Implementation of Accrual Accounting in Malaysian Public Sector

IMPLEMENTATION OF ACCRUAL ACCOUNTING ACCOUNTING IN THE MALAYSIAN MAL AYSIAN PUBLIC SECTOR SECTOR

PREPARED FOR: PUAN RAZINAH HASSAN

PSA522 - PUBLIC PUBL IC SECTOR SECTOR ACCOUNTING

GROUP MEMBERS MEMB ERS

NAME

ID STUDENT STUDENT

SITI NUREADAH BINTI MD ARIS

2013245966

NORA BINTI ISMAIL

2013463134

NUR FADILAH FADIL AH CHIN BINTI ABDUL AB DUL HALIM HAL IM CHIN

2013497676

NORHAKIMAH NORHAK IMAH BINTI MOHD NOOR

2013431642

NUR AMALIN AMA LINA A BINTI AZIZ

2013270966

Implementation of Accrual Accounting in the Mala ysian Public Sector

TABLE OF CONTENT TITLE

PAGE NUMBER

Foreword

3

1.0 Introduction

4

2.0 Finding & Research Methodology 2.1 Research Journal & Publication On Accrual Accounting

8

2.2 Core Team & Accountant General Department Published Report &

8

Published Articles 2.3 Questionnaire On Accrual Accounting Implementation Among Among Federal Government Servants

9

3.0 Finding & Discussion 3.1 Cash Vs Accrual Accounting System With Reference T o Public Sector

10

3.2 Limitation Of The Modified Cash Basis

14

3.3 Advantages Of Accrual Accounting

16

3.4 Countries That Have Implemented Accrual Accounting

18

3.4.1 The Move to Accrual Accounting

19

3.4.2 The Introduction of Accrual Based Accounting In The UK Public Sector

20

3.4.3 Experience of Other Countries, Which Prepare Appropriation Accounts

21

Under The Accrual System 3.5 The Risks of Moving To Accrual Based Accounting

22

3.6 Accrual Accounting Integrating With Outcome-Based Budgeting And

24

Activity-Based Cos Malaysian Public Sector Perspective Perspective 3.7 Current Development & Progress For Implementation of Accrual

28

Accounting in Malaysian Public Sector

4.0 Conclusion

34

5.0 Recommendation

36

6.0 References

38

7.0 Appendix

40

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TABLE OF CONTENT TITLE

PAGE NUMBER

Foreword

3

1.0 Introduction

4

2.0 Finding & Research Methodology 2.1 Research Journal & Publication On Accrual Accounting

8

2.2 Core Team & Accountant General Department Published Report &

8

Published Articles 2.3 Questionnaire On Accrual Accounting Implementation Among Among Federal Government Servants

9

3.0 Finding & Discussion 3.1 Cash Vs Accrual Accounting System With Reference T o Public Sector

10

3.2 Limitation Of The Modified Cash Basis

14

3.3 Advantages Of Accrual Accounting

16

3.4 Countries That Have Implemented Accrual Accounting

18

3.4.1 The Move to Accrual Accounting

19

3.4.2 The Introduction of Accrual Based Accounting In The UK Public Sector

20

3.4.3 Experience of Other Countries, Which Prepare Appropriation Accounts

21

Under The Accrual System 3.5 The Risks of Moving To Accrual Based Accounting

22

3.6 Accrual Accounting Integrating With Outcome-Based Budgeting And

24

Activity-Based Cos Malaysian Public Sector Perspective Perspective 3.7 Current Development & Progress For Implementation of Accrual

28

Accounting in Malaysian Public Sector

4.0 Conclusion

34

5.0 Recommendation

36

6.0 References

38

7.0 Appendix

40

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FOREWARD Alhamdulillah, we praise Allah for giving us an opportunity to complete a project paper within the allotted time. This topic was selected by our group as we found it very interesting and challenging as Malaysia's public sector is in the progress of the transition to the new accounting landscape; accrual accounting. It is hoped that this thesis will determine the most important and critical discovery in the implementation of accrual accounting in the pub lic sector in Malaysia. We thank all of those individuals who have contributed directly or indirectly to complete this thesis. Mrs Razinah Hassan, a lecturer of our courses, to the guidelines provided in this paper completion of the project. Mr. Roslan bin A. Rahman, Director of Accounts, Ministry of Finance, Accountant General's Department Malaysia in an opinion accrual accounting and the actual structure that facilitates this project. To our partners, we want to thank them for their help and advice when writing this project paper. For our family, we would like to thank them for their patience and understanding through writing of this paper.

Lastly, to all members of the group for cooperation, resources, commitment and teamwork provided. We are pleased very much if we can again work together in research and other projects.

Thank you.

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1.0 INTRODUCTION The New Economic Model (NEM) report has specified accrual accounting to replace cash-basis accounting in the Federal Government of Malaysia starting year 2015. This transition will reform and strengthen the country’s fiscal discipline particularly through the public finance management. With the drive for “ People First, Performance Now”, it is an imperative part in the transformation of public sector, in line with the aspiration of the Malaysian Government to become a developed nation by the year 2020. Accrual accounting is an accounting method that recognizes an economic event as it occurs, regardless of the cash transactions. Particularly, revenues are recorded when income is earned, but not necessarily received; and expenses are recognized when expenditures are incurred or resources are consumed; but not necessarily paid for. Major or long-term assets will be capitalized and charged to the expenditure account with their costs spread out over a specified period of time. Furthermore, accrual accounting also provides a consistent framework covering the identification of existing liabilities, and potential or contingent liabilities. This contrasts with the cash-basis accounting, under which revenues and expenditures are recognized only when payment is received and made, respectively. Assets are expensed and future liabilities are recorded when paid for, not at the time of incurrence. In other words, the main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. Accrual accounting in public finance management will incorporate financial statements style similar to the private sectors’ in which will involve complete disclosure of assets and liabilities through balance sheet and cash flow statements, revealing the real economic impact of fiscal management for assessment. Thus, itwill help in driving the government towards a more comprehensive planning on budget and expenditure by including information on the existing liabilities and future resources. The decision to implement accrual accounting is notably a fundamental change to the way that resources will be managed in the future. Beyond that, the main advantage to accrual accounting is the ease of interpreting monetary information on government programs and activities, giving a whole picture of financial commitments and accrued receipts, in comparison with cash-basis accounting which only enables people to see payments made and cash gained within a short period of time. As a result, it will certainly enhance transparency and accountability of the government in decisions made and actions taken. PSA522

