Public sector accounting is set to be transformed as Malaysia adopts an accrual accounting system under the MPSAS framework, explains Ramesh Ruben Louis
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This article was first published in the April 2018 Malaysia edition of Accounting and Business magazine.
The federal and state governments (and their related agencies, bodies and local authorities) have long used modified cash accounting, where financial transactions are accounted for and recorded when there is an inflow or outflow of cash in the reporting period. Under the modified cash accounting basis, assets are not capitalised and liabilities are not reported in the financial statements. However, this will soon be a thing of the past in Malaysia as both the federal and state governments are currently transitioning (in phases) to accrual accounting under the Malaysia Public Sector Accounting Standard (MPSAS) framework.
The implementation of accrual accounting is in tandem with the government’s Public Sector Transformation Policy under the New Economic Model and the implementation of outcome-based budgeting (OBB) by the government. It is envisaged that the adoption of accrual accounting in the public sector (together with OBB) will have a significant effect on good fiscal management and improve the effectiveness of financial management and accounting of federal and state governments.
The accountant general’s department (AGD) had issued a circular that federal and state governments will apply accrual accounting using MPSAS with effect from 1 January 2018.
The MPSASs, which are primarily based on the International Public Sector Accounting Standards (IPSAS) published by the International Federation of Accountants (IFAC), was developed by the AGD. The MPSASs are converged with IPSASs. The AGD has, to a large extent, maintained the accounting treatment and original text of the IPSASs unless there is a significant public sector issue and local legislation that warrant a departure.
Besides the MPSASs itself, the AGD has also issued recommended practice guidelines (RPGs), certain policies and an accrual accounting manual to provide guidance on good practices that public sector entities are encouraged to follow.
The MPSASs are designed to be applied in the preparation of general purpose financial reports of all public sector entities other than government business entities (GBEs). Public sector entities include the federal government, state governments and local governments, unless otherwise stated. GBEs apply approved accounting standards, which are issued by the Malaysian Accounting Standards Board (MASB) – either MFRS or MPERS. MPSAS 1 defines GBEs as an entity that has all the following characteristics:
- is an entity with the power to contract in its own name
- has been assigned the financial and operational authority to carry on a business
- sells goods and services, in the normal course of its business, to other entities at a profit or full cost recovery
- is not reliant on continuing government funding to be a going concern (other than purchases of outputs at arm’s length)
- is controlled by a public sector entity
To date, 32 MPSASs have been issued by the AGD (MPSAS 6, 7 and 8 have been superseded). Generally, the MPSAS standards are based largely on MFRS/IFRS standards but there a few that are unique to the public sector environment and therefore there is no equivalent MFRS/IFRS. This includes impairment of non-cash-generating assets to deal with assets of public sector that are mainly non-cash generating; disclosures of certain financial information peculiar to public sector entities; treatment of income from non-exchange transactions arising from collection of taxes and transfers by government; and presentation of budget information.
MPSAS 32, on service concession arrangements, addresses accounting for the government side of service concession arrangements (ie provides for the recognition, measurement, and disclosure of service concession assets and related liabilities, revenues and expenses by the grantor), which is not addressed by IFRIC 12. IFRIC 12 prescribes the accounting treatment for the operator in a service concession arrangement. The criteria in IFRIC 12 for determining whether the operator controlled the asset used in a service concession arrangement, however, have been used in MPSAS 32 to assess whether the grantor controlled the asset. This approach minimises the possibility that neither the operator nor the grantor would recognise the service concession asset. With MPSAS/IPSAS 32, there is symmetry with IFRIC 12 on relevant accounting issues (ie liabilities, revenues and expenses) from the grantor’s point of view.
To drive implementation, the AGD established two committees – the Government Accounting Standards Advisory Committee (GASAC) and the Accrual Accounting Steering Committee (ACSC) – to oversee, confirm and approve the development, adoption and implementation. The GASAC comprises representatives from state treasury, the ministry of finance, the auditor general’s office, institutions of higher learning, the Malaysian Institute of Accountants, MASB, ACCA, the Malaysian Institute of Certified Public Accountants, CPA Australia and others. The ACSC is responsible for approving the MPSASs that have been deliberated and endorsed at GASAC meetings. ACSC is headed by the accountant general of Malaysia and its members comprise senior directors of AGD and chief accountants of federal ministries.
Besides the committees, the AGD has also come up with a four-pronged implementation strategy for accrual accounting in the public sector in Malaysia that encompass standards and policies, rules and regulations, process and technology and human resources.
Other guidelines and policies
The AGD has also developed several guidelines, circulars, policies and an accrual accounting manual to assist preparers of financial statements:
- accounting policies approved by the ACSC (revised September 2014) – government accounting policies that have to be complied with by all federal ministries and departments
- interpretation of accounting policies prepared by the Standards and Policies Unit (revised March 2016)
- Transition Policy for Accrual Accounting Implementation of the Federal Government Guideline – to guide the three-year transitional period using the 1GFMAS system, accounting for opening balances of assets, liabilities and equity and measurement and recognition of public sector/government assets, liabilities, equity and income during the transition period
- Accrual Accounting Implementation – Government Assets
- Accrual Accounting Implementation – Government Inventories
- Accrual Accounting Implementation – Government Receivables
- Federal Government Accrual Accounting Manual (May 2015) – covers accounting policies and treatment under MPSAS and examples of accounting entries for generic transactions
- 1GFMAS (Go Live) Implementation Guideline (updated November 2017)
- guidebook and templates for data collection for opening balances of various assets and liabilities
- charts of accrual accounts
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory
CPD technical article
"The adoption of accrual accounting will have a significant effect on good fiscal management"