operate the imprest


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Accounting for Imprest (cont) Sub-imprest- an imprest holder may

issue part of the imprest to a subordinate officer for purposes of the main imprest.

However, the imprest holder retains the responsibility for the custody and accounting for the sub-imprest issued.

Retirement of imprest: Imprest should be retired at the close of

a financial year and any unretired imprest should treated as a personal advance of the imprest holder.

Failure to retire imprest is financial indiscipline, unless occasioned by death or invalidity.

Unretired imprest should be reported to CAG and AG


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Cash Reconciliation

Accounting records on cash requires regularly reconciliation as means of control and determent of fraud.

Most common approach is to reconcile the bank statement balances with the cash book records (that is bank reconciliation statement)

Purpose of Bank reconciliation:

Cash control mechanism

Detection of errors in either records

To detect and deter fraud

Tracking bank fees and charges


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Preparing Bank Reconciliation Adjust the cash book with

informational differences such as bank charges, cheque book charges, dividend received, standing orders, direct credits etc to arrive at adjusted cash book balance

Identify all unpresented cheques from the bank statement and add the total to the adjusted cash balance

Similar, look for unaccredited cheques and deduct the total from the adjusted cash book balance

Adjust for errors committed by the bank.

There you are with the reconciled balances.


Accounting for Advances

Advances are moneys lent out from the public funds on condition of repayment within one year.

Examples include:

Vehicle advances

Salary advances

Special advances

Rent/accommodation advances

Contract advance (mobilization)


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Provisions on Advances

MOF is the chief authority for the issue and management of all advances from the consolidated fund.

MOF may delegate the responsible for issue and managing advances to HOD or chief finance officer not below director.

There are two authorities for payment of advances from the consolidated fund:

General authority

Special authority.

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Establishing of Advance Scheme

A scheme establishing an advance in a department must be submitted to MOF who presents to Parliament for approval.

Typical content of an advance scheme include: Public purpose to be served by the

scheme

Estimated cost of the scheme

Proposed rules for operating the scheme ( including terms and conditions e.g recovery modalities)

Any interest charge on the advance (if any)

Means of promulgating the rules

Maximum amount of advance allowed

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Responsibility of a head of department

HOD, as advance administering authority must ensure that: Total advances granted to an officer

do not exceed the authorized maximum

Advances are granted to only persons entitle to receive them

Advances granted are duly recovered in accordance with the advance agreement.

Maintain proper records on advances granted and history of recovery.


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Conditions for granting of an advance

An advance should not be granted to a public officer if: Any advance of the same class in

the name of the officer has not been fully repaid

Any advance of any class in the name of the officer is not being regularly recovered

Any advance is outstanding against the officer on account of losses, uncleared cheques or unretired impressed.

The normal installment of recovery will let the totals deductions exceed 50% of the net monthly salary after statutory deductions.


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Recovery of Advances HOD or any officer to whom the

administering authority has been delegated must ensure that advances issued are duly recovered in accordance with that agreement.

Methods of recovery of advance Deduction from payment due from

government to the borrower (eg deduction from salaries, contract payments etc)

Direct payment to government by the borrower/proxy

Borrowers estate in case of death

Other feasible means.


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Other advances

Contract advances It refers to amounts advanced to a

contractor prior to the performance of the contract. It popularly known as mobilization payment.

It is provided to facilitate the work of Ghanaian contractors by providing financial assistance to these contractors.

Contract advance clause in the contract agreement requires the prior approval of the MOF.

Contract advances should be recovered from contract payments by the head of department.

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other Advances (cont)

Loss advance

Refers to advances resulting from responsibility of a loss occasioned by government

An officer responsible for a loss should be charged with the liability as an advance in his name subject to subsequent investigations.

Thus an advance account is opened in the name of the officer.

HOD is required to report losses in excess of the forecast to the MOF.


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Accounting for loans

Loans are moneys lent out from the public funds on condition of repayment within periods exceeding one year

Two types of loan granted from the consolidated fund:

General loan are granted in accordance with an approved loan scheme

Specific loans are loans that requires parliamentary approval as matter of policy.


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General and specific loans

General loans are approved, administered and accounted for according to the procedures for granting loans under the financial regulations and the schemes.

Specific loans is passed through the MOF to Parliament for approval.