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The transition from cash-basis accounting to accrual-basis accounting involves 4 aspects of implementation structure: standards and accounting policies, law and regulation, people, and lastly process and technology. The first 2 aspects set the platform for accrual accounting to operate accordingly. They are done by mapping financial statement to international accounting standards, International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants (IFAC), and reviewing other relevant law and regulations pertaining to the accounting system. The accounting policies are being developed to explain the way in which accounting information is measured, collated and externally reported in accordance to the IPSAS requirements. The 2 latter aspects are the prime levers to the actual implementation of accrual accounting. The accounting personnel in the Accountant General’s Department as well as Ministries and other government agencies are undergoing comprehensive capacity-building process to equip them with relevant knowledge and skills. In addition, change management process is systematically applied in order to empower personnel in coping with changes. In the aspect of technology, the competency of the system vendor and consultants will be closely monitored to ensure the deliverables and proposed timeline is on track. At the same time, the existing system and processes are being analyzed and scrutinized to facilitate the development of a new accrual accounting system. Other factors being considered are the system integration, in terms of consistency and compatibility of technology platform being used. Accrual accounting will indubitably provide higher-quality information with added depth to the transparency and accountability of the public sector resources management. Such detailed information enables program evaluation based on costing information, which is essential for Outcome-Based Budgeting (OBB) in promoting sustainability of fiscal policies. The efficacy and efficiency of Ministries’ programs can also be evaluated through synergistic implementation of accrual accounting and Activity-Based Costing (ABC) by analyzing the full resource impact together with the cash expenditure. The implementation of accrual accounting ultimately will act as a complement for OBB and ABC in strengthening the public finance management, as part of the strategic reform initiatives to revitalize Malaysia’s economy and to be more responsive as well as accountable to the needs of Malaysian citizens. PSA522

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The Government has set eight Strategic Reform Initiatives (SRIs) for the realization of the New Economic Model (NEM) through the Economic Transformation Programmed. SRIs is set between Strengthening the Public Sector. One Step Strategic Policy to strengthen the public sector is through the fiscal discipline and reform.

For this purpose, Accrual Accounting System will be implemented to ensure a more prudent fiscal management so as to implement the financial management of the public sector more effective and comparable to developed countries. On May 11, 2011, the Honorable Dato 'Seri Najib bin Tun Abdul Razak, Prime Minister of Malaysia has approved the implementation of accrual accounting starting in 2015 will be the basis of accrual accounting in the preparation of the financial statements of the Federal Government as contained in the report of the New Economic Model. This is done so that Malaysia par with the other developed countries in the context of an efficient fiscal management and prudent.

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The Government is confident that with the implementation of accrual accounting would better explain the concept accountability and integrity of the government in the management and expenditures of the State through its financial resources. This policy will also be in line with the 1Malaysia concept of "People First, Performance Now" that puts the interests of the people and performance now to achieve the dream of becoming a high-income and developing countries. Accrual accounting are expected to be used for the reporting year 2016. The implementation of accrual accounting has been put under the responsibility of the Accountant General. Accountant General's Department has developed the directions and proposals to change the accounting practices of the public sector for the Malaysian federal government in the Strategic Reform Initiatives (SRI) laboratory held February 21 to April 1, 2011. The process of transformation requires the Accountant General to undertake a systematic and comprehensive diagnosis of the system and practices in place to identify the specific needs of this transformation. The current practice of providing government financial statements are Customization Cash Accounting. Accounting system transition and transformation are expected to fully comply by 2015. However, implementation has been postponed to 2016 to allow the drafting process of the Malaysian Public Sector Accounting Standards (MPSAS) based on International Public Sector Accounting Standard (IPSAS).

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2.0 2.1

FINDING & RESEARCH METHODOLOGY

Research Journal & Publication On Accrual Accounti ng

We have search for numerous research journal and publication on accrual accounting. There are quite a lots of publication on accrual accounting issues (report, discussion, journal, articles). However there are lack of publication on accrual accounting in context of Malaysia public sector since researches are still on going and not yet published. Refer to references for listing of journal and publication reviewed. Most of the journal and publication searching are using Google Scholar search engine. Whereas others are from published articles from various accounting books.

2.2

Core Team & Accou ntant General Department Publi shed Report & Publis hed Arti cles

Accountant General's Department has set up a special unit to service the transition to accrual accounting in the public sector. Accrual Accounting Implementation team is working to develop and implement accrual accounting system of the Federal Government by the year 2016. Among the functions of this section are:

 Study, and set the police and the public sector accrual accounting standards  Review, to design, build, test and implement public sector accrual accounting system  Plan, coordinate and monitor the implementation plan of the public sector accrual accounting  Managing ICT infrastructure and technical requirements for the implementation of public sector accrual accounting

 Implement and Manage Uni-center Systems  Plan, develop and implement training programs accrual accounting  To operate and manage public sector accrual accounting documentation Our group has received good cooperation in sharing information during and progress of this force through the circulation of seminars and briefing notes.

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2.3 Implementation Readiness Questionnaire Accounting Changes among Federal Government Financial Employees One of the key success factors for the implementation of accrual accounting is the awareness of civil servants in implementing accrual accounting this migration. Therefore, we conducted a survey among financial employees of the Federal Government to identify their consciousness in implementing accrual accounting within 6 months away. The questionnaire that was developed by our own basis Likert Scale. We can only issue agreeness stage in which elements are examined in the survey. Elements under review in the questionnaire as the following: •

Awareness & Readiness Government Employees Shift Towards New Accounting Landscape

•

Awareness Senior Management in applying MPSAS

•

The perception of government performance and accountability in applying the accrual accounting system

Please refer to Appendix A for the results of the questionnaire.