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Procedures for granting Specific Loans

The procedures involved are: Proposal for the granting the specific

loans together with the terms and conditions is submitted to the MOF

MOF makes recommendations and present the proposals to parliament for approval to negotiate the loan

Loan agreement is drawn up in consultation of Attorney General

Loan agreement is submitted to parliament through the MOF for approval.

MOF endorses the final loan agreement

Copies submitted to CAG and Attorney General

Loan is disbursed, interest collected, and recovery ensured by the administering authority


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Accounting for Equity Investment

Equity investment refers to moneys paid for stock or shares in any institution that confers ownership right upon the GOG.

Procedures for making Investment Proposal for purchase of stock or share

(include prospectus, designated administering authority) is submitted to the MOF for Approval

MOF evaluates the proposal and approves it or otherwise,

CAG and the Attorney General are informed about the pending purchase and furnish them with the agreement.

Administering Authority arranges for the payment for the stock/shares through CAG

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Responsibilities of Administering Authority

The department or body designated as administering authority of the investment has the following responsibilities: Act on behalf of the GoG in exercising

ownership rights

Protect public interest in the operation of the company

Receive the annual accounts of the company and advise GOG accordingly

Collect and keep the stock/share certificate in safe custody

Ensure the due collection of dividend and lodge same into the consolidated fund.

Report to the MOF about the investment

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Matters Reported to the MOF on the Investment

The administering authority is required to furnish MOF with the following information A forecast of dividend to included in

the years revenue estimate Failure of the company to present

audited annual reports Distribution of profits Delay in declaration and payment of

dividend Any shortfall in companies profit and

the reasons Any information on improper

management practices that endangers the investment

Any representation or directions made to the company.


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Financial Loss Financial loss refers to deprivation

of the public occasioned by misuse or management of the financial assets

Categories of financial loss include Irrecoverable advances and loan

result from debtors default and guarantee default

Irregular advances and loans as result from expenditure wrongly charged to advances or advances/loans made without recovery agreement

Reduction of financial assets resulting from capital restructuring or failure

Loses on sale of securities.


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Accounting for Non-Financial Assets

Non-financial asset is collective term for inventory (government stores) and Capital assets.

Therefore, there are two aspects of accounting for non-financial assets :

Accounting for inventory (government stores)

Accounting for capital assets.


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Accounting for Government Stores (inventory)

Government stores are made up of supplies of consumable and non consumables which are received, stored and available for issue.

Features of government store are

They are physically visible

They are movable

They are available for use

Exclude scraps, obsolete and unserviceable item.


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Accounting Disclosure Treatment of government store

(inventories) depends on the policy on basis of accounting.

Under cash basis and modified accrual basis: Inventories treated as expenditure

in the period in which they are acquired, irrespective of whether they are used up or not.

No inventory is reported on the statement of financial position.

Under accrual basis, closing inventory is valued using

recommended method and show on the statement of financial position as asset.

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Types of Government Stores

Joint stores These are stores jointly acquired by

two or more departments for the purpose of economy and convenience.

Heads of departments acquiring such stores shall be responsible for their respective share of the resources committed to the joint stores.

Consumable store Store that are used up in the day to

day operations of an entity.

Examples include stationary, fuel and lubricants, refreshment items, cleaning agents, etc

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Non-consumable stores

They are stores that remain in use for more than one year. They long live items.

Two Types of NCS:

Expendable store- they are used for a period between 2-5 years. Examples are computers, Tv set, shovels, calculators, etc

Non-Expandable- they are used for very long period, usually beyond 5 years. Examples include plant and equipment, furniture and fittings, premises, etc


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Allocated stores

They are stores procured from already existing budget provision and as such are chargeable to the sub-head responsible for the expenditure.

It may be directly procured or received from unallocated stores

Unallocated stores

Stores acquired for general use. The sub-head to be charged is not known as the time of procurement. The cost is charged to unallocated stores in the budget estimate.


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Acquisition of Government Stores

Governments stores can only be procured from VAT registered persons.

The procurement of stores should be in accordance with the Public Procurement Act 2003 (Act 663)

Under the procurement law, there are five approved methods of procuring stores: Competitive tendering

(Domestic/international)

Restricted tendering

Two-stage tendering

Single sourcing

Quotation from at least three suppliers


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Responsibilities of Heads of Department for stores

HODs are responsible for the general management and accountability for government stores.

HOD may delegate store functions to an officer, called store keeper

However, HODs remain accountable for stores in his department from the time of purchase to the time they are no further in use or value to government.