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3.0 3.1

FINDING & DISCUSSION

Cash Vs Accru al Acco unt ing System With Reference To Public Sector

The Federal Government has now adopted a modified cash basis of accounting is a method of accounting that recognizes transactions and record something when cash received or paid during the accounting period. Under this method, assets are not capitalized expenses and liabilities reported in the financial statements, all expenses will use the current year provision and payment is made until January of the following year. The implementation of accrual accounting in line with Public Sector transformation policy in the new economic Model aimed at strengthening the prudent fiscal management and enhancing the efficiency of financial management and accounting of the Federal Government. Difference with accrual accounting which recognizes transactions and recording at the time of the transaction. In addition, all assets and liabilities also accounted for under accrual accounting. All the transactions are reported in the financial statements for the financial year. To this end, the Department Accountant General of Malaysia (JANM) will issue a Public Sector Accounting standards (MPSAS) based on International Public Sector Accounting Standards (IPSAS). The difference between the modified cash accounting with accrual accounting are as Figure 1. Demonstrate a simple example of difference recognitions in both accounting method. It shows how the government takes into accounts for the given situation with different accounting method:

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Cash Accountin g

Accrual Accountin g

Your computer installation

Under the cash method, you

Under the accrual method,

business finishes a job in

would record the payment in

you would record the income

November, and doesn't get

January

in your November books.

You purchase a new laser

Using the cash method, you

Under the accrual method,

printer on credit in May and

would

RM1,000

you would record the RM

pay RM1,000 for it in July,

payment for the month of July,

1,000 payment in May, when

two month s later

the month when the money is

you take the laser printer and

actually paid

become obligated to pay for it.

paid

until

three

months

later in January.

record

a

Expenses

immediately

Warnabes Sdn. Bhd. supply

In

stationeries to government

recognized event though it is

recognized in the government

in

liability to the government.

in 2016.Warnabes Sdn Bhd

The

will become account payable

year

government

2015.The then

pays

2015,no

expenses

expenses

will

be

Warnabes Sdn.Bhd.in year

recognized

2016.

2014,whenthepaymentmadeto

in

year

to government.

ABC Sdn.Bhd. Revenue

immediately

Government billed Jannah

In

for

year

recognized even though it is

recognized in the government

2014.Ahmad only pay for

receivable to the government.

even though no cash received

the quit rent bill in year

The

in2014.

2015.

recognized in year 2014,when become account receivable to

the

quit

rent

2014,no

revenue

revenue

will

the payment received.

be

Jannah

will

government.

Figur e 1 :Example Of Governm ent Recognit ion In Cash & Acc ru al Ac counti ng

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Implementation of Accrual Accounting in the Mala ysian Public Sector Malaysian

Government

is

currently

practicing

Modified

Cash

Accounting. Basically, Modified Cash Accounting is actually the same concept of cash basis accounting but with severe modifications made to suit with the Malaysian Government nature of Business.

Modified Cash Basis accounting enable payment for the accounting period to be made in the month

of

January

in

the

following

year.

For

example,

payment

for

transaction

made in between January–December year 2014, could be paid in the month of January 2015. This period

of

extension

(January

2015)

is

known

as account payable or ‘Akaun Kena Bayar’ (AKB). Even though payment for year 2014 is made in

January

2015

(during

the

extension

period

or AKB) the transaction will be recorded and reported in year 2014 accounting period.

Treasury Instruction (TI) 56 specify the details for ‘ Akaun Kena Bayar’. There are three (3) condition that need to be fulfilled when make payment during the period of extension AKB: st

i.

Work or service have fully delivered & provided to the government on or before 31 December

ii.

Sufficient allocation balance for the accounting period

iii.

The payment is to be made on or before 31 January in the following accounting period

st

Work or service provided in year 2014 will be paid in January 2015 by using the allocation of year 2014.However, if the payment for 2014 being made in year 2015 using the allocation of year 2015, then it’s not consider AKB anymore, and its fall under TI 58; payment requires special permission.

Even though both cash accounting and accrual accounting offers it owns advantages to public sector, the implementation of accrual accounting seen give more benefits to the government in term of accountability & integrity, performance evaluation, and accurate financial presentation. We discussed the limitation of Modified Cash Accounting in para 3.2 and the benefit of accrual accounting in para 3.3. PSA522

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Implementation of Accrual Accounting in the Mala ysian Public Sector There are lots of differences between cash and accrual accounting method. We summarized the comparison between cash and accrual accounting as per Figure 2:

CASH ACCOUNTING

Acco unti ng

whic h

ACCRUAL ACCOUNTING

recog nizes

and

Acco unti ng whic h recogni zes so me

record some transaction and event

transaction

when

happened

cash

were

received

and

disbur sed in the accounting period.

and and

event

when

record

in

it the

accounting period. REVENUE

Recognized /recorded only when cash

Recognized /recorded for the period

received.

earned. EXPENSES

Recognized /recorded only when cash

Recognized /recorded for the period it

paymentcarried out.

spend /us ed. FIXED ASSET

Charged to expenditure in the time it

Recogn ized /recorded as long as age

purchase.

period use andcapitalized.

LIABILITY Not recognized/ recorded expenses at

Recognized / recorded for the period it

the time physical cash is actually paid

achieved or borne.

out. Figure 2 : Summary Of Cash Account ing Vs Accru al Accounting

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Implementation of Accrual Accounting in the Mala ysian Public Sector 3.2 Limit ation Of The Modified Cash Accountin g Cash limit modification is that it is easier but the concepts are not familiar to the general public, such as the wider use of accrual accounting in the trade. Modified cash accounting provides only basic information, cash is easy to manipulate and therefore less thorough. The objective of the move from cash to accrual reporting was to make the actual cost the Government more transparent. For example, accrual accounting will see the right of atriums the cost of pension Government employees for a period of time when they work and accumulated pension rights with them, rather than this report as an expense which is not when they retired under the cash system. Cash systems also allow government debt to be exceptionally designed such a way that all interest expense paid in one lump sum at the end of a loan rather than propagated through the years when a loan is exceptional, as is done under an accrual basis. These examples show how the focus on cash only can interfere with the actual cost of government spending. Alternatively, accrual accounting is generally more reliable than cash accounting in measuring the financial performance and accountability challenges in dealing with the sovereign and risk management. This explained the Government stance "s fight for accounting accruals." Moving to accrual accounting has been set as the substance of the new economic Model (NEM) report. Financial absorption would put the Malaysian public sector practices in line with the developed countries. In accounting accruals, economic events are recognized when they occur no matter when cash transactions occur, means that economic events are recognized at the time where the transactions occur rather than when payment is made (or accepted). Although accruals have been used in the private sector for a very long time, it is not possible to simply adopt the accrual of the private sector in the public sector in total. There are several unique issues that arises when the Government moved to an accrual basis. The Government has several different types of assets and liabilities does not exist in the private sector, including heritage assets, military assets, infrastructure assets and social security programs. Type of assessment method used is also very important, especially in terms of economic analysis.