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Discharge of Accountability for stores

HODs are release of their accountability for stores when:

Stores are consumed in the normal course of public business and records attest to that.

Stores are worn out in the normal course of public business and deletion is approved by MOF

Stores are lost, stolen, damaged or rendered unserviceable other than wear and tear and deletion is approved by the MOF.


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Trading in government stores

Any form of transaction in stores resulting into transfer ownership of government stores is prohibited unless authorized by an enactment.

Transactions prohibited included

Transfer to a department/person

Lease

Loan

sale


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Duties/responsibilities of public officer in Charge of

stores Public officer in charge of stores has

the following responsibilities To exercise general control over all

activities in Stores Department To ensure safe keeping both as to

quality and quantity of materials. To maintain proper store records such

store ledgers, bin cards etc To initiate purchase requisitions for the

replacement of stock of all regular stores items whenever the stock level of any item of store approaches the minimum limit fixed in respect thereof.

To initiate action for stoppage of further purchasing when the stock level approaches the maximum limit.


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Responsibilities (cont) To check and receive purchased

materials forwarded by the receiving department and to arrange for the storage in appropriate places.

To reserve a particular material for a specific job when so required.

To issue materials only in required quantities against authorized requisition notes/material lists.

To check the book balances, with the actual physical stock at frequent intervals by way of internal control over wrong issues, pilferage, etc.

To restrict access by an unauthorized persons

Report all losses, damages and shortages to the HOD


Disposal of Stores

Procedures for disposal of stores:

Head of entity convenes a board of survey made of representative of affected department

BOS conducts an assessment of the store and makes a technical report recommending the appropriate method for disposal

HOD receives the BOS report and gives approval

Stores are disposed of accordingly.


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Disposal of stores

Methods of disposal of store include:

Transfer to other government department or institutions with or without financial adjustment

Sale by public tender to the highest bidder

Sale by public auction with reserved price

Destruction, dumping or burying


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ACCOUNTING FOR CAPITAL ASSETS

As indicated, capital assets are those assets used in operation and have long live.

The term embraces both tangible assets (land, buildings, building improvements, vehicles, machinery, equipment, works of art, historical treasures, infrastructure) and intangible assets (easements, software, water rights)


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Capital Assets (cont0

Tangible assets includes:

PPEs*

Infrastructure*

Heritage Assets*

Natural deposits

Military assets

* Will be discussed here


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Accounting for PPEs PPE is a grouping of capital assets

of similar nature and use in an entitys operation.

The example separate classes :

Land

Land and building

Machinery

Ships

Aircraft

Motor vehicles

Furniture and fixtures

Office equipment (computers etc)


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Asset Register It is the financial duty of the HOD to

compile and maintain assets register of the department as determined by the CAG.

A fixed asset register is used to ensure the correct information regarding fixed asset holdings is recorded and entered into the accounting system.

The asset register is a cornerstone of an asset management framework for entities that it keeps asset information as well as an historical record of both financial and non- financial information over each asset's life-cycle.

It is also used as a check for the physical existence of fixed assets within the business, usually at the end of a financial year.

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Benefits of Assets Register

AR information helps in asset planning;

assisting in meeting accounting standards and legislative compliance;

monitoring performance; and

accountability.

Determining likely current condition of assets;

Determining when assets need to be replaced;

Determine asset locations and asset custodians for stock takes;

Determine level and frequency of asset maintenance programs; and

Determine life-cycle costs by asset, program and business activity.

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Asset Register (cont)

Information contained in AR include Description of the asset

Unique code number or reference for the asset

Date of acquisition

Original cost

Depreciation charged on an annual basis

Accumulated depreciation charge

Net book value

Date of disposal

Profit or loss on disposal

How the capital expenditure was financed -hire purchase, loan etc


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Accounting for PPEs IPSAS 17

Under Cash/ Modified Accrual: Under these bases, PPEs are

classified as Investment cost and written off completely in the year of purchase or construction.

Thus PPEs are not shown on the statement of financial position (therefore, no depreciation charged)

Under Accrual Basis (IPSAS) Asset is depreciated over its useful

year and charge to Expenditure.

The net book value of the asset is shown as asset on the statement of financial position.


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Recognition of PPEs as Asset under accrual basis.

The cost of PPE is recognized as an asset if and only if: The cost of the item can be

measured reliably

It is probable that future economic benefits associated with the item will flow to the entity.

PPEs in general do not suffer recognition problem since the two critical recognition conditions are usually.