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Implementation of Accrual Accounting in the Mala ysian Public Sector Need to also keep in mind that the treatment of social security programs, such as the elderly pension program, General was contentious in an environment of an accrual basis. It is important to emphasize that this does not refer to the treatment of servants "pension program”. This is the obligation of contracts and their treatment as a liability is clear-cut. These programs is a great obligation for the Government in the future, particularly in the circumstances of an aging population. Other cash accounting limit can be summarized as below: 

It does not give full information on current assets accrued income such as royalties, for example, fees, service charge, tax arrears and o ther



Comprehensive

information

not

available

about

government

liabilities

(pensioned

commitment, interest payable, bills payable or depreciation for the replacement of assets) 

it will ignore certain transactions by not recording the expenses were incurred but the payment is not made for example supply made , payroll, telephone charges, interest arrears and others and also the revenue earned but cash is not accepted for example license fee, the services delivered (electricity, water etc.)



It does not misrepresent the full post of the financial position, namely information on assets and liabilities cannot be used for fixed assets (land, buildings, machinery)



No information on capital work-in-progress such as dams, power plants, roads and bridges and other possible.



It presents one of the income received, as tax receipts are recognized as income in advance.



No age weight given to the concept of "matching" which is a certain period expenses must be deducted from earnings over the same period.



No disclosure of contingent assets and contingent liabilities which may turn out to be done.



Unit cost and the total cost of services provided by government departments such as health, education, water supply, transportation cannot be determined (as depreciation, interest and others not apportion able)

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Implementation of Accrual Accounting in the Mala ysian Public Sector 3.3 Advantages of Accru al Accountin g Accrual basis accounting is more popular than cash basis accounting because it produces more accurate, more faithful financial statements that constitute better representations of actual circumstances than its main competitor. Since accrual basis accounting records revenues and expenses together in the same time periods based on their causal relationships, it produces more accurate gauges of entities' performance in any time period. By contrast, the use of cash basis can lead to distortions due to the collection of cash and cash equivalents not aligning with the actual timing of sales. Financial reports prepared on an accrual basis allow users to: 

assess the accountability for all resources the entity controls and the deployment of thoseresources;



assess the performance, financial position and cash flows of the entity; andmake decisions about providing resources to, or doing business with, the entity.



shows how a government financed its activities and met its cash requirements;



allows users to evaluate a government’s ongoing ability to finance its activities and to meet itsliabilities and commitments;



shows the financial position of a government and changes in financial position;



provides a government with the opportunity to demonstrate successful management of its resources;



is useful in evaluating a government’s performance in terms of its service costs, efficiency andaccomplishments.

Accrual accounting provides information on an entity’s overall financial position and current stockof assets and liabilities. Governments need this information tomake decisions about the feasibility of financing the services they wish to provide. Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within subentities for the management of activity and pr ogram costs. Accrual accounting allows an individual entity to: PSA522

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Implementation of Accrual Accounting in the Mala ysian Public Sector 

record the total costs, including depreciation of physical assets and amortization of intangibleassets, of carrying out specific activities;



recognize all employee-related costs and to compare the cost of various types of employment orremuneration options;



assess the most efficient way of producing their goods and services and of managing the resourcesover which they have been deleg ated authority;



determine the appropriateness of cost-recovery policies; and



monitor actual costs against budgeted costs.

All this advantages can be conclude as below : 

Give an overview of the financial position of the Government's more comprehensive and accurate;



Increase Government tr ansparency and accountabilit y in the management of finance and accounts;



Improve financial management and accounting of Government through good governance as well as lead for value for money;



Increase the efficiency and effectiveness of the Government with the generation of performance reports and financial statements in a more complete and comprehensive;



Measurement of the impact of the policy in a more effective manner through the implementation of management accounting; and



Give better indicators in financial management prudent.

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Implementation of Accrual Accounting in the Mala ysian Public Sector 3.4Countries That Have Implemented Accrual Accounting

ICELAND (1992) KANADA (2002)

SWEDEN(1994)

AMERIKA SYARIKAT (1998) AUSTRALIA(1995)

U.K(2000)

NEW ZEALAND (1992)

Figure 3 : Countries That Have Implement Accrual Accounting

Accrual accounting if being adopted in public sector, provide a better quality of information and a better way of discharging accountability among the public sector managers.

Among the countries that have successfully adopted accrual accounting in their public sector are United Kingdom, New Zealand, Australia, Canada, Colombia, France and United State of America. The time taken for these countries to adopt accrual accounting are more than ten years since of PSA522

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Implementation of Accrual Accounting in the Mala ysian Public Sector the process of gathering, classifying of asset consume too much time. Only United Kingdom able to make it in seven years followed by New Zealand which took 10 years.

Besides the success of the above countries, there are also countries meet failure in the accounting transformation from cash to accrual such as Indonesian Government and Madagascar Government. The causes of failure are in many reasons. One of the identified causes of failure in Indonesian Government accounting reformation is the insufficient skilled government staff to implement and operate the new accounting system.