So its easy for government to recognize PPE as an asset under accrual accounting.


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Depreciation of PPEs

Depreciation and amortization are the systematic allocation of the depreciable amount of an asset over its useful life.

In the case of an intangible asset, the term amortization is generally used instead of depreciation. Both terms have the same meaning.

Under accrual accounting all PPEs requires to be depreciated using appropriate depreciation method

Depreciation charged should be treated as an expenditure described as consumption of fixed capital

There is a need to prepare PPE schedule showing cost, additions, disposals, accumulated depreciation, depreciation charge and the net book values


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Impairment of PPEs IPSAS 21

Impairment refers to a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the assets future economic benefits or service potential through depreciation.

An asset is impaired when its carrying amount exceeds its recoverable amount.


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Impairment of PPEs (Cont)

The issue of impairment is only relevant when government adopts the accrual basis of reporting.

IPSAS 21 requires an entity to assess at each reporting date whether there is any indication that an asset may be impaired.

In assessing whether there is an indication of impairment the Standard requires an entity to consider, as a minimum, a number of specified indications


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Impairment (Cont) Indicators of impairment are

group into two external sources and internal sources

External sources (indicators)

Cessation, or near cessation, of the demand or need for services provided by the asset

Significant changes during the period in the technological, market, economic, or legal environment in which the entity operates.

Increase in market interest rate which negatively affect the value in use of the asset

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Impairment (cont)

Internal sources : obsolescence or physical damage of

an asset

the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset

A decision to halt the construction of the asset before it is complete or in a usable condition

economic performance of an asset is, or will be, worse than expected.


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Impairment (cont) Approaches of determining

impairment:

Depreciated replacement cost approach

Restoration cost approach

Service unit approach

Treatment of impairment loss in financial reporting:

An impairment loss shall be recognized immediately in surplus or deficit.

The entire amount of the impairment can be treated as a direct increase to accumulated depreciation based on the notion that the impairment is tantamount to a reduction of the capital assets useful life


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Accounting for Infrastructure assets

Infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets.

Examples of infrastructure assets include roads,

bridges, tunnels,

drainage systems,

water and sewer systems,

dams, and

lighting systems etc


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Infrastructure Assets

Infrastructure items normally are reported as networks or subsystems, rather than as individual assets in their own right.

Note that: land associated with an

infrastructure asset must be reported separately as land.

buildings associated with infrastructure should be reported as buildings, unless they are purely ancillary to an infrastructure network or subsystem (rest area facilities for a state highway)


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Infrastructure (cont) Modified Approach in lieu of

Depreciation. Most infrastructure asset have

indefinite useful life which renders them depreciable.

In such cases, modified approach to depreciation is adopted

Under this approach governments are required to capitalize their infrastructure assets, but they are not required to report depreciation expense on those assets, provided certain conditions are met that demonstrate the governments commitment to maintaining infrastructure at a specified condition level.


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Infrastructure (cont)

Modified approach

Therefore government treats the cost of regular improvement in the infrastructure as an expenditure in the period in which it as carried out.

If government fails to meet the conditions necessary for adopting the modified approach, then the infrastructure shoud be capitalized and depreciated.


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Accounting for Heritage assets

Heritage assets are assets held by government for their cultural, historical and environmental significance.

These are assets that government intends to preserve indefinitely because of their unique cultural, historical and environmental attributes.

These are not held because of future economic benefits.


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Heritage Assets (cont)

Examples include:

Monuments

Art and museum collections

Wilderness preservation

Battle fields

Historical buildings

Archaeological sits


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Characteristics of Heritage assets;

Their value is difficult ( or impossible) to be expressed in market prices.

There exist legal or statutory restriction of their disposal by sales

They are often irreplaceable

Their value increases over time even if their physical condition deteriorates

It is difficult to estimate their useful lives.


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Measurement and recognition In general, it is difficult to measure

the cost of heritage assets reliably and that most do not have future economic benefit that will flow to government.

Therefore, heritage asset are usually not recognized in the financial reports because of their inability to meet the critical conditions for recognition assets.

However, Heritage asset that meets the measurement criteria should be capitalized and depreciated in the usual manner.


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Valuation Of Assets It refers to the process of placing

value on assets for the purpose of recognition.

Methods of asset valuation in the public sector include

Historical cost

Market values/prices

Fair values

Net realizable value

Replacement cost

Nominal value

Value in use (present value)

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Accounting for Public Assets

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