3.4.1

The Move to Accrual Account ing

The use of accrual accounting is still unusual for most governments. Very few governments have yet to adopt it, certainly at the national level. This first occurred in Chile in the mid-1970s under the Pinochet regime. New Zealand followed suit in 1990 and the US federal government moved to accrual based accounting in 1997, but US State and local governments are only now making the change .By the year 2000, only three other central governments had adopted the accrual basis for their annual financial accounts. Also by 2000, eight of the 30 most developed countries–members of the OECD– had not adopted accrual based accounting for any aspect of their public sectors. The UK government moved to accrual based accounting in 2001–2002 as did Canada in the following year. By the middle of 2003 only half the OECD countries had adopted accrual based accounting for their central government accounts. In 2000, Malaysia and Tanzania were the only non-OECD countries that were planning to adopt the accrual basis for their central government accounts (according to an IFAC Public Sector Committee publication, Study11: Government Financial Reporting, Accounting Issues and Practices, 2000). This is not now considered a priority for Tanzania and the change is unlikely to take place there in the near future. South Africa is actively following a programmed to change the basis of its public sector accounting to the accruals over the next few years and this basis has already been adopted in Mongolia.

Several of the governments of the largest economies in the world have yet to introduce such changes. The French National Assembly has agreed definite plans to make the change by 2005, PSA522

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Implementation of Accrual Accounting in the Mala ysian Public Sector but in Germany and Italy there are no such plans. Late in 2003 the Dutch government dropped its plans to move the accounts of its national ministries to the accrual basis because of the costs involved. Japan has decided not to introduce this reform in the near future.

3.4.2

The Introd ucti on of Accr ual Based Account ing In The UK Public Sector

The use of accrual accounting in the public sector is not an idea and the arguments for and against its use has been finely balanced for at least 150 years. It was being used by some public sector organizations as soon as it was developed in its current form in the private sector. Thus accrual based accounting was introduced for UK local authority accounts from the mid- nineteenth century. Birmingham City Council (the sixth largest economic entity in the UK at the time), for example, adopted accrual based accounting from 1850. Accrual accounting was not generally accepted in the public sector, however, and the cash basis of reporting was established by the Treasury (UK equivalent of the ministry of finance) as part of the major reforms introduced in 1866. Thus it was the cash basis which was used in the British colonies across the world over the next 100 years or so.

By the end of the nineteenth century it had been adopted by most of the larger,Municipal councils, although in the early years of the 20 th century there was vigorous debate on its suitability.

Eventually all but the smallest local councils were required to adopt the accrual

basis of accounting after there-organization of local government in1974. With the major reforms of the UK National Health Service in the early1990s the internal market was adopted and hospitals were established as quasi-independent businesses accounting on the accrual basis. At about the same time the move from the cash to the accruals basis was agreed for central government.

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Implementation of Accrual Accounting in the Mala ysian Public Sector 3.4.3 Experience of Other Countries, Which Prepare Appropriation Accounts Under The Acc ru al System

In most countries, government needs funds for the purposes of the development from their respective consolidated funds. Accordingly their legislatures authorize the appropriations through according of approvals to the appropriations bills proposed by the concerned government. Once an appropriation is authorized, an appropriation account is established, which disclose expenditure at the same level of detail as in the estimates, to make amounts available for expenditure from the Treasury. Various countries follow different types of appropriation. The different types of appropriation accounts include:



Open Appropriation Account : An open appropriation account is an account that has not had the balance transferred to a success or account or to surplus. The appropriation in the account may be expired or unexpired.



Closed appropriation account: A closed appropriation account is an account that has had the balance transferred to a success or account or to surplus. The appropriation in the account is lapsed.



Successor Account : A success or account is an account established for the payment of obligations applicable to appropriations for the same general purposes, but which have either lapsed or been discontinued. A success or account is available in definitely for the payment of obligations chargeable to any of its predecease or accounts. Further, appropriation accounts may include not only accounts to which money is directly appropriated, but also other funds. A fund, as used in connection with appropriations, is a sum of money or other resources, usually segregated, to be expended or used for specified purposes. Funds differ from appropriations in that they are usually permanent In nature and do not expire unless they are revoked by the Parliament. Thus, in USA, appropriation accounts are prepared for General Fund, Trust Fund and Revolving Fund. Nevertheless, appropriation accounts as prepares in India, are similar to the system followed in the Commonwealth countries like UK, Canada and Australia. Thus, in UK, the Resource Accounts for each financial year are prepared and laid before Parliament under the Government Resources and Accounts Act 2000. They show the extent to

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Implementation of Accrual Accounting in the Mala ysian Public Sector which there sources granted by Parliament through Consolidated Fund Acts (following voting by the House of Commons on Estimates presented to it) have been used, and are signed by senior civil servants from the departments concerned (Accounting Officers). They are audited by the Comptroller and Auditor General. In addition to giving his certificate that the financial statements give a true and fair view of the state of affair so

the

audited

department

concerned

and

that

expenditure

has

been

appliedforthepurposesauthorizedbyParliament,hemaymakeadditionalcomments on the accounts.

3.5 The Risks o f Moving To Accru al Based Acco unti ng Internationally, the limited experience of governments moving to the accrual basis of accounting means that there are still a significant number of risks involved in adopting this approach. These may include: 

loss of financial control with the introduction of a more complex system



reduction in budgetary control–in the UK, expenditure in excess of budget occurred in nearly one in five ministries, and Parliament has retained cash reporting in addition to accrual information to monitor governmental expenditure



diversion of resources from more productive reforms



the possibility of government accounting being brought into disrepute if accrual accounting fails



the possibility that international accounting standards could be applied with no real understanding of the issues involved, especially as they are principles-based standards



the gaps in the standards not being properly addressed



the standards not being continually made up to date and relevant



decisions on accounting treatment being made on political grounds



the external auditor being unable to prevent politically-based amendments to the accounts



the IT systems not being adequate



the process of financial management and expenditure control being made more difficult

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Implementation of Accrual Accounting in the Mala ysian Public Sector for members of Parliament and 

members of Parliament, the government, staff of theministryof finance and other ministries and the external auditors not being given enough training



an adequate time scale and budget not being allowed for the change.

Status of implementation of accrual accounting is monitored by a main Committee that is Steering Committee (CMC) Accrual Accounting which is chaired by the Accountant General of Malaysia (ANM). CMC is also supported by three working committees: Accrual accounting standards Advisory Committee (GASAC) system development Working Committee, the Implementation Committee a t the Ministry level, effectiveness and sustainability of the implementation of accrual accounting is supported by the Committee the implementation of Accrual Accounting to ensure the implementation of accrual accounting is implemented according to plan. Accrual Accounting Governance structure is as shown in figure below.

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Implementation of Accrual Accounting in the Malaysian Public Sector

3.6 Accrual Accounting Integrating With Outcome-Based Budgeting and Activity-Based Cost of the Malaysian Public Sector Perspective a) Public Sector Accounting; A Way Forward

The

Economic

Reform

Transformation

Initiatives

(SRI)

and

Programme also

proposal

(TTP) from

comprises the

of

National

several

Strategic

Economic

Advisory

Council (NEAC), was part of the effort and aspiration by the Malaysia government to achieve

the

New

Economic

Model

(NEM).

Following

to

the

SRI

dated

from

21

February to 1 April 2011, the Accountant General’s Department (AG) has proposed to the Government to migrate the present accounting system to accrual accounting. With that, on the 11 May 2011, YAB Prime Minister of Malaysia has endorsed the accrual accounting implementation started from 2015 as part of the 21 SRI Public Finance initiatives.

The adoption of accrual accounting will set the new paradigm of Malaysia public sector finance practices which in-line with the other developed countries. However, the move will resulted several challenges, as stated by the speakers during the National Public

Sector

Accountants

Conference

(NAPSAC

2011)

jointly

organized

by

the

Malaysian Institute of Accountants (MIA), Accountant General’s Department (AG) and Persatuan Akauntan Sektor Awam Malaysia (PERASAMA) in Kuching, Sarawak from 6 - 7 June 2011.

Fundamentally, the success of the accrual accounting in Malaysia depends on several factors as follow:-

(i)

Complete record;

(ii)

Competent human resource;

(iii)

Sufficient fund; and

(iv)

100% commitments throughout the implementation.

In relation to the competent human resource, YBhg Dato’ Rosini Abd Samad, Deputy Accountant General Malaysia (corporate) states that:-

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“As a result of the initial lack of awareness in accrual accounting with its attendant benefits and costs, policies and standards, we need to BUILD CAPACITY for staff in the Accountant General’s Department as well as in the respective Ministries and agencies” 1

However,

Prof.

Dr.

Andreas

Bergmann,

Chairman

from

International

Public

Sector

Accounting Standards Board addressed different view during the NAPSAC 2011 as follow :-

“In Malaysia, with its strong accounting profession, human resources are less of an issue than elsewhere. I think completeness of assets and liabilities registers in all entities is the key challenge here.”

It should be recognized that the adoption of accrual accounting in Malaysia will assist in the rigorousness of performance reporting of the programmed since it can provide multiple reporting dimensions from which managers can make better and informed decisions.

The

combination

of

the

accrual

accounting

and

Activity-Based

Costing

(ABC) approach can help to evaluate the efficiency and effectiveness of programmed in pursuing the respective outcomes. Hence, the cost information will provide better understanding and options evaluation in the provision of public services such as healthcare and education.

An important element of accrual accounting is that the costing of resources can be calculated, which is essential to the effectiveness of Outcome-Based Budgeting in promoting the sustainability of fiscal policies. It will also add depth to the accountability and transparency of the management of public sector resources, which explained by Mr Thomas who are the Head of Project Team, OBB Project Team, Ministry of Finance.

To add to the above, Mr Koshy Thomas, also stated that:-

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“Accrual accounting provides the data and information that will enable it to generate costing information for programmed evaluation” 2

In

essence,

the

accrual

accounting

adoption

provides

more

effective

fiscal

management in terms of accountability, sustainability, better measures of policy effect, organizational effectiveness and efficiency which may promote greater integrity.

b) Outcome Based Budgeting (OBB)

Malaysia has embarked the Outcome Based Budg eting (OBB) implementation which accrual accounting complements OBB as an effective fiscal management tool. Hence, accrual accounting will set the platform for the implementation of Activity Based Costing.

c) Case for change:-

i)

Accrual accounting will facilitate the costing of resources, which is essential to the effectiveness of OBB in promoting the sustainability of f iscal policies;

ii)

Accrual accounting will add depth to the accountability and transparency of the management of public sector resources;

iii)

Financial markets and credit rating agencies are particularly interested in the sustainability of financing and expenditure policies. The IMF contends that accrual financial statements provide greater information for analyzing the sustainability of fiscal policy and the quality of fiscal decision making;

iv)

The adoption of accrual accounting in Malaysia will assist in the rigorousness of performance reporting of the programmed since it can provide multiple reporting dimensions from which managers can make better and informed dimensions;

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v)

Accrual accounting provides the data and information that enables to generate costing information for program evaluation. ABC approach can help to evaluate the efficiency and effectiveness of Ministries’ programs in pursuing the respective outcomes. T he cost information can help to evaluate the options to the provision of public services such as healthcare and education;

vi)

Refer Figure 4: Summary of the integrating and transformation phases from Modified Cash Basis to Outcome- Based Budgeting to Accrual Accounting;

Figure 4: Phase Transformation

"Malaysia is expected to fully switch to accrual-based accounting by 2016", "where assets and liabilities are fully taken into account. It will have a centralized system with a single database and is fully integrated with the Outcome-Based Budget (OBB) and other systems relate. Accruals accounting with activity-based cost (ABC) will convert existing data to information and ultimately to knowledge in which decisions and actions are better informed can be taken, he said.

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Accrual accounting provides the data and information that will enable it to generate costing information for programmed evaluation. The adoption of accrual accounting in Malaysia will assist in the rigorousness of performance reporting of the programmed since it can provide multiple reporting dimensions from which managers can make better and informed decisions.

Using accrual accounting together with the Activity-Based Costing (ABC) approach can help to evaluate the efficiency and effectiveness of programs in pursuing the respective outcomes. The cost information can help to evaluate options in the provision of public services such as healthcare and education. In other words, “Accrual accounting will facilitate the costing of resources, which is essential to the effectiveness of Outcome-Based Budgeting in promoting the sustainability of fiscal policies. It will also add depth to the accountability and transparency of the management of public sector resources”.

3.7

New Strategy & Current Developm ent

For Implementati on of Accr ual

Accounti ng in Malays ian Publi c Sect or Accrual accounting will be fully implemented in the public sector in 2016. This means that only six months longer for transitions. This year the implementation of accrual accounting transformation challenge needs to be faced with harder, especially in the public sector who are involved with financial management Responsibilities nor the central accounting office. Ministry of finance, by letter dated 27 October 2014 has decided to make the implementation of accrual accounting for the Government will be determined according to the date of publication of the relevant law, after a trial period of 2015. This policy decision is made to take into account aspects of risk management in the implementation of accrual accounting. Among Financial Procedure Act amendment to the 1957 and other related Act that have not been approved in Parliament. In addition to readiness and achievements of Ministry is still low. As the Accountant General of Malaysia as a "lead agency", responsible for coordinating activities in the implementation of accrual - Ministry of the probationary period. Based reform strategy will involve the implementation of dry run that allows applications 1GFMAS system thoroughly tested with the full input of the process through to final output and report

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accurate financial statements will be generated and comprehensively as planned. This comprehensive early preparation is essential for resolving all issues related to the application 1GFMAS system before implementation. In addition, the implementation of continuous training plan accounting is still carried out, among others, basic concepts of accrual accounting, accrual accounting policies and standards (MPSAS), Manual Accrual Accounting (MPA) and Accrual Accounting Chart (CAA) and the Financial Documents 1GFMAS. 1GFMAS Work Procedure Manual will be an important document for all users 1GFMAS in finance and accounting duties either as Responsibility Center (RC) or Accounting Office (PP). A total of 396 standard operating procedure (SOP) which was identified by 13 types of modules in the Asset Accounting module 1GFMAS them, Accounts Payable, Accounts Receivable, General Ledger, Activity Based Accounting and others.

By the year 2016, the implementation of accrual accounting (PPA) through the Policy and Standards Unit has established MPSAS Based Task Group to study and recommend a procedure for accounting for School Fund (KWS) in accordance with the requirements of accrual accounting implementation and compliance with financial regulations in force. This figure shows the change in the accounting treatment that has been recommended by Government Accounting Standards Advisory Committee (GASAC) and approved by the Steering Committee of Accrual Accounting (DFA) No. 1/2015 dated January 29, 2015.

Kumpulan Wang Sekolah

Kumpulan Wang Sekolah

KWS terdiri daripada 3 Kumpulan Wang

Satu akaun amanah Kerajaan

Kump Wang Kerajaan

Kump Wang SUWA

Kump Wang Asrama

(S.10 FPA 1957) AKAUN AMANAH XX (BAHARU)

Figure 5 : The changes in accounting treatment of School Fund

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This team has also secured PPPA formulation 35 MPSAS adapted from the International Public Sector Accounting Standards (IPSAS). The status of f ormulation of 17 March 2015 MPSAS until portrayed through this figure.

38 International Public Sector Accounting

24 approved

Standard (IPSAS)

24 MPSAS had

MPSAS issue

been approved

by the

by JKP

International Federation of Accountants

3 IPSAS irrelevant for adapted (IPSAS 15 10 & 18)

6 exposure

35 IPSAS will be

(IFAC)

drafts in the

adopted to MPSAS

approval

5 IPSAS in process of adaptation and preparation of Exposure Draft

Figure 6: Current Status MPSAS The Government is also now in the process of improvement of the process of ' to be ' 1GFMAS. The process of ' To Be ' 1GFMAS has already been finalized in meetings of the Steering Committee on an accrual basis Accounting No 1/2010 dated January 19, 2013. However, as a result of further discussion, improvements to the workflow process of ' To Be ' 1GFMAS to process RECEIPTS and PAYMENT ORDER without PT has been made and approved at the meetings of the Steering Committee on an accrual basis Accounting No 1/2015 dated 29 January 2015. Refer to the extract of the article Focus Accruals No 5 Issue.

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Figur e 7 : Proses To Be

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In addition, there are a number of activities are being carried out by the implementation of Accrual Accounting in the realization of this accounting accruals in 2016. Program Town hall with Accountant General (AG). This program

Among them; opportunities in

communication of two (2) semi-formal way in between. Dato ' AG with Division Director and Chief Accountant at JANM ministries to meet the challenges of implementation of Accrual Accounting. This programmed is carried out on 5 March 2015 (Thursday) at Banquet rooms 1, level

8,

JANM

attended

by

Director/Representative

Director

at

JANM

and

Chief

Accountant/Senior Accountant in the Ministry. This program is effective because Dato ' AG can communicate directly with each part of JANM and in particular with all ministries regarding their views and ideas towards the success of the implementation of Accrual Accounting.

Department of Accountant General of Malaysia have been invited to participate in an exhibition in conjunction with the ASOSAI Assembly held on 10 to 13 February 2015 at The Royale Chulan Hotel Kuala Lumpur organized b y the auditor. ASOSAI is a regional organization with 47 Member, represented the Auditor General, was established to enhance the professionalism of Auditors of Government through the exchange of knowledge, experience and skills related to government auditing.

One booth dedicated to JANM equipped with information relevant to the implementation of Accrual Accounting of the Federal Government. This Assembly was officiated by YAB Dato ' Sri Mohd Najib bin Tun Abdul Razak and he had to spend time visiting the booth JANM. This gathering also attended by 200 participants from the Member countries as well as representatives from International Organizations Audit Institutions (INTOSAI), the Organization of National Audit (EUROSAI) European and National Audit Organization Africa ( AFROSAI) have the opportunity to visit the booth JANM.

During the year, data migration activities continued with a Mock Run 3 commenced in February 2015, involving data assets and liabilities as at 31 December 2014. Data Migration Activities Preparatory briefings (Mock Run 3) was held with all representatives of the ministries and State/Branch JANM at 15 and 19 January 2015. This briefing is intended to explain in detail about the activities of Mock Run 3 and the action to be taken by the parties involved. In January

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2015 Up Front Validation Checking activities were also held in preparation for the early detection of errors that may be contained within a template data collection assets and liabilities before uploading data activities of Mock Run a real run on 3 March 2015. Here attached timeline implementation of accrual accounting which has been fully implemented by up to successfully ' Go Live 1GFMAS’

Figur e 8 : Timeli ne Process

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4.0 CONCLUSIONS

The purpose of accrual concept is to make sure that all revenues and costs are recorded

in

the

appropriate

statement

at

the

appropriate

time

period.

Costs

concerning a future period must be carried forward as a prepayment for that period and not charged in the current profit statement. For example, payments made in advance such as the prepayment of rent would be treated in this way.

Therefore, accrual basis of accounting helps in reflecting true picture of expenditure in an

accounting

period.

For

example,

one

of

the

parameters

in

government

for

performance evaluation of a department could be per unit cost of service. Accrual basis

of

accounting

helps

in

quantifying

the

cost

correctly,

which

is

the

key

requirement for estimating per unit cost of service.

However, there are some issues to be addressed at the time of transition to accrual accounting.

First,

preparation

of

the

first

Balance

Sheet

under

accrual

basis

accounting. The decision on the format of financial statements on migration to accrual accounting and generation of first set of financial statements is of key importance in transition. The format has to facilitate transparent, accurate and complete depiction of financial position. Checks and balances have to be in place to ensure appropriate measurement and recording of accounting data.

Issues

like

preparation

of

Assets

register

and

valuation

of

assets

have

to

be

addressed. Internationally the role of auditor has been significant in ensuring a smooth transition to accrual basis of accounting. Auditors may be helpful in framing the accounting policies on assets and liabilities, recognition of revenues and expenses, citizen’s net worth, reporting period and measurement basis.

Second issue is in accruing revenues. Accurate information of revenues is essential for assessing the impact of taxation and other revenues on the Government’s fiscal position, in assessing the need for borrowing in the long term and also to assess

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whether current revenues are sufficient to cover the costs of current programs and services. It is necessary to take a decision on the types of revenues that are capable of accruing with reasonable degree of certainty. In case there are few line items that are not suitable for accruing, they may be continued under cash basis accounting. The decision in this regard has to be taken by government.

If the government resist to transform today, one day the accrual accounting will still need to be implemented since they are growing demand for a greater transparency and better performances of the government sector.

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5.0 RECOMMENDATION

To overcome the above issues, we suggest to implementing accrual accounting at a local level first and only later transfer the implementation of accrual accounting to the national government. The advantage to taking this approach is that lessons can be learned from the local implementation to be incorporated into the approach for making that transition at a national level.

Under this approach, it is important that at the local level similar principles are followed by all bodies to retain consistency and transparency. The results show that the use of accruals principles for certain areas is significantly behind other areas. The most common example is the recognition of tax revenues which for many countries is still on a mainly cash basis where the rest of the financial statements are on an accruals basis.

This would appear to be due to the challenge in finding an appropriate accounting policy. In contrast, the recognition of operating income and expenses on an accruals basis is a much simpler concept to implement. We would recommend that Malaysian government deciding to implement the accruals basis, they give early consideration to the best way to incorporate such challenging areas into the accruals based financial statements.

There is significant scope under the accruals principles for interpretation. Government must adapt those principles to the circumstances. A common example is whether to value assets at historic cost or whether to revalue those assets to fair value. This is a choice under the available standards on asset accounting. However, it is in the area of the debatable cases that the significant inconsistencies appear. We takes the view that it is important to have a common set of standards employed by all, and supports principles based accounting allowing for application taking into account the specific national circumstances.

There has been much recent debate about the need for a public sector Conceptual Framework. It is undeniable that such a framework could assist preparers of accounts, in particular for situations where no defined accounting standards exist and therefore

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assist public sector administrations in preparing their financial statements. Improved consistency statements

would which

also

enhance

accounts

are

one

of

comparable

the over

main time

objectives and

of

between

any

financial

organizations

enabling an assessment of the performance of the public sector to be made.

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6.0 REFERENCES

6.1. A Case Study of Governmental Accounting & Budgeting Reform At Local Authority in Indonesia: An Intuitionalist Perspective – Ali Djamhuri (USM 2009) 6.2. Accrual Accounting: Concepts, Standards and Implementation – James L.Chan (University of Illinois at Chigago, University of Cagliari) 6.3. Adoption of Accrual Accounting in Local Authorities in Kedah Darul Aman – Ropidah Omar, Nor Afza Aman, Norhan Ariffin (UUM) 6.4 Public Sector Accounting: Malaysian Context: 4th Edition Author: Fatimah Abd Rauf And Others 6.5.Audit Negara Web http://www.audit.gov.my/intranet/images/pdf/bank_pengetahuan/2011/slide%2520utama%2520 melayu_11072011%25202.pdf+Ho 6.6.Survey & questionnaire toolshttp://freeonlinesurvey.com/s.asp?sid=c65oyz2bezgcrnd134474 6.7.Is The Move to Accrual Based Accounting A Real Priority for The Public Sector Accounting ? – Any Wynne (ACCA, Jan 2004) 6.8.Jabatan Akauntan Negara Malaysia - http://www.anm.gov.my 6.9.Jabatan Akauntan Negara Malaysia - Laporan Tahunan 2011 6.10.Managing The Transition To Accruals In T he Public Sector – Gillian Fawcet (ACCA) 6.11.NSW Public Sector Accounting: Why Did It Happen And Has It Mattered ? – Mark Christensen 6.12.Pemandu – http://etp.pemandu.gov.my/Public_Finance_Reform-@ Accrual_Accounting.aspx 6.13.Persatuan Akauntan Sektor Awam Malaysia http://www.perasama.org.my/km/Panel_2_Rosli_Abdullah.pdf 6.14.Persatuan Akauntan Sektor Awam Malaysia http://www.perasama.org.my/km/Panel_2_Koshy_Thomas.pdf

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Implementation of Accrual Accounting in Malaysian Public Sector

